We are maintaining our Neutral recommendation on Texas-based natural gas pipeline firm Spectra Energy Corporation (SE). The company operates in four segments: U.S. Transmission, Distribution, Western Canada Transmission & Processing, and Field Services.
Spectra maintained its momentum in both organic as well as inorganic growth, and the company remains upbeat about 2012 prospects. We particularly expect strong returns from its western Canadian assets, including BC Pipeline, BC Field Services, Midstream and Natural Gas Liquids. These constitute the largest natural gas midstream businesses in Canada and are well positioned for future growth.
Spectra’s venture with British natural gas giant BG Group plc is aimed at constructing a pipeline in Canada’s British Columbia to carry fuel from the northern British Columbia shale-gas fields to the proposed LNG-export facility in Prince Rupert. Spectra also partnered with Enbridge Inc. (ENB) and DTE Energy Co. (DTE) to develop the NEXUS Gas Transmission system to carry natural gas from Ohio Utica shale to the U.S. Midwest markets, including Ohio and Michigan as well as Ontario, Canada. These pipelines are expected to enhance oil yield in the surrounding regions and boost the company’s growth.
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 be come online by 2013.
We see upside from diverse near- to medium-term projects, including its New Jersey-New York pipeline (received regulatory consent to progress in June 2012), an NGL pipeline in Texas, opportunities in the Gulfstream Pipeline and infrastructure to serve western Canada LNG exports. The New Jersey-New York pipeline project is expected to diversify the sources of energy for New York. This will be the first-ever major natural gas pipeline linking the two cities and will be highly accretive.
However, Spectra’s results are vulnerable to fluctuations in natural gas markets. The proposed liquid-rich drilling activities by the company clearly suggests that low natural gas prices have little ability to pick up in the near term. Major investment in several projects in Canada also exposes Spectra to fluctuations in currency rates that may affect the results of its operations.
Spectra carries a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.
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