Shares of Houston-based Spectra Energy hit a new low in intra-day trading last Monday after the company reported a 39% drop in second quarter earnings. Spectra shares hit their lowest level since the company was created through the spin-off of Duke Energy's natural gas business (see NGI, Jan. 8).

Spectra saw lower second quarter earnings due to maintenance at gas processing plants as well as unplanned outages. Second quarter 2007 net income was $196 million compared with $320 million in second quarter 2006. Excluding special items, ongoing net income was $192 million in 2Q2007 compared with $264 million in 2Q2006.

By early afternoon last Monday shares in Spectra had traded as low as $22.05 before rebounding to close at $24.44. The previous 52-week range for Spectra shares was $23.55-30. Trading volume was more than double the average. At the market's close last Friday Spectra shares stood at $23.88.

In a note following Spectra's analyst conference call with analysts last week, Michael C. Heim of A.G. Edwards & Sons Inc. wrote that Spectra earnings were in line with the firm's expectations.

"We did not see anything in the earnings report or management's call with investors to explain [why] the shares should be underperforming peers today [Monday]," Heim wrote. "We would attribute the weakness to a $2 per barrel decline in oil prices, which may be causing investors to speculate that natural gas liquids prices may be declining and thus put pressure on [Spectra Energy's] gathering and processing margins. We would also note that master limited partnerships are very weak today, including the recently formed Spectra Energy Partners (SEP)."

In a report issued last Tuesday, Argus Research Co. said it was maintaining its "buy" rating on Spectra with a 12-month price target of $33/share. Argus said Spectra shares could yield a total return of "just over 25%" over the next 12 months. "We view Spectra as one of our top choices in the energy industry," Argus said.

Spectra said the decline in its earnings was largely due to weaker results the Field Services unit and Western Canada Transmission and Processing. Second quarter results reflected strong ongoing operations in Spectra's distribution business and continued solid U.S. Transmission results, the company said.

Spectra Energy Transmission 2007 year-to-date capital spending increased more than 80% compared to the prior year period, reflecting progress made on the $3 billion expansion program for the 2007-2009 period. A total of approximately $650 million of capital projects are expected to be placed in service before the end of the year.

In July 2007, Spectra Energy completed its initial public offering of Spectra Energy Partners LP (SEP). Spectra Energy retained an 83% equity interest in SEP and received net cash of $345 million.

"Based on the results year-to-date, the progress of our capital expansion program, the successful launch of our master limited partnership and the strong commodity price environment we are now seeing, the company is well positioned to achieve its 2007 financial goals," said Spectra CEO Fred Fowler. In May Fowler outlined a three-year, $3 billion capital spending plan (see NGI, May 14).

The U.S. Transmission segment reported 2Q2007 earnings before interest and taxes (EBIT) of $223 million, compared with $230 million in 2Q2006. The modest decrease is mainly due to lower gas processing volumes associated with pipeline operations in 2Q2007. In addition, increased revenues from the Maritimes & Northeast pipeline, and from expansion projects, were substantially offset by higher operating costs.

Spectra's Distribution segment reported 2Q2007 EBIT of $54 million compared with $39 million in 2Q2006, a 38% increase primarily attributable to increased customer usage and distribution rates, higher storage revenues and increased transmission volumes. Storage revenues increased as a result of higher prices, and transmission revenues benefited from the completion of Phase 1 of the Dawn-Trafalgar expansion project, which was placed into service at the end of 2006.

The Western Canada Transmission and Processing segment reported 2Q2007 EBIT of $48 million, compared with $89 million in 2Q2006. The lower earnings were driven primarily by two scheduled plant maintenance turnarounds at the Pine River and Empress processing plants. In addition, the Fort Nelson region realized lower revenues due primarily to lower volumes associated with reduced producer activity.

The Field Services segment reported 2Q2007 EBIT of $123 million, compared with $148 million in 2Q2006. The 2007 earnings include $3 million in costs related to the creation of stand-alone corporate functions. The remaining decrease resulted primarily from reduced processing margins due to unplanned outages at plants, mostly in southeastern New Mexico and in western Kansas, that were caused by severe thunderstorms.

In addition, Field Services experienced higher operating costs in the second quarter, including higher planned spending on asset integrity and other cost increases resulting from industry price pressures. These earnings decreases were partially offset by favorable natural gas liquids prices over the prior year quarter.

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