Sempra Energy Remains Neutral - Analyst Blog

Our long-term recommendation for Sempra Energy (SRE) is Neutral, which means the stock will perform in line with the broader market. Based in San Diego, California, Sempra Energy, along with its subsidiaries, engages in the development of energy infrastructure, operation of utilities, and provision of energy-related products and services to its worldwide consumers.

Sempra Energy's diversified basket of businesses insulates its operations to a significant degree from regulatory rate risks. Also, geographic disparity in its assets spread across the western U.S. and the Gulf area; along with clusters in Mexico and Latin America. We believe that Sempra Energy presents a lower risk-profile relative to its peers.

Sempra Energy appears to be well positioned given stable earnings through its utility subsidiaries, which cater to more than 20 million customers in central and southern California. The company is also implementing infrastructure improvement programs focused mainly on system reliability, smart grid technology to comply with California's renewable energy mandate. The company plans to spend $6.9 billion over the 2010-2014 period for capital expansion projects focused mainly on its California based utilities, which would keep the growth momentum going.

Positives in Sempra Energy's story include steady progress at its Sunrise Powerlink transmission line, ongoing installations of smart meter, substation expansions, higher utility operating margins from regulatory rate hikes, and developing renewable power projects in the Pacific Southwest. Sempra Energy's move to divest its commodities trading businesses to align its assets towards regulated utility is a big positive for the company in the long term.

Sempra Energy has a long-standing record of consistent dividend payment at incremental rates. The company presently shells out an annual dividend of $1.56 per share, yielding approximately 3%. Also the ongoing $500 million share repurchase program will add value to shareholders.

Sempra Energy's businesses are capital intensive and rely significantly on long-term debt for its capital expenditures. In fiscal 2009, the company issued more than $1.8 billion of new long-term debt to finance a portion of its $2.5 billion capital expansion program. The trend followed in 2010 with the exception of the sale of its commodities trading business, which brought in much needed funds to cover a portion of its expansion programs.

However, almost 75% of Sempra Generation's power output is sold to California's Department of Water Resources under a long-term contract that expires in September 2011. Non-renewal of the contract or a renewal for a lower contracted consumption will affect earnings. Also Henry Hub Natural Gas Spot Prices has witnessed a steep decline since inception in fiscal 2010 (From $6.09/mmBtu to $4.22/mmBtu as on December 15, 2010).

This weak trend will continue to affect earnings viability at the LNG segment and for natural gas storage within the Pipelines & Storage segment. As a result due to the ongoing trepidation in natural gas prices we believe the Zacks #4 Rank (Short-term Sell Rating) Sempra Energy's stock price will encounter weak trends in the near-term. In the near term, we would advise investors to focus on its Zacks #1 Rank (Short-term Strong Buy Rating) peers like Chesapeake Utilities Corporation (CPK).

 
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