Spectra Energy: Quality, Value & Yield
06/22/2017 2:54 am EST
Spectra Energy Partners LP (SEP) has ranked high on our watch list for nearly a year-and-a-half. We now think the stock offers high quality at a reasonable price and are adding the shares to our income portfolio, notes Ari Charney, editor of Investing Daily's Utility Forecaster.
Spectra was one of the few MLPs that did a superior job of weathering the energy crash. Amid a supply-induced downturn, it was one of the only major midstream players with a mostly demand-facing business.
The MLP’s 15,000 miles of pipelines deliver natural gas and crude oil under long-term contracts to customers ranging from utilities to refineries in key demand markets.
Furthermore, Spectra’s lower leverage didn’t raise the same existential concerns that weighed on its peers. And its strong distribution coverage, recently at 1.3 times, helped pacify fearful income investors.
Even so, Spectra’s units have more or less treaded water for nearly two years. Although the MLP held up far better than others during the sector’s downturn, it has barely participated in the ensuing rally.
At current prices, Spectra trades just below its trailing five-year average, even though its business and payout have both grown markedly during this period.
And from a fundamental valuation standpoint, Spectra is very compelling, especially when you factor in its high yield.
We sliced and diced the MLP universe according to a number of valuation metrics and discovered that Spectra trades in line with or slightly below the sector average despite being one of the highest-quality operators in the space.
Additionally, thanks to its $4.4 billion of growth projects currently in execution, Spectra has a strong EBITDA growth trajectory for a mature and reasonably levered MLP. And that’s expected to drive solid distribution growth of 7.3% annually.
So why is Spectra getting no love from the market? We believe the main reason is the overhang from the acquisition of Spectra’s general partner, Spectra Energy Corp. by the Canadian pipeline giant Enbridge (ENB).
MLP investors hate it when the GP is acquired by another entity. That’s because it creates uncertainty about further consolidation and whether it will be done on fair terms.
However, Spectra’s equity remains an extremely valuable currency for its sponsor. Enbridge said it intends to maintain Spectra as its natural gas-oriented investment vehicle. As such, we think the risk of a further consolidation involving Spectra is low for at least the next three to five years.
Meanwhile, Spectra has boosted its payout for 37 consecutive quarters, and more is on the way. With a forward yield of 6.4%, Spectra Energy Partners LP is a new addition to the Income Portfolio.