CSX Corporation’s Coal Freight Revenues Will Likely Decline In The Near Term

CSX Corporation (NYSE: CSX) generates its revenues primarily from various commodities freight, including agriculture, coal, and industrial, among others. The coal freight accounts for roughly 20% of the company’s value, according to our estimates. We forecast a low to mid-single digit segment revenue growth in the long run. This can be attributed to the expected steady growth in volume and pricing, led by higher demand for coal in the coming years. However, in the near term we expect the company to face some pressure on volume, given the lower price for natural gas. We have created an interactive dashboard analysis highlighting the company’s coal freight segment. You can adjust revenue drivers and margins for 2018 to see how it impacts the company’s overall revenues and income. Below we discuss our expectations and forecasts for the company.

Expect Coal Freight To Decline In Low Single Digits In 2018 But Rebound Thereafter

CSX’s Coal freight is dependent on two factors: 1) Number of Coal Carloads, and 2) Revenue Per Carload. The company reported a 2% decline in both volumes and pricing for Coal in Q1, and we expect this trend to continue in the near term, given the expected decline the U.S. coal production. Coal production is expected to decline by 3% to 751 MMst in 2018, due to a decline in domestic coal consumption. Coal exports are also expected to be lower by 9% this year, according to the U.S. Energy Information Administration (EIA). The expected decline in consumption can be attributed to its reduced share in the power generation, as natural gas’ share is increasing. This can be attributed to changes in fuel costs, and the development of renewable energy technologies. Natural gas prices are more or less stable when compared to 2017. Henry Hub Spot price forecast for 2018 currently stands at $3.12, which compares with $3.10 in 2017. Lower natural gas prices will likely result in less demand for coal, and thus impact the shipment volume for railroad companies. The company’s management in the recent earnings call conference stated that domestic coal utility may remain under pressure in the near term, while they expect exports to trend better.

Looking beyond 2018, EIA forecasts Henry Hub Spot price to average higher at $3.23 in 2019. It also forecasts no further decline in the U.S. coal production in 2019. These factors will drive volume growth in the coming years. Pricing is also expected to pick up, given the trend in oil prices, which recently touched the $70 mark (WTI), the highest levels seen in the last four years. It should be noted that fuel surcharge is a component of pricing, and it is dependent on the WTI crude oil prices, which have jumped over 15% since the beginning of the year. Oil prices are expected to continue to trend higher in 2019, as well. Accordingly, we estimate a low single digit growth in both volume and pricing from 2019 onward.

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