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Spectra Earnings Beat Est, Same YoY

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Premier natural gas company, Spectra Energy Corp. (SE - Free Report) reported first-quarter 2013 earnings per share from continuing operations of 51 cents, beating the Zacks Consensus Estimate of 48 cents. The quarterly figure was in-line with the year-ago number.

The company’s operating revenues of $1,589.0 million rose approximately 2.9% from the year-earlier level of $1,544.0 million. However this failed to reach our projection of $1,665.0 million.

Operational Analysis

U.S. Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $266.0 million, reflecting a downside of 1.8% from the year-ago quarter. This was due to lower storage and transportation revenues.

Distribution: The segment reported a year-over-year 11.3% increase in its EBIT to $168.0 million from the prior-year level of $151.0 million. The increase was mainly attributable to higher customer usage year over year.

Western Canada Transmission & Processing: The segment witnessed an EBIT of $111.0 million, down 19.6% from the year-earlier level. The downside was due to lower contracted volumes and lower propane sale prices.

Field Services: The segment’s EBIT of $88.0 million fell approximately 5.4% from the year-ago level of $93.0 million. The underperformance was mainly due to lower natural gas liquid (NGL) prices and volumes.

Production and Price Realizations

The company produced NGLs of 396 thousand barrels per day (MBbl/d), down from the year-ago quarter level of 412 MBbl/d. Price of NGLs averaged 74 cents per gallon (down nearly 26% year over year), while crude oil averaged at approximately $94.66 per barrel (down 8% year over year). Natural gas was sold at $3.34 per million British thermal units (MMBtu) versus $2.74 per MMBtu in the first quarter of 2012.

Balance Sheet

As of Mar 31, 2013, Spectra Energy had long-term debt of approximately $12,280 million with a debt-to-capitalization ratio of 55.6% (versus 52.0% 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 see lingering commodity price concerns 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 $25 billion over the next decade on fee-based gas infrastructure growth projects. The company plans to allocate an amount of $25 billion in growth projects through the end of the decade. Further, momentum will be driven by the advancing of the master limited partnership (MLP) dropdown strategy through the recent asset additions. Currently, Spectra is investing more than $6 billion in expansion projects.

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.

Spectra Energy holds a Zacks Rank #3, which is equivalent to a Hold rating for a period of one to three months.

However, there are certain companies in the oil and gas industry like InterOil Corporation , Tesco Corporation and EPL Oil & Gas, Inc. that offer value and are worth buying now. These companies sport a Zacks Rank #1 (Strong Buy).


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