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The merger of CP Rail with Kansas City Southern is expected to benefit Canadian shippers

CALGARY – The merger of Canadian Pacific Railway Ltd. and Kansas City Southern promises improved service to Canadian shippers, but the impact on the volume of crude oil by rail will be muted, observers said Monday.

CALGARY – The merger of Canadian Pacific Railway Ltd. and Kansas City Southern promises improved service to Canadian shippers, but the impact on the volume of crude oil by rail will be muted, observers said Monday.

The US $ 25 billion acquisition agreement announced on Sunday would connect the Canadian and northern US rail networks of the Canadian Pacific with KCS’s southern and Mexican routes. The only significant overlap is in Kansas City, Missouri, where the railroads share a freight yard.

In a tweet on Sunday, Alberta Prime Minister Jason Kenney said the deal was a win for Western Canada’s crude oil export capacity following the cancellation of the Keystone XL pipeline project, but a longtime crude-by-rail exporter says he expects it won’t make much of a difference.

“Most of the oil brought to market from Western Canada comes from Canadian National rather than Canadian Pacific,” said John Zahary, CEO of Calgary-based Altex Energy Ltd. Sask., Rail terminal located on a CN railway line.

“The CN Main Line runs through Edmonton while the CP Main Line runs through Calgary – and most of western Canada’s oil production is in the northern part of the provinces.”

He added that the current system of moving railcars from one railroad to another to reach their destination is working well. For shippers with access to CP, however, railroading of crude oil from western Canada to the US Gulf Coast refinery complex will likely be more efficient.

Canada’s crude-by-rail export figures have been volatile over the past year. Shipments rose to a record 412,000 bpd in February 2020 and fell to an eight-year low of 39,000 bpd last July. Average shipments in December were 190,000 bpd.

Working with a new railroad company called Canadian Pacific Kansas City (CPKC) will diversify customers in terms of both business areas and geographic location, RBC analyst Walter Spracklin wrote in a report.

“What is remarkable is the amount of goods exposure that KSU brings for CP, which accounts for about 70 percent of KSU’s sales, but only 36 percent for CP,” he wrote.

“The combined company would have goods 46 percent of the mix … Similarly, adding the US and Mexican revenue streams from KSU to CP, we believe the geographic mix results in a better geographic mix by adding that CP exposure in Canada will decrease from 76 to 53 percent and a substantial increase in exposure in the US (from 24 to 33 percent) and Mexico (from zero to 14 percent). “

Cowan Equity Research analyst Jason Seidl said in an interview that he thinks the deal will benefit shipments of crude oil by rail, but the bigger benefit for Canadian shippers will be the general improvement in service and route options to the southern states and be to Mexico.

“The combination should lead to customer growth in North America, efficiency gains on new single-line routes, greater market reach and remarkable synergies,” he said.

CP Rail shares fell on the Toronto Stock Exchange, while Kansas City Southern shares rose on the New York Stock Exchange on Monday.

CP Rail was down 4.9 percent or $ 23.26 to $ 451.01 while KCS was up 16 percent or $ 36.13 to $ 260.29

As part of the deal, Kansas City Southern shares will be valued at $ 275 per share, a 23 percent premium over Friday’s closing prices, the companies said in a joint press release.

For each KCS common share held, KCS shareholders will receive 0.489 CP shares and USD 90 in cash. The resulting company will be 75 percent owned by CP Rail shareholders.

The merger must be approved by the Surface Transportation Board, a US federal regulator, to proceed. They said no government approvals are required in Canada or Mexico.

The companies estimate that the merger will result in annual revenue growth of $ 800 million within three years of receiving U.S. regulatory approval, expected in mid-2022.

They also expect annual cost savings of $ 180 million in fuel efficiency, administration, equipment rentals, facilities, information technology, and licensing, but do not anticipate a net loss of manpower.

The combined company’s global headquarters will remain in Calgary, while Kansas City will house its US headquarters.

The combined company is expected to operate more than 32,100 kilometers of railroad in Canada, the United States and Mexico, employ approximately 20,000 people, and have total sales of approximately $ 8.7 billion based on 2020 figures.

This Canadian press report was first published on March 22, 2021.

Companies in this story: (TSX: CP, TSX: CNR)

Dan Healing, the Canadian press

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