Union Pacific’s Chemicals Freight Business Will Likely Benefit From An Uptick In U.S. Chemicals Production

We expect Union Pacific Corporation’s (NYSE: UNP) Chemical Freight revenues to grow in mid-single digits in the near term, led by an increase in volume as well as pricing. The company generates its revenues primarily from various commodities freight, such as agriculture, coal, and industrial, among others. The Chemical Freight segment accounts for over 15% of the company’s value, according to our estimates. The segment over the last couple of years has been facing pressure on the volume front. However, the pricing has seen some growth during the same period, which has aided the segment revenues. Looking forward, higher chemicals production and a continued growth in pricing will likely aid the segment revenue growth. An increase in oil production, and higher oil prices will likely bode well for the segment. We have created an interactive dashboard analysis ~ A Quick Snapshot of Union Pacific’s Chemicals Freight Business highlighting the company’s Chemical 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 Chemical Freight Segment To See Mid Single Digit Growth

The Chemical Freight segment accounted for roughly 17% of the company’s overall revenues and EBITDA in 2017. In terms of carloads, it accounts for around 20% of the company’s overall carloads, excluding the Intermodal segment. We expect Union Pacific’s Chemical Freight revenues to grow 4% to $3.74 billion in 2018, and $4.70 billion by the end of our forecast period. Chemical freight revenues are dependent on two factors – Total Carloads of Chemicals, and Average Revenue Per Chemical Carload. We expect steady growth for both of the factors in the near term. We expect the volume growth to be driven by higher production. The shale boom has helped the U.S. become one of the lowest cost producers of key petrochemicals, which has led to the increase of production of chemicals. The U.S. crude oil production is projected to grow to 10.7 million barrels per day in 2018. Growth in production should provide Union Pacific the opportunity to increase its chemical carloads. While the chemical production was up 1.7% in 2017 (y-o-y), it is expected to grow by 2.3% in 2018 and 2019. In terms of exports, the growth was over 2% in 2017. However, there is a risk on the export front, given the recent fear of a trade war with China. The U.S. has decided to levy import duties of 25% on $50 billion worth of products made in China, and the same is in effect now. It should be noted that over 12% of U.S. chemical exports go to China. As such, any growth in chemical shipments will likely be capped in the near term. We thus forecast only a low-single-digit growth in the chemical shipment volume for Union Pacific in the near term.

The average revenue per chemical carload has increased at an annual average rate of 2% over the last five years, and we expect the growth to continue in the coming years. The recent uptrend seen in oil prices will likely aid the pricing growth for Union Pacific, given that fuel surcharge is a component of pricing. In addition, the capacity constraint in the trucking industry due to the implementation of the ELD Mandate has been favorable for railroad companies, and has led to an increase in freight rates. This trend will likely continue in the near term.

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