Coal revenues in 2Q16
In the previous part of the series, we looked at the reasons behind the decline in Union Pacific’s (UNP) industrial products revenues. Now let’s look at the company’s coal revenues in the second quarter of 2016.
UNP’s coal revenues in 2Q16 were $494.0 million, a decline of 27% compared to $679.0 million in the corresponding period of 2015.
Union Pacific’s coal volumes in 2Q16
In 2Q16, UNP’s coal volumes declined 21%. This was primarily due to a 23% reduction in shipments in the Powder River Basin (or PRB) and the Colorado and Utah regions in 2Q16.
The major reasons behind the decline are low natural gas prices and higher coal stockpiles. Export coal volumes declined as a result of weak international coal prices and a solid US dollar.
PRB coal inventory for 105 days in June 2016 was 35 days above the last five-year average. On a sequential basis, 32.0 million tons of PRB coal was utilized in June, marking a 47% rise from the levels burned in May 2016.
UNP expects declines in the demand for coal and, in turn, fewer volumes for the remainder of the year. It anticipates high inventory stockpiles and low natural gas prices to further create an unfavorable situation for coal freight.
Weather conditions also impact electricity consumption, thus affecting coal shipments. The company expects coal volumes to be 20% lower in the second quarter of 2016 on a year-over-year basis.
Coal dynamics for peer group
Investors should note that energy prices, specifically natural gas, have been recovering from their previous lows. However, an increasing focus on renewable energy such as wind in the United States will most likely increase capacity. This may be a negative for coal.
Let’s compare the changes in coal revenues change for 1Q16 over 1Q15 for UNP’s peers.
- Union Pacific (UNP): declined by 43%
- Norfolk Southern (NSC): declined by 23.3%
- CSX (CSX): declined by 37.0%
- Canadian National Railway (CNI): declined by 42%
- Canadian Pacific Railway (CP): declined by 9.4%
- BNSF Railway (BRK-B): declined by 38.6%
- Kansas City Southern (KSU): declined by 32.5%
- Genesee & Wyoming (GWR): declined by 24.0%
Investors interested in the transportation space can consider investing in the SPDR S&P Transportation ETF (XTN). This ETF holds 13.4% in US major railroads.
In the next part of the series, we’ll look at UNP’s automotive revenues, the bright spot in the first quarter of 2016. We’ll also look at related company guidance.