Canexus Pays Price in Canadian Crude-by-Rail Boom

Canexus Corp, the developer of Canada's first dedicated oil train terminal, has embraced the crude-by-rail boom with little success so far. Its shares are down 45 percent over the past year and the company is expected to report a weak quarter on Tuesday.

The company's Bruderheim terminal, 55 kilometers (35 miles) northeast of Edmonton, Alberta, is one of seven unit train terminals operating or under construction in Western Canada.

Although Canexus beat other midstream companies such as Gibson Energy Inc in the race to ship oil to market on mile-long trains, it is yet to see much benefit.

Some industry players are speculating the Calgary-based chemicals and handling company may have to sell Bruderheim to ease pressure on its balance sheet.

Asked about a potential sale, Lavonne Zdunich from Canexus investor relations said the company's portfolio of assets had not gone unnoticed and it would continue discussions with parties that had expressed interest.

Canexus also owns sodium chlorate and chlor-alkali plants in Canada and Brazil.

The cost of Bruderheim, planned as a 100,000 barrel-per-day loading facility offering Canadian crude producers an alternative to congested export pipelines, has risen by 60 percent as construction work fell behind schedule.

This year Canexus has revised costs up to C$355 million, cut its dividend and replaced its chief executive.

The terminal loaded its first unit train in December but was shut down in June to expand capacity to 70,000 bpd and establish a connection to Inter Pipeline's Cold Lake network.

Only 60 percent to 70 percent of capacity is currently contracted out to shippers and further debottlenecking may be needed before the terminal can finally start loading 100,000 bpd in 2015.

"It's been a rough couple of years," said Acumen Capital analyst Brian Pow. "Other companies will learn from their mistakes."

Pow said he was expecting another poor quarter from Canexus, which has a market capitalization of C$886 million and reports results on Tuesday.

WHAT WENT WRONG?

On paper, Canexus was in a great position to tap into North America's crude-by-rail boom when it announced plans to build a terminal at Bruderheim in 2012.

Its 480-acre site, formerly home to a sodium chlorate plant, is one of the few locations in Alberta where Canadian National Railway and Canadian Pacific Railway (CP) lines cross, giving shippers access to markets across the continent.

A former Canexus employee, who declined to be named, said the company was well versed in shipping hazardous materials and management felt oil-by-rail would not be a difficult transition.

But a harsh Canadian winter and the long-running problem of a tight Alberta labor market slowed construction.

An incinerator built to flare vapors discharged from crude being loaded into rail cars had to be modified twice, halting operations, and Canexus is now building a second incinerator.

Industry players said the biggest mistake was not bringing in experts until January, a failing that Canexus itself admitted.

"Involving the major capital project experts earlier would have been beneficial," said Zdunich.

Amid speculation of a sale some analysts have questioned how valuable an asset Bruderheim really is.

Canadian crude-by-rail exports reached a record 160,000 bpd in the first quarter of 2014 and are rising fast.

But much of the demand is driven by lack of pipeline space, and the oil-by-rail sector is vulnerable to new projects such as TransCanada Corp's planned 1.1 million bpd Energy East pipeline.

"When you invest in assets like this you normally want to see 15 to 20 years ahead. The risk is that the window for these terminals could be less if pipelines get approved," said BMO Capital Markets analyst Joel Jackson.

Reporting by Nia Williams