This Company Loves Cheap Natural Gas

While natural gas producers have been suffering from stubbornly low prices since the advent of the shale gas boom, companies engaged in gathering, processing, transmitting, and distributing natural gas have actually been doing quite well. One such company benefiting from such trends is Spectra Energy (NYSE: SE  ) .

Company snapshot:

Market Cap $20.6 billion
Net Debt $11.2 billion
TTM Operating Cash Flow $2.1 billion
TTM Capital Expenditures $1.8 billion
Price-to-OCF Ratio 9.9
Recent Price $31.55
Dividend Yield 3.5%

Source: S&P Capital IQ. TTM = trailing 12 months.

Spectra has indeed been benefiting from low natural gas prices, which has been increasing demand for the commodity. Spectra operates a diverse portfolio of assets in the U.S. and Western Canada. The company's strategy is to be there at the first and last mile, connecting large demand markets with diverse sources of supply. The company's ongoing target is to achieve 10%-12% returns on capital employed. From 2007 to 2011, the company has achieved about 14%, exceeding its goal.

However, with the share price at a new 52-week high, it's more important to know whether the company can continue to perform. After all, we care where the company's going to go in the future. Given the company's diverse portfolio of assets, Spectra sees opportunities to invest up to $15 billion by the end of the decade at the target return of 10%-12%, and that's without even counting the opportunities in its DCP Midstream business.

Many sources of growth
In Western Canada, the company's gathering and processing are done on an attractive fee-for-service basis. Spectra has 16 plants in operation, with three more slated to come on line going forward. Spectra expects this business to generate 60% of its Canadian earnings in 2012. In addition to gathering and processing, Spectra has also made moves to be relevant in exporting LNG from British Columbia's West Coast.

In the U.S., Spectra sees favorable demand characteristics due to low gas prices. In the Northeast alone, there are 46 coal-fired power plants representing 51,000 megawatts of generation capacity within 30 miles of the company's pipelines. Capturing just 10% of the potential 10 billion cubic feet per day opportunity would lead to a marked increase in demand.

In addition to electric generation, residences are converting from oil to natural gas to heat homes at a high rate, given the attractive price of natural gas. This could mean additional increases to capacity, which would mean more business for Spectra.

Also, the low price of natural gas has spurred other LNG projects. Last year, Cheniere (AMEX: LNG  ) received authorization to export about 2.2 BCF per day of natural gas out of its Sabine Pass project. Spectra believes its systems are attractive to the terminals because of its accessibility to multiple sources of supply. Cheniere also intends to construct a second LNG export terminal in Corpus Christi, Texas, to be supplied by the Eagle Ford shale. That's yet another area where Spectra has existing infrastructure.

Finally, Spectra jointly owns DCP Midstream with ConocoPhillips (NYSE: COP  ) . DCP Midstream is the largest producer of natural gas liquids in the lower 48 states, and is also repositioning from just gathering and processing to a full value midstream provider. The growth capex opportunities for DCP Midstream are diverse, with $4 billion in committed projects alone.

Foolish bottom line
All told, Spectra expects to utilize its varied expansion projects to increase earnings per share over the next three years at 7%-9% and to continue earning 10%-12% on its capital employed for a long time. Continued success should lead to additional dividend increases as well. I'm leery about the stock's new 52-week high, but it's hard to deny the company's execution on its growth strategies thus far.

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Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up to date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul does not own shares in any companies mentioned. Motley Fool newsletter services have recommended buying shares of Spectra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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