Premier natural gas company Spectra Energy Corp. (SE) reported better-than-expected second-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 42 cents in the reported quarter, fairly ahead of the Zacks Consensus Estimate of 40 cents and higher than the year-earlier profit of 27 cents.
The company reported operating revenues of $1,188 million, up 12% from the year-earlier level of $1,063 million. However, the quarterly figure failed to meet the Zacks Consensus Estimate of $1,204 million.
Operational Analysis
U.S.Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $243 million, showing an improvement of almost 9% 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 segment’s profit.
Distribution: The segment reported a year-over-year jump in its EBIT to reach $88 million from the prior-year level of $73 million. The performance was aided by higher customer usage, a stronger Canadian dollar, a hike in the number of residential customers as well as an increase in revenues from short-term transportation services.
Western Canada Transmission & Processing: The segment witnessed an EBIT of $113 million, up more than 63% from the year-earlier level. The increase over the prior-year quarter 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 $138 million registered a substantial jump from the year-ago quarter level of $58 million. The improvement was driven by higher commodity prices during the quarter.
During the quarter, the company produced NGLs of approximately 377 thousand barrels per day (MBbl/d), up 4.4% year over year. Price of NGLs averaged $1.24 per gallon (up 36.3% year over year), while crude oil averaged at approximately $103 per barrel (up 32.1% year over year).
Balance Sheet
As of June 30, 2011, Spectra Energy had long-term debt of approximately $10,640 million with a debt-to-capitalization ratio of 53.4% (versus 53.5% in the preceding quarter).
Outlook
With second-quarter results showing an improvement over the prior base year, management remains optimistic about the company’s performance going forward and looks to deliver or exceed its full year earnings per share forecast of $1.65. With a market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain its growth momentum.
However, the heavy debt-to-capitalization ratio serves as a competitive disadvantage for the company. Spectra also faces strong competition from its peer, El Paso Corp. (EP). Hence, we prefer to remain on the sidelines and maintain our long-term Neutral recommendation. Spectra Energy holds a Zacks #3 Rank, which translates into a short-term Hold rating.
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