Sempra Energy: Updated Research Report - Analyst Blog

On May 23, 2014, we issued an updated research report on Sempra Energy SRE. This southern California-based energy services holding company recently reported stronger-than-expected first quarter 2014 earnings.

Sempra Energy is involved in the sale, distribution, storage and transportation of electricity and natural gas. Sempra's two regulated Californian utilities provide services to more than 20 million natural gas and electricity customers.

Recently, the company reported impressive first quarter earnings that were driven by favorable weather as well as by underlying growth and operational performance. The company's diversified basket of businesses insulates its operations to a significant degree from regulatory rate risks. Also, geographic diversity in its assets exempts the company from any region specific risk. Thus, Sempra Energy presents a lower risk profile relative to its peers.

Mexico's state-owned electric utility, Comision Federal de Electricidad (CFE) recently announced five pipeline bids. These bids comprise three in the U.S. with an estimated cost of $1.2 billion. Sempra Energy's unit Sempra U.S. Gas & Power seems to be well positioned to grab the opportunities here. These ventures will be supported by long-term take-or-pay contracts and have targeted operation dates of Mar 2016 through Mar 2017.

Sempra Energy is also focused on its Cameron LNG Liquefaction-export Project. A Sempra Energy unit, Sempra LNG, is the prime company developing this project, which comprises three liquefaction trains with a nameplate capacity of approximately 13.5 million tons per annum of LNG. The construction is slated to start later this year and the company has several large projects in Mexico and Peru coming online in the second half of 2014.

We note, however, that 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 20%-plus renewable portfolio standard, with the targets ramping up to 33% by 2020. This entails significant investments in renewable energy projects that would require more funds.

Sempra Energy presently carries a Zacks Rank #3 (Hold). Better-ranked stocks worth considering are New Jersey Resources Corp. NJR, AGL Resources Inc. GAS and Atmos Energy Corp. ATO. While New Jersey Resources carries a Zacks Rank #1 (Strong Buy), AGL Resources and Atmos Energy hold a Zacks Rank #2 (Buy).