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CN Railway profit rises as crude oil shipments increase

Mon Jul 22, 2013 6:52pm EDT

By Scott Haggett and Solarina Ho

July 22 (Reuters) – Canadian National Railway,
Canada’s largest railroad, said on Monday it expects the boom in
crude-by-rail shipments to continue, despite the Lac-Megantic
tragedy earlier this month and as narrowing spreads between
benchmark world oil prices raise questions about the economics
of rail transport.

The company reported an 11 percent rise in adjusted profit
for the second quarter and said its oil shipments grew by 150
percent from the year-earlier period, boosting revenue by about
C$100 million ($96.7 million). It said that growth would likely
continue over the next 18 months.

Moving crude oil by rail is becoming increasingly popular in
North America as oil output surges and environmental opposition
and regulatory issues delay pipeline projects.

Industry players estimate that Canada will export more than
200,000 barrels of crude oil by rail per day to the United
States by the end of 2013, more than four times the average of
46,000 a day in 2012.

“We still believe there will be an increase in the volume,”
Jean-Jacques Ruest, CN’s chief marketing officer, said on a
conference call. “The (percentage growth) may not be the same
because the base is getting bigger, but there is still a
likelihood that crude-by-rail will continue to rise in volume.”

The forecast comes despite a deadly accident in
Lac-Megantic, Quebec, earlier this month, when a runaway crude
oil train operated by small company Montreal Maine & Atlantic
derailed and exploded, killing 47 people and devastating the
small town.

CN said it is reviewing all its safety procedures in the
wake of the tragedy.

The growth forecast also comes despite narrowing price
differentials between Canadian crude and the West Texas
Intermediate (WTI) benchmark in recent months, which raised
questions over whether the opportunity of using costly rail
transport to ship crude to U.S. markets is still viable.

“I’d like to know if that game is changing, with the
differentials closing and whether that closes that opportunity
for them going forward,” said Ryan Bushell, a portfolio manager
at Leon Frazer, prior to CN’s release of its results. His firm
owns close to 485,000 shares in CN, according to Thomson Reuters
data.

Earlier this year, Western Canada Select crude sold for more
than $43 per barrel less than WTI. That has since narrowed to
just over $16, undermining the advantage of moving lower-priced
crude oil to higher-priced markets.

The price difference between the two global markers, West
Texas Intermediate and European Brent, has also collapsed in
recent weeks. Once more than $20 per barrel in favor of Brent,
the spread has narrowed to just over $1 per barrel.

CN’s Ruest said crude-by-rail has become firmly established
and has helped boost the price of Canadian oil. He thinks oil
producers will continue to use rail to access the highest-paying
markets, but admitted that the impact of a tighter spread is not
yet clear.

“I think short-term the change in the spread has no impact
because people have already made a decision, they have bought
their product. Product that has been bought, that will be
delivered,” he said. “So the question is maybe more a couple of
months from now whether or not there will be some change in the
run rate.”

PROFIT RISES

CN reported net income rose to C$717 million ($693.42
million), or C$1.69 per diluted share, in the second quarter,
from C$631 million, or C$1.44 a share, in the same quarter last
year.

Adjusted to exclude a year-ago gain, earnings per share rose
to C$1.66 from C$1.50 a year earlier. Revenue was C$2.67
billion.

Analysts had expected adjusted earnings of C$1.62 a share on
revenue of C$2.7 billion, according to Thomson Reuters I/B/E/S.

CN Rail, whose shares have climbed about 20 percent over the
past year, said revenues increased 18 percent in its petroleum
and chemicals segment.

Crude shipments are the fastest-growing product for a number
of Class 1 North American railroads.

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