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Jim Simons’ Eyes Are on the North American Oil & Gas Industry

November 07, 2013 | About:
The shale gas boom in North America gave the oil and gas industry an important push. Those quick to respond to market preferences and advantages were able to absorb market synergies. Others, like Royal Dutch Shell (RDS), arrived late and left soon after. Spectra Energy (SE) and Magellan Midstream (MMP) were two companies with an important base at the time the boom hit. So, their benefits were derived from the fact of being at the right place in the right time. Now that the boom is over, what is left for both these companies?

Dropping Weight to Recover Speed

Spectra Energy is a company involved in the gas industry, from the wellhead to the burner tip. The company has developed several joint ventures and is an important partner for the industry as a whole. Additionally, analysts estimate the firm has a storage capacity of 305 billion cubic feet and 19,000 miles of pipelines. Currently, operations include gathering, processing, transportation, storage, and distribution in Western Canada and the Northern U.S.

Looking forward, Spectra Energy´s greatest challenge is flat natural gas prices. Company activities have hinted that a greater focus will be placed in liquid-rich drilling activities to improve overall performance. Weak prices have also affected earnings generated by fractioning activities and made some joint ventures unprofitable. So far, long-term contracts have shielded the company from further loses, and the protection is expected to continue so long the macroeconomic environment continues to recover.

A very important catalyst for Spectra Energy´s growth prospects is the conclusion of its divestiture and restructuring policies. Analysts highlight the firm as one of the most attractive, low-risk business models in the MLP space. The transaction has freed a whole lot of cash expected to be divided between dividend increments and projects focused on organic growth. The most important projects under way are the New Jersey-New York pipeline, an NGL pipeline in Texas, opportunities in the Gulfstream Pipeline and infrastructure to serve Western Canada LNG exports.

Financially, Spectra Energy remains troubled amid wide margins due to debt levels that are expected to improve with the recent asset dropdown. Currently trading at 22.6 times its earnings, the stock is trading at a 33% discount to the industry average. James Barrow and Jim Simons the two gurus with the largest holding have been disposing of the stock during the current year. I share their pessimism since growth has stagnated, and there are no important catalysts ahead.

Steady Performance with Happy Investors

Magellan Midstream transports, stores and distributes refined petroleum products and owns and operates a diversified portfolio of energy infrastructure assets. Operated volumes amount to 48% gasoline, 30% distillates, 16% crude oil and 6% between liquefied petroleum gas and aviation fuel. Magellan Midstream’s 9,400 mile pipeline system with 49 integrated terminals and 27 independent terminals are located in the U.S. exclusively. Opposite to Spectra Energy, Magellan Midstream continues to report impressive quarterly performance.

Strong activities from transportation and terminal operations have fed Magellan Midstream performance. The robust performance is expected to continue growing as the economy shifts on a higher gear and the macroeconomic environment keeps improving. Underway projects are a substantive evidence of the confidence on future performance held my management. The Double Eagle joint venture pipeline project, expansion of storage units at the Tulsa pipeline terminal, Longhorn pipeline capacity increment, and Galena Park marine facility are the most relevant.

Most of the growth for Magellan Midstream originated at the oil segment, supported by the Longhorn pipeline’s start-up earlier this year. The prospects for this segment are also evidenced on the expansion of current terminals and pipelines, and reinforced by the growth on the refined products segment. Most importantly, the firm can still post revenue increases because of attractive annual regulated tariff increases, and demand is expected to remain stable through the next decade.

Financially, Magellan Midstream is strong thanks to wide operating margins and increasing revenues year-over-year. Currently trading at 25.2 times its trailing earnings, the stock carries a 25% discount to the industry average. Jim Simons, the guru holding the largest position in the company, continues to increase his stake, and I share his optimism. The company continues to enjoy impressive performance, invest on capital improvements, and raise dividend quarterly payouts.

Last Thoughts

Spectra Energy is undergoing an important restructuring process under a new boss, taking away a great bit of attractiveness as a long-term investment. Opposite, Magellan Midstream continues to grow organically thanks to the great performance achieved. Additionally, an expected stable demand for the following decade and a diversified asset portfolio places the firm at an advantageous position, especially when size is added to the equation.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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