Spectra Lags Consensus, Falls Y/Y - Analyst Blog


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Premier natural gas company Spectra Energy Corp. ( SE ) reported first-quarter 2012 earnings per share from continuing operations of 51 cents, lower than the Zacks Consensus Estimate of 53 cents and the year-earlier profit of 54 cents. The underperformance was due to lower commodity prices and record warm weather.

The company reported operating revenues of $1,544.0 million, down approximately 4.2% from the year-earlier level of $1,612.0 million. The quarterly figure failed to meet the Zacks Consensus Estimate of $1,630.0 million.

Operational Analysis

U.S. Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $271.0 million, showing a downswing of nearly 3% from the year-ago quarter. Higher software amortization costs and lower revenues at Ozark Gas Transmission contributed to the reported quarter's decline in profits, which were partially mitigated by the profits from expansion projects that came online.

Distribution: The segment reported a year-over-year fall in its EBIT to $151.0 million from the prior-year level of $167.0 million. The underperformance was primarily due to lower customer usage related to warmer weather.

Western Canada Transmission & Processing: The segment witnessed an EBIT of $138.0 million, down more than 1% from the year-earlier level. Although the segment registered improved results in the base gathering and processing business, primarily driven by expansions in the Horn River area of British Columbia, it remains tempered by lower earnings at the Empress natural gas liquids (NGL) business.

Field Services: The segment's EBIT of $93 million jumped from the year-ago level of $81 million. The improvement was driven by improved volumes from expansion projects. Again, the year-earlier quarter experienced severe weather conditions, which were absent during the reported quarter.

The company produced NGLs of 412 thousand barrels per day (MBbl/d), up 15.1% year over year. Price of NGLs averaged $1.00 per gallon (down 11.5% year over year), while crude oil averaged at approximately $103 per barrel (up 9.6% year over year). Natural gas was sold at $2.74 per million British thermal units (MMBtu) versus $4.11 per MMBtu in the first quarter of 2011.

Balance Sheet

As of March 31, 2012, Spectra Energy had long-term debt of approximately $9,749 million with a debt-to-capitalization ratio of 51.5% (versus 53.3% in the preceding quarter).


Management remains optimistic on its performance going forward on the back of its expansion program that remains on track. With its market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain the growth momentum.

However, the heavy debt-to-capitalization ratio is a competitive disadvantage for the company. Spectra also faces threats from Kinder Morgan Inc ( KMI ). Spectra Energy holds a Zacks #3 Rank, which translates into a short-term Hold rating, and we maintain our long-term Neutral recommendation on the stock.

KINDER MORGAN (KMI): Free Stock Analysis Report
SPECTRA ENERGY (SE): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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