Spectra 2Q Falls on Prices

Zacks

Premier natural gas company Spectra Energy Corp. (SE) reported second-quarter 2012 earnings per share from continuing operations of 33 cents, failing to meet the Zacks Consensus Estimate of 36 cents. The quarterly figure also dropped 21.4% from the year-earlier profit of 42 cents. The underperformance was due to lower commodity price realizations.

The company reported operating revenues of $1,112.0 million, down approximately 6.4% from the year-earlier level of $1,188.0 million. The quarterly figure also failed to meet the Zacks Consensus Estimate of $1,226.0 million.

Operational Analysis

U.S. Transmission: The segment posted quarterly earnings before interest and taxes (:EBIT) of $237.0 million, showing a downswing of 2.5% from the year-ago quarter. Lower processing and storage revenues contributed to the decline.

Distribution: The segment reported a year-over-year fall in its EBIT to $75.0 million from the prior-year level of $88.0 million. The underperformance was primarily due to a negative regulatory decision that adversely affected 2010-2011 storage revenues and a weaker Canadian dollar.

Western Canada Transmission & Processing: The segment witnessed an EBIT of $94.0 million, down almost 17% 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 area of British Columbia, it remains restricted by lower earnings at the Empress natural gas liquids (NGL) business.

Field Services: The segment’s EBIT of $66.0 million plummeted approximately 52% from the year-ago level of $138.0 million. The underperformance was mainly due to lower commodity prices. However, higher volumes in key growth areas like the Permian and Eagle Ford basins partly mitigated the weakness.

Production and Price Realizations

The company produced NGLs of 392 thousand barrels per day (MBbl/d), up 4.0% year over year. Price of NGLs averaged $0.77 per gallon (down nearly 40% year over year), while crude oil averaged at approximately $93.46 per barrel (down 8.9% year over year). Natural gas was sold at $2.22 per million British thermal units (MMBtu) versus $4.31 per MMBtu in the second quarter of 2011.

Balance Sheet

As of June 30, 2012, Spectra Energy had long-term debt of approximately $9,632 million with a debt-to-capitalization ratio of 51.3% (versus 51.5% in the preceding quarter).

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 remain for 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 deploy $1 billion per year through 2015 on fee-based gas infrastructure growth projects. The company expects to commission around 8 projects through 2016. We see upside potential from diverse near- to medium-term projects, including its New Jersey-New York pipeline, an NGL pipeline in Texas, opportunities in the Gulfstream Pipeline and infrastructure to serve western Canada LNG exports.   

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.

The company's closest contender in the natural gas utilities industry, Enterprise Products Partners L.P. (EPD), reported better-than-expected second quarter earnings as it transported more crude, natural gas and other commodities through its pipelines.

Currently, we maintain our long-term Neutral recommendation on the stock.
 

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