Spectra Energy Gets Pipeline Stakes

Spectra Energy Corporation (SE - Analyst Report) closed its previously announced deal to purchase minority stakes in Sand Hills and Southern Hills pipelines.

The pipelines are being built by DCP Midstream, which is a 50:50 joint venture between Spectra Energy and Phillips 66 (PSX - Snapshot Report). Per the agreement, Spectra Energy, Phillips 66 and DCP Midstream each gain one-third interest in the two pipelines after the constructions are over.

The Sand Hills pipeline is planned for the transportation of natural gas liquid (NGL) originating from the Permian Basin and Eagle Ford region. The pipeline is expected to have an initial daily transportation capacity of 200,000 barrels that will likely be expanded to 350,000 barrels per day.

The Southern Hills pipeline is projected to transport 150,000 barrels per day of NGL from the mid-continent to Mont Belvieu. Its capacity will likely be boosted to 175,000 barrels per day and be in service by 2013.

The outstanding expenditure for completion of these projects will be shared by the three entities. Spectra Energy, for its part, is expected to shell out around $700 million to 800 million on these two pipeline projects. These ventures will be an integral part of Spectra Energy’s existing network of natural gas pipelines in North America and will generate a secure earnings and cash flow stream.

Spectra Energy is one of North America’s premier natural gas infrastructure plays and has strong business positions in growth markets. Though we believe commodity price concerns linger in the near term, the company’s core fee-based businesses of storage, transmission, distribution and Canadian gathering and processing have the potential to move the needle toward solid earnings and cash flow growth in the long run.

We see upside potential from diverse near- to medium-term projects, including its New Jersey-New York pipeline, which began construction during the third quarter, an NGL pipeline in Texas, opportunities in the Gulfstream Pipeline and infrastructure to serve western Canada LNG exports.

However, we remain concerned about the lower price realizations and also believe that the heavy debt-to-capitalization ratio is a competitive disadvantage for the company. Its debt-to-capitalization ratio stood at 51.2% in the third quarter.

Currently, we maintain our long-term Neutral recommendation on the stock. However, the company retains a Zacks #4 Rank (short-term Sell rating).