What is up with the CSX / CN railroad merger?


We have watching railroad consolidations for quite a while. Canadian Pacific has approached CSX Corp. with a proposal to merge, according to a Wall Street Journal (WSJ) report issued over the weekend.

The merged railroad would have a combined market value of about $62 billion and combined synergies to better exploit the North American energy boom, various rail industry analysts said after the WSJ issued the report. CSX’s network covers the Midwest and East Coast, including numerous refineries, but doesn’t directly access the Bakken Shale oil fields, while CP has access to North Dakota crude-by-rail terminals. A deal would potentially create a single railroad that could haul crude from North Dakota oil fields all the way to Northeastern refineries, analysts said.

If a merger deal is on the table, gaining Surface Transportation Board (STB) approval for such a marriage would likely be difficult, said Robert W. Baird & Co. Inc. analysts in a special report.

Despite minimal network overlap between CP and CSX, a North American cross-border railroad combination proposed in 1999 by CN and BNSF Railway Co. — which similarly had little overlap — prompted the STB to declare a 15-month moratorium on large railroad mergers and draft new railroad merger guidelines. CN and BNSF consequently abandoned the deal, Baird analysts said.

In addition to the crude-transportation synergies, another primary motivating factor for the proposed CP-CSX merger is the congested Chicago rail hub, Baird analysts said. CP Chief Executive Officer E. Hunter Harrison purchased the Elgin, Joliet & Eastern Railway (EJ&E) while leading CN in 2007. The EJ&E provided a bypass to CN around Chicago, a major rail interchange point that has been particularly congested so far this year, contributing to service issues.

CN Rail
CN Rail

CSX broke four financial records in 3Q. Guess that makes them harder for CP to buy.

A diverse business portfolio, volume growth in a number of commodities and pricing gains helped CSX Corp. set four financial records in the third quarter.

Revenue rose 8 percent to a 3Q-best $3.2 billion, operating income jumped 16 percent to a record $976 million, net earnings increased 12 percent to a 3Q-high $509 million and earnings per share climbed 13 percent to a record 51 cents compared with third-quarter 2013 results. In addition, volume rose 7 percent to 1.76 million units, the operating ratio improved 2.2 points to 69.7 and operating expenses increased 5 percent to $2.25 billion.

CSX beat several performance projections, including a revenue target of $3.17 billion, operating income target of $914 million, operating expenses target of $2.26 billion and operating ratio target of 71.1, Citi Research analysts said in a report.

“Overall, the quarter appeared solid on very strong carload growth,” the analysts said. “In addition, a 16 percent increase in utility coal likely added materially to CSX’s strong operating ratio improvement and 16 percent growth in [earnings before interest and taxes].”

The Class I continued to capitalize on economic momentum in many markets, said CSX Chairman, President and Chief Executive Officer Michael Ward during the railroad’s 3Q earnings conference held this morning. For example, CSX has emerged stronger in part because of the energy transition occurring in the nation, he said.

“As the economy continues to expand, out record third-quarter results are built on the foundation of CSX’s network reach and sustainable growth opportunities,” said Ward. “At the same time, we are focused on the execution of our core strategy. That means enhancing our ability to grow faster than the economy, price above inflation, make strategic investments and produce ever more efficient operations.”

By business group, merchandise revenue climbed 12 percent to $1.9 billion and volume rose 9 percent to 748,000 units, intermodal revenue increased 6 percent to $455 million and volume rose 5 percent to a new record 691,000 units, and coal revenue was flat at $721 million while volume increased 7 percent to 319,000 units.

Within the merchandise sector, grain volume rose 7 percent, propelled by strength in corn, wheat, fertilizer, phosphate and ethanol shipments; construction-related volume rose 5 percent, driven by aggregates and building product traffic; and energy volume climbed 13 percent, elevated by crude oil, liquified petroleum gas and frac sand shipments. Coal business was helped by a 14 percent increase in domestic volume due in part to stockpile replenishments, but hurt by a 13 percent drop in export volume that reflected a global oversupply.

Looking ahead, CSX expects to sustain double-digit earnings growth in 2015 based on the strength of its 3Q performance and continues to target a mid-60s operating ratio longer term.

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