Canadian National, Coalspur Tie Up

One of the leading Canadian railroads, Canadian National Railway Company ( CNI - Analyst Report ) has entered into a multi-year agreement with Coalspur Mines Limited. The agreement involves a 7-year contract for transporting thermal coal from Coalspur’s Vista Coal Project in Alberta, Canada, to Ridley Terminals as well as construction of railway lines to serve its mine. We expect the new agreement to provide significant synergies to Canadian National Railway in uplifting its coal revenues despite being surrounded by a challenging demand environment.

Of late, most of the freight railroad carriers like Canadian National, Union Pacific Corporation ( UNP - Analyst Report ) and CSX Corp. ( CSX - Analyst Report ) have been hit by coal woes due to cheaper availability of natural gas and its substitution effect on coal. As a result, declining coal volumes, in particular thermal coal, due to lower demand has been a matter of significant concern for these companies.

Coal represents one of the single-most important commodities and accounts for over 40% of railroad tonnage. Domestic coal demand, of which utility coal accounts for approximately 93%, is witnessing persistent declines.

However, the Energy Information Administration (EIA) projects coal consumption by power plants to grow 6% in 2013 on an anticipated rise in natural gas prices. As a result, we believe these projections bode well for Canadian National’s initiatives to improve its prospects in the coal transportation market. More exports of U.S. thermal coal along with Canadian petroleum coke will lead to incremental revenue for the company. Given the rise in Asian demand, the Canadian oil sand and petroleum coke businesses are also likely to remain strong.

Canadian National Railway – which operates along with other Canadian railroads – Canadian Pacific Railway Limited ( CP - Analyst Report ) – currently retains a Zacks Rank #3, implying a Hold rating.