Even though these two companies couldn’t work out a deal, the proposed merger brought to light an interesting outcome of the booming domestic energy industry.
You see, this proposed merger was a bit different.
Unlike the many recent deals based on inversions and tax avoidance, this deal was all about oil.
Oil by Rail: An Emerging Market
Transporting oil via the railroad has turned into a growing business for the rail industry, in part due to a lack of pipeline infrastructure.
According to U.S. government data, moving crude oil was only a $25.8-million business in 2008. But last year, revenue reached $2.15 billion!
And that growth is still clipping down the track.
The merger proposal, made by CP, would have taken advantage of the strengths of both railroads, in order to fully benefit from the North American energy bonanza.
CP, which has activist Bill Ackman on its board, is one of only two big railroads with direct access to Bakken oil in North Dakota. (Warren Buffett’s BNSF is the other.) Meanwhile, CSX controls routes that run from the Midwest to East Coast refineries.
In theory, a merged CP-CSX could have railcars that bring oil directly from the Bakken to refineries on the East Coast without stopping.
That would generate cost savings for the refining industry and profits for the combined company. The new company would’ve had about 35,000 miles of tracks and generated roughly $18 billion in annual revenues.
Doomed From the Start
It would’ve been a great business move, but it was always unlikely that government regulators would permit such a merger.
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The U.S. Surface Transportation Board has previously prevented other deals that would have allowed a single company to have rail lines stretching from coast to coast – like when the board denied a merger between BNSF and Canadian National (CNI), CP’s larger rival, back in 2000.
The combined firm would have owned track running from British Columbia to Massachusetts.
Even though the merger won’t happen, railroad is still a good investment. But which company will do better?
CP vs. CSX
Well, CSX is still heavily dependent on the Appalachian coal market, which is in a state of steady decline.
All signs point to CP being the better investment, and not just because of the presence of Mr. Ackman.
The company transformed to a leader in the industry by its CEO, Hunter Harrison, who came on board in 2012.
Harrison trimmed unprofitable operations and placed a growing emphasis on the energy side of the business.
CP also recently forecasted that its earnings would double by 2018, with revenues climbing by 50%. Most of this is due to the rail’s wise emphasis on oil transportation. CP reports that one-third of the revenue gain will be due to crude oil shipments.
This is logical, considering oil shipments in CP’s home market of Canada alone quadrupled since 2012.
Sixty percent of the company’s oil shipments come from Alberta’s heavy crude fields, with the rest coming from the hefty Bakken.
Overall, the company forecasts that it’ll ship 200,000 railcars filled with oil next year, versus the 120,000 carloads it did in 2014.
If you’re looking to play shale oil’s transformation of the railroad industry, Canadian Pacific is a smart way to go.
And “the chase” continues,