Spectra Misses Earnings, Beats Rev

Premier natural gas company Spectra Energy Corp. (SE - Analyst Report) reported fourth-quarter 2011 earnings per share from continuing operations of 44 cents, lower than the Zacks Consensus Estimate of 50 cents and the year-earlier profit of 47 cents.

In 2011, earnings per share (EPS) from continuing operations increased 13% from 2010, reaching $1.77. However, EPS failed to meet the Zacks Consensus Estimate of $1.81.

The reported quarter results reflect strong performance with increased earnings before interest and tax (EBIT) across all business segments, earnings growth from expansion projects that came online, positive effect of favorable commodity prices at the company’s Field Services business as well as a strong Canadian dollar.

The company reported operating revenues of $1,428 million, up approximately 3% from the year-earlier level of $1,383 million. The quarterly figure just managed to surpass the Zacks Consensus Estimate of $1,426 million.

For full year 2011, operating revenues were $5,351 million, up from $4,945 million but lagging the Zacks Consensus Estimate of $5,418.

Operational Analysis

U.S.Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $226 million, showing a downswing of nearly 9% from the year-ago quarter. Higher operating costs and lower revenues at Ozark Gas Transmission contributed to the reported quarter’s decline in profits, partially offset by earnings from expansion projects that came online.

Distribution: The segment reported a year-over-year fall in its EBIT to $120 million from the prior-year level of $127 million. The underperformance was primarily due to lower customer usage related to warmer weather.

Western Canada Transmission & Processing: The segment witnessed an EBIT of $137 million, up more than 4% from the year-earlier level. The increase was driven by improved results in the base gathering and processing business primarily driven by expansions in the Horn River area of British Columbia.

Field Services: The segment’s EBIT of $96 million plunged from the year-ago quarter level of $108 million. The improvement was driven by higher commodity prices during the quarter.

The company produced NGLs of 406 thousand barrels per day (MBbl/d), up 6% year over year. Price of NGLs averaged $1.20 per gallon (up 13% year over year), while crude oil averaged at approximately $94 per barrel (up 10.4% year over year).

Balance Sheet

As of December 31, 2011, Spectra Energy had long-term debt of approximately $10,146 million with a debt-to-capitalization ratio of 53.3% (versus 53.9% in the preceding quarter).

Outlook

The fourth-quarter revenues showed an improvement over the prior-year quarter, management remains optimistic on its performance going forward as it delivered its full-year earnings per share of $1.77, which was in excess of the $1.65 forecast.

Management also remains hopeful of recording an improvement in 2012 as is evident from an overall 8 cent increase in its annual dividend. With its market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain the growth momentum.

However, the heavy debt-to-capitalization ratio serves as a competitive disadvantage for the company. Spectra also faces threats from El Paso Corp. (EP - Analyst Report). Spectra Energy holds a Zacks #3 Rank, which translates into a short-term Hold rating, while we maintain our long-term Outperform recommendation on Spectra Energy.

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