Tags: Union | Pacific | shale | UNP

Union Pacific a Transport Shale Oil Play

Monday, 26 Mar 2012 08:51 AM

By Dan Weil

Union Pacific (UNP), the nation’s largest railroad, is chugging along at a high speed. It operates on 32,000 miles of track in the Western two-thirds of the country. Aside from the general U.S. recovery, UNP is turning into a transport shale oil play thanks to its service routes.

The railroad company’s shares have rewarded investors richly, producing an annualized total return of 49.5 percent over the past three years. The S&P 500 offered a return of less than two-thirds that amount.

Union Pacific is well positioned to benefit from the increase in demand for rail transport of coal, agricultural products, and intermodal containers, according to Morningstar. For example, Union Pacific has choice coal routes in Utah, Colorado, and Wyoming’s Powder River Basin.

The railroad’s profit jumped 24 percent to $964 million in the fourth quarter from a year earlier. Revenue climbed 16 percent to $5.11 billion.

Petroleum shipments soared 46 percent in the quarter, as Union Pacific carried booming output of crude oil from the Bakken and Eagle Ford Shale areas. The railroad transports drilling equipment in addition to the oil itself.

Oil boom

The company estimates that the number of loads of oil and associated products it transports may double this year to 400,000.

Union Pacific is confident enough in growth that it plans about $3.6 billion in capital spending this year. The railroad’s ratio of operating expenses to sales hit a fourth-quarter record low of 68.3 percent last year.

Standard & Poor’s analyst Kevin Kirkeby has a hold rating on Union Pacific shares. Favorable pricing on contract renewals and ongoing volume gains provide support for the stock, he says.

The downside: “Our expectation that operating costs will start to rise as certain volume thresholds are reached, and what we see as UNP's above-peer average investment requirements,” Kirkeby writes.

The company next reports earnings April 19.

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