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Spectra Energy's Stock Had a Fantastic 2016. Is There Room to Run in 2017?

Se Enb Map

Few companies in the oil and gas transportation and logistics business can tout the level of success Spectra Energy (NYSE: SE) had in 2016. Then again, there are few companies that are in the same position as Spectra. With a large retinue of projects to capture the wave of surging natural gas production and consumption in the U.S. and a decent looking balance sheet, there's little wonder why Enbridge (NYSE: ENB) decided to pick Spectra as a potential merger partner over any other midstream player.

Here's the thing, though, it's very rare for a company as large as and in the same business as Spectra Energy to see gains of 66%. So after such a strong performance last year, you have to wonder if Wall Street has outpaced itself with Spectra Energy's stock. So let's take a look at what made 2016 so special for Spectra Energy and whether the company's stock price is right for more gains in 2017.

Se Enb Map

Image source: Spectra Energy/Enbridge investor presentation.

Still room to run?

It's not a 100% guarantee that the Enbridge/Spectra Energy deal is going to go through. For arguments sake, though, let's assume that it does go through and we need to think of this company as a single entity from here on out. Based on the company's investor presentation and what management projects for the next several years, it looks like a pretty good deal. The combined company will have about $26 billion in capital projects come online between now and 2019 with an additional $48 billion in capital investments under review.

All of these investments are projected to lead to 10%-12% annual dividend growth between now and 2024. That's a pretty long time horizon for any company to be making those kinds of projections, so take it with a grain of salt. That being said, there is a pretty strong growth pipeline that these two companies have to build on for the next several years.

At the same time, though, buying into that growth is going to cost you. Shares of Spectra Energy trade at a pretty significant premium compared to many of its U.S. peers.

Company Total Enterprise Value to EBITDA Price to distributable cash flow Dividend yield
Spectra Energy 21.1x 26.1x 4.2%
Kinder Morgan 13.1x 11.0x 2.2%
ONEOK 13.6x 17.5x 4.3%
Enterprise Products Partners 16.0x 14.0x 5.9%
Magellan Midstream Partners 19.2x 19.0x 4.5%

Source: Company press releases and S&P Global Market Intelligence.

At that kind of valuation, it's hard to imagine shares of Spectra Energy pulling a repeat performance in 2017.

What a Fool believes

For investors looking for long term bets on North America's oil and gas industry thriving over the next several years, the combination of Enbridge and Spectra Energy look to be a great way to do just that. One word of caution is that the deal hasn't been completed. If for some reason the merger were to fall through, Spectra would have to shell over $1 billion in cash to Enbridge. So if there is even a whiff of it not happening, that may be enough to prevent investors from jumping into this stock with reckless abandon.

At today's valuation, any investor needs to be looking at the very long term. Returns for the next year or two might not be as good because of the overly optimistic share price, but management's promises of strong dividend growth well into the 2020s might be enough to make this company worth a look.

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Tyler Crowe owns shares of Enterprise Products Partners and Magellan Midstream Partners. You can follow him at Fool.comor on Twitter @TylerCroweFool.

The Motley Fool owns shares of and recommends Kinder Morgan, ONEOK, and Spectra Energy. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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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