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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 LevelQuarterly Target Threshold per ShareCommon Unitholder [LP]%General Partner [GP]%
Minimum$0.30098%2%
First Target$0.30098%2%
Second Target$0.34585%15%
Third Target$0.37575%25%
Thereafter$0.45050%50%

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 ENERGYSPECTRA ENERGY PARTNERSWILLIAMS COSKINDER MORGANONEOKEL PASO PIPELINEKINDER MORGAN ENERGY PARTNERSTRANSCANADA CORPONEOK PARTNERSENTERPRISE PRODUCTS PARTNERS
Latest Fiscal Year:12/201312/201312/201312/201312/201312/201312/201312/201312/201312/2013
Latest Available Period Date:3/31/20143/31/20143/31/20143/31/20143/31/20143/31/20143/31/20143/31/20143/31/20143/31/2014
52-Week High41.7357.5647.9540.4566.2144.9988.0847.4957.8476.50
52-Week High Date6/6/20145/5/20146/6/20147/16/20136/6/20146/27/20137/11/20134/3/20142/18/20146/3/2014
52-Week Low30.0636.0131.2530.8134.4828.8771.3242.2745.4056.11
52-Week Low Date6/6/20136/6/20136/24/20133/20/20147/5/20133/12/20143/20/201410/7/20136/24/20136/24/2013
Daily Volume1,567,505116,8303,772,0765,740,628649,703492,8671,521,6291,490,670305,388926,282
Current Price:6/6/1441.7053.2847.7335.0865.8934.7778.6046.3955.5975.23
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 % Change40.8%53.6%52.7%13.9%91.1%20.4%10.2%15.5%22.4%34.1%
Total Common Shares [M]670.00289.9683.01,030.7206.6222.3443.4707.0232.0935.7
Market Capitalization27,967.615,450.632,719.836,058.913,696.57,573.935,674.632,834.213,729.670,287.8
Total Debt14,422.05,907.012,850.035,242.07,334.74,185.022,088.023,868.16,175.918,367.8
Preferred Stock258.0------2,042.8--
Minority Interest1,879.0132.04,101.015,634.02,543.2-447.01,335.34.6223.1
- Cash and Equivalents193.0110.01,064.0513.0210.281.0347.0678.5115.4988.4
Current Enterprise Value44,333.621,379.648,606.886,421.923,364.111,677.956,627.659,413.919,794.787,890.3
ValuationAverageMedian
Total RevenueLFY5,518.01,965.06,860.014,070.014,602.71,505.012,530.08,542.711,869.347,727.012,519.010,206.0
LTM5,772.01,291.06,799.015,057.014,224.61,501.013,521.08,960.312,514.149,253.812,889.410,737.2
FY+15,973.52,259.58,010.715,893.414,585.31,578.514,376.89,442.514,693.954,085.914,090.011,909.6
FY+26,313.52,487.99,681.816,955.616,491.61,673.415,320.59,572.915,340.556,854.515,069.212,501.1
EV/Total RevenueLFY7.33x9.73x6.02x6.25x1.61x8.09x4.54x6.89x1.53x1.67x5.4x6.1x
LTM7.13x15.41x6.43x5.56x1.55x7.26x4.12x6.88x1.48x1.68x5.7x6.0x
FY+17.42x9.46x6.07x5.44x1.60x7.40x3.94x6.29x1.35x1.63x5.1x5.8x
FY+27.02x8.59x5.02x5.10x1.42x6.98x3.70x6.21x1.29x1.55x4.7x5.1x
EBITDALFY2,453.01,239.02,190.05,796.01,311.11,093.04,675.04,234.91,137.44,517.62,864.72,321.5
LTM2,600.0971.52,069.06,013.01,319.61,100.04,897.04,262.11,264.24,608.52,910.52,334.5
FY+13,133.01,543.73,001.16,533.71,457.11,179.45,818.74,874.71,585.95,191.13,431.83,067.0
FY+23,266.71,685.03,790.27,019.31,686.81,248.86,314.95,045.31,809.75,484.43,735.13,528.4
EV/EBITDALFY16.50x15.43x18.86x15.16x17.95x11.14x12.17x13.91x15.95x17.61x15.5x15.7x
LTM17.05x22.01x23.49x14.37x17.71x10.62x11.56x13.94x15.66x19.07x16.5x16.4x
FY+114.15x13.85x16.20x13.23x16.03x9.90x9.73x12.19x12.48x16.93x13.5x13.5x
FY+213.57x12.69x12.82x12.31x13.85x9.35x8.97x11.78x10.94x16.03x12.2x12.5x
EPSLFY1.647.200.820.601.621.863.762.182.322.832.482.02
LTM1.723.960.820.831.351.823.482.202.712.822.172.01
FY+11.572.571.141.231.641.712.772.232.923.142.091.97
FY+21.622.691.531.472.001.722.792.333.003.302.252.17
P/ELFY21.72x6.30x47.04x60.00x38.38x19.35x21.45x21.67x22.69x23.46x28.2x22.2x
LTM24.28x13.45x58.40x42.25x48.93x19.10x22.59x21.91x20.51x26.66x29.8x23.4x
FY+126.53x20.71x41.98x28.57x40.30x20.38x28.43x20.84x19.02x23.97x27.1x25.3x
FY+225.68x19.84x31.14x23.85x32.91x20.18x28.17x19.88x18.51x22.82x24.3x23.3x
Revenue Growth1 Year8.7%12.0%-8.4%41.1%15.6%-0.7%38.7%9.9%16.6%12.1%14.6%12.1%
5 Year6.1%146.4%0.2%-5.3%94.6%17.4%6.6%23.2%23.8%36.0%17.4%
EBITDA Growth1 Year5.1%9.0%-7.5%44.2%-8.8%4.7%28.1%10.5%-2.5%8.9%9.2%7.0%
5 Year3.5%73.8%-10.6%18.5%2.5%60.3%15.7%1.0%8.1%13.0%18.6%10.6%
EBITDA MarginLTM45.05%75.3%30.4%39.9%9.3%73.3%36.2%47.6%10.1%9.4%37.6%38.1%
FY+152.45%68.3%37.5%41.1%10.0%74.7%40.5%51.6%10.8%9.6%39.7%40.8%
FY+251.74%67.7%39.1%41.4%10.2%74.6%41.2%52.7%11.8%9.6%40.0%41.3%

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.

Source: Spectra Positioned For Accelerated Growth