Spectra Energy: Pipeline Exposure Without K-1s

| About: Spectra Energy (SE)

For quite some time, firms involved in oil / NG pipeline and storage facilities have been on a tear, and it's no wonder given the dearth of income opportunities in the current low / no interest environment. Typically, the companies so engaged have been structured as MLPs, which accounts at least partially for the high yields they're able to offer investors. This is because MLPs are "pass-through" entities, paying no income tax, passing earnings through to the limited partners who are then liable for any income taxes due.

However, some folks aren't comfortable with dealing with the K-1s that MLPs issue, (rather than a 1099 that a regular corporation would issue), and try to avoid investing in such securities. Spectra Energy (NYSE:SE) allows such investors to gain exposure to assets like these without having to deal with the K-1 issues.

Spectra Energy Corp. is the result of the Duke Energy's 2007 spin-off of all of its NG gathering, processing, transport, and storage operations. Unlike some of the other firms in the sector, SE is a pureplay on NG, and consists of over 19k miles of pipelines and approximately 7% of the nation's NG storage facilities.

Spectra Energy owns both Canadian, as well as U.S. assets, but the current driver for growth appears to be focused on U.S.-based operations, involving the Marcellus, Horn River, and Montney shale plays.

SE has some direct exposure to commodity prices by virtue of a 50% stake in DCP Midstream, which gathers and processes NG. The other 50% is held by ConocoPhillips (NYSE:COP). The price of natural gas liquids (NGLs) is usually tied to the price of oil. The U.S.-based transmission / storage facilities, as well as the Canadian Empress gas processing plant operate on a fee-based model, which means profitability and cash flows, are not contingent on high NG / oil prices. The U.S. pipelines and storage facilities handle approximately 12% of the NG consumed in North America.

For those not averse to MLPs, Spectra spun some assets into Spectra Energy Partners (NYSE:SEP), and is the GP for that entity, as well as holder of 69% of the limited partner units.

As of the close of trading on August 2, SE yields 3.83%; notably less than is available from most MLPs, including SEP, which is yielding 6.32%. But as noted, the difference in entity structure likely accounts for the difference.

SE is trading approximately 9.5% below its 52 week high of $29.24, and at 10.4 times cash flow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.