Union Pacific Corporation (NYSE:UNP) is one of the leading railroad companies in the United States. While the company is facing significant headwinds in the coal market, its chemical business has received a boost due to large jump in crude oil shipments. The chemicals segment accounts for around 16% of its overall freight revenues. The shale gas boom has led to an expansion in the U.S. chemicals sector, which has resulted in higher industrial chemicals and plastics shipments.
Going forward, we believe petroleum products’ shipments will continue to increase rapidly in 2013, as oil production continues to surpass pipeline capacity. Continued growth in the U.S. chemicals sector due to low natural gas prices will further benefit Union Pacific’s chemicals business. During the period January-March 2, 2013, Union Pacific’s chemicals volume grew by 12%, with over 100% growth in crude oil shipments. 
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In this article, we evaluate the performance of Union Pacific’s chemical business in Q4 2012. Further, we discuss the outlook for this business in 2013.
What was the performance of Chemicals segment in Q4 2012?
In Q4 2012, Union Pacific’s chemical revenues grew by 15% annually owing to 14% y-o-y rise in its chemicals volumes. The average revenue per car remained in line with the prior year. The chemicals segment includes various products such as petroleum products, industrial chemicals, plastics, fertilizer and soda ash.
% Contribution in Union Pacific’s Chemicals Carloads (2012)
Annual Volume Growth for Union Pacific in Q4 2012
|Petroleum & Other||
Reasons For This Performance And Future Outlook
Crude oil shipments drive growth of petroleum products
Union Pacific’s petroleum products volumes which account for the highest proportion (34%) of its chemical carloads, grew rapidly by 69% annually in Q4 2012. Significant growth in Union Pacific’s crude oil volumes, which rose by 160% annually in Q4 2012, contributed to this strong performance. 
According to the Association of American Railroads, crude oil shipments by U.S. railroads more than tripled in 2012 to 233,811 carloads.  This resulted in 46% annual rise in crude oil and petroleum products shipments by U.S. railroads in 2012.  Significant growth in railroad crude oil shipments is being recorded in areas witnessing heavy growth in oil production and where pipeline infrastructure is not adequate to transport oil.
Going forward, we believe Union Pacific’s crude oil shipments will continue to increase significantly in 2013, as oil production continues to exceed pipeline capacity. Union Pacific connects to oil producing areas such as Bakken, Permian and Eagle Ford Shale formations, which is likely to drive its petroleum business. However, the growth rate in 2013 could be affected by difficult y-o-y comparisons. Union Pacific’s crude oil shipments were up by more than 100% during January -March 2, 2013. 
Industrial chemicals and plastics shipments are supported by growth in the U.S. Chemicals industry
In Q4 2012, Union Pacific’s industrial chemicals and plastics volumes grew by 8% and 7% annually respectively due to growth in the U.S. chemicals industry on account of low natural gas prices.
We expect shipments of these product categories to record higher demand in 2013. The shale gas boom has led to increased investments in the chemicals sector, and this will positively impact Union Pacific’s chemicals shipments in 2013.
Soda ash and fertilizer shipments correlated to international demand
Union Pacific’s soda ash shipments grew by 4% annually in Q4 2012. We expect soda ash shipments to post modest growth in the near term, in line with growth in the global demand. 
Union Pacific’s fertilizer shipments declined by 8% in Q4 2012, on account of weak global demand for potash . We believe this market could stay challenging in the near term on account of sluggish international demand. 
Our $141 price estimate for Union Pacific is in line with the current market price.Notes:
- J.P. Morgan Aviation, Transportation & Defense Conference, Union Pacific, March 06, 2013 [↩] [↩]
- Union Pacific Management Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, January 24, 2013 [↩]
- Rail shipments of crude oil triple; coal declines, JournalStar.com, February 21, 2013 [↩]
- Rail traffic reflects more oil production, less coal-fired electricity generation, U.S. Energy Information Administration, February 05, 2013 [↩]
- Global Soda Ash Market Trends Examined in New In-Demand Research Report Now Available at MarketPublishers.com, PRWeEB September 21, 2012 [↩]
- Weak Demand Turns Tables on Potash Firms, The Wall Street Journal, January 03, 2013 [↩]