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Over the last few years, many power plants have started shifting to natural gas from coal, and thus coal shipments for railroad companies are decreasing. Eastern railroad company CSX Corp (NYSE:CSX) is at disadvantage over its Western U.S. peers, Union Pacific Corporation (NYSE:UNP) and Berkshire Hathaway (NYSE:BRK.A)'s subsidiary BNSF Railway, due to its geographical location. The coal price from the Appalachian basin is about $63 per short ton, while the price in the Powder River basin, or PRB coal, where Union Pacific and BNSF are major railroad companies, is about $12 per short ton. Because of the high cost, the Appalachian basin has seen a decline in demand in comparison to PRB.

It is expected that domestic coal-shipment volume will stabilize this year, as the share of electricity produced by coal will increase to 40.2% from 39.1% in 2013. With the rise in coal consumption, power plants' coal stock will be reduced, increasing coal shipments.

However, this rise is expected to be short-term only, because many coal-fired plants are expected to retire by 2020. These plants are shutting down mainly for two reasons. One is the expected strict environmental rules to be proposed by the EPA, for power plants. The second is that long-term natural-gas prices are expected to stay low, which will make running plants through coal less economical. Because of the shutdown of these plants, coal-shipment volume will fall further over the long-term.

In export markets too, the company will face headwinds, because global oversupply of coal has led to a price drop, which is affecting the company's revenue. In the fourth quarter of 2013, the company's coal revenue per unit shipment fell by 4% over last quarter due to lower export prices.

Another worry for the company is the slowdown in China's economic growth to 7.7% last year, the slowest since 1999. This slowdown may lead to a slump in the country's coal imports, which will affect Australian miners as most of their coal is exported to China. Because of oversupply, Australia will increase their exports to Europe, where about 60% of CSX's coal export volume is shipped. CSX is expecting that its export shipment volume will drop to about 35 million tons this year from 44 million tons in 2013.

Although, CSX is trying to decrease its dependence on coal by expanding its other businesses, as coal shipment accounts for 23% of its revenue. The company's domestic as well as export shipment is expected to stay low, so its coal business will have a negative impact on its overall revenue growth.

Intermodal and crude by rail will boost the company's top line

Although the company's coal-shipment volume is decreasing, its other divisions have grown. The company is specifically bullish about its intermodal business, which showed quarter-over-quarter growth of 11% in car loads in the fourth quarter of 2013. The segment will benefit once its National Gateway initiative for creating an efficient rail route to link Mid-Atlantic ports with Midwestern markets is completed in 2015. After completion 95%, up from the current 90%, of the company's rail intermodal will move in a double-stack lane. Double-stack rails can carry 100% more goods than normal rails in one trip, so the company's shipment trips will lessen, and 20 million tons of carbon dioxide emissions will be reduced. Improved efficiency will make the company more competitive against truck companies, helping it to tap an estimated truck-load opportunity of about $9 million.

Crude by rail volume is rising

CSX is expecting crude oil from the Bakken shale formation in North Dakota to help it offset the declining coal volumes. Currently it contributes only 1% to the company's total shipment volume, but the market is growing rapidly. Last year, the company moved 46,000 loads of crude compared to 9,000 loads in 2012, and it is expecting another 50% rise this year. The company's shipment volume from the Bakken is increasing due to insufficient pipelines in the region. There are a few pipeline projects, such as TransCanada's (NYSE:TRP) Keystone XL, Enbridge's (NYSE:ENB) Northern Gateway, and Kinder Morgan's (NYSE:KMI) Trans Mountain, which can decrease shipment of crude by rail, but approval of these projects is still doubtful due to political reasons. Moreover, none of these projects are focused toward East Coast refineries, which is CSX's main focus. Hence, I expect the company's crude-by-rail shipment will increase in the coming years.

Potential risk

However, there are safety concerns regarding shipment of Bakken oil through rail due to its combustible nature, and the concerns have increased due to train derailments that have occurred in the last few months. In fact, 85% of the tank cars in which crude is transported through trains are unsafe and need to be replaced with new tank cars. The estimated cost to upgrade all tank cars that are used for transportation of crude oil will be $2.4 billion to $4.8 billion. However, the new rules are not expected to come before 2015, and until then shipment through old tank cars will continue.

Conclusion

The decline in coal shipments is a major concern for CSX as both domestic and export volumes are falling, which will negatively affect the company's top line. However, the company is expecting to offset coal-shipment volume weakness by its intermodal business, which is continuously increasing. The company's crude shipment also has growth prospects. Despite new rules due to insufficient pipelines in the company's focus region, crude-by-rail volume is expected to grow. The company has previously given guidance of double-digit earnings growth by 2015 over its 2013 base, but looking at the weakness in coal demand it looks uncertain at the moment. My recommendation for this stock is to hold the position, but not make any new positions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.