Canadian Pacific Railway Limited
) recently announced its new fracturing sand business. The company
entered into a multi-year agreement with Unimin Corporation for
shipping fracturing sand from Wisconsin, where Unimin's facility
will begin operations by next year.
Unimin Corporation is one of the leading producers of industrial
minerals in the U.S. and is a subsidiary of Sibelco Group, a
Belgium based multinational involved in the production of
Upon completion of the new facility, Canadian Pacific will be
benefited from the two million tons of fracturing sand that it will
ship every year to markets like North Dakota, Texas and
The second largest railroad company, Canadian Pacific continues
to benefit from its strong foothold in the Canadian rail freight
transportation market. Given its extensive rail networks and
potential business strategies, the company covers the majority of
freight businesses in key industrial areas like Alberta Industrial
Heartland, the U.S. gulf coast and mineral-rich regions like Bakken
Shale oil field and Marcellus Shale natural gas field.
We believe that the alongside the Bakken and Alberta oil sands
transport business, Canadian Pacific will also benefit from
Marcellus Shale natural gas production unit and Alberta's
Industrial Heartland area, Canada's largest hydrocarbon processing
unit, driving revenue and market share gains in the upcoming
Additionally, the company's plan on improving train lengths and
network expansion in 2012-2013 will also support its new business
opportunities. This year, the company intends to upgrade and
install new sidetracks in key areas to support increased train
Further, in 2013, Canadian Pacific plans to increase train
length by 11% on the trans-Canada rail routes. Enhancement of
network capabilities over the next couple of years remain
concurrent with its goal of enhancing capacity, safety and service
metrics as well as increasing fuel efficiency of 1-2%
over the long term.
Since 2008, the company's intermodal trains have grown by 40% to
a length of approximately 12,000 feet. The longer trains have
resulted in increased efficiency in terms of capital inputs and
have enabled the company to tap potential opportunities in the
rapidly growing rail freight market.
Further, we believe that the company's decision to improve train
length remains a key strategy given the emergence of new markets
for rail intermodal services due to uncertainties surrounding truck
freight. Additionally, the growth in export coal and potash
shipments along with the recent development in crude shipment has
propelled the company to expand its capacity via longer trains.
To support these growth plans, Canadian Pacific projects
long-term capital expenditures of nearly C$2.3 billion for
2011-2028, with approximately $1.0 billion for the current year.
Although these initiatives look attractive for long-term growth and
provide competitive advantage to the company over railroads like
), which operates on almost similar tracks, we believe heavy
investments in new locomotives, technology and fuel recovery
initiatives overlooks the current economic outlook and stressed
operating metric due to soaring fuel prices, paving the way for
distressed margin performance in the near term.
We maintain our long-term Neutral recommendation on Canadian
Pacific supported by a short-term Zacks #3 Rank (Hold).
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