We have upped our long-term recommendation for one of North America's premier integrated natural gas companies, Spectra Energy Corporation (SE), to Outperform from Neutral following better-than-expected second quarter 2011 results.
The quarter’s outperformance was backed by expansion projects that led to higher commodity prices as well as a stronger Canadian dollar. U.S. Transmission and Distribution segments delivered better-than-expected results, while its Western Canada Transmission & Processing as well as Field Services segments outperformed in the last quarter mainly reflecting higher contracted volumes in the Horn River area of British Columbia, a favorable foreign currency exchange rate and higher commodity prices.
Though we believe commodity price concerns remain for the near term, the company’s core fee-based businesses of storage, transmission, distribution, Canadian gathering and processing have the potential to move the needle toward solid earnings and cash flow growth in the long run.
Again, in order to extend its portfolio, the company decided to deploy $1 billion per year through 2015 on fee-based gas infrastructure growth projects to meet or beat the company’s targeted return on capital employed of 10–12%.
Spectra’s growth momentum continues with both organic as well as inorganic means. We remain upbeat on Spectra’s various near- to medium-term projects that include its New Jersey-New York pipeline, an NGL pipeline in Texas, opportunities in the Gulfstream Pipeline and infrastructure to serve western Canada LNG exports. For 2011, the company expects about 80% of its margins to come from liquids-rich areas. Hence, its 2011 earnings per share forecast of $1.65 appear conservative in our view.
However, Spectra’s results are vulnerable to fluctuations in natural gas markets, which remain the key risk to our recommendation. The proposed liquid-rich drilling activities by the company clearly suggest that low natural gas prices have little ability to pick up in the near term. Again, major investment in several projects in Canada exposes Spectra to fluctuations in currency rates that may affect the results of its operations.
With a market leading position, diversified asset portfolio and strong investment opportunities, we expect the company to sustain its growth momentum. Spectra Energy competes with Williams Companies, Inc. (WMB) and El Paso Corp. (EP).
EL PASO CORP (EP): Free Stock Analysis Report
SPECTRA ENERGY (SE): Free Stock Analysis Report
WILLIAMS COS (WMB): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment