If I were to tell you that Sempra Energy (SRE 2.30%) announced it expects its Cameron LNG facility to be delayed by up to a year, I guess you would think that the company's stock would drop. The company did just that in its most recent earnings report, but its stock increased.
How was this possible? Let's take a look at Sempra's most recent earnings results and see what the company did to make investors overlook this major project delay.
Image source: Getty Images.
By the numbers
| Metric | Q2 2017 | Q1 2017 | Q2 2016 |
|---|---|---|---|
| Revenue | $2.53 billion | $3.03 billion | $2.15 billion |
| Adjusted earnings | $276 million | $438 million | $200 million |
| GAAP* earnings | $259 million | $441 million | $16 million |
| EPS | $1.03 | $1.75 | $0.06 |
Data source: Sempra Energy earnings release. *GAAP = Generally Accepted Accounting Principles.
I feel compelled to remind everyone that Sempra's business is very seasonal. The business of selling natural gas for home heating is always more active in the winter months, so the first and fourth quarters of the year always have better earnings results than the second and third quarters of the year.
The best way to compare Sempra's results is to look at year-over-year changes in adjusted earnings. This past quarter, the company delivered robust gains thanks to higher LNG marketing activities, the addition of several operating assets at its IEnova subsidiary in Mexico, and more favorable rates of return for its regulated utilities.
Data source: Sempra Energy earnings release. Chart by author.
The highlights
Sempra has been a busy bee lately. It seems every quarter there has been a new investment opportunity management has decided to pursue. This past quarter, the company gave the green light for four new projects, including a joint venture with Valero Energy for liquids terminals in Mexico, electric transmission lines in Chile, and 310 megawatts' worth of new utility-scale solar projects in Mexico and the U.S.
Perhaps the most surprising thing this past quarter was the company's guidance. Management announced that several delays at Cameron LNG had forced Sempra and its construction contractor to delay the start-up of liquefaction Train 1 to 2019. Instead of lowering guidance in light of this new information, though, management raised guidance for the rest of 2017 (from $4.85-$5.25 per share to $5.00-$5.30 per share) and affirmed its guidance for 2018 ($5.30-$5.80 per share). Sempra even stressed that performance from other assets will completely offset the lack of a contribution from Cameron in 2018.
What management had to say
CEO Debra Reed discussed the success management had with negotiating better rates of return for its regulated utilities and noted that its Aliso Canyon facility is up and running again:
Increased operating earnings in our utility and infrastructure businesses through the first half of the year allow us to raise our 2017 earnings guidance. Strong operating results were coupled with positive regulatory outcomes, including the final regulatory decision in the Cost-of-Capital proceeding, which provides greater visibility to earnings at our California utilities over the next two years. Earlier this week, Southern California Gas Co. was able to resume limited injections at the Aliso Canyon natural gas storage facility after receiving regulatory approval in mid-July. Additionally, our Mexican business continues to expand, taking an important step forward in developing infrastructure for the promising new liquids market in Mexico.
What a Fool believes
The delay of Cameron LNG is a bit of a bummer, but Sempra Energy's growth trajectory is unperturbed. With a suite of development projects slated to come on line in the next year and the favorable rate ruling for its California utilities, the company should have plenty of additional earnings sources to cover up for the operational hiccup.
For a utility, Sempra has been growing at a breakneck pace and spending way more money than it brings in every quarter. It will likely remain at these high investment levels for a few more years as management implements its 2017-2021 growth plan. There is no reason to be concerned with these high spending levels today since management continues to deliver high rates of return and fast growth. If earnings stall out, though, then it will be worth revisiting this strategy.
