Spectra Energy Partners (SEP) was falling 3% after hours on Wednesday, after announcing a public offering of common units. The firm will offer 6.25 million units, with an underwriters option for another 937,500 units. The money raised is being used to fund the Big Sandy aquistion, which was announced in early May. As Spectra Energy Partners falls to a new 52 week low after hours, is there value in this partnership?
Spectra's assets are broken down into 3 natural gas pipeline systems (Ozark Gas Transmission, East Tennessee Natural Gas, and Gulfstream Natural Gas) and the Market Hub Partners storage facilities. The Ozark Gas Transmission system runs from Oklahoma's Woodford Shale, through the Arkoma Basin and the Fayetteville Shale in Arkansas, ending in Missouri. In addition to the 0.5 Bcf/d capacity 565 mile interstate pipeline, there are 365 miles of gathering systems feeding into the pipeline. The East Tennessee Pipeline runs through Tennessee and into Virginia and North Carolina to the east, and Georgia and Alabama to the south. The 1,510 mile pipeline has 1.5 Bcf/d capacity, as well as roughly 1 Bcf of LNG storage capacity. The Gulfstream Pipeline, which Spectra owns a 49% interest, runs from Alabama, through the Gulf of Mexico, and into Florida. The 745 mile pipeline has capacity of 1.29 Bcf/d, and is supported by an average contract life of 18 years. The Market Hub storage facilities, which Spectra owns a 50% interest in, are Moss Bluff In Texas and Egan In Louisiana, and together both of these salt caverns have roughly 43 BCF capacity (being expanded to 52 Bcf), 77 miles of pipelines, and 13 interconnects to pipelines.
Spectra's distribution has been marching higher, increasing in every quarter since the end of 2007. Distributions increased 12% in 2010, showing strong growth and increasing returns to shareholders. The partnership expects distributable cash flow to grow 19% in 2011, supported by organic growth projects being completed as well as a full year of an increased ownership stake in the Gulfstream Pipeline. At a current rate of $0.46 per quarter, and a unit price of $30.70, units currently yield 5.9%
Not included in the distributable cash flow growth estimates are acquisitions, such as the Big Sandy pipeline that Spectra Energy Partners is acquiring from EQT Corp (EQT). The 70 mile pipeline has capacity of 171 MMcf/d, and is located in Kentucky. The purchase price is $390 million, the deal is expected to close in Q3, and the assets are estimated to increase EBITDA by about $35 million in 2012. The partnership says the acquisition provides a platform for further growth, and with the pipeline located just 50 miles from the Tennessee Pipeline assets, it seems logical to consider connecting the two lines.
While Spectra Energy Partners owns more of a patchwork of pipelines rather than a nationwide pipeline network, the assets are located in prime positions to take advantage of increased natural gas production and usage. As power suppliers in the Southeastern U.S. continue to build new natural gas power plants, the Tennessee Pipeline and Gulfstream Pipeline are ideally positioned to connect to these plants. The Ozark assets stand to benefit from increasing production from the Fayetteville Shale, and the Market Hub assets should see continued demand to store the ever increasing amounts of natural gas produced in the US. Distribution growth seems easily maintained going forward, given organic growth projects and strategic acquisitions. While the price action in the units has been less than stellar, the partnership has great assets in premier locations. Should unit prices remain around $30, distribution growth will propel the yield over 6% by year end, making Spectra Energy Partners an even more attractive investment.