Spectra Energy Beats on Earnings, Up Y/Y - Analyst Blog

Premier natural gas company, Spectra Energy Corp. SE reported first-quarter 2014 earnings per share from continuing operations of 62 cents, beating the Zacks Consensus Estimate of 50 cents. Moreover, the results were up 21.6% from 51 cents in the year-ago quarter. The upside came from all segments.

The company's operating revenues of $1,843.0 million rose 16% from the year-earlier level of $1,589.0 million and came in line with our projection.

Operational Analysis

On Nov 1, 2013, Spectra Energy completed dropdown of the remainder of its U.S. Storage and Transmission assets to its MLP Spectra Energy Partners, LP. The transaction transformed Spectra Energy Partners into one of the largest 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 $429.0 million, reflecting an increase of 23.6% 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 year-over-year 2.7% increase in EBITDA to $226.0 million from $220.0 million. The increase was mainly due to higher approved rates, a colder winter and the favorable decision by the Ontario Energy Board requiring certain transportation revenues to be treated as utility earnings.  

Western Canada Transmission & Processing: The segment witnessed an EBITDA of $237.0 million, up 24.7% from the year-earlier level. The upside came from increased earnings at the Empress NGL business, attributable to higher propane sales prices.

Field Services: The segment's EBITDA of $130.0 million rose 47.7% from the year-ago level of $88.0 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 partially offset by increase in interest expense, depreciation expense and operating costs.

Production and Price Realizations

The company produced NGLs of 445 thousand barrels per day (MBbl/d), up from the year-ago quarter level of 396 MBbl/d. Price of NGLs averaged $1.06 per gallon (up 19.1% year over year), while crude oil averaged approximately $98.68 per barrel (up 4.2% year over year). Natural gas was sold at $4.94 per million British thermal units (MMBtu) versus $3.34 per MMBtu in the first quarter of 2013.

Balance Sheet

As of Dec 31, 2014, Spectra Energy had long-term debt of approximately $14.4 billion with a debt-to-capitalization ratio of 58% (unchanged from 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.

Spectra Energy carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil and gas sector include Unit Corp. UNT, Targa Resources Partners LP NGLS and Boardwalk Pipeline Partners LP BWP. All of these sport a Zacks Rank #1 (Strong Buy) and would offer above-average returns to investors.