Earnings Scorecard: Spectra Energy (SE)

While Spectra Energy Corporation (SE) posted strong results in the second quarter, it slipped from our estimate mainly due to lower-than-expected contribution from the Field Services segment. We believe that current concerns related to commodity prices remain in place, at least for the near term. However, the company is on track to meet its financial goals for the year.

Spectra announced a $540 million Bobcat natural gas storage acquisition last month. The transaction is expected to be completed by the year end and the company plans to spend $400–$450 million for further development. Management anticipates 10–12% returns on this, following completion of the project in 2015. While this will act as a positive catalyst in the long term, near-term returns are likely to be considerably low.

Earnings Review

Net income from operations in the second quarter was 27 cents per share, below the Zacks Consensus Estimate of 29 cents, but ahead of the year-earlier profit of 22 cents.

The company’s operating revenues were $1,063 million, slightly below the Zacks Consensus Estimate of $1,069 million but ahead of the year-ago quarter’s level of $937 million.

We have discussed the quarterly results at length here: Spectra Misses in Q2

Agreement of Analysts

The overall trend in annual estimates remains downside-weighted, with 8 out of 15 analysts covering the stock having lowered their estimates for 2010 in the last 30 days. Only one upside movement was made. In the last 7 days, 3 analysts revised their estimates downward; while no upside movement was noticed.

For 2011, there were 5 downward revisions in the last 30 days, while no analyst out of 15 revised the estimate in the opposite direction. However, during the last 7 days, we noticed that only one analyst raised the estimate and 2 moved in the opposite direction.

Magnitude of Estimate Revisions

Given the negative tone of the revisions, the earnings estimate for fiscal 2010 decreased 2 cents over the past one week and 3 cents over the last one month. Earnings estimates for fiscal 2011 remain flat with week-ago estimates and decreased 2 cents over the last one month. The current Zacks Consensus Estimates are $1.51 and $1.72 for 2010 and 2011, respectively.

Neutral Maintained

We maintain our Neutral recommendation for Spectra shares. Spectra’s growth momentum continues with both organic as well as inorganic means. Last year’s expansion projects in Canada coupled with the Marcellus investments should drive annual organic growth in the pipeline business going forward. The company will also build a new natural gas processing plant west of Dawson Creek with the capacity of 200 million cubic feet per day (MMcf/d) at a total cost of $1.5 billion. On the other hand, the recent acquisition of storage assets has solid potential to increase Spectra’s operating profit significantly.

With a rising production trend in the Marcellus Shale play, the company is on track to meet its financial goals for the year. In the near term, earnings would be responsive to commodity prices. Additionally, with a debt-to-capitalization ratio of 52.8%, the company’s relatively debt-heavy balance sheet is a competitive disadvantage.

SPECTRA ENERGY (SE): Free Stock Analysis Report

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