CP: Market alliances can serve as means to convert truck traffic

Canadian Pacific has a number of options it can pursue should the regulatory and market environments not be conducive to mergers and acquisitions, executives said during the railway’s second-quarter 2021 earnings call on Wednesday.

Besides CP’s “unique origin strengths” and shorter lengths of haul, it could engage with marketing alliances with the Western U.S. railroads to capture markets on both sides of the Mississippi River, CP (NYSE: CP) President and CEO Keith Creel told investors.

CP also has more than 1,000 acres to develop that could serve as “self-help initiatives” because they could build out additional capacity serving Chicago or Vancouver, as well as Eastern Canada via the CMQ short line acquisition, Creel said.

“There are still many chapters left of that growth,” Creel said.

These are strategies that CP also could pursue as a means to convert more freight traffic from trucks to rail, according to CP Chief Marketing Officer John Brooks.

“As you think about alliances and other marketing partnerships … how do we take that interline rail move and make it truck competitive,” Brooks said. “A lot of the opportunities we always talk about are focused on just maybe our long-haul single-line shipments, but if you really think about as more and more PSR [precision scheduled railroading] evolves on the U.S. roads, you get more like-mindedness in terms of opportunities and service. How can you combine networks to really drive that truck conversion?”

For a merger or acquisition to proceed, CP would not only have to convince the Surface Transportation Board to approve it but also convince the board at a time when governmental pressures appear to be more welcoming to additional regulation. A recent executive order from President Joe Biden targeted the maritime and railroad industries among others, charging STB Chairman Marty Oberman to weigh in on longstanding proceedings that address what competitive rail service should be for shippers.

“I can say this overall, we’re not fans of more regulation. I’m not going to suggest that. We think competition is the best way to assure good outcomes for our customers and for the North American economy,” Creel said. “But with regard to the specific executive order, we think that in fact it emphasizes the importance of competition [and] it emphasizes the importance of Amtrak access, both of which are unique facts that speak well without the need for the STB to enforce through any new promises. So we think that proves and sits well for our proposed combination” with Kansas City Southern (NYSE: KSU).

For its part, Creel reiterated CP’s interest in acquiring KCS should the merger between rival Canadian railway CN (NYSE: CNI) and KCS cease to proceed before federal regulators. CP expects in the coming weeks for the board to decide whether or not to grant a proposed voting trust that CN would use to acquire KCS.

“In reading and listening to the statement that Chairman Oberman spoke to … consolidation can be beneficial under certain circumstances. We firmly believe that our facts satisfy and complement certain circumstances where consolidation can be beneficial,” Creel said.

In the meantime, CP anticipates continued volume growth into the second half of 2021, including strong growth into 2022 for intermodal, based on discussions it has had with international shippers.

“Keith and I just met with a major international shipper last week, and they were extremely bullish that this is going to push right on into 2022 and probably be the better part of the whole year. They were quite bullish on the contracting opportunity that they see sort of the demand profile and frankly some of the challenges that continue at the overseas ports continuing and that just creating this longer and longer tail,” Brooks said.

Among the new intermodal initiatives CP has lined up for the remainder of 2021 are a new multiyear contract with ocean carriers COSCO and OOCL at the ports of Vancouver and Montreal, which CP says will generate over CA$100 million [US$80 million] annually in incremental revenue, according to John Brooks, CP’s chief marketing officer. Meanwhile, a domestic transload facility will open in Vancouver in September, Brooks said.

Executives provided updates on other commodities. CP is watching how dry conditions will affect the timing of the grain harvest. The railway expects “normal” peak demand levels for the upcoming crop year, following a 2020-21 crop year that saw an all-time company record of 30 million metric tons.

Meanwhile, CP’s first train carrying heavy crude oil processed by a diluent recovery unit (DRU) will soon be traveling from the USD Terminal in Hardisty, Alberta, Brooks said. The train, in partnership with Gibson Energy, USD and ConocoPhillips, will head to USD’s facility in Port Arthur, Texas, and CP expects the business to ramp up to 15 to 20 trains per month in the third quarter, according to Brooks.

“This marks the beginning of a long-term shift from traditional crude by rail to DRUbit, a more sustainable environmentally friendly and pipeline competitive product,” Brooks said.

CP’s second-quarter 2021 net income was CA$1.25 billion, or $1.87 per diluted share, compared with second-quarter 2020 net income of CA$635 million, or 93 cents per diluted share. One Canadian dollar equals about 80 cents in U.S. dollars.

For more on CP’s second-quarter 2021 financial results, click here.

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