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Commodity Prices Lift Spectra Profits; Shale Plays Driving Growth

Spectra Energy got a boost from higher commodity prices in the second quarter, which helped the company chart a nearly 51% increase in net income. CEO Fred Fowler is looking toward existing and emerging gas shale plays to grow Spectra's gathering and processing as well as its pipeline businesses, he said last week.

"It's an area that we're very focused on at this point, particularly where we enjoy strong existing assets positions and we have several of those. On Texas Eastern and [East] Tennessee [Natural Gas], for example, those are very well positioned to take advantage of the developing Marcellus Shale play," Fowler told financial analysts during a conference call last Wednesday, noting the company's just-announced nonbinding open season for its Texas Eastern Appalachia to Market (TEAM) expansion to transport emerging Appalachian production (see related story).

Earlier this year Spectra held "a very successful" open season for its Greenway Project on East Tennessee (see NGI, March 10), which targets Marcellus production.

"It's a little early to predict how much gas will be developed out of these emerging shale plays, but we've had success in several regions via both our pipeline as well as our gathering and processing businesses," Fowler said. "I think as these plays further develop it really is going to provide us very good opportunities for both incremental pipeline expansions as well as gathering and processing infrastructure expansions. DCP Midstream's assets, they are very strategically located in the Haynesville, the Barnett and the Woodford [shale] regions, and they also are going to be looking to take advantage of potential opportunities in the Marcellus, the Huron [shales] as well as other emerging plays [see related story]."

In addition, Spectra's Canadian business is "extremely well aligned with both the emerging Horn River play and the current ongoing Montney play of British Columbia," Fowler said.

Spectra reported 2008 second quarter net income of $295 million (47 cents/share) compared with $196 million (31 cents) in the year-ago period. The improved results are primarily attributable to the positive effect of higher commodity prices and sound performance across all of the company's businesses, Spectra said.

"We exceeded last year's second quarter reported net income by 51% and currently expect to significantly exceed this year's $1.56 EPS [earnings per share] employee incentive target," said Fowler. "Assuming commodity prices stay at current levels through 2010, together with earnings from our $4 billion capital expansion plan, we expect to deliver average annual EPS growth of 8%. That, combined with a dividend yield of about 3.5%, takes our expected total shareholder return over the next several years to more than 10%."

Business segment results were:

Fowler, who helped launch Spectra as a spin-off from Duke Energy in January 2007 (see NGI, Jan. 8, 2007), is slated to retire at the end of the year. CFO Greg Ebel is in line to take his place.

Last quarter Spectra Energy announced a $600 million share repurchase program. As of June 30 the company had repurchased 10.5 million shares worth $284 million. The program is expected to be completed in the third quarter.

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