UNP Union Pacific Corp

By Laura Stevens and Betsy Morris 

The dismal energy environment slammed Union Pacific Corp. in the fourth quarter, causing the railroad's earnings to fall 22% from a year ago and the company to miss Wall Street expectations.

The company sustained steep declines in shipments of such higher-margin businesses as coal, crude oil and fracking sand plus a sharp drop in its fuel surcharge revenue, causing profit to fall to $1.12 billion, or $1.31 per share. Analysts polled by Thomson Reuters had expected earnings of $1.42 per share. The net impact of lower fuel prices, including the decline in fuel surcharge revenues, reduced earnings per share by 11 cents in the quarter compared with last year.

"Another quarter of solid pricing gains were not enough to offset the 9% decrease in total volumes," Chief Executive Lance Fritz said on an earnings call with analysts.

The news sent Union Pacific's stock down more than 8% in early trading, though shares recovered somewhat by early afternoon, when they were down 3.1% at $71.31. Their 52-week high is $124.52.

The railroad said shipments of crude oil plunged 42%, and loads of fracking sand used to drill wells fell by 52% in the quarter. Coal, one of Union Pacific's largest businesses, fell by a fifth as temperatures were higher than average and power plants used more natural gas. Coal inventory levels reached 105 days through December, 39 days above normal and 43 days above the same month a year ago, executives said.

Energy will continue to weigh on earnings in the first quarter, executives told analysts on the earnings call. Coal volume is expected to decline by about 20% in the quarter, and full-year total volumes are expected to be slightly down, depending on the overall economy.

Union Pacific executives said they're getting mixed economic signals from U.S. consumers. It appears that consumer spending is shifting away from goods, such as retail, and more toward services, they said, which is affecting their business mix. Auto shipments rose 8% in the quarter as consumer demand remained strong, but the executives cautioned that auto sales might not be sustainable at current record levels.

When asked, the executives said they couldn't predict whether the current rail downturn pointed toward a recession. "Certainly, our volume drop-off, as the 2015 year progressed quarter-to-quarter and as we're entering 2016, is dramatic," Mr. Fritz said on the call. But "it's not approaching what we experienced in 2008 to 2009."

Union Pacific reiterated its opposition to rail mergers, saying it doesn't think a big rail merger would improve safety or efficiency and that it would be a "disincentive to capital investment."

Without mentioning Canadian Pacific Railway Ltd.'s roughly $30 billion bid for Norfolk Southern Corp., executives said that one big merger could trigger others, and it is monitoring the situation.

"Our focus right now is on running a safe, efficient business," Mr. Fritz said in an interview. "We are monitoring this proposed merger, and any proposed industry consolidation closely. As the situation evolves, we'll do what is right for our shareholders and our stakeholders."

Union Pacific's balance sheet is in excellent shape, he added. "We know we'll be able to handle whatever we need to do looking forward," he said.

Write to Laura Stevens at laura.stevens@wsj.com and Betsy Morris at betsy.morris@wsj.com

(END) Dow Jones Newswires

January 21, 2016 14:24 ET (19:24 GMT)

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