Unlike other regions, Powder River Basin (PRB) and Colorado/Utah regions are witnessing some improvements in coal production, as evidenced by Union Pacific‘s (NYSE:UNP) coal loading report for August.  This is an indication of high demand for coal from these regions. Though the number of coal train loadings in August are below the last year numbers for August, there has been a continual rise month over month lately. Union Pacific loaded 974 coal trains in August from the Powder River Basin region, the most since January 2012 when it loaded 1,022 trains. Let’s delve deep into the significance of these two regions for Union Pacific.
According to the report, these two regions – PRB and Colorado/Utah – form the bulk of the coal that Union Pacific transports, nearly 80% of all transports. Hence, these regions alone decide much of Union Pacific’s performance in coal freight franchise. Of late the demand for coal from these regions have risen especially from the PRB region.
The primary reasons for the upsurge in PRB coal demand are its relatively cheaper grade and cleaner characteristics. Colorado/Utah Region has also witnessed a similar rise. From that region, Union Pacific loaded 257 coal trains in August, the highest monthly total so far in 2012.
Railroad companies typically rely significantly on coal, which is one of their largest businesses. According to our analysis, coal forms nearly 18% of Union Pacific’s stock price. The rise in coal demand in a region in the U.S., although depressed demand for coal nationally is surprising, but it is happening in the West. In addition, Union Pacific as the primary operator in the region enjoys a virtual monopoly in the west. In the past, one of the concerns for Union Pacific has stemmed from its under-performing coal freight business, but it looks to be benefiting from the improvement in the coal business.
We have discussed the dynamics of PRB and Colorado/Utah in detail in our previous article Union Pacific’s Coal Freight Business Rebounds From Powder River Basin Activity
Our price estimate for Union Pacific stands at $128, which now stands at 5% premium to the current market price.Notes: