Market Overview

Spectra Energy - Sour is the Smell

Texas (01/12/2014) - Spectra Energy Corporation (NYSE: SE) – Sell based on a recent price of $35.19 and a fair value estimate of $23-$29.

The company, through its subsidiaries and equity affiliates owns and operates a portfolio of complementary natural gas-related energy assets that includes processing, transmission, storage and distribution of natural gas and liquids.

Additionally, the company has interests in 14172 miles of transmission pipeline across the United States and Canada with 12463 miles owned directly by the company and or its affiliates.

Perhaps the single thing that stood out to me as I reviewed the company's latest annual financials was the amount of debt the company has, totaling roughly $12.8 billion.

While much of the debt is underwritten via corporate bonds and debentures, what I found very strange was the average coupon rate for all of this debt was 6.015%.

In today's world of almost free money, it just seems incredible for a company the size of Spectra to pay an average interest rate that high. It also makes me wonder why the company would want to add debt. But add they did, increasing total debt y-o-y by 7.5%.

My issue with debt, a necessary evil, is regardless of the type, secured, unsecured, a bond, or a debenture, the borrowed money still must be returned and interest must be paid.

It is the interest part that admittedly I tend to focus on because the interest payment comes from company profits.

As I noted, the company increased its total debt y-o-y by 7.5%. What I found fascinating was that for increasing its debt by 7.5% the company received nothing, nada, zilch.

Year over year there was no increase in sales, no increase in profits, no increase in CAPEX, no increase in anything except debt.

Simply put, for an increase in risk, the company appears to have received no increase in potential reward. How odd.

As the matter of fact some of the company's other y-o-y points of interest were free cash flow growth of (-53%), operating cash flow margin of (-1.5%), reduction in cash on hand by 46%, a 5% sales decline, and a 4% decline in earnings.

Once again, just like the increase in debt was a negative, there were additional negatives from other parts of the financial statements. All of which are extremely disappointing.

I realize that the company, like so many other energy companies, is involved with its Master Limited Partnership. And I realize that over time, adjustments to company's financial statements, including debt adjustment may be required in order to balance the MLP holdings.

But considering year over year operations, a management KPI (Key Performance Indicator) of 39%, and a recently announced increase in the annual dividend, I think an investment in Spectra Energy at this time, will only end up smelling like the gas in the company's pipelines..sour.

Wax

Disclosure:Wax Ink is a baseline equity research company not licensed or registered with any government agency and has no position in any stock mentioned.
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