CSX Rail Down 5% on Shocking Conference Call

This week, rail company CSX (CSX -3.02%) dropped 5% in a single day after CEO Hunter Harrison reported that not only was he leaving the company, and not only was CSX planning for 700 layoffs, but also that he thinks fossil fuels are a doomed industry.

In this segment of Industry Focus: Energy, Motley Fool energy analysts Sean O'Reilly and Taylor Muckerman talk about why fossil fuels are so important for CSX, what their apparent demise could mean for the company, and more.

A full transcript follows the video.

This video was recorded on July 20, 2017.

Sean O'Reilly: I didn't even notice this, so thank you for sending it. CSX's shares dropped 5% on Wednesday, July 18, after its quarterly conference call, but not because of the results. During the call, CEO Hunter Harrison said that he expected his tenure to be short. That in and of itself might be jarring. We can talk about it, but that might not be the whole reason the shares dropped. Also on the call, noted that 700 layoffs may be on the way.

Taylor Muckerman: Yeah. There's a few things on the call that I think caught --

O'Reilly: They're talking about shrinking fleet, cars, and coal pricing, and I was like ...

Muckerman: Yeah, they're not going to add any cars for coal; they're not going to add any extra lines for coal. And coal was CSX's lifeblood for many, many years, simply because of its route up and down the Appalachian Trail, essentially. So that caught people off guard. They basically came out and said, "Fossil fuels are dead. Not in the immediate term -- it's not going to be in two to three years -- but it's going away, in my view." It's a very long-term view.

O'Reilly: This is the guy that's supposedly going to be going in six months.

Muckerman: Yeah, I know. So when you look at this company, a fifth of its second-quarter revenue came from coal, around $530 million. But if you look at the same quarter in 2011, they had $1 billion of coal revenue. So the industry is struggling.

O'Reilly: Now, didn't coal pricing go up a little?

Muckerman: A little bit. We're still exporting coal. That's where most of the rising volumes for CSX came from -- 8.2 million tons of exports; 11 million tons was the decline in U.S. deliveries.

O'Reilly: We might need to do another railroad show again. We did that one month ago.

Muckerman: Yeah, we talked a little bit about the Canadian rails, mostly, along with Buffett's interest in the railroad sector.

O'Reilly: And Buffett's railroad, Burlington Northern, we pulled out the results there and they earned less money last year than they did the previous year, and it's because of this oil stuff. They used to make a bunch of money bringing oil from the Dakotas down.

Muckerman: There was a couple-year spike in that. It was a very short-lived boom for the railways that had access to it.

O'Reilly: I just have to wonder about these stocks long-term, because it's not even a ship you can turn, but it's a big ship to turn. It's like, OK, if fossil fuels are dead in 30 years, what are these railroads going to do?

Muckerman: If you look at oil as a percentage of overall revenue, it was kind of a blip, but it was a nice blip for the couple of years that they had it, because it was unexpected.

O'Reilly: And the pricing was amazing.

Muckerman: Yeah, because oil companies had to pay up, because they needed that transportation, because pipelines are so far behind, which, they've caught up somewhat. And the downturn in oil prices prevented companies from being able to afford the higher price demanded by these rails. But coal, I think, has a much bigger impact than the decline of oil by rail, on certain railroads. Not every railroad cares about coal. CSX is certainly one that has cared about coal more than most in the past. And now you see Hunter Harrison basically saying sayonara, it's gone in a few years. He did say that the last carload of coal that shipped out of this country, I want to be the carrier that ships it. So, a little heartfelt nod to the industry, but he's not going to be there when that last railcar likely ships, as he did say he's more of a placeholder CEO. He's really like a vagabond that jumps from train to train, making his way across North America. He revolutionized CN Rail, boosted his own personal stock as a rail-line CEO, then he went to Canadian Pacific, then he was poached by CSX activist investors, jumped the ship to CSX after he had only recently joined Canadian Pacific. So much did CSX want him that they paid him the $84 million that he gave up by leaving CP.