Union Pacific Q4 2015 Earnings Preview: Lower Fuel Expenses To Partially Offset Impact Of Top Line Headwinds

+2.68%
Upside
244
Market
251
Trefis
UNP: Union Pacific logo
UNP
Union Pacific

Union Pacific (NYSE:UNP) will announce its fourth quarter results and conduct a conference call with analysts on Thursday, January 21. [1] We expect the weakness in the company’s shipment volumes, especially coal shipments, to adversely impact its top line. According to Union Pacific’s carload report for the fourth quarter, the company’s shipment carloads, including intermodal shipments, declined 9% year-over-year, with coal carloads declining around 24%. [2] Besides the decline in shipments, the weakness in diesel prices will negatively impact Union Pacific’s fuel surcharge revenues. However, lower fuel expenses will offset most of the impact of lower fuel surcharge revenues and shipments on Union Pacific’s operating profits. In this article, we will take a look at what to expect from the company’s Q4 results.

Declining Coal Shipments

The company’s coal shipments declined primarily due to the weakness in demand for coal. The demand for coal, specifically thermal coal — which is used in electricity generation, has weakened considerably over the past year due to an unfavorable regulatory environment and soft natural gas prices. As a part of the federal government’s crackdown on carbon dioxide emissions, new regulations envision a 32% reduction in power plant carbon dioxide emissions below 2005 levels by 2030. [3] Since coal has a much higher emissions intensity as compared to natural gas, the regulatory environment favors an increasing proportion of natural gas based electricity generation in the U.S. going forward. Besides the adverse regulatory environment, weak natural gas prices are expediting the process of adoption of natural gas as the preferred fuel for electricity generation. Natural gas prices averaged less than $3 per million British Thermal Units (MMBtu) in 2015 and are expected to remain in similar territory in 2016 as well. [4] These price levels favor the increasing adoption of natural gas as the preferred fuel for electricity generation. The combined impact of low natural gas prices and the adverse regulatory environment was reflected in the decline in Union Pacific’s coal shipments in Q4 2015. Lower shipments will lead to a decline in the company’s top line in Q4.

Relevant Articles
  1. Should You Pick Union Pacific Stock At $250 After 20% Gains Last Year And Q4 Beat?
  2. Up Over 2x In 2023 Is AMD A Better Pick Over Union Pacific Stock?
  3. Should You Pick Union Pacific Stock After An 18% Fall In Q3 Earnings?
  4. What To Expect From Union Pacific’s Q3 After Stock Up Only 2% This Year?
  5. Should You Pick Union Pacific Stock Over McDonald’s?
  6. Earnings Beat Ahead For Union Pacific Stock?

Impact of Lower Fuel Prices

Brent Crude Oil Prices, Source: Y Charts

Oil prices currently stand at multi-year lows, due to a global supply glut negatively impacting prices. The decline in crude oil prices over the course of the past twelve months, as illustrated by the chart shown above, will negatively impact Union Pacific’s fuel surcharge revenues, which are tied to two-month lagged values of diesel prices. Diesel prices for the period ranging from August to October, which would impact Union Pacific’s Q4 results, declined roughly 33% year-over-year. [5] Thus, weaker fuel surcharge revenues are likely to negatively impact the company’s overall revenues on a year-over-year basis in Q4 2015.

Despite the negative impact of lower fuel prices on the company’s top line, Union Pacific may benefit on a net basis in terms of profitability. Lower fuel expenses as a result of lower prices as well as lower shipment volumes, in addition to improved productivity of the company’s operations, translated into a 110 basis points improvement in the company’s operating ratio (operating expenses as a percentage of revenues) in the first nine months of the year. [6] With Union Pacific’s shipments likely to remain under pressure in 2016 as well, the company will be looking to improve the productivity of its operations in order to bolster its profitability. We will be looking out for any specific announcements pertaining to productivity improvements in the earnings conference call.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Union Pacific Corporation Invites You to Join Its Fourth Quarter 2015 Earnings Release Broadcast, Union Pacific News Release []
  2. Union Pacific’s Week 52 2015 Carloading Report, Union Pacific Website []
  3. Obama’s New Climate-Change Regulations to Alter, Challenge Industry, Wall Street Journal []
  4. Short Term Energy Outlook, EIA []
  5. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), EIA []
  6. Union Pacific’s Q3 2015 10-Q, SEC []