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Leading Canadian railroad Canadian National Railway Company (CNI - Analyst Report) has entered into a long-term contract to transport bitumen for Southern Pacific Resource Corp. Under the five-year arrangement, bitumen will be shipped from Canadian National intermodal terminal at Lynton in Alberta to another terminal in Natchez in Mississippi.

The shipments will then be carried in barges to refineries on the Gulf Coast. These shipments are expected to begin by the end of this year, starting at volumes of 12,000 carloads per year and more as production ramps up.

In transporting bitumen through Canadian National rail-based transportation, Southern Pacific expects to increase its cost efficiency by reducing diluent costs, and ultimately leading to higher netbacks. Further, Southern Pacific will be able to benefit from access to the Gulf Coast’s large crude oil market that currently trades at a premium to West Texas Intermediate (WTI)-based pricing.

With respect to Canadian National, the company expects to transport approximately 25,000 carloads of crude oil versus 5,000 carloads transported last year. As a result, the new agreement will remain accretive to Canadian National’s projected growth in petroleum products.

Canadian National expects strong demand across all its businesses with growth in wholesale and retail market supporting high business volumes for the company. As the main revenue contributor, pricing continues to rise at an average of 3 to 5% year over year growth.

Fuel surcharges have also risen substantially year-over-year. The management expects North American industrial production growth to be approximately 3.5%. We believe the projection remains accretive to the company’s estimated mid-single digit carload growth and accounts for approximately 10% earnings growth this year.

However, headwinds related to fuel cost, lower-utility coal shipments, poor U.S. grain export along with lower U.S. corn and soybean production and competition from peers like Canadian Pacific Railway Ltd. (CP - Analyst Report) remain near-term concerns.

We have a Neutral recommendation on Canadian National, supported by a Zacks #3 Rank (Hold).

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