Premier natural gas company Spectra Energy Corp. (SE) reported better-than-expected third-quarter 2011 results owing to expansion projects that led to higher commodity prices along with a stronger Canadian dollar.
Earnings per share from continuing operations were 38 cents in the reported quarter, a penny short of the Zacks Consensus Estimate, but higher than the year-earlier profit of 31 cents.
The company reported operating revenues of $1,123 million, up approximately 10% from the year-earlier level of $1,019 million. However, the quarterly figure failed to meet the Zacks Consensus Estimate of $1,133 million.
Operational Analysis
U.S. Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $235 million, showing a 2% uptick from the year-ago quarter. Northeast expansion projects that became operational during the fourth quarter of 2010, including TEMAX/TIME III and Algonquin East-to-West, contributed to the reported quarter’s profit, partially offset by higher planned operating costs.
Distribution: The segment reported a year-over-year fall in its EBIT to $50 million from the prior-year level of $63 million. The underperformance was primarily due to higher operating costs (mainly employee benefits costs), partially offset by a stronger Canadian dollar.
Western Canada Transmission & Processing: The segment witnessed an EBIT of $119 million, up more than 23% from the year-earlier level. The increase was driven by improved results in the base gathering and processing business primarily driven by expansions in the Horn River area of British Columbia, coupled with a stronger Canadian dollar.
Field Services: The segment’s EBIT of $134 million registered a substantial jump from the year-ago quarter level of $70 million. The improvement was driven by higher commodity prices during the quarter.
During the quarter, the company produced NGLs of approximately 392 thousand barrels per day (MBbl/d), up 3.7% year over year. Price of NGLs averaged $1.24 per gallon (up 42.5% year over year), while crude oil averaged at approximately $90 per barrel (up 18.4% year over year).
Balance Sheet
As of September 30, 2011, Spectra Energy had long-term debt of approximately $10,234 million with a debt-to-capitalization ratio of 53.9% (versus 53.4% in the preceding quarter).
Outlook
With third-quarter results showing an improvement over the prior-year quarter, management remains optimistic on its performance going forward and looks to deliver or exceed its full-year earnings per share forecast of $1.65.
Management also remains hopeful of recording an improvement in 2012 as is evident from an overall 8 cent increase in its annual dividend. With its market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain the growth momentum.
However, the heavy debt-to-capitalization ratio serves as a competitive disadvantage for the company. Spectra also faces competitive threats from El Paso Corp. (EP). Spectra Energy holds a Zacks #3 Rank, which translates into a short-term Hold rating. While we maintain our long-term Outperform recommendation on Spectra Energy.
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