Spectra Energy: Balanced Risk, Reward - Analyst Blog

On May 15, 2014, we issued an updated research report on Spectra Energy Corporation SE. The company is one of North America's premier natural gas infrastructure plays. It has a strong presence in growth markets that should lead to value-creating investment opportunities over the coming years. Also, the acquisition of the Express-Platte Pipeline System has enabled the company to diversify its portfolio to a growing market of crude oil pipeline businesses. The company's core fee-based businesses have the potential to move the needle toward solid earnings and cash flow growth.

Spectra Energy has delivered positive earnings surprises in three of the last four quarters, with an average beat of 11.41%. The company reported improved financial results for the first quarter of 2014 with the bottom line beating the Zacks Consensus Estimate while the top line on par with the same.
 
Though we believe that commodity price concerns remain for the near term, the company's core fee-based businesses of storage, transmission, distribution and Canadian gathering and processing have the potential to generate solid earnings and cash flow growth in the long run. Going forward, Spectra intends to increase its presence in the oil and refined products pipelines, storage tanks and terminals business.

Management remains optimistic on its future performance as its expansion program is on track. With its market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain the growth momentum. Additionally, Spectra plans to invest $1 billion per year through 2015 on fee-based gas infrastructure growth projects.

The company expects to commission around 8 projects through 2016. Among these projects, Southern Hills and Sand Hills Pipelines, Front Range Pipeline, and Texas Express Pipeline, are expected to come online in the near future.

However, Spectra's results are vulnerable to fluctuations in natural gas markets. The proposed liquid-rich drilling activities by the company clearly suggest that volatility in natural gas prices will change little going forward. Major investments in several projects in Canada also expose Spectra to fluctuations in currency rates that may affect its operations.

Stocks That Warrant a Look

Spectra Energy carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil and gas sector include Encana Corporation ECA, Pembina Pipeline Corporation PBA and Matador Resources Company MTDR. All of these sport a Zacks Rank #1 (Strong Buy) and would offer above-average returns to investors.

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