Sempra Energy: A Good Utility Bet With LNG Exposure

Feb.27.12 | About: Sempra Energy (SRE)

Sempra Energy (NYSE:SRE) was created in 1998, by the merger of two long time utilities in Southern California - San Diego Gas & Electric Co. and Southern California Gas Co. Sempra has also developed other subsidiaries, Sempra U.S. Gas & Power and Sempra International. Let's talk first about the two original utilities of Sempra.

San Diego Gas & Electric Co provides natural gas and electricity to 3.4 million consumers (1.4 million meters electric, 850,000 natural gas meters) from Orange County to the Mexican border. The utility covers a 4,000 square mile area. Southern California Gas Co. provides 20 million consumers (5.8 million meters) natural gas service over a 20,000 square mile area. This is the largest natural gas distribution utility in the United States. Both of these utilities are regulated utilities.

Sempra U.S. Gas & Power provides 1500 MW of natural gas/renewable energy. Sempra owns the largest solar facility in the United States. This portion of the company also operates 23 billion cubic feet of natural gas storage.

One of the most interesting aspects of the US Gas and Power part of Sempra is their growing footprint in the Southeast. Sempra bought Willmut Gas & Oil Company in Mississippi to complement their earlier purchase of Mobile Gas, which provides 90,000 customers, but also has an extensive amount of natural gas storage and pipelines in the Southeast.

The last company of Sempra is Sempra International. They produce and distribute energy in competitive markets of the Americas. The company develops, builds and operates energy infrastructure assets and distributes electricity and natural gas to customers in Mexico, Chile, Peru and Argentina. I'm not going to talk about this portion of Sempra International. It is my opinion that third world utility companies are not money makers for utilities. But read the next paragraph for the interesting part of the Sempra International portfolio.

Additionally, Sempra International builds and operates electricity generation facilities and liquefied natural gas ((NYSEMKT:LNG)) receipt terminals in Mexico and the United States. BINGO - Sempra is in the LNG field. Additionally, they are only the third company to receive an export permit for LNG. The other two companies, ConocoPhillips (NYSE:COP) and Cheniere Energy Inc (LNG). ConocoPhillips only exported a small amount from Alaska before suspending operations in 2011. Cheniere Energy is at the forefront of exporting LNG, and their stock has tripled since they have acquired the permits and contracts to build the export terminals. However, I would be extremely nervous to buy their stock, as the company has not turned a profit in their 9 years of existence. So, long story short, my search for LNG providers brought me to a solid and profitable company, Sempra. Sempra's plan is to begin exporting 1.7 billion cubic feet per day from Louisiana starting in 2017.

Earlier this month, I wrote an article saying it was time to sell Dominion Resources (NYSE:D), because they outperformed their dividend. I got some comments back about their proposed export facility at Cove Point. Well just a week ago, bills were introduced in the House to ban approving any new LNG terminals until 2025. Sempra's is already approved. Dominion is hoping to have theirs approved this year. Even if this legislation fails, I believe it will delay the approval process, which of course will delay the construction process.

I want to talk a little bit about Sempra's earnings.

  • 2010 EPS: $3.96
  • 2011 EPS: $4.33 - estimated 4th quarter of $1.06
  • 2012 EPS: $4.43 - estimated

Sempra shows a strong history of earnings, and a solid forward PE of 13.4.

Sempra's dividend payout has increased the last 7 out of 8 years. The annual dividend has jumped from $1.00 a share in 2004 to $1.92 a share for 2011. There was a significant jump from 2010 to 2011, from $1.56 to $1.92 (the dividend did not change from 2009-2010). The current dividend payout is under 50% of EPS, so there is definitely room for the payout to grow, or at a minimum, an ample cash flow to continue to pay the current dividend.

Conclusion

If you want to purchase a strong regulated utility stock, with an upside of liquefied natural gas, Sempra is the stock for you. I believe this is a much safer bet than rolling the dice with Cheniere Energy, or hoping that Dominion will get their permit to build.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SRE over the next 72 hours.