On Nov 24, 2015, we issued an updated research report on Texas-based Spectra Energy Corporation SE.
Spectra continues to grow through organic as well as inorganic means. Also, the company remains upbeat about its prospects in 2015. The company expects to secure about $35 billion in growth opportunities by the end of 2020. We expect strong returns from the company’s western Canadian assets, BC Pipeline, BC Field Services, Midstream and Natural Gas Liquids, in particular. These constitute the largest natural gas midstream businesses in Canada and are well positioned for growth.
Spectra plans to deploy about $25 billion over the next decade on fee-based gas infrastructure growth projects. The company expects to commission around eight projects through 2016. Further, growth is expected from its master limited partnership (MLP) dropdown strategy.
Spectra’s East Tennessee Natural Gas (ETNG) pipeline will supply an incremental 86 million cubic feet per day (MMcf/d) of fixed transportation capacity to Eastman Chemical Company’s Kingsport facility, TN, for 25 years. This long-term agreement is expected to add significantly to the company’s revenues and thus, boost its growth.
Though we believe that commodity price concerns remain for the near term, the company’s core fee-based businesses of storage, transmission, distribution, along with Canadian gathering and processing, have the potential to move the needle toward solid earnings and cash flow growth in the long run. Spectra intends to increase its presence in the oil and refined products pipelines, storage tanks and terminals businesses, going forward.
However, Spectra’s results are vulnerable to fluctuations in natural gas markets. The proposed liquid-rich drilling activities by the company clearly suggest that low natural gas prices have little hope of picking up in the near term.
Moreover, major investments in several Canadian projects expose Spectra to fluctuations in currency rates, which in turn may affect the results of its operations.
Though most of Spectra's revenues are based on regulated tariff rates, an unfavorable macro environment may result in lower earnings and cash flows. Moreover, with a relatively heavy debt-to-capitalization ratio of 56.8%, the company's balance sheet remains highly leveraged.
Zacks Rank and Stocks to Consider
Spectra carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Energy Transfer Equity, L.P. ETE, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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