Sempra Energy's (SRE 0.55%) acquisition of Oncor was a bit of a coup on Wall Street, as it was able to outbid Berkshire Hathaway for the Texas utility. The victory didn't come cheap, though, as Sempra had to cough up $9.5 billion and take on quite a bit of debt in the process of completing the deal. Even though the company sees immense potential in the purchase and the growth opportunities that come with it, shares of Sempra have been mostly flat for the past year.
Is the market undervaluing Sempra because of the debt load it incurred to cover the deal, or is there some cause for concern in the future? Let's take a look at the company's most recent earnings results to see if there are any hints of trouble.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$2.98 billion||$2.96 billion||$3.03 billion|
|Operating earnings||$667 million||$400 million||$752 million|
|Net income||$347 million||($501 million)||$441 million|
Considering the monumental changes that have occurred in Sempra's income statement over the past year, it's pretty much impossible to make an apples-to-apples comparison here. Operating earnings and net income both declined somewhat, but much of that is related to higher depreciation, maintenance, and interest expenses related to the recent acquisition of Oncor. Oncor was only officially added to the books in early March, so we didn't get a full quarter's worth of results from that particular investment.
It should also be noted that Sempra realized some substantial one-time gains and charges related to the new U.S. tax laws in the prior quarter. While the business took an $870 million writedown overall, it also realized a $190 million one-time gain for its renewables business (part of its infrastructure segment). On a business-segment basis, the only real sign of weakness was its investment in Mexico's IEnova, which was in part due to timing and foreign currency effects.
From an investor standpoint, it's hard to make out if this drop in earnings was a real concern or if it simply was a timing-related effect to when the Oncor deal was officially closed. Management did reaffirm its 2018 guidance, though, so it doesn't look like it will be a big deal. We'll get to see if that really is the case next quarter when we see a full quarter with Oncor incorporated.
What management had to say
On May 1, CEO Debra Reed stepped down and former CFO Jeff Martin took the helm. While Martin and the rest of Sempra's team didn't go into too much detail on this most recent conference call -- its analyst day presentation is only a few weeks away -- he did highlight one thing that has been a bit of an issue for Sempra, and that was its Cameron liquefied natural gas (LNG) facility, which has been hit with multiple delays. According to management, it still expects the facility to be operational by the end of 2019, which was the plan after its construction contractor, Chicago Bridge & Iron (CB&I), experienced several weather-related delays last year. Martin also voiced his opinion on the potential merger between CB&I and McDermott International and how it impacts Cameron:
[W]e're making great progress with Cameron trains 1 through 3. To be clear, this is one of our top priorities. We continue to expect all three trains to be producing LNG in 2019. Recall at the end of last year we reached a settlement agreement with our contractor to resolve all claims. This was important because it better aligned the parties' interests with the goal of having all three trains producing LNG in 2019. We continue believe this agreement puts both the contractor and Sempra in a stronger position to meet the current schedule.
We're also pleased with the recent shareholder approval to combine McDermott and CB&I, which we believe improves our contractors' overall delivery capabilities and financial strength.
(You can take a look at the transcript of the whole quarterly conference call here.)
Growing too fast?
Despite all of the growth Sempra has added to the books over the past year, the market hasn't exactly responded to those changes. After all, the company has taken on a lot of debt to make this Oncor deal happen, and its debt-to-EBITDA ratio has soared to 5.5. That will come down a bit once those Oncor assets are added to the mix, and Cameron is rather far along in the construction phase, so we can expect it to be a significant contributor to the bottom line in the next 18 months. That is, of course, provided that both of these new assets can deliver as expected. If for any reason they don't turn out as planned, Sempra could be left with a large debt load that will be harder to handle.
As it stands today, that scenario doesn't look likely. So while the company's finances could look dicey for the next few quarters, they should materially improve as these assets go live. If that high debt load is enough of a concern for investors, then it may be worth waiting to see what the situation looks like after we see what kind of contribution Sempra will get from Cameron.