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Oil & Gas Stocks

Spectra Energy Corporation – April 2015 $SE

Spectra_Energy_LogoBenjamin 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 5 Most Undervalued Companies for the Defensive Investor – February 2015.  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 specific look at how Spectra Energy Corporation (SE) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Spectra Energy Corp is a pipeline and midstream company. The Company owns and operates diversified portfolio of complementary natural gas-related energy assets, and owns and operates a crude oil pipeline system. The Company operates in three areas of the natural gas industry: gathering and processing, transmission and storage and distribution. The Company provides transmission and storage of natural gas to customers in the United States and Canada. The Company provides natural gas sales and distribution services to retail customers in Ontario, and natural gas gathering and processing services to customers in western Canada. The Company’s operations include more than 22,000 miles of natural gas, natural gas liquids and crude oil pipelines, and approximately 305 billion cubic feet of natural gas storage in the United States and Canada. The Company conducts its business in four segments: Spectra Energy Partners, Distribution, Western Canada Transmission & Processing and Field Services.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $36.73
MG Value $13.51
MG Opinion Overvalued
Value Based on 3% Growth $22.98
Value Based on 0% Growth $13.47
Market Implied Growth Rate 7.34%
Net Current Asset Value (NCAV) -$35.04
PEmg 23.18
Current Ratio 0.61
PB Ratio 3.02

Balance Sheet - December 2014

Current Assets $2,332,000,000
Current Liabilities $3,809,000,000
Total Debt $12,769,000,000
Total Assets $34,040,000,000
Intangible Assets $4,714,000,000
Total Liabilities $25,880,000,000
Outstanding Shares 672,000,000

Earnings Per Share

2014 $1.61
2013 $1.55
2012 $1.43
2011 $1.81
2010 $1.61
2009 $1.32
2008 $1.81
2007 $1.51
2006 $1.97
2005 $1.88

Earnings Per Share – ModernGraham

2014 $1.58
2013 $1.56
2012 $1.58
2011 $1.64
2010 $1.58
2009 $1.61

Dividend History

Conclusion:

Spectra Energy Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, short dividend history, insufficient earnings growth over the last ten years along with the high PEmg and PB ratios.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) remain completely steady from $1.58 in 2010 to the same amount for 2014.  This lack of growth does not support the market’s implied estimate of 7.34% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

Be sure to check out previous ModernGraham valuations of Spectra Energy Corporation (SE) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Spectra Energy Corporation (SE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Spectra Energy Corporation (SE) at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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