We recommend investors stay invested in the Southern
California-based energy services holding company
). At present, the stock reflects a balanced risk-reward
proposition. A short discussion of the underlying factors would
further explain our middle-of-the-road stance.
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SEMPRA ENERGY (SRE): Free Stock Analysis
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Sempra Energy appears to be well positioned given its stable
earnings stream from its utility subsidiaries - Southern
California Gas Company (SoCalGas) and San Diego Gas &
Electric (SDG&E) - which cater to more than 20 million
customers of central and southern California. These utilities
generate about two-thirds of Sempra's earnings. The utilities
also have generous opportunities for capital spending over the
next five years, which can be recovered through rate base hikes.
The company is now more focused on its stable, regulated
operations and long-term contracted businesses following the
divestiture of its commodities trading business in 2011. The
recent sale of a partial interest in an unregulated
natural-gas-fired power plant, and the stated intention to either
sell or contract the remainder of its generated power, along with
a growing renewables portfolio, make Sempra's business model less
volatile. Also, Sempra's South American utilities (in Peru and
Chile) are regulated distribution companies with favorable
earnings and cash flow growth prospects.
Sempra has a liquid natural gas (LNG) business and is building
its wholly owned Cameron LNG liquefaction project on the
Calcasieu Channel in southwestern Louisiana. This large-scale
initiative will involve a 13.5 million-tons-per-annum (Mtpa)
complex capable of transporting 12 Mtpa or 1.7 billion cubic feet
of per day (Bcf/d) of LNG. It also includes three trains to be
used for freight delivery purposes and a regasification
capability of 1.5 Bcf/d.
The construction activities will commence from 2014 with the
first stage of operations anticipated to begin by the latter half
of 2017. Following this, the three trains will fully come online
by 2018. The liquefaction project will turn out to be a key
earnings driver in the future for Sempra Energy.
Despite the many positives running for Sempra, we remain
concerned about the near-term trepidation in natural gas prices
and some pending regulatory cases.
Sempra Energy's businesses are capital intensive and rely
significantly on long-term debt for capital expenditures.
Furthermore, the company operates in the state of California
which maintains an aggressive 25%-plus renewable portfolio
standard requirement by 2016, with the targets ramping up to 33%
by 2020. This entails significant investments in renewable energy
projects that require more funds.
In addition, the company's third quarter 2013 earnings missed our
projected mark by 1.7% as well as the year-ago figure by 10.5%.
This was mainly due to lower contribution from its SDG&E
Given a blend of both positive and negative factors, we currently
maintain our Neutral recommendation on the stock. Sempra holds a
Zacks Rank #3 (Hold). Stocks worth considering in the energy
Mdu Resources Group Inc.
Atmos Energy Corporation
National Fuel Gas Company
), all with a Zacks Rank #2 (Buy).