Oil Prices to Affect CP and CN Rail's Q4 Earnings

Fuel prices are expected to hit fourth quarter earnings at both Canadian Pacific Railway Ltd. (CP) and Canadian National Railway Co.(CNI). The rapid rise for West Texas Intermediate crude oil and the higher Canadian dollar will hit CN to the tune of C$0.03 per share, according to RBC Capital Markets’ Walter Spracklin.

While the company is reporting volume growth at nearly 6%, the analyst notes that this is overstated due to a disruption in the fourth quarter of 2006 at a customer plant. As a result, CN’s volume growth is really in the 2% to 3% range, he said in a report.

Continuing deterioration of growth in forestry products also poses a major challenge given that this segment represents more than 20% on CN’s revenue bases, Mr. Spracklin added.

His new fourth quarter estimate is C$0.87 per share, which is accompanied by a corresponding C$0.03 reduction to his 2007 earnings per share (EPS) estimate now at C$3.37. Mr. Spracklin continues to rate CN at “outperform” with a C$61 price target.

For CP, the analyst estimates that fuel expenses will lead to a C$0.04 reduction in fourth quarter EPS, while foreign exchange will have a negative impact of C$0.01 to C$0.02 He now expects earnings will come in at C$1.16 in the fourth quarter, also C$0.05 lower at C$4.29 for 2007.

He expects CP’s bulk volumes will outperform competitors in 2008.

In terms of the recent downgrade of CP’s senior debt by Moody’s that came as a result of its acquisition of railway DM&E, Mr. Spracklin said it increases the chances that CP will seek a financial partner if it decides to go ahead with the Powder River Basin project in Wyoming.

He continues to rate CP at “outperform” with a C$83 price target.

CNI vs. CP 1-yr chart: