How Did Major US Railroads Perform in 1Q16?

(Continued from Prior Part)

1Q16 coal revenues

Previously, we discussed the 1Q16 revenues for all of the US Class I railroads. Now, we’ll look at coal. Since 2015, coal has turned into a black hole in the universe of commodities hauled by these carriers. Let’s look at the coal revenues lost by these railroads in 1Q16—compared to 1Q15.

As you can see in the above graph, Union Pacific (UNP) saw its coal revenues fall by 43% in 1Q16 on a year-over-year basis. The immediate followers were Canadian National Railway (CNI) and Burlington Northern Santa Fe—owned by Berkshire Hathaway (BRK-B). They had a loss of 42% and 38.6% in coal revenues, respectively. However, investors should note that coal’s exposure in total revenues is merely 5% for Canadian National Railway—Canada’s largest railway. Coal’s exposure in total revenues is 16.3% for Burlington Northern Santa Fe—the United States’ biggest Class I railroad.

For the major eastern US Class I rail carrier, CSX (CSX), you should know that the coal revenue loss was 37% compared to 23.3% for Norfolk Southern (NSC) in 1Q16. What’s worrisome is the fact that coal’s share of CSX’s total revenues is 1% higher than rival Norfolk Southern’s 14.4% in 1Q16. In this scenario, Canadian Pacific appears to be relatively better off in the peer group. We would like to remind investors’ that this railroad’s coal traffic in Canada starts primarily from Teck Resources’ (TCK) mines in southeastern British Columbia. The good news is that Tech Resources intends to produce slightly more coal in the current year—compared to 2015.

Coal outlook

However, the coal production and consumption outlook remains bleak. According to the U.S. Energy Information Administration, “Forecast coal production is expected to decrease by 143 MMst (16%) in 2016, which would be the largest annual percentage decline since 1958. Interior region production is projected to account for more than 20% of production in 2016 and 2017, up from 13% of coal production 10 years ago. This increase in share reflects the Interior region’s growing competitive advantages compared with other U.S. coal-producing regions, despite the higher sulfur content of its coal.”

Norfolk Southern and CSX’s coal freight prospects are more dependent on coal production in the Appalachian region. Burlington National Santa Fe and Union Pacific depend on coal shipments originating from the Powder River Basin region. The Powder River Basin’s coal output is expected to fall significantly for the first time since 1998. The Appalachian region’s 2016 output is expected to fall ~13%. It will impact the future coal volumes for eastern US railroads.