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posted on 31 May 2017

LNG-Fueled Dividend Growth

by Ari Charney, Investing Daily

Investing Daily Article of the Week

It’s amazing what the passage of time can do.

At least once a week, I review a custom monitor that I created to track the entire utility sector according to all manner of fundamental data.

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Of course, the most exciting information is projected earnings and dividend growth. After all, we’re in this to get paid.

Over the past week, I spent a fair amount of time poring over this table in preparation for the next issue of Utility Forecaster.

And as I was sorting the columns from highest earnings and dividend growth to lowest, I noticed something interesting.

All of a sudden Sempra Energy (NYSE: SRE) had vaulted to the top of the earnings growth column, even surpassing industry darling NextEra Energy Inc. (NYSE: NEE).

Analysts forecast the California utility giant will grow adjusted earnings per share 10.0% annually through 2020, which is expected to drive dividend growth of 9% annually over the same period.

That compares quite favorably to consensus forecasts of earnings and dividend growth of 5.0% annually for the overall sector.

While Sempra’s enviable earnings-growth trajectory includes 2017, it doesn’t really get going until next year. This year, Sempra’s earnings are only expected to grow by 1%, whereas next year they’re expected to jump 22%.

So what changed? Nothing really. In fact, analysts have actually been lowering their forecasts for fiscal-years 2018 and 2019 from expectations that were previously even loftier.

Instead, Sempra’s sudden appearance at the top of the rankings is due to last year’s lackluster earnings dropping out of the picture and the fact that 2018 isn’t actually all that far away now.

One of the main drivers behind Sempra’s potential earnings ascendance is its Cameron LNG project, a liquefied natural gas (LNG) terminal situated on a shipping channel in Louisiana near the Gulf Coast.

The utility has a 50.2% equity interest in the joint venture, and it expects to collect cash distributions from the project amounting to more than $11 billion over the next 20 years.

Sempra began converting the terminal to an export facility in 2014, and it’s expected to enter service in stages, with the first of as many as five gas liquefaction trains coming on line by mid-2018. The facility’s full nameplate capacity is secured under 20-year contracts with utilities in Europe and Asia.

Naturally, there are downside risks to Sempra’s future earnings, especially considering that they hinge on projects of this magnitude. Some investors worry about the potential for construction delays, which is a possibility that earnings models may not incorporate.

Then there’s the continuing overhang from last year’s massive gas leak - the largest in U.S. history - at Sempra subsidiary SoCalGas’ Aliso Canyon storage facility.

Although Sempra believes all costs associated with the leak will be covered by insurance - the company expects to collect between $1.2 billion and $1.4 billion from its policies - it’s still awaiting a report from a state agency that’s investigating the root cause of the leak.

If the cause can be attributed to negligence, then that could have negative implications for regulatory proceedings and legal claims against the company.

Nevertheless, analysts are mostly bullish on Sempra, with 11 “buys" and seven “holds." But at current levels, the stock trades close to full value.

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