A Quick Snapshot of Union Pacific’s Coal Freight Business
Union Pacific Corporation (NYSE: UNP) generates its revenues primarily from various commodities freight, including agriculture, coal, and industrial, among others. The Coal Freight segment accounts for over 12% of the company’s value, according to our estimates. The segment of late has been facing pressure on the volume front, given a decline in the coal shipments. The coal demand is impacted by natural gas prices, which haven’t seen much growth since last year. However, we forecast the segment revenues to grow in mid-single-digits in the near term, led by exports, and a growth in pricing. We have created an interactive dashboard analysis highlighting the company’s Coal Freight segment. You can adjust revenue drivers and margins for 2018 and 2019 to see how it impacts the company’s overall revenues, earnings, and price estimate. Below we discuss our expectations and forecasts for the company.
Expect Coal Freight Segment To See Mid Single Digit Growth
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The Coal Freight segment accounts for roughly 12.5% of the company’s overall revenues and EBITDA. In terms of carloads, it accounts for around 23% of the company’s overall carloads, excluding the Intermodal segment. We expect UNP’s Coal Freight revenues to grow 5% to $2.8 billion in 2018. Coal freight revenues are dependent on two factors – Number of Carloads, and Revenue Per Carload. We expect steady growth for both of the factors in the near term. We expect the volume growth to be driven by higher exports. While the overall coal demand is expected to be slightly lower than the previous year, coal exports have been trending well. In fact, the coal exports were up a solid 30% in the first four months of 2018, when compared to the prior year period. The April month export volume was the highest since 2013. However, we forecast only a low-single-digit growth in the shipment volume for UNP. This can be attributed to the overall coal demand, which is expected to be lower in 2018, given the lower natural gas prices. EIA forecasts coal production to decline by 2% in 2018, led by lower consumption demand. The natural gas prices fell 7% (y-o-y) in Q1 2018, which has impacted the coal demand.
Looking at pricing, we forecast a low-single-digit growth in the near term, led by fuel surcharge. The oil prices are trading at higher levels when compared to 2017. In fact, EIA forecasts Brent crude oil prices to average around $71 in 2018, reflecting a 30% growth from the 2017 average. Fuel surcharges are a component of Revenue Per Carload, and are linked to prices of WTI or U.S. On Highway Diesel. With oil prices expected to trend higher in 2018, higher fuel surcharge revenues will boost the Revenue Per Carload.
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