Spectra

Energy (SE)

Analyst: Rebekah Ebangit

November 12, 2015

Ticker: SE (NYSE)

Sector: Energy
Price: $27.97 Industry: Oil and Gas Storage and Transportation

Highlights

Market Share: Spectra Energy delivers 20% of North America Natural gas.

Growth: From 2013 to present SE is almost halfway through its acquisition of new projects.

Currently at $16.5 billion projected to grow to $35 billion by 2020.


Fair Valuation: Based on a PE of 24.31 Spectra Energy is fairly priced. It also is at par with

the industry average. SE has had positive Net Income for the past 5 years and should

continue to positively grow. Additionally it was at a 52 wk. high last November and should

rebound this Q4. In Q3 SE brought on an additional $700 million in projects bringing it to a

total of $3 billion for the year. The favorable interest rates makes it ideal for SE to access

debt at lower rates.


Investment Thesis:

This centers on Spectra Energys market share in in North American natural gas markets

and presence in Northeastern United States, where the populations has presented growth

opportunities. This is also underlined by its long-term contracts that are renewed at 95%


and driven by the demand for natural gas especially in highly populated areas.

Stock Performance:

Financial Metrics:

Price to Sales

3.34

Price to Book

2.60

Price to CFO

N/A

Price to Earnings (FY1)

24.31

5 Year Projected Growth Rate

4.98%

PEG Ratio

5.05

Dividend Yield

1.48 %

Return on Equity

12.99%

Market Capitalization (B)

Company Description:
Spectra Energy Corp with head quarters in
Houston Texas, transports, stores and gathers
crude oil, natural gas and natural gas liquids
though its subsidiaries. Its Primary region is
midwestern, northeastern, and southeastern
United States. It has an approximated natural gas
line of 21,000 miles and a storage capacity of 295
billion cubic feet (BCF) in the United States alone.

Revenue
(B)

Sales
Change

EPS ($)

EPS Change

2017

6.29

6.89%

2.10

32.08%

2016

5.88

10.48%

1.59

38.26%

2015

5.32

-9.77%

1.15

-28.57%

2014

5.90

7.0%

1.61

3.9%

5.52

8.7%

1.55

8.4%

2013

18.77

INVESTMENT SUMMARY
Market Share: Spectra Energy currently serves some of the fastest growing and largest markets in North America.
With the demand to heat residential homes the demand to transport their natural gas will increase. There is also a
demand to transport gas from rural areas to their urbanized final destination.
Q3 Performance drivers: Spectra Energy Partners earning increase was from expansion of Uniontown to Gas City
and higher tariffs on crude transportation. The distribution decline was due to the exchange rate between Canada
and the US and also affected Western Canada. Lower commodity prices and new partnerships at DPM resulted in a
decrease in Field Services; this was slightly offset by increase earnings from asset growth.

Gross Margin: With the exception of DYN that produces and sells electricity, its other competitors EPD and KMI
deal directly with natural gas pipeline. SE has comparable performance with its competitors and the industry. SE
having the highest gross margin in comparison to its competitors and industry.
Risk: The greatest risk is the cost of doing business. SE spends millions every year building its infrastructure this
includes establishing new pipelines or expanding existing ones. Cost of operations may include equipment, labor,
insurance etc. These high costs of operations are the major reason they finance their activities with debt.

INDUSTRY OVERVIEW
The Energy Sector encompasses number of industries including building of oil rigs and drilling equipment. It also
involves companies that explore, refine, market and transport oil and gas products. Recently the sector has taken a
dive in the petroleum industry because of the unbalanced supply and demand. The supply is almost twice the
amount of demand. The sector is heavily tied to the price of oil, if prices are high, so are profits and if they are low
so are profits. The Energy sector was the best performing sector in Q2 and the worst in Q3. Going off previous
trends, sectors that perform poorly in the previous quarter then to rebound in the next quarter.
In the oil and gas transportation and storage industry, demand is driven by the economy and is dependent on the
population density. Profitability in this industry is based on the amount of product transported via the pipeline and
efficiency. The higher the population the better the industry performs. For companies with a diversified number of
pipelines i.e. operating in different countries or multiple locations, this gives them the advantage of economies of
scale in purchasing. The major service in this industry is the transportation of natural gas, liquefied natural gas and
crude oil.

BUSINESS DESCRIPTION
Spectra Energy Corp with head quarters in Houston Texas, transports, stores and gathers crude oil, natural gas and
natural gas liquids though its subsidiaries. Its Primary region is midwestern, northeastern, and southeastern
United States. It has an approximated natural gas line of 21,000 miles and a storage capacity of 295 billion cubic
feet (BCF) in the United States alone.
Spectra Energy also operates in Canada, it provides the gather, transmission and processing of natural gas. This
segment has approximately 40,000 miles of main and service pipelines; storage capacity of 160 Bcf; and
transmission system of 3,000 miles of high-pressure pipeline and mainline compressor stations.

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SWOT Analysis

19000 miles of natural gas transportation

305 billion cubic feet of storage capacity
Future projects planned and in pipeline
One of the largest pipeline systems in USA

Highly financed with debt reducing companys profitability

Government and global regulations reduces the operational efficiency
Exchange rate differences

Substitute product where petroleum is used.

Advances in technology helps in reaching previously un-reachable gas
reserves

Competitors from mergers

Slow industry growth
Government policies and economic down fall

Strength

Weakness

Opportunity

Threats

Competition

Competitors

Enterprise Products Partners L.P

Dynegy Inc.
Kinder Morgan Energy Partners

GROWTH DRIVERS
Spectra Energy currently serves some of the fastest growing and largest markets in North America. With the
demand to heat residential homes the demand to transport their natural gas will increase. There is also a demand
to transport gas from rural areas to their urbanized final destination.

Florida Power & Lights power generation uses more than One billion cubic feet per day

Texas Eastern to become a fully bi-directional system by 2017 using 2.4 billion cubic feet per day, the first
600 million cubic feet is already in use

Shale gas to be moved to U.S. Midwest and Ontario, Canada with a capacity of 1.5 billion cubic feet per day

Partnership with Eversource Energy to provide 70% of New Englands gas-fired electric generation, this
operation will prove to be more environmentally friendly and save residents $1 billion annually.

210 millions cubic feet production in the heart of British Colombia Canada in the Monteny.

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FINANCIAL ANALYSIS

Q3

* Excludes $26 million from gain on sale of an asset.
*Q3 decrease $70 million from the prior-year quarter.
Q3 performance drivers

Spectra Energy Partners earning increase was from expansion of Uniontown to Gas City and higher tariffs on crude
transportation. The distribution decline was due to the exchange rate between Canada and the US and also affected
Western Canada. Lower commodity prices and new partnerships at DPM resulted in a decrease in Field Services;
this was slightly offset by increase earnings from asset growth.

Over the past five years Spectra Energy has had a decrease in revenue for two out of the five years. It has however
been able to maintain positive Net Income growth over the 5 past years and should have positive growth over the
next two years.

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Spectra Energy Net Income Vs. Total Revenue

SE Vs. S&P 500

Incomparision to the S&P 500 Spectra Energy has gone done 29.5% while the S&P 500 has returned 3.31%.

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PEER ANALYSIS
The table below shows a comparison between SE and its direct competitors. With the exception of DYN that
produces and sells electricity, its other competitors EPD and KMI deal directly with natural gas pipeline. SE has
comparable performance with its competitors and the industry. SE having the highest gross margin in comparison
to its competitors and industry.

RATIO ANALYSIS
Liquidity
0.5 SE, 0.7 EPD, 0.5 KMI have a really bad liquidity. They would not be able to meet the debt coming due. If there
were a turn in the economy for the worse, then they would all be in bad shape. DYN that has a current ratio of 2.2
would be able to meet its debt obligations.

Financial Leverage
SE, EPD, KMI and DYN are all debt heavy companies. That is the nature of the industry; a lot of their investments
are covered by new debt. This can create a volatile situation due to high interest expense.

Profitability
SE having the highest gross margin in comparison to its competitors and industry at 56 cents for each dollar.

ANALYSIS OF FUTURE PERFORMANCE

Pro forma analysis for the years 2015-2020, the Income Statement, Balance Sheet, and Statement of Cash Flows.
The financial statements can be found in the appendix.

FORECAST ASSUMPTIONS

SE will operate at full capacity for 2015.

Forecast will be completed using the percent of sales method.
Assets, Accounts Payable, Accruals, and Claims and Discounts Payable must grow proportionally with sales.

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Assuming that Profit Margin is flexible.

Dividend payout will be maintained
Holding all items that do not grow with sales constant.
All items that are infrequent, or rely on the firms decision at that moment in time will also be held
constant.
Assumption for growth rate:
o G1 = 9.77 %
o G2 = 10.48%
o G3 = 6.89%
o G4 = 9.05%
o G5 = 9.05%
o G6 = 8.33%
Statement of cash flows will be generated using forecasted financial statements exclusively, disregarding
any adjustments that SE may have made in the current year.

VALUATION

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INVESTMENT RISKS
There are two major risks involved with investing in Spectra Energy. First is Price risk, because the energy sector is
very much driven by supply and demand. When prices go down, the profitability goes down too and when they go
up so does profitability. In addition the more competitors in the industry the volatile the price risk is.
The second and probably the greatest risk is the cost of doing business. SE spends millions every year building its
infrastructure this can includes establishing new pipelines or expanding existing ones. Cost of operations may
include equipment, labor, insurance etc. This is major reason they finance their activities with debt.

CONCLUSION
Based on a PE of 24.31 Spectra Energy is fairly priced. It also is at par with the industry average. SE has had
positive Net Income for the past 5 years and should continue to positively grow. Additionally it was at a 52 wk.
high last November and should rebound this Q4. In Q3 SE brought on an additional $700 million in projects
bringing it to a total of $3 billion for the year. The favorable interest rates makes it ideal for SE to access debt at
lower rates.

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APPENDIX

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References:
Bloomberg
CapitalIQ
Yahoo Finance
Nasdaq
Amigobulls
http://www.spectraenergy.com/

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