The year 2015 has been a fairly challenging one for Union Pacific, with significant top line pressure as a result of declining shipments and fuel surcharge revenue. Falling shipments of coal and frac sand have primarily been responsible for the decline in Union Pacific’s shipment carloads. The decline in diesel prices as a result of weakening crude oil prices negatively impacted the company’s fuel surcharge revenues as well. However, on the cost side, lower fuel prices helped Union Pacific lower its expenses, and along with its productivity enhancement measures, helped the company report a better operating ratio in the first nine months of the year (operating expenses as a percentage of revenue). In this article, we will look back at the how the year 2015 panned out for Union Pacific.
Union Pacific’s shipments declined roughly 6% year-over-year in 2015. The main reasons for the decline in shipments have been lower shipments of coal and petroleum products.
Declining demand for coal from utilities drove down Union Pacific’s shipments of the commodity. Low natural gas prices and a crackdown on power plant carbon dioxide emissions by the federal government, have quickened the pace of adoption of natural gas as the fuel of choice for electricity generation in the U.S., undermining the demand for coal. New regulations envision a 32% reduction in power plant carbon dioxide emissions from 2005 levels by 2030, which is bad news for coal since the carbon dioxide emissions intensity of coal is much higher than that of natural gas. Coal’s share of U.S. electricity generation stood at 35% in Q3 2015, down from 38% in the corresponding period of 2014. Union Pacific’s coal shipments stood 18% lower on a year-over-year basis in the first nine months of 2015.
Weakness in oil prices, as illustrated by the chart shown above, has negatively impacted drilling activity in the U.S. This was responsible for the decline in Union Pacific’s shipments of frac sand, which is used in hydraulic fracturing. The weakness in drilling activity also negatively impacted the company’s steel shipments, which were further negatively impacted by competition to the domestic steel industry from steel imports. The combination of these factors resulted in a 10% decline in the company’s industrial products shipments in the first nine months of 2015.
Top line headwinds largely contributed to the decline in Union Pacific’s stock price this year, as illustrated by the chart shown below