Spectra Energy (SE) Q2 Earnings May Beat: Stock To Gain?

Premier natural gas company, Spectra Energy Corp. (NYSE:SE) is expected to report second-quarter 2016 earnings on Aug 3, before the opening bell.

Last quarter, the company’s earnings of 35 cents per share lagged the Zacks Consensus Estimate of 38 cents and deteriorated 14.6% from the year-ago earnings of 41 cents. Let’s see how things are shaping up prior to the announcement.

SPECTRA ENERGY Price and EPS Surprise

SPECTRA ENERGY Price and EPS Surprise | SPECTRA ENERGY Quote

Earnings Whispers

Our proven model shows that Spectra Energy is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate is +12.00%. This is because the Most Accurate estimate stands at 28 cents, while the Zacks Consensus Estimate is pegged at 25 cents. This is very meaningful and a leading indicator of a likely positive earnings surprise.

Zacks Rank: Spectra Energy holds a Zacks Rank #2 (Buy). Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Hold) or 3 have a significantly higher chance of beating earnings.

Conversely, the Sell-rated stocks (Zacks Rank #4 and 5) should never be considered going into an earnings announcement.

The combination of Spectra Energy’s favorable Zacks Rank and a positive ESP makes us confident about an earnings beat.

Currently, the stock is trading at $35.97. We expect the release to lead to stock movement.

Factors Likely to Influence this Quarter

Though we believe that commodity price concerns remain in the near term, the company’s core fee-based businesses of storage, transmission, distribution, along with Canadian gathering and processing, have the potential to move the needle toward solid earnings and cash flow growth in the long run.

Going forward, Spectra intends to increase its presence in the oil and refined products pipelines, storage tanks and terminals businesses. This should help to boost its top line and bottom line.

Spectra’s East Tennessee Natural Gas (“ETNG”) pipeline will supply an incremental 86 million cubic feet per day (MMcf/d) of fixed transportation capacity to Eastman Chemical Company’s Kingsport facility, TN, for 25 years. This long-term agreement is expected to add significantly to the company’s revenues and thus, boost its growth.

Spectra plans to deploy about $25 billion over the next decade on fee-based gas infrastructure growth projects. The company expects to commission around eight projects through 2016. Further, growth is expected from its master limited partnership (MLP) dropdown strategy.

However, Spectra’s results are vulnerable to fluctuations in natural gas markets. The proposed liquid-rich drilling activities by the company clearly suggest that low natural gas prices have little chance of recovery in the near term.

Though most of Spectra's revenues are based on regulated tariff rates, an unfavorable macro environment may result in lower earnings and cash flows. Moreover, the company has a relatively heavy debt-to-capitalization ratio of 57.5% and hence, its balance sheet remains highly leveraged.

Stocks to Consider

Here are some companies from the same space which, according to our model, have the right combination of elements to post an earnings beat this quarter:

SM Energy (NYSE:SM) has an Earnings ESP of +2.82% and a Zacks Rank #2.

Cimarex Energy (NYSE:XEC) has an Earnings ESP of +200.00% and a Zacks Rank #2.

Rowan Companies plc (NYSE:RDC) has an Earnings ESP of +2.74% and a Zacks Rank #3.