Spectra Positioned For Accelerated Growth

Jun. 9.14 | About: Spectra Energy (SE)

Summary

Q1/14 EBITDA of $1,005 million was 21% higher than Q1/13 EBITDA of $831 million, and well above consensus estimates of $896 million.

Expansion of gas pipeline projects focuses capital on high return prospects.

GP stake in Spectra Energy Partners benefits from maximum incentive distribution rights.

Company Description:

Spectra Energy (NYSE:SE) is one of largest pipeline and midstream companies in North America with major holdings of pipelines, storage, gathering, and processing assets. The company currently holds over 35,000 km of natural gas, natural gas liquids (NGL), and crude oil pipelines, and 305 Bcf of natural gas storage. In additional, Spectra Energy possesses natural gas gathering and processing, and local distribution operations.

The Spectra Structure:

Spectra Energy is the parent company, with 82% LP and 2% GP holdings in Spectra Energy Partners (NYSE:SEP), the U.S. Gas Transmission and Liquids Segment, ownership of Union Gas, the Canadian natural gas storage, transmission, and distribution company, ownership of Western Canadian natural gas and NGL operations, and 50% holdings in DCP Midstream LLC, the field services operations. DCP Midstream LLC, in turn, has 21.5% LP and 1.4% GP holdings in DCP Midstream Partners (NYSE:DPM), the largest U.S. NGL producer and natural gas processor. Phillips 66 (NYSE:PSX) owns the other 50% of DCP Midstream LLC.

Investment Rationale:

  • Strong growth led by gas pipeline projects. Spectra Energy currently has $4.8 billion of projects in execution, focused primarily on expanding transportation capacity of the Marcellus/Utica basins. The two largest projects, combining for over $2.5 billion in capital expenditure, in execution are the Sabal Trail, estimated to be completed in 1H/2017, and AIM, estimated to be completed in 2H/2016. I like Spectra's ability to deploy capital, demonstrated by an average of $1.1 billion in growth capital expenditure since 2007 IPO, with no shortage of projects in the current pipeline. Management sees $7 billion in a potential project to expand capacity in northeastern U.S., southwestern Ontario, mid-Atlantic, and Gulf Coast.
  • Incentive distribution structure benefits Spectra Energy as General Partner if per share earnings targets are met. Since Spectra Energy has dropped down all of its liquids pipeline assets to Spectra Energy Partners, Spectra Energy has received cash flows of $2.9 billion, as well as improved GP distribution share as outlined in the following table. As Spectra Energy Partners improves its unit distributions, targeting 9% LP distribution, Spectra Energy's share will see exponential growth. Given Spectra Energy Partners' latest distribution of .55625, Spectra Energy is entitled to the highest share at 50%.

Incentive Distribution Table

Threshold Level Quarterly Target Threshold per Share Common Unitholder [LP]% General Partner [GP]%
Minimum $0.300 98% 2%
First Target $0.300 98% 2%
Second Target $0.345 85% 15%
Third Target $0.375 75% 25%
Thereafter $0.450 50% 50%
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Source: Spectra Energy Investor Relations

I believe that Spectra Energy's focus on expanding gas pipeline projects will help the company grow in a segment that has low commodity price exposure. As seen in the comparables table below, Spectra has above average EBITDA margin, but below average EBITDA growth. The lack of EBITDA growth can be explained by underperformance within the field services and Western Canada commodity-based operations, which are exposed to natural gas, NGL, and oil prices. Since Spectra Energy is focusing on growing exposure to transmission and distribution, the firm should see much stronger growth going forward to boost its 3.4% dividend yield.

Given the commodity-exposed nature of its field services and transmission and processing segments, Spectra Energy is exposed to NGL prices, natural gas prices, and crude oil prices. Furthermore, Spectra Energy is exposed to volume risk, although long-term contracts help to control exposure to roughly 5% of U.S. transmission revenue.

Comparables Table

(NYSE:WMB) (NYSE:KMI) (NYSE:OKE) (NYSE: EPB) (NYSE: KMP) (NYSE: TRP) (NYSE:OKS) (NYSE: EPD)
Company Name: SPECTRA ENERGY SPECTRA ENERGY PARTNERS WILLIAMS COS KINDER MORGAN ONEOK EL PASO PIPELINE KINDER MORGAN ENERGY PARTNERS TRANSCANADA CORP ONEOK PARTNERS ENTERPRISE PRODUCTS PARTNERS
Latest Fiscal Year: 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013
Latest Available Period Date: 3/31/2014 3/31/2014 3/31/2014 3/31/2014 3/31/2014 3/31/2014 3/31/2014 3/31/2014 3/31/2014 3/31/2014
52-Week High 41.73 57.56 47.95 40.45 66.21 44.99 88.08 47.49 57.84 76.50
52-Week High Date 6/6/2014 5/5/2014 6/6/2014 7/16/2013 6/6/2014 6/27/2013 7/11/2013 4/3/2014 2/18/2014 6/3/2014
52-Week Low 30.06 36.01 31.25 30.81 34.48 28.87 71.32 42.27 45.40 56.11
52-Week Low Date 6/6/2013 6/6/2013 6/24/2013 3/20/2014 7/5/2013 3/12/2014 3/20/2014 10/7/2013 6/24/2013 6/24/2013
Daily Volume 1,567,505 116,830 3,772,076 5,740,628 649,703 492,867 1,521,629 1,490,670 305,388 926,282
Current Price: 6/6/14 41.70 53.28 47.73 35.08 65.89 34.77 78.60 46.39 55.59 75.23
52-Week High % Change -0.1% -7.4% -0.5% -13.3% -0.5% -22.7% -10.8% -2.2% -3.9% -1.7%
52-Week Low % Change 40.8% 53.6% 52.7% 13.9% 91.1% 20.4% 10.2% 15.5% 22.4% 34.1%
Total Common Shares [M] 670.00 289.9 683.0 1,030.7 206.6 222.3 443.4 707.0 232.0 935.7
Market Capitalization 27,967.6 15,450.6 32,719.8 36,058.9 13,696.5 7,573.9 35,674.6 32,834.2 13,729.6 70,287.8
Total Debt 14,422.0 5,907.0 12,850.0 35,242.0 7,334.7 4,185.0 22,088.0 23,868.1 6,175.9 18,367.8
Preferred Stock 258.0 - - - - - - 2,042.8 - -
Minority Interest 1,879.0 132.0 4,101.0 15,634.0 2,543.2 - 447.0 1,335.3 4.6 223.1
- Cash and Equivalents 193.0 110.0 1,064.0 513.0 210.2 81.0 347.0 678.5 115.4 988.4
Current Enterprise Value 44,333.6 21,379.6 48,606.8 86,421.9 23,364.1 11,677.9 56,627.6 59,413.9 19,794.7 87,890.3
Valuation Average Median
Total Revenue LFY 5,518.0 1,965.0 6,860.0 14,070.0 14,602.7 1,505.0 12,530.0 8,542.7 11,869.3 47,727.0 12,519.0 10,206.0
LTM 5,772.0 1,291.0 6,799.0 15,057.0 14,224.6 1,501.0 13,521.0 8,960.3 12,514.1 49,253.8 12,889.4 10,737.2
FY+1 5,973.5 2,259.5 8,010.7 15,893.4 14,585.3 1,578.5 14,376.8 9,442.5 14,693.9 54,085.9 14,090.0 11,909.6
FY+2 6,313.5 2,487.9 9,681.8 16,955.6 16,491.6 1,673.4 15,320.5 9,572.9 15,340.5 56,854.5 15,069.2 12,501.1
EV/Total Revenue LFY 7.33x 9.73x 6.02x 6.25x 1.61x 8.09x 4.54x 6.89x 1.53x 1.67x 5.4x 6.1x
LTM 7.13x 15.41x 6.43x 5.56x 1.55x 7.26x 4.12x 6.88x 1.48x 1.68x 5.7x 6.0x
FY+1 7.42x 9.46x 6.07x 5.44x 1.60x 7.40x 3.94x 6.29x 1.35x 1.63x 5.1x 5.8x
FY+2 7.02x 8.59x 5.02x 5.10x 1.42x 6.98x 3.70x 6.21x 1.29x 1.55x 4.7x 5.1x
EBITDA LFY 2,453.0 1,239.0 2,190.0 5,796.0 1,311.1 1,093.0 4,675.0 4,234.9 1,137.4 4,517.6 2,864.7 2,321.5
LTM 2,600.0 971.5 2,069.0 6,013.0 1,319.6 1,100.0 4,897.0 4,262.1 1,264.2 4,608.5 2,910.5 2,334.5
FY+1 3,133.0 1,543.7 3,001.1 6,533.7 1,457.1 1,179.4 5,818.7 4,874.7 1,585.9 5,191.1 3,431.8 3,067.0
FY+2 3,266.7 1,685.0 3,790.2 7,019.3 1,686.8 1,248.8 6,314.9 5,045.3 1,809.7 5,484.4 3,735.1 3,528.4
EV/EBITDA LFY 16.50x 15.43x 18.86x 15.16x 17.95x 11.14x 12.17x 13.91x 15.95x 17.61x 15.5x 15.7x
LTM 17.05x 22.01x 23.49x 14.37x 17.71x 10.62x 11.56x 13.94x 15.66x 19.07x 16.5x 16.4x
FY+1 14.15x 13.85x 16.20x 13.23x 16.03x 9.90x 9.73x 12.19x 12.48x 16.93x 13.5x 13.5x
FY+2 13.57x 12.69x 12.82x 12.31x 13.85x 9.35x 8.97x 11.78x 10.94x 16.03x 12.2x 12.5x
EPS LFY 1.64 7.20 0.82 0.60 1.62 1.86 3.76 2.18 2.32 2.83 2.48 2.02
LTM 1.72 3.96 0.82 0.83 1.35 1.82 3.48 2.20 2.71 2.82 2.17 2.01
FY+1 1.57 2.57 1.14 1.23 1.64 1.71 2.77 2.23 2.92 3.14 2.09 1.97
FY+2 1.62 2.69 1.53 1.47 2.00 1.72 2.79 2.33 3.00 3.30 2.25 2.17
P/E LFY 21.72x 6.30x 47.04x 60.00x 38.38x 19.35x 21.45x 21.67x 22.69x 23.46x 28.2x 22.2x
LTM 24.28x 13.45x 58.40x 42.25x 48.93x 19.10x 22.59x 21.91x 20.51x 26.66x 29.8x 23.4x
FY+1 26.53x 20.71x 41.98x 28.57x 40.30x 20.38x 28.43x 20.84x 19.02x 23.97x 27.1x 25.3x
FY+2 25.68x 19.84x 31.14x 23.85x 32.91x 20.18x 28.17x 19.88x 18.51x 22.82x 24.3x 23.3x
Revenue Growth 1 Year 8.7% 12.0% -8.4% 41.1% 15.6% -0.7% 38.7% 9.9% 16.6% 12.1% 14.6% 12.1%
5 Year 6.1% 146.4% 0.2% - 5.3% 94.6% 17.4% 6.6% 23.2% 23.8% 36.0% 17.4%
EBITDA Growth 1 Year 5.1% 9.0% -7.5% 44.2% -8.8% 4.7% 28.1% 10.5% -2.5% 8.9% 9.2% 7.0%
5 Year 3.5% 73.8% -10.6% 18.5% 2.5% 60.3% 15.7% 1.0% 8.1% 13.0% 18.6% 10.6%
EBITDA Margin LTM 45.05% 75.3% 30.4% 39.9% 9.3% 73.3% 36.2% 47.6% 10.1% 9.4% 37.6% 38.1%
FY+1 52.45% 68.3% 37.5% 41.1% 10.0% 74.7% 40.5% 51.6% 10.8% 9.6% 39.7% 40.8%
FY+2 51.74% 67.7% 39.1% 41.4% 10.2% 74.6% 41.2% 52.7% 11.8% 9.6% 40.0% 41.3%
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.