(Adds details from conference call, updates stock price)
By Solarina Ho
Oct 23 (Reuters) - Canadian Pacific Railway’s third-quarter profit rose more than expected as freight revenue hit a record high and operating costs fell, lifting the stock of Canada’s No. 2 rail operator more than 10 percent to a historic peak.
Industrial and consumer products, including crude oil, were among the biggest contributors to freight revenue growth in the quarter. Revenue per ton miles in that category rose 11 percent due to growth in volumes of long-haul crude oil and sand for the fracking industry, CP said on Wednesday.
Energy shipments have been making increasingly large contributions to rail companies’ profits as producers search for alternatives to crowded pipelines to get oil to markets. Rival CN Rail also highlighted energy sector growth when it reported quarterly results on Tuesday.
The results sent CP’s stock soaring 10.6 percent, or C$14.32, to C$149.06 on the Toronto Stock Exchange at mid-afternoon, and the shares at one point hit a record C$149.47.
Shares of CN, which reported record revenue after markets closed on Tuesday, rose 5.9 percent to a record C$116.20.
CP said it moved 65,000 carloads of crude so far this year and was expecting to hit 85,000 to 90,000 this year. It is still on track to meet the longer-term guidance of 140,000 to 210,000.
The railroad said it is expecting more heavy crude shipments than the lighter Bakken crudes that it currently moves. Frac sand volume grew by double digits.
The company saw some moderation of orders during the quarter due to tight spreads between benchmark world oil prices.
“In terms of our outlook, we are seeing orders pick up in October as spreads have widened recently, although we don’t know how long this will persist,” said Chief Marketing Officer Jane O‘Hagan.
CP, which last year brought in 40-year rail veteran Hunter Harrison as chief executive officer to turn the company around, said its operating ratio improved 820 basis point to 65.9 percent in the quarter.
Operating ratio, the percentage of revenue needed to maintain operations, is a key measure of railroad efficiency. The lower the number the better.
CN’s operating ratio improved by 80 basis points to 59.8 percent.
“Where we started this journey 16 months ago, they were somewhere around 17 points ahead of us. Now they are 6 or so, so we have made some gains. They see us in the rear view mirror,” said Harrison.
CP Rail, which is ahead of schedule in meeting some of its longer-term targets, said it may put out new guidance late spring to early fall next year.
“CP Rail could deliver another 300- to 400-point improvement next year,” BMO analyst Fadi Chamoun said in a client note.
CP net income climbed to C$324 million ($315 million), or C$1.84 per share, from C$224 million, or C$1.30 per share, a year earlier. Adjusted earnings per share, which excludes a significant tax item, was C$1.88.
Analysts had expected earnings of C$1.72 per share, according to Thomson Reuters I/B/E/S.
Operating expenses fell 6 percent to C$1 billion. Since July 1, 2012, the company has cut 4,200 jobs and Harrison told analysts the cuts were expected to total 4,500 by the end of the year. Revenue rose 6 percent to C$1.5 billion.
Freight revenue growth was also buoyed in large part by shipments of fertilizer and sulfur, and grains.
Analysts expect CP Rail to meet its full-year targets, but some say its outlook is marred by the loss of four sizeable contracts to CN over the past two years. These include Chrysler, Hong Kong’s Orient Overseas Container Line, liner carrier MOL and container shipper APL Ltd, a subsidiary of Singapore-based Neptune Orient Lines Ltd.
But Harrison told analysts that losses from international contracts were mostly offset by domestic growth.
The railroad is also named in an order from the province of Quebec to those deemed responsible to clean up a disastrous runaway train crash in Lac-Megantic that killed 47 people and in a motion for a class-action lawsuit on behalf of residents and businesses.
CP said it was too early to assess the potential liability and damages and reiterated that it was not liable in either proceeding. A motion of appeal of the Quebec order and a notice of appearance for the class-action motion have been filed, it said. ($1 = 1.03 Canadian dollars) (Additional Sneha Banerjee in Bangalore; Editing by Janet Guttsman, Maureen Bavdek and Richard Chang)