Union Pacific defies coal declines to beat forecasts

Union Pacific on Thursday became the second rail freight network in two days to announce far stronger than expected full-year results as strong agricultural and automotive demand allowed it to defy falling coal and oil volumes.

Fourth-quarter net income for UP was up 13 per cent to $1.17bn, on revenues up 7 per cent to $5.3bn. The earnings per share figure – up 16 per cent to $2.55 – was 6 cents better than consensus forecasts.

The results sent shares in UP, operator of the US’s biggest rail freight network, up 3.3 per cent to $174.12 by the close of trade.

UP’s results came the day after Norfolk Southern, the US’s fourth-biggest operator, announced fourth-quarter net income up 24 per cent to $513m, on revenues up 7 per cent to $2.9bn.

The results illustrate how US railroads continue to be able to increase prices and improve returns, despite declines in coal volumes – traditionally the biggest single commodity for railroads. US power stations have been using far less coal as the country’s shale oil and gas boom has sent natural gas prices tumbling.

UP’s fourth-quarter coal volumes fell 10 per cent and its coal revenue declined 1 per cent to $985m, while NS’s coal volumes fell 8 per cent and its coal revenues fell 2.4 per cent to $641m.

UP also defied a 22 per cent fourth-quarter decline in shipments of crude oil, which has been one of the fastest-growing areas for the industry.

Eric Butler, UP’s head of marketing and sales, said greater supplies of imported oil at Gulf Coast refineries had depressed shipments from West Texas and Oklahoma. Changing price differentials had also prompted shippers to send less oil from the Bakken Shale in North Dakota to Louisiana refineries, which UP is best placed to serve.

Jack Koraleski, chief executive, said 2013 had been a “terrific year” for UP.

“For the first time in six quarters, we reported overall volume growth despite significantly weaker coal shipment, which highlights the strength of our diverse franchise, the extensive network reach we have to various markets and a strong grain harvest,” he said of the fourth quarter.

The company had improved its operating ratio – the proportion of its revenues consumed by operating costs – to 65 per cent for the quarter. The figure was above 70 per cent as recently as 2010.

Mr Koraleski said UP now expected to return a full-year operating ratio below 65 per cent before the target date of 2017, but he could not be sure when. The 2013 full-year figure was 66.1 per cent.

UP attributed its improved profitability in the quarter mainly to a 3.5 per cent increase in “core pricing”, its average price per unit shipped. NS also succeeded in raising its core prices.

UP’s agricultural traffic in the quarter rose 13 per cent, while revenue grew 19 per cent. Automotive traffic – both completed cars and parts – rose 10 per cent, with revenue up 17 per cent.

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