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Hedge-fund-backed Canadian railroad aims high

Stan Alcorn Oct 3, 2014
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Hedge-fund-backed Canadian railroad aims high

Stan Alcorn Oct 3, 2014
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The humble railroad is a hot investment, thanks in part to crude oil. 

Warren Buffett’s Berkshire Hathaway bought Burlington Northern Santa Fe Corporation in 2009. Bill Ackman’s Pershing Square became the largest shareholder in Canadian Pacific Railroad in 2012. 

Both have profited from the rise of rail transportation of crude oil.

“Canada’s growth in ‘crude by rail’ has really been tremendous,” says Sarah Emerson, managing principal at ESAI Energy. Emerson says the 300,000 barrels a day transported by Canadian rail is twice what it was in 2012. 

“I think [crude is] important,” says Jeff Nelson, analyst at Edward Jones & Co. But he cautions that it’s not the most important factor for Canadian Pacific’s bottom line. “I mean, look, it’s still small,” he says. 

Crude oil is 6 percent of the railroad’s cargo, according to its latest investor book. In the last two years, the railroad has done well largely by becoming more efficient, as Hunter Harrisonthe CEO installed after a proxy battle waged by Bill Ackmanhas closed railyards and laid off nearly 1/6 of its workforce. But this was only phase one of Harrison’s plan, according to Nelson. “Phase two is about revenue growth,” he says.

Doubling the company’s profits will require growth throughout its business, which includes transporting grain, automobiles and fertilizer. “This plan doesn’t work in a recession,” says Nelson.

To handle the growing traffic while maintaining efficiency will be a challenge. 

“He doesn’t have many options,” says Steve Ditmeyer, professor of railway management at Michigan State University. “He can run longer trains. He can run trains faster.”

In other words, for Canadian Pacific, it’s full steamor fossil fuelahead.


CORRECTION: The original version of this story incorrectly described Pershing Square Capital Management as having bought a majority stake in Canadian Pacific Railroad in 2012. In fact, Pershing Square became the largest shareholder in Canadian Pacific Railroad in 2012, though it did not acquire a majority stake. The text has been corrected.

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