Premier natural gas company, Spectra Energy Corp. (SE) reported second-quarter 2013 earnings per share from continuing operations of 30 cents, missing the Zacks Consensus Estimate of 32 cents. The results decreased 9.1% from the year-ago earnings of 33 cents. The decline was mainly due to loss in all segments excluding U.S. Transmission.
The company’s operating revenues of $1,220.0 million rose 9.7% from the year-earlier level of $1,112.0 million. However, this failed to reach our projection of $1,264.0 million.
Operational Analysis
U.S. Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $248.0 million, reflecting an upside of 4.6% from the year-ago quarter. This was due to the expansion of Texas Eastern which was partially mitigated by lower storage revenues.
Distribution: The segment reported a year-over-year 13.3% decrease in its EBIT to $65.0 million from the prior-year level of $75.0 million. The decrease was mainly due to lower storage and transportation revenues.
Western Canada Transmission & Processing: The segment witnessed an EBIT of $74.0 million, down 21.3% from the year-earlier level. The downside was due to lower contracted volumes and lower propane sale prices.
Field Services: The segment’s EBIT of $46.0 million fell 30.3% from the year-ago level of $66.0 million. The underperformance was mainly due to the adverse effects of asset drop-downs to DCP Midstream Partners and lower natural gas liquid (NGL) prices.
Production and Price Realizations
The company produced NGLs of 412 thousand barrels per day (MBbl/d), up from the year-ago quarter level of 392 MBbl/d. Price of NGLs averaged 71 cents per gallon (down nearly 7.8% year over year), while crude oil averaged at approximately $94.22 per barrel (up 0.8% year over year). Natural gas was sold at $4.09 per million British thermal units (MMBtu) versus $2.22 per MMBtu in the second quarter of 2012.
Balance Sheet
As of Jun 30, 2013, Spectra Energy had long-term debt of approximately $11,656 million with a debt-to-capitalization ratio of 54.5% (versus 55.6% 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. We see lingering commodity price concerns for the near term. However, 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 invest about $25 billion over the next decade on fee-based gas infrastructure growth projects. The company plans to allocate $25 billion in growth projects through the end of the decade. Further, momentum will be driven by the advancing of the master limited partnership (MLP) dropdown strategy through the recent asset additions.
However, we remain concerned about lower price realizations and also believe that the heavy debt-to-capitalization ratio is a competitive disadvantage.
Spectra Energy holds a Zacks Rank #3, which is equivalent to a Hold rating for a period of one to three months. However, there are other stocks in the oil and gas sector – Range Resources Corporation (RRC), Gulfmark Offshore, Inc. (GLF) and Dril-Quip, Inc. (DRQ) – which hold a Zacks Rank #1 (Strong Buy) and are expected to perform better.
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