UPDATE 3-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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