Image source: Spectra Energy.
Just like the prior quarter, there wasn't much that changed in Spectra Energy's (SE) latest earnings. Despite its large suite of developing projects, no new ones were brought online this quarter and earnings results were more or less in line with what the company expected. For investors, the bigger news was that the company continues to add large projects to its backlog that will drive results in the coming years.
Let's take a quick look at the company's most recent results, the big news for the quarter, and what investors should keep watching going forward.
Spectra Energy's results: The raw numbers
| Results | Q2 2016 | Q1 2016 | Q2 2015 |
|---|---|---|---|
| Revenue | $1,159 million | $1,384 million | $1,192 million |
| EBITDA | $622 million | $750 million | $435 million |
| EPS | $0.21 | $0.35 | $0.03 |
| Distributable cash flow | $246 million | $523 million | $274 million |
| Distribution coverage ratio | 0.86x | 1.8x | 1.1x |
Data source: Spectra Energy earnings release.
Some alarm bells may be going off when you see that the company's distributable cash flow and distribution coverage ratio dropped so much compared to the previous quarter. This is actually by design. As a natural gas supplier, the first quarter and winter months have higher demand that lead to better results across several of its business segments. On an annual basis, the company is still projecting its distribution coverage ratio to be 1.2 times or higher.
Data source: Spectra Energy earnings release, author's chart.
One thing to also remember is that the comapny transferred its ownership of the Sand Hills and Southern Hills natural gas liquids pipelines from Spectra Energy Partners (SEP) to DCP Midstream (DCP) to shore up the balance sheet and make it a more sustainable entity. DCP Midstream is a 50-50 joint venture with Phillips 66 and its results are reported under field services. This transfer will slightly skew Spectra Energy Partners' and field services' results on a year-over-year basis through the next quarter, too.
Aside from that, Spectra's results pretty much held serve. There were a few gains from some new projects coming online, but they were mostly offset by lower commodity prices and volumes in its gathering and processing assets in Western Canada.
What happened with Spectra Energy this quarter?
- Spectra Energy raised $479 million through an equity issuance in April. Much of that was used to buy issued shares from Spectra Energy Partners.
- The company plans to complete the $200 million sale of its Empress natural gas liquids (NGL) pipeline in the third quarter. The pipeline has higher commodity-price exposure than many other parts of the business, so by shedding this asset it will reduce the company's overall commodity exposure.
- DCP Midstream's cost-cutting efforts should make it break even at $0.35 cash NGL margins. It also plans to increase its fee-based contract structure to 55%.
- Spectra Energy was the winning bidder for a $1.5 billion Valley Crossing pipeline project with Comision Federal de Electricidad, the Mexican state-owned power utility. The pipeline will deliver gas from Nueces, Texas, to Brownsville, Texas, and is secured under a long-term, fee-based contract. The addition of the pipeline also means that the company's current backlog of projects has increased from just over $8 billion last quarter to $10 billion today.
Image source: Spectra Energy investor presentation.
What management had to say
For the past few quarters, Spectra Energy's big focus has been on project development and access to capital. The recent equity issuance was a sign that the company still has access to the equity market. Wtih that in mind, CEO Greg Ebel wanted to highlight how this is leading to the company expanding its backlog over the next couple of years by using the recently awarded Valley Crossing as an example:
Not only are we making significant progress advancing our projects already in execution, but our project backlog continues to grow, reaching $10 billion this quarter. Notably, we secured the $1.5 billion Valley Crossing Pipeline project to serve Mexico's developing natural gas market. Our excellent liquidity and investment-grade balance sheet, as well as our access to multiple financing options, continue to be significant competitive advantages. These advantages, combined with our limited commodity exposure, give us confidence in our ability to deliver on our commitments to our investors.
10-second takeaway
Spectra's cash flow numbers were a little lacking compared to the prior quarter, but that is to be expected to a certain degree. What's more important is whether the company will be able to meet its target distribution coverage for the year. So far, Spectra appears on track to meet that goal, but it will be worth watching as the company won't see many new assets come online until the fourth quarter. Longer term, access to cheap capital is still the most important component to Spectra's plans, so investors should closely monitor this going forward.
