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Spectra Energy: Believe in It

Posted on: July 25, 2008 - Email Article - Printable Version

Mark Kinsella

About the Author:

We all know about natural gas. It is one of the most traded and talked about commodities in the market today. More often than not however, all of the light is shined on the companies that produce the gas. Today, I am writing about a company that does not get a lot of attention yet, but definitely should not be ignored: Spectra Energy Corp. [SE: 17.27, +0.42 (+2.49%)]. Spectra is a North American company based out of Houston, TX that operates in three main areas of the natural gas industry: transmission and storage, gathering and processng, and distribution. It operates 18,000 miles of transmission pipeline, moves 12% of the natural gas that is consumed in North America, and has about 272 billion cubic feet in storage. On top of this, Spectra Energy Corp. also has a 50% ownership in DCP Midstream which is the largest natural gas gatherer and processor in the United States. For a company that has only been in operation for about 17 months, it has quite the impressive resume.

By The Numbers

Spectra is a natural gas pipeline company. It is responsible for moving mass volumes of natural gas daily. The upside of a pipeline company is that there is no other alternative for moving natural gas. There is no competitive method that Spectra has to deal with. This, along with conservative management leads to steady and consistent cash flows. Let’s take a quick look at the numbers:

Market Capitalization - $16.76 billion
Trailing P/E - 15.65
Return on Equity (TTM) - 17.13%
Return on Investment (TTM) - 5.76%
Dividend Yield - 3.71%

A Trailing P/E of 15.65 might look a little high for this industry, but it is important to keep in mind that natural gas pipeline stocks preach consistent returns and are not going to have massive growth years. Spectra’s ROE and ROI are both well above the industry average. A dividend yield of 3.71% is extremely tempting and a great reason why Spectra is such a promising value play in this extremely unstable market.

Moving Forward

Spectra Energy Corp. spent $650 million in 2007 to start up 13 new projects and they plan to continue this growth. They have plans to expand their three main segments: transmission and storage, gathering and processing, and distribution by a billion dollars in each of the next three years starting this year in 2008. The company plans to spend this money to grow their operations into Ontario and grow their current operations in the Gulf region. It is expected that these new projects will generate some $500 million of earnings by 2011. Although this is not a growth play, Spectra’s plans for expansion will help the company maintain consistent cash flow in the coming years.

Last Thoughts

As you can see, Spectra Energy Corp. is a company that is quickly becoming a fixture in the natural gas pipeline business. Its current operations makes it worth the look as it owns a substantial amount of the natural gas pipeline business in North America. On top of this, they have great plans for expansion and are very competently run at the upper level. Although it is a young company, Spectra is not a growth company but rather a strong value play that should be held while they continue to grow their operations. It is conservative, consistent companies like this that should be considered in our current market situation.

-Mark Kinsella

Disclaimer: Author does not have any positions in SE.

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