UBS Securities upgraded the rating of Spectra Energy Partners, LP (SEP) to 'neutral' from 'sell' based on valuation, while reiterating its price target of $34.
With ample distribution coverage, a track record of successful acquisitions/organic growth initiat ives, consistent distribution increases, and a committed sponsor, we have long considered SEP a premier natural gas pipeline/storage MLP Its consistently strong performance through varied market conditions since its 2007 IPO illustrates SEP's operational expertise, said Ronald Barone, an analyst at UBS Securities.
Barone said the company's recent underperformance has rebalanced its risk/reward profile; hence, upgrading to Neutral, on valuation.
Barone believes SEP's significant investment in natural gas transmission and storage assets, in addition to its close affiliation with Spectra Energy Corp. (SE), positions it to continue capitalizing on positive long-term natural gas fundamentals.
Fueled by acquisitions and organic growth initiatives, SEP has grown distributions at a compound annual growth rate (CAGR) of about 13.5 percent since its IPO. Barone expects planned projects will help drive a distribution CAGR of 4.6 percent through 2014 while maintaining a coverage ratio of 1.1 times.
Barone believes this growth in captured in SEP's valuation and current levels present a balanced risk/reward trade.
Last week, the FERC commenced an investigation into the rates charged by Ozark Gas Transmission, a wholly-owned subsidiary of SEP acquired from APL in 2009. The Section 5 proceedings will determine whether Ozark is over-recovering its costs; we believe this investigation could weigh on the units, said Barone.
The brokerage maintained its 2010 EPS estimate for Spectra Energy Partners of $1.69 and its 2011 estimate of $1.89.
Spectra Energy Partners shares closed Wednesday's regular trading session up 0.95 percent at $34 on the NYSE.