Canadian Pacific profits fall $132 million in fourth quarter
By Gareth Madoc-Jones
CP Rail’s 2015 fourth quarter profits have fallen by $132 million when compared to the same quarter in 2014. This marks a 29.3 per cent slide in net income.
The decreased profits can be attributed to two main factors in CPs fourth quarter report. Commodity shipments across Canada have been reducing resulting in declining revenues. As well, the low Canadian dollar is costing the company tens of millions in additional interest payments for its long-term debt in US dollars.
Over the fourth quarter, revenue from shipping commodities dropped $74 million when compared to the previous quarter. When breaking this loss down into commodity categories, crude oil shipments fell by $25 million, equating to 5,000 fewer carloads over the three-month period.
To view the annotated financial report click below.
Professor Raymond Cox, the finance chair at Thompson Rivers University, says falling oil prices are to blame for the decrease in crude oil shipping revenues. “With the drop in oil prices that’s put a depressing effect on the Alberta economy, putting it into a recession and that’s rippling over into the Canadian economy overall and as such shipping has declined and obviously a sub-component of that is shipping oil,” says Cox.
Other commodity categories also had sizable drops in revenues. Metals, minerals and consumer products fell by $40 million. US grain, coal, potash as well as domestic and international intermodal shipments combined for a further loss of $79 million.
The low Canadian dollar is also eating into CPs profits. The most recent quarterly report shows $100 million in losses from paying off long-term debt in US dollars. “Having just been informed that CP Rail has a high amount of US dollar denominated debt, then obviously their interest payments in US dollars are more expensive now that the loonie’s gone down,” says Cox.
Canadian Pacific Railway, TSX stock price in US dollars by GarethMJ on TradingView.com
What’s also worth noting is CPs stock price on the Toronto Stock Exchange. In April 2015, the stock peaked at $198 US a share. Over the course of the next nine-months the stock fell by 51 per cent to a low of $97 US in mid-January 2016. Cox says this dip is not only attributed to the low loonie and falling oil prices, but also to two failed attempts to purchase the American railroad Norfolk Southern Corp. for an estimated $30 billion.
“So far they’ve been rebuffed by the company and they have raised their offer price,” says Cox, adding, “Even if they succeed they have the winners curse where they overpay for the stock and that would have a short run negative impact on CP Rail stock price.”
Norfolk Southern isn’t giving any indication a deal with CP Rail is close. In fact, they have said CPs proposals have not only been unsolicited, they’ve been grossly inadequate.
CPs stock has rebounded in the past week and a half. It’s now trading at around $120 US a share. This rise in stock price follows the decision by CP to cut 1000 jobs this year. The cuts were announced on Jan. 21, the same day CP released its fourth quarter results. “Despite challenging economic conditions and lower commodity prices, we continue to focus on what we can control – lowering costs, creating efficiencies,” said Harrison in the quarterly report.
Even though CPs profits have been shrinking they still managed to post fourth quarter earnings of $319 million and $1.35 billion for the entire 2015 year. While some might believe these bottom line numbers are impressive, CPs CEO has demonstrated by the job cuts the company is willing to take significant action in an attempt to reverse the trend in falling profits in 2016.