We reaffirmed our Neutral recommendation on Texas-based natural gas pipeline company Spectra Energy Corporation (SE), on Nov 11, 2013. The company comfortably beat its third quarter earnings thanks to higher profits in all segments excluding Distribution. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.
Spectra Energy is one of North America’s premier natural gas infrastructure plays with a strong presence in growth markets. These positions should lead to value-creating growth opportunities in the coming years.
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. Going forward, Spectra intends to increase its presence in the oil and refined products pipelines, storage tanks and terminals business.
Management remains optimistic on its future performance as its expansion program is on track. With its market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain the growth momentum. Additionally, Spectra plans to invest $1 billion per year through 2015 on fee-based gas infrastructure growth projects.
The company expects to commission around 8 projects through 2016. Among these projects, Southern Hills and Sand Hills Pipelines, Front Range Pipeline, and Texas Express Pipeline, are expected to come online in the near future.
However, Spectra’s results are vulnerable to fluctuations in the natural gas markets. The proposed liquid-rich drilling activities by the company clearly suggest that volatility in natural gas prices will change little going forward. Major investments in several Canadian projects also expose Spectra to fluctuations in currency rates that may affect its operations.
Other Stocks to Consider
There are other stocks in the sector that appear more rewarding. These include SM Energy Company (SM), VOC Energy Trust (VOC) and TransGlobe Energy Corp. (TGA), which are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).