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Canadian Pacific expects to ramp up crude oil capacity a year early

Canadian Pacific Railway, after delivering a strong earnings report Wednesday, had more good news for investors, saying it expects to double its deliveries of crude oil 12 months earlier than previously forecast.

The Calgary-based railway said Wednesday that it expects to ship 140,000 carloads of crude by the end of 2015. It delivered 53,500 carloads last year and expects to reach a 70,000-carload run rate by the end of 2013.

“We have clear line of sight to the two- to three-times previously mentioned 70,000 carload run rate,” chief marketing officer Jane O’Hagan said Wednesday during a conference call.

“And we believe the two-times target run rate can be likely reached 12 months earlier than our original 2016 prediction.”

The burgeoning crude business was one of the key drivers behind the company’s ability to deliver CP’s best first-quarter results in its 132-year history.

The railway said it is on track to deliver strong results this year as it also benefited from strong volumes for grain, fertilizers and coal despite a harsh winter.

Canadian Pacific, which traces its history to 1881, earned $217 million or $1.24 per share in the first quarter. That beat analyst estimates and was up from $142 million or 82 cents per share a year earlier.

Revenue increased nine per cent to a quarterly record of $1.495 billion, also slightly better than the consensus estimate. A year earlier, Canadian Pacific (TSX:CP) reported revenue of $1.376 billion.

Analysts had been looking for $1.20 per share of net income, $1.21 per share in adjusted income and $1.491 billion of revenue in the three months ended March 31, according to Thomson Reuters.

CEO Hunter Harrison, who was brought in last year to shake up the country’s second-largest railway, said the performance should silence critics who predicted such change couldn’t happen so quickly.

“I think the most important thing it does is lay a solid foundation for what’s to come in the future,” he told analysts.

Harrison, the former head of Canadian National Railway (TSX:CNR), was pulled out of retirement in a highly public and hotly contested shareholder revolt against the former leadership lead by activist investor Bill Ackman’s Pershing Square Capital Management.

Harrison later lured Keith Creel from CN to become the Calgary-based railway’s president and chief operating officer.

After three months on the job, Creel said the railway achieved its best first-quarter by focusing on asset utilization — moving more freight with fewer cars.

“There’s no secret formulas here, there’s no special plays,” he said.

Increased quantities of grain and coal were transported despite fewer cars and locomotives.

Grain shipments to Vancouver increased 13 per cent despite 10 per cent fewer cars. The success helps customers and bolsters Canada’s reputation as a reliable global supplier, he said.

Coal destined for western export grew 12 per cent.

CP maintained its guidance for high single-digit revenue growth this year, an operating ratio in the low 70s and earnings growth of at least 40 per cent.

Harrison said the railway will probably spend $50 million to improve infrastructure on line segments that haven’t traditionally been main lines, primarily because of new crude opportunities.

O’Hagan said CP’s ability to hit its crude-by-rail targets will depend on winning new opportunities from contracts that are in various stages of negotiation.

The railway’s current crude volume is driven by movement of product from the Bakken region. But it foresees a growing opportunity for heavy crude from Canada to the Gulf.

“As we move forward, obviously the heavy crude is the real opportunity for us in the near term,” she told analysts.

The railway’s operating ratio — a measure of efficiency — improved to 75.8 per cent, which Canadian Pacific said was a record for the company. That’s was an improvement from 80.1 per cent a year earlier under the measurement in which lower is better.

Analyst Jeff Nelson of Edward Jones said that key figure demonstrates that Harrison’s turnaround plan is working.

“The company is attacking the cost structure of the business so, if you layer over strong volumes and a lower cost basis of the business, obviously that’s where the main earnings growth comes from,” he said in an interview from St. Louis.

Nelson said crude oil has been a great growth market for CP, CN and American railways in recent years as pipeline construction has been delayed. Rail can also service markets that pipelines don’t reach.

Walter Spracklin of RBC Capital Markets said the results were solid but likely anticipated by investors because of weekly performance data throughout the winter and the railway’s signals about volume growth.

“We don’t see any reason for significant outperformance as we consider this result to be broadly in line with the market’s expectations,” he wrote in a report.

Analyst Benoit Poirier of Desjardins Capital Markets said he was surprised by the total workforce reductions.

The number of employees, contractors and consultants fell by about 3,400 to 16,108. That’s more than the railway’s initial forecast for a reduction of 2,300 workers.

The cuts translate into $110 million in annual savings and represent a 1.7 per cent decline in the operating ratio and 46 cents per share increase in earnings, he said.

The railway intends to cut its workforce by at least 4,500 by the end of 2016.

On the Toronto Stock Exchange, CP’s shares closed at $124.73, down $1.50 or 1.19 per cent in Wednesday trading.