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Summary

  • Acquisitions and expansions have played a vital role in growing revenues for the company.
  • Capital projects coming online over the next few months will be vital for continued revenue growth.
  • The fee-based business of the company should allow it to gain stability in revenues.

Spectra Energy (NYSE:SE) is one of the largest diversified natural gas utility companies in North America, owning and operating a large portfolio of pipelines, storage, gathering and processing assets. The company came into existence in 2006 as Duke Energy (NYSE:DUK) spun-off its natural gas business, including Westcoast Energy and Union Gas, to form Spectra Energy.

The company also has an impressive asset base with storage capacity of about 350 million cubic feet of natural gas and more than 21,000 miles of crude oil and natural gas liquids transmission pipelines. Further, the company also owns a 50% stake in DCP Midstream, which owns DCP Midstream Partners (NYSE:DPM), while the other 50% is owned by Phillips 66 (NYSE:PSX). The company formed Spectra Energy Partners (NYSE:SEP) in 2007 and serves as a general partner of the partnership.

Spectra Energy has performed well over the last two years. The company has considerably enhanced its revenues and increased its dividends over the last year. The market seems to be happy with the performance of the company as the stock gained about 27% during the last year, and it is further up 17% year-to-date.

Revenue Growth and Performance

The company operates under several different segments distributed among its subsidiaries such as Union Gas, DCP Midstream and Spectra Energy Partners. The ownership of these assets has proved to be a catalyst for company's revenue over the last two years. The primary reasons for this revenue increase are the acquisition of the Express-Platte pipeline system in the last year and the ongoing expansion projects at SEP. The company reported revenues of $5.52 billion, which is up almost 9% compared to the last year. Further, Spectra Energy has planned to place growth projects worth $35 billion into service by 2020, which will further enhance the revenue growth.

Source: AGA Financial Forum, May 18-20, 2014

Natural gas prices have been on the rise due to the harsh winter weather. As a result, Spectra Energy has been able to report substantial revenue gains during the period. This trend is mainly due to the fee-based business operations that provide steady cash flows despite the commodity risks. Moreover, the company has also planned to increase its liquids business to extend its revenue stream over the next few years. The Express-Platte pipeline system, acquired in the last year, proved to be an exceptional asset for the company. The Express pipeline is capable of delivering between 250,000-300,000 Bbls/d of liquids. Further, Sand Hills and Southern Hills NGL pipelines are placed in service ahead of schedule and under the allocated budget, increasing the total liquids' CAGR by 32% until 2016.

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Source: Barclays Investment Grade & Energy Pipeline Conference, March 2014.

Strong Future Growth Prospects

Spectra Energy also maintained its impressive performance in the first quarter and reported increased net income of $419 million, up 23% year-over-year, compared to $340 million. This increase is mainly attributed to increased winter demand, higher commodity prices and new assets in the company portfolio. Moreover, strong growth is observed in the company's Transmission and Liquids businesses. The company also has an impressive backlog of projects and opportunities which ensures strong future growth by the end of this decade.

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Source: Credit Suisse MLP and Energy Logistics Conference, June 2014.

The Transmission and Liquids businesses hold solid growth prospects for Spectra Energy over the short-medium term. These projects are anticipated to incur capital expenditures of around $4 billion, with the earliest to be operational by fourth quarter of the current year. The fee-based nature of these projects will surely benefit the company and it will also provide a hedge to the company against commodity price risk. Moreover, the company is showing great progress on the Sabal Trail Pipeline into Florida which will serve the growing need for natural gas used in power generation. The company allocated around $1.6 billion as capital expenditures for the pipeline which will be operational by the first half of 2017. The table below details the planned capital projects.

Source: Credit Suisse MLP and Energy Logistics Conference, June 2014.

Conclusion

Spectra Energy has been performing very well over the last few months on the back of solid fundamental growth. We believe the capital projects coming online in the short to medium term will further enhance the growth of the company. The growth in revenues and cash flows will continue and the company will be able to further grow its dividends. We believe that Spectra Energy is a solid long-term investment.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Source: Is Spectra Energy A Good Investment?