Oil & Gas Stocks

Spectra Energy Corp Valuation – June 2016 $SE

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – June 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Spectra Energy Corp (SE) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Spectra Energy Corp is a natural gas infrastructure company. The Company owns and operates natural gas-related energy assets and a crude oil pipeline system connecting Canadian and the United States producers to refineries. It conducts its business in four segments: Spectra Energy Partners, Distribution, Western Canada Transmission & Processing and Field Services. Its Spectra Energy Partners segment provides transmission, storage and gathering of natural gas, as well as the transportation and storage of crude oil through interstate pipeline systems. Its Distribution segment provides distribution services in Canada through its subsidiary, Union Gas Limited. Its Western Canada Transmission & Processing business comprises the British Columbia (BC) Pipeline, BC Field Services, Canadian Midstream and Empress NGL operations, and Maritimes & Northeast Pipeline Limited Partnership. Its Field Services segment consists of approximately 50% investment in DCP Midstream, LLC.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of SE – June 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $24,365,564,520 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.47 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -36.64% Fail
6. Moderate PEmg Ratio PEmg < 20 32.80 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.24 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.47 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -7.81 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

SE value chart June 2016

EPSmg $1.05
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $15.20
MG Value based on 0% Growth $8.91
Market Implied Growth Rate 12.15%
Current Price $34.37
% of Intrinsic Value N/A

Spectra Energy Corp. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.58 in 2012 to an estimated $1.05 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 12.15% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Spectra Energy Corp. scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

SE charts June 2016

Net Current Asset Value (NCAV) -$37.71
Graham Number $15.65
PEmg 32.80
Current Ratio 0.47
PB Ratio 3.24
Current Dividend $1.52
Dividend Yield 4.41%
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $1,475,000,000
Total Current Liabilities $3,163,000,000
Long-Term Debt $13,190,000,000
Total Assets $34,091,000,000
Intangible Assets $4,211,000,000
Total Liabilities $26,928,000,000
Shares Outstanding (Diluted Average) 675,000,000

Earnings Per Share History

Next Fiscal Year Estimate $1.04
Dec2015 $0.29
Dec2014 $1.61
Dec2013 $1.55
Dec2012 $1.43
Dec2011 $1.81
Dec2010 $1.61
Dec2009 $1.32
Dec2008 $1.81
Dec2007 $1.51
Dec2006 $1.97
Dec2005 $1.88
Dec2004 $1.54
Dec2003 -$1.48
Dec2002 $1.22
Dec2000 $2.34
Dec1998 $1.25
Dec1997 $1.87
Dec1996 $1.86
Dec1995 $1.91
Dec1994 -$2.37

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.05
Dec2015 $1.15
Dec2014 $1.58
Dec2013 $1.56
Dec2012 $1.58
Dec2011 $1.64
Dec2010 $1.58
Dec2009 $1.61
Dec2008 $1.75
Dec2007 $1.51
Dec2006 $1.35
Dec2005 $1.06
Dec2004 $0.76
Dec2003 $0.59
Dec2002 $1.65
Dec2000 $1.86
Dec1998 $1.38

Recommended Reading:

Other ModernGraham posts about the company

Spectra Energy Corporation – April 2015 $SE
16 Companies in the Spotlight this Week – 4/19/14
Spectra Energy Corp (SE) Annual Valuation – 2014

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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