Railroads Drop Coal, Focus on Fracking

Brian Hicks

Written By Brian Hicks

Posted October 22, 2012

Railroads and coal have had a long—and mostly mutually beneficial—relationship in the U.S. But what happens when coal production begins to falter, and national attention turns toward the ongoing natural gas boom?

Well, if you’re Union Pacific Corp. (NYSE: UNP), you might exploit the shale-oil industry to offset more than 12 percent in decreased coal volumes and an associated 5 percent decline in coal shipment revenues.

Currently, Union Pacific is making a killing on shipments of drilling equipment, sands, chemicals, and other elements needed for fracking operations. The company is shipping all of this to North Dakota, Ohio, Pennsylvania, and parts of Texas – homes of the Bakken, Utica, Marcellus, and Eagle Ford shales.

And on the way back, the same trains are returning crude to refineries of California, Texas, and Louisiana.

UP hasn’t been doing this for long, and it doesn’t own or control all the tracks that service these areas. However, traffic on these routes frequently links up with UP’s main lines. Last Thursday, UP’s reported third quarter revenue from chemical shipments showed an increase of 17 percent from last year, MarketWatch reports.

The story isn’t quite as rosy for CSX Corp. (NYSE: CSX). That company reported—on Tuesday last—a significant drop in third quarter coal shipment volumes.

More worryingly, it has not been able to garner much shale business. And that’s because the majority of CSX’s tracks are located in the East or South; in other words, they aren’t where the shale is.

Norfolk Southern Corp. (NYSE: NSC) has a similar tale of woe; most of its operations are focused in the East.

CSX warned that fourth quarter coal volumes will drop by at least 16 percent from 2011, while Norfolk issued a similar warning last month that its third quarter results would reflect the ongoing slump in coal markets.

It’s probably safe to say that, recently, coal hasn’t been as dominant as it once was. And though shale shipping can be highly profitable, it isn’t something that all rail companies can quickly transition to.

Those that can, however, will reap the profits.

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