We recommend investors stay invested in the Southern California-based energy services holding company Sempra Energy (SRE). At present, the stock reflects a balanced risk-reward proposition. A short discussion of the underlying factors would further explain our middle-of-the-road stance.
The Positives
Sempra Energy appears to be well positioned given its stable earnings stream from its utility subsidiaries – Southern California Gas Company (SoCalGas) and San Diego Gas & Electric (SDG&E) – which cater to more than 20 million customers of central and southern California. These utilities generate about two-thirds of Sempra's earnings. The utilities also have generous opportunities for capital spending over the next five years, which can be recovered through rate base hikes.
The company is now more focused on its stable, regulated operations and long-term contracted businesses following the divestiture of its commodities trading business in 2011. The recent sale of a partial interest in an unregulated natural-gas-fired power plant, and the stated intention to either sell or contract the remainder of its generated power, along with a growing renewables portfolio, make Sempra's business model less volatile. Also, Sempra's South American utilities (in Peru and Chile) are regulated distribution companies with favorable earnings and cash flow growth prospects.
Sempra has a liquid natural gas (LNG) business and is building its wholly owned Cameron LNG liquefaction project on the Calcasieu Channel in southwestern Louisiana. This large-scale initiative will involve a 13.5 million-tons-per-annum (Mtpa) complex capable of transporting 12 Mtpa or 1.7 billion cubic feet of per day (Bcf/d) of LNG. It also includes three trains to be used for freight delivery purposes and a regasification capability of 1.5 Bcf/d.
The construction activities will commence from 2014 with the first stage of operations anticipated to begin by the latter half of 2017. Following this, the three trains will fully come online by 2018. The liquefaction project will turn out to be a key earnings driver in the future for Sempra Energy.
The Concerns
Despite the many positives running for Sempra, we remain concerned about the near-term trepidation in natural gas prices and some pending regulatory cases.
Sempra Energy’s businesses are capital intensive and rely significantly on long-term debt for capital expenditures. Furthermore, the company operates in the state of California which maintains an aggressive 25%-plus renewable portfolio standard requirement by 2016, with the targets ramping up to 33% by 2020. This entails significant investments in renewable energy projects that require more funds.
In addition, the company’s third quarter 2013 earnings missed our projected mark by 1.7% as well as the year-ago figure by 10.5%. This was mainly due to lower contribution from its SDG&E business.
Zacks Rank
Given a blend of both positive and negative factors, we currently maintain our Neutral recommendation on the stock. Sempra holds a Zacks Rank #3 (Hold). Stocks worth considering in the energy space are Mdu Resources Group Inc. (MDU), Atmos Energy Corporation (ATO) and National Fuel Gas Company (NFG), all with a Zacks Rank #2 (Buy).
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