CP: Land assets and partners provide growth opportunities

Canadian Pacific aiming for 2021 annual operating ratio below 57%

Canadian Pacific (NYSE: CP) is looking to build upon its existing network and land assets as a way to expand capacity, company executives said during the railway’s fourth-quarter earnings call Wednesday.

“I’m not aware of any CMQ-like opportunities. I would say that we keep a strong financial position or keep our balance sheet strong and pattern our pockets so that we can be opportunistic if one of those comes up,” said CP President and CEO Keith Creel during the call. Creel was referring to CP’s acquisition of the Central Maine and Quebec (CMQ) Railway, which CP views as an opportunity to expand into Atlantic Canada.

“But in the meantime, it’s about building out this network that we have,” Creel said. In addition to strategic partnerships with companies such as Maersk, CP can also use its land holdings nearby its terminals should it decide to expand localized opportunities, he said. For instance, CP is considering building a multimodal transload and logistics facility near Vancouver.

“I can grow in Vancouver. I can grow in Calgary. I can grow in Toronto. I can grow in Winnipeg. I can grow in Chicago. I can grow in Montreal,” Creel said. “We have land holdings contiguous to every one of those terminals that can create customer solutions. … [You will expect to] see that playbook play itself out of this company for years to come, outside of any kind of acquisition we might participate in.”

Some areas where CP sees revenue growth in 2021 include automotive and the bulk franchise, including grain, biofuels, agricultural nutrients and frac sand, according to CP Chief Marketing Officer John Brooks.

“I’m bullish across the board, and that’s without even getting to the full ramp-up of our Maersk business and … the opportunities that we’re going to see in Saint John in 2021,” Brooks said, referring to the Port of Saint John’s CA$200 million modernization project to bump up capacity there to 300,000 twenty-foot equivalent units annually.

The railway is also seeing growth opportunities on its network for intermodal, according to Brooks. Those opportunities include its newly expanded Shoreham intermodal terminal that serves the Minneapolis market, as well as capacity expansion plans slated for terminals at the Port of Vancouver. 

“I don’t see capacity at the terminals being an issue. … I think we feel quite comfortable around our product to deliver inland from those ports,” Brooks said.

CP is eyeing an operating ratio (OR) for 2021 that’s “in excess of” 100 basis points, or below 2020’s OR of 57.1%. Investors sometimes use OR to gauge the financial health of a company, with a lower OR implying improved financial health. OR is a company’s expenses as a percentage of revenue.

But to know how much lower CP’s annual OR could go, that will depend on how grain volumes play out in the 2020-21 and 2021-22 crop years, as well as how price spreads for Canadian crude oil will look like, according to Creel.

“If you could give me those inputs, I could land on that OR number,” Creel said. 

Fourth-quarter financial results

CP reached a record low operating ratio (OR) in the fourth quarter of 2020: 53.9% compared with 57% in the fourth quarter of 2019.

Fourth-quarter net income was CA$802 million, or $5.95 per diluted share, a 20.8% increase from $664 million, or $4.82 per diluted share, in the fourth quarter of 2019. All figures are in Canadian dollars, and 1 Canadian dollar equals about 79 cents in U.S. currency.

Canadian Pacific2020 Value2019 ValueY/Y Gross ChangeY/Y % Change
Freight revenue (millions, in CAD)$1,968$2,024($56)-2.8%
Carloads, including intermodal (000s)728702263.7%
Revenue per carload (including intermodal)$2,704$2,883-$179-6.2%
Intermodal shipments279262176.6%
Intermodal revenue per carload$1,470$1,528-$58-3.8%
Gross ton miles (millions)71,97771,4954820.7%
Freight revenue per revenue ton mile$4.89$5.14$0-4.9%
Employee counts (average)12,02812,860-832-6.5%
Train velocity (mph)21.922.4-1-2.2%
Dwell time (hours)6.75.9113.6%

For more on CP’s fourth-quarter results, go here.

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Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.