Natural gas company Spectra Energy Corp. (SE) reported second-quarter 2014 earnings per share from continuing operations of 22 cents, lagging the Zacks Consensus Estimate of 30 cents. Moreover, the results were down 26.7% from 30 cents in the year-ago quarter. The downside came from all Distribution and Western Canada Transmission & Processing segments.
The company’s operating revenues of $1,253.0 million rose 2.7% from the year-earlier level of $1,220.0 million but came short of the Zacks Consensus Estimate of $1,313 million.
Operational Analysis
On Nov 1, 2013, Spectra Energy completed its dropdown of the remainder of its U.S. Storage and Transmission assets to MLP Spectra Energy Partners, LP. The transaction transformed Spectra Energy Partners into one of the major fee-based MLPs in North America, with an enterprise value of almost $20 billion.
Spectra Energy Partners: The segment posted quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) of $374.0 million, reflecting an increase of 4.5% from the year-ago quarter. The rise was attributable to dropdown of Express-Platte, the performance of which exceeded expectations and increased earnings from pipeline expansions, mainly the New Jersey to New York project commissioned on Nov 1, 2013. Moreover, higher natural gas transportation revenues stemming from a record demand in the winter aided the increase.
Distribution: The segment reported a 2.6% decrease in EBITDA to $112.0 million from $115.0 million in the year-ago quarter. The decline was mainly due to weaker Canadian dollar, higher operating fuel costs and earnings sharing under the incentive rate framework
Western Canada Transmission & Processing: The segment witnessed EBITDA of $111.0 million, down 29.3% from the year-earlier level. The downside came from the weaker Canadian dollar.
Field Services: The segment’s EBITDA of $54.0 million rose 17.4% from the year-ago level of $46.0 million. The improvement came primarily on the back of higher volumes from new processing plants, higher commodity prices and positive results from gas and natural gas liquid (NGL) marketing during the quarter. These factors were partly offset by increase in interest expense, depreciation expense and operating costs.
Production and Price Realizations
The company produced NGL of 452 thousand barrels per day (MBbl/d), up from the year-ago quarter level of 412 MBbl/d. Price of NGLs averaged $0.93 per gallon (up 13.4% year over year), while crude oil averaged approximately $102.99 per barrel (up 9.3% year over year). Natural gas was sold at $4.67 per million British thermal units (MMBtu) versus $4.09 per MMBtu in the second quarter of 2013.
Balance Sheet
As of Jun 30, 2014, Spectra Energy had long-term debt of approximately $14.4 billion with a debt-to-capitalization ratio of 57% (compared with 58% in the preceding quarter).
Outlook
Spectra Energy is one of North America’s major natural gas infrastructure players and has a strong business position in growth markets. The company plans to invest about $25 billion over the next decade in fee-based gas infrastructure growth projects. It also intends to allocate $25 billion in growth projects through the end of the decade.
At present, Spectra Energy carries a Zacks Rank #3 (Hold). Better-ranked stocks in the oil and gas sector include Weatherford International plc (WFT), CNOOC Ltd (CEO) and Natural Gas Services Group Inc. (NGS). All of these sport a Zacks Rank #1 (Strong Buy) and would offer above-average returns to investors.
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