Canadian Pacific Railway Limited
) has inked a multi-year deal with
U.S. Silica Holdings, Inc.
). According to the agreement, Canadian Pacific will exclusively
provide freight solutions for shipping frac sand from U.S. Silica's
new facility in Wisconsin. U.S. Silica - the second largest
domestic commercial silica maker - is setting up a new frac sand
mining and processing facility to connect with Canadian Pacific's
rail network in Sparta, Wisconsin. The production facility is
expected to begin operations in the first quarter next year.
Given the fact that Canadian Pacific is the only railroad that
connects to Bakken, Alberta Industrial Heartland and the Marcellus
Shale region, the increasing opportunity for energy products in
these regions will also remain accretive for to Canadian Pacific's
business. Higher movements of petroleum products, natural gas and
frac sand for drilling activities open up lucrative opportunities
for Canadian Pacific.
The company had previously projected that the Marcellus Shale
natural gas production unit and Alberta's Industrial Heartland,
Canada's largest hydrocarbon processing unit, to support its
revenue through higher shipments in the upcoming years.
Additionally, Canadian Pacific's plans to improve train lengths
and network 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 by 1-2% over the long
Since 2008, Canadian Pacific's intermodal trains have grown by
40% to approximately 12,000 feet. 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, 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 an approximately $1.0-$1.2 billion budget for the
Although these initiatives look attractive for long-term growth
and provide a competitive advantage over railroads like
), which operates on almost similar tracks, we believe heavy
investments in new locomotives, technology and fuel recovery
initiatives overlook the current economic outlook and stressed
operating metric due to soaring fuel prices, thereby paving way for
distressed margin performance in the near term.
Consequently, we maintain our long-term Neutral recommendation
on Canadian Pacific supported by a short-term Zacks #3 Rank
CDN NATL RY CO (CNI): Free Stock Analysis
CDN PAC RLWY (CP): Free Stock Analysis Report
US SILICA HOLDI (SLCA): Free Stock Analysis
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