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Spectra's 3Q Lags on Lower Prices

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Premier natural gas company Spectra Energy Corp. (SE - Free Report) reported third-quarter 2012 earnings per share from continuing operations of 27 cents, lagging the Zacks Consensus Estimate of 31 cents. The quarterly figure also dropped 29% from the year-earlier profit of 38 cents. The underperformance was due to lower commodity price realizations.

The company reported operating revenues of $1,072.0 million, down approximately 4.5% from the year-earlier level of $1,123.0 million and also failed to meet the Zacks Consensus Estimate of $1,157.0 million.

Operational Analysis

U.S. Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $238.0 million, reflecting an upside of 1.3% from the year-ago quarter. Higher earnings from expansions and lower operating expenses contributed to the growth.

Distribution: The segment reported a year-over-year rise in its EBIT to $55.0 million from the prior-year level of $50.0 million. The increase was primarily due to increased short-term transportation revenues.

Western Canada Transmission & Processing: The segment witnessed an EBIT of $83.0 million, down 30% from the year-earlier level. Although the segment registered improved results in the gathering and processing business, primarily driven by expansions in the Horn River and Montney areas of British Columbia, the upside was restricted by lower earnings at the Empress natural gas liquids (NGL) business.

Field Services: The segment’s EBIT of $62.0 million plummeted approximately 54% from the year-ago level of $134.0 million. The underperformance was mainly due to lower commodity prices as well as higher planned repairs and maintenance expenses relating to the growth in the assets.

Production and Price Realizations

The company produced NGLs of 398 thousand barrels per day (MBbl/d), up 1.5% year over year. Price of NGLs averaged $0.72 per gallon (down nearly 42% year over year), while crude oil averaged at approximately $92.22 per barrel (down 2.7% year over year). Natural gas was sold at $2.81 per million British thermal units (MMBtu) versus $4.19 per MMBtu in the third quarter of 2011.

Balance Sheet

As of September 30, 2012, Spectra Energy had long-term debt of approximately $9,892 million with a debt-to-capitalization ratio of 51.2% (versus 51.3% in the preceding quarter).


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.

Spectra plans to invest about $20 billion over the next decade on fee-based gas infrastructure growth projects. The company is executing expansion projects worth $8 billion. We see upside potential from diverse near- to medium-term projects, including its New Jersey-New York pipeline, which commenced 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.

The company's closest contender in the natural gas utilities industry, Enterprise Products Partners L.P. (EPD - Free Report) , has scheduled its earnings release for today, after market close.

Currently, we maintain our long-term Neutral recommendation on the stock. The company retains a Zacks #3 Rank (short-term Hold rating).

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