Spectra Misses on Weak Prices

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Premier natural gas company Spectra Energy Corp. (SE) reported fourth-quarter 2012 earnings per share from continuing operations of 32 cents, failing to meet the Zacks Consensus Estimate by a penny. The quarterly figure also dropped 27.3% from the year-earlier profit of 44 cents. The underperformance mainly stemmed from the lower commodity price realizations.

The company’s operating revenues of $1,347.0 million shrunk approximately 5.7% from the year-earlier level of $1,428.0 million and also failed to reach our projection of $1,472.0 million.

Full-year 2012 earnings from continuing operations of $1.43 per share fell short of the Zacks Consensus Estimate of $1.45 and fell 19.2% from the year-earlier profit level of $1.77.

Total revenue in 2012 dropped 5.2% year over year to $5,075.0 million, lagging our expectation of $5,161.0 million.  

Operational Analysis

U.S. Transmission: The segment posted quarterly earnings before interest and taxes (:EBIT) of $249.0 million, reflecting an upside of 10.2% from the year-ago quarter. Higher earnings from expansions and lower operating expenses contributed to the growth.

Distribution: The segment reported a year-over-year 22.5% decrease in its EBIT to $93.0 million from the prior-year level of $120.0 million. The decrease was primarily due to the refund of certain revenues to the clients that were realized from upstream shipping contracts. This reimbursement was regulated by the Ontario Energy Board in November 2012.

Western Canada Transmission & Processing: The segment witnessed an EBIT of $72.0 million, down 47.4% from the year-earlier level. Although the segment registered improved results in the gathering and processing business, primarily driven by expansions in the Horn River and Montney areas of British Columbia, the upside was restricted by lower earnings at the Empress natural gas liquids (NGL) business.

Field Services: The segment’s EBIT of $58.0 million plummeted approximately 39.6% from the year-ago level of $96.0 million. The underperformance was mainly due to lower natural gas liquid (NGL) prices.

Production and Price Realizations

The company produced NGLs of 405 thousand barrels per day (MBbl/d), down marginally from the year-ago quarter level of 406 MBbl/d. Price of NGLs averaged 77 cents per gallon (down nearly 36% year over year), while crude oil averaged at approximately $88.11 per barrel (down 6.3% year over year). Natural gas was sold at $3.40 per million British thermal units (MMBtu) versus $3.55 per MMBtu in the fourth quarter of 2011.

Balance Sheet

As of Dec 31, 2012, Spectra Energy had long-term debt of approximately $10,653 million with a debt-to-capitalization ratio of 52.0% (versus 51.2% in the preceding quarter).

Guidance

Earlier, the company had projected diluted earnings per share (EPS) at $1.50 for 2013 and increased the annual dividend by 10 cents to reach $1.22.

Spectra intends to allocate about $1.4 billion for expansion in 2013. This is in sync with its long-term growth plan of $1.5 billion average annual growth capital expenditure (capex). The company has assumed expansion and maintenance capex of $1.4 billion and $790 million, respectively, for 2013.

Outlook

Spectra Energy is one of North America’s premier natural gas infrastructure plays and has strong business positions in growth markets. Though we believe commodity price concerns linger in the near term, the company’s core fee-based businesses of storage, transmission, distribution and Canadian gathering and processing have the potential to move the needle toward solid earnings and cash flow growth in the long run.

Spectra plans to invest about $25 billion over the next decade on fee-based gas infrastructure growth projects. The company plans to allocate an amount of $25 billion in growth projects through the end of the decade. Further, momentum will be driven by the advancing of master limited partnership (MLP) dropdown strategy through the recent asset additions.

Recently, Spectra Energy inked an agreement to purchase the Express-Platte Pipeline System from Kinder Morgan Energy Partners L.P. (KMP), the Ontario Teachers’ Pension Plan and Borealis Infrastructure. The transaction, valued at $1.49 billion, involves 100% ownership of the pipeline system that includes both the Express and Platte crude oil pipelines.

However, we remain concerned about the lower price realizations and also believe that the heavy debt-to-capitalization ratio is a competitive disadvantage for the company.

Spectra Energy holds a Zacks Rank #3, which is equivalent to a Hold rating for a period of one to three months.

However, there are certain companies in the oil and gas industry like Total SA (TOT) and Cabot Oil & Gas Corporation (COG) that offer value and are worth buying now. The companies sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on SE

Read the Full Research Report on TOT

Read the Full Research Report on COG

Read the Full Research Report on KMP

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