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Canadian National Railway: Alberta Ups Petroleum Revenues

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CNI’s chemicals revenue

In this part, we’ll look at Canadian National Railway’s (CNI) petroleum and chemicals segment in 2Q17. Revenues for this segment are the company’s second-largest share of revenues at 17.6%.

In the second quarter of 2017, petroleum and chemicals revenues were $549.0 million Canadian, a fall of 12.0% from $492.0 million Canadian in 2Q16.

For the last few quarters, the segment’s freight revenues have fallen. However, it was much better on a year-over-year basis in 2Q17.

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Petroleum volumes in 2Q17

While RTMs (revenue ton miles) for this segment rose 15.0%, the revenue per RTM fell 3.0% in 2Q17. Railcars for petroleum and chemicals rose 6.0% to 149,000 railcars from 141,000 in 2Q16.

Volume growth was due to increased shipments of crude oil. Higher production in the Alberta oil sands and increased volumes of hydrochloric acid and caustic soda led to the rise in crude oil shipments. Increased freight rate and fuel surcharge rates also led to a rise in revenue. The higher volumes were partially impacted by reduced shipments of plastic pellets and condensate.

Management’s insight in 2017

CNI’s management expects lower crude by rail in the second half of 2017. Even though crude oil volumes recovered from the Fort McMurray fire in 2016, CNI foresees a stoppage of crude by rail by an eastern Canada refinery. The company projects the pipeline capacity to suffice the current lower crude oil production. However, the company anticipates higher crude oil volumes in the second and third quarters of 2018.

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Canadian National Railway hopes a steady demand for fractionating sand will drive freight volumes in the second half of 2017. However, competition from local sand production will most likely impact the fractionating sand volumes in the near future. On a sequential basis, CNI hopes the situation will improve for fractionating sand.

Peers’ shipment prospects

New housing starts in the United States saw a rising demand for specialty chemicals in construction projects. That should open up new doors for higher shipments of plastics and other chemicals for CNI’s peers such as Canadian Pacific Railway (CP), Norfolk Southern (NSC), Union Pacific (UNP), and CSX (CSX).

All US-originated Class I railroad companies are included in the portfolio holdings of the VanEck Vectors Morningstar Wide Moat ETF (MOAT).

Next, we’ll take a look at Canadian National Railway’s grain segment in 2Q17.

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