Please ensure Javascript is enabled for purposes of website accessibility

Shares of Spectra Energy Soar 13% After Buyout Annoucement

By Tyler Crowe – Sep 6, 2016 at 12:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The proposed union of Enbridge and Spectra Energy would create an oil and gas midstream giant that would stand above the rest.

Image source: Getty Images.

What happened

Shares of Spectra Energy (SE) are up 13.6% as of 10:45 a.m. ET after it was announced that Enbridge (ENB 0.70%) would acquire Spectra in an all-stock deal. Shares of Enbridge are up 4.7% while shares of the two companies' subsidiary partnerships -- Spectra Energy Partners (SEP) and Enbridge Energy Partners (EEP) -- are down 3.1% and up 4%, respectively. 

So what

After the merger between Energy Transfer Equity and Williams Companies fell through, this makes the Enbridge/Spectra Energy deal the largest in the energy pipeline and logistics industry for the year. As per the deal's announcement, shareholders in Spectra will receive 0.984 shares in Enbridge per one share of Spectra. That premium is pretty much why we're seeing shares of Spectra moving as much as they have today. 

The combination of the two companies creates a real powerhouse in the midstream sector by both diversifying the combined company and helping the two shore up weak points in their portfolios. Prior to the deal, Enbridge's big moneymaker was its extensive liquids pipelines, while Spectra's was its long-haul natural gas lines. At the same time, there are some interesting overlapping businesses, such as their natural gas distribution assets in both Ottowa and Quebec, their natural gas gathering and processing assets in Canada, and their gas gathering assets in the U.S. held separately through Midcoast Energy Partners and DCP Midstream Partners. Midcoast and DCP have been trouble spots for Enbridge and Spectra, respectively, in recent quarters, and Enbridge had mentioned exploring "strategic alternatives" for these assets. This deal could very much be part of that alternative plan. 

According to the investors presentation released today, the combined company expects that its increased size will allow it greater access to the capital markets. This is critical because the two now have a combined capital expenditure plan in place that is set to spend $26 billion and another $48 billion in projects that are currently under evaluation. This huge growth platform is, according to management, going to allow the company to generate dividend growth of 10% to 12% annually between now and 2024. Even for a stable midstream company, that is a very long projection.

Now what

As exciting as this deal sounds, there are definitely some questions that need to be answered before anyone jumps in. One big question will be how the company deals with its subsidiary partnerships and whether they will remain separate. There is also the question of how it will deal with its troubled partnerships with Midcoast and DCP. How the company ultimately wants to structure itself, and what the company has to pay in order to make it happen, could ultimately determine the effectiveness of the deal.

The other thing to keep in mind here is that we have seen lots of megamergers get proposed in the energy industry lately, only to have them nixed by either regulatory pressure or shareholders. The amount of companies with pipelines that cross the U.S.-Canada border is already rather slim, so further consolidation could raise some flags with regulators. 

Probably the best thing for long-term investors to do is to sit tight. Those that own shares shouldn't rush to sell, nor should any investor that has been looking at either of these companies instantly jump in now. There is a lot to unpack with a merger of this size, and it's worth doing a lot of research as well as waiting for the ink to dry on the deal before taking any investment action. If it does go through, though, this is certainly a company worth keeping an eye on in the coming quarters. 

Tyler Crowe has no position in any stocks mentioned. You can follow him at or on Twitter @TylerCroweFool.

The Motley Fool owns shares of and recommends Spectra Energy. The Motley Fool recommends DCP Midstream Partners and Enbridge Energy Partners. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Spectra Energy Corp. Stock Quote
Spectra Energy Corp.
Enbridge Stock Quote
$41.74 (0.70%) $0.29
Enbridge Energy Partners, L.P. Stock Quote
Enbridge Energy Partners, L.P.
Spectra Energy Partners Stock Quote
Spectra Energy Partners

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.