There is money to be made...

From "The Financial Times", 19 October 2012, written by Robert Wright in New York

Union Pacific, operator of the largest US rail network, illustrated the industry’s continued robust earning power in the face of the global downturn when it unveiled record quarterly profits despite a sharp fall in coal volumes.

Union Pacific, which operates in the two-thirds of the US west of the Mississippi, reported a 15 per cent rise in net income compared with last year’s third quarter to $1.04bn on operating revenues up 5 per cent to $5.34bn.

Union Pacific is the second of North America’s big rail operators –known as the Class Is – to report third-quarter figures. There had been an intense focus ahead of the earnings round on the likely effects of sharp drops in demand for coal both for use in domestic power stations and for export. Union Pacific said its coal revenue fell 5 per cent to $1.06bn, while the volumes of coal carried fell 12 per cent to 501,000 carloads.

However, Union Pacific benefited more strongly than CSX, operator of the largest network east of the Mississippi, from the boom in crude oil and gas production from shale rock formations. Some railroads have experienced sharp rises in their crude oil traffic as states such as North Dakota, which are unconnected to the US’s oil pipeline network, have emerged as significant oil producers.

Union Pacific’s petroleum product traffic rose 95 per cent year-on-year to 62.1m carloads, contributing to an 18 per cent year-on-year increase in chemical traffic. The chemical segment’s revenue rose 17 per cent to $841m.

Eric Butler, Union Pacific’s executive vice-president of marketing, said the company had seen a “steady ramp-up” in crude oil volumes throughout the year.

“We would see ourselves being able to continue to take advantage of that growth opportunity,” Mr Butler said.

Intermodal traffic – truck trailers and shipping containers – rose 1 per cent while revenue from the business increased 8 per cent to $1.02bn. The business had suffered from sluggish US economic growth, Union Pacific said, but continued to benefit from conversions of traffic from truck to rail amid high fuel prices.

Tony Hatch, an independent railroad analyst, said the results were a tribute to a company that following some years of lacklustre performance, had “got its operational momentum back”.

“This is very impressive,” he said.

Union Pacific was solidly in the second tier of rail beneficiaries from the switch towards new energy sources, Mr Hatch added. It handles significant quantities of oil heading from other railroads’ networks to its customers and large volumes of the sand used in hydraulic fracturing of shale oil and gas wells.

Union Pacific’s shares rose 1.4 per cent to $125.43. Diluted earnings per share rose 18 per cent to $2.19, while the company declared a dividend of 60 cents, up 26 per cent. 

Union Pacific Freight Train (Wikimedia Commons Photo)

 

Union Pacific Freight Train (UP Photo)

 

Union Pacific Route Map (Source: Union Pacific)