Fidelity likes CP rail for crude opportunity amid pipeline spat

TORONTO (Bloomberg) -- A C$6.9 billion ($5.5 billion) Fidelity Investments fund is adding to its position in Canadian Pacific Railway as a pipeline spat increases the likelihood that energy companies will need rail to get their oil to market.

“I don’t think that the current consensus captures the opportunity and revenue and profits of crude by rail,” said Darren Lekkerkerker, who manages the equity portion of the Fidelity Canadian Balanced Fund.

The fund returned 3.8% in the past year and posted an annualized return of 6.7% over the past 10 years. It has outperformed its category in eight of the past 10 years, according to Morningstar data.

Although Lekkerkerker describes himself as “very cautious on energy,” and doesn’t expect crude prices to rise much above current levels, he sees plenty of opportunity for CP Rail to capitalize on growing demand for alternative ways to get crude to market as Canadian pipeline projects languish amid legal and political uncertainty.

Kinder Morgan Canada halted work on its Trans Mountain expansion this month and set a May 31 deadline to reach an agreement that will allow it to build the pipeline without the threat of new conditions or requirements. The British Columbia government plans to challenge the project in court, but Canadian Prime Minister Justin Trudeau has said the government will start talks with the company to find ways to backstop it.

The uncertainty follows a decision by TransCanada to scrap its Energy East pipeline, and a government rejection of Enbridge’s Northern Gateway project, leaving oil producers with little choice but to turn to rail.

“In the past, crude by rail was looked at as low-quality revenue because it was very cyclical, but given the lack of market access I think it makes sense for the energy producers to sign up to longer-term take-or-pay contracts, which is great for Canadian Pacific,” Lekkerkerker said.

CP’s main competitor, Montreal-based Canadian National Railway, has been struggling with service issues and the ouster last month of CEO Luc Jobin, giving CP an opportunity to take market share, he said.

Crude by rail made up a small percentage of both railways’ total freight revenue in 2017, with CN slightly ahead at 2.7% versus 2.4% at CP.

Both Calgary-based CP Rail and Kinder Morgan Canada are scheduled to report earnings on Wednesday.