Premier natural gas company Spectra Energy Corp. (SE) reported better-than-expected fourth-quarter as well as full-year 2010 results owing to strong growth from expansion projects that came online, higher commodity prices and a stronger Canadian dollar.
Earnings per share (excluding special items) were 47 cents in the reported quarter, fairly ahead of the Zacks Consensus Estimate of 40 cents and the year-earlier profit of 33 cents. Full-year 2010 earnings of $1.57 per share also surpassed the Zacks Consensus Estimate of $1.50 and the 2009 earnings of $1.18.
The company reported operating revenues of $1,383 million, surpassing the Zacks Consensus Estimate of $1,362 million and above the year-earlier level of $1,298 million.
Operational Analysis
U.S. Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $247 million, compared with $204 million in the year-ago quarter. Business expansion projects, including TEMAX/TIME III and Algonquin East-to-West and the Bobcat Storage acquisition contributed to the segment’s profit.
Distribution: The segment reported an EBIT of $127 million, a substantial increase of more than 32% year over year, driven by a hike in storage and transportation revenues, lower operating costs, higher customer usage as well as a stronger Canadian dollar.
Western Canada Transmission & Processing: The segment witnessed an EBIT of $131 million, up more than 9% from the year-earlier level. The sharp increase over the prior-year quarter was driven by the improved results in the base gathering and processing business, partially offset by lower earnings at the Empress natural gas liquids (NGL) business.
Field Services: The segment’s EBIT of $108 million significantly increased from the year-earlier level of $77 driven primarily attributable to higher commodity prices and a gain related to ongoing unit issuances by DCP Midstream’s master limited partnership and lower maintenance costs.
During the quarter, the company produced NGLs of approximately 383 thousand barrels per day (MBbl/d), up 3.8% year over year. Price of NGLs averaged $1.06 per gallon (up 10% year over year), while crude oil averaged approximately $85.18 per barrel (up nearly 12% year over year).
Balance Sheet
As of December 31, 2010, Spectra Energy had long-term debt of approximately $10,169 million with a debt-to-capitalization ratio of 54.5% (versus 53.6% in the preceding quarter).
Outlook
With fourth-quarter results showing a marked improvement over the prior base year, management remains optimistic about the company’s performance going forward. Spectra Energy not only exceeded its 20% earnings growth target to reach $1.42 per share in the year, it also remains focused on investing more than $5 billion in expansion capital over the next five years.
This is expected to facilitate the company to reach its annual EBIT of $500 million to $600 million with returns on capital employed in the 10% to 12% range.
With a market leading position and strong investment opportunities, we expect Spectra Energy to sustain its growth momentum.
However, the heavy debt-to-capitalization ratio serves as a competitive disadvantage for the company. Spectra also faces strong competition from its peer company, El Paso Corp. (EP). Hence, we prefer to remains on the sidelines and maintain our long-term Neutral recommendation. Spectra Energy holds a Zacks #3 Rank, which translates into a short-term Hold rating.
EL PASO CORP (EP): Free Stock Analysis Report
SPECTRA ENERGY (SE): Free Stock Analysis Report
Zacks Investment Research
