A critical overview of Spectra Energy Corp. (Part 13 of 16)
Weakening Canadian dollar
In the previous sections of the series, we discussed Spectra Energy’s (SE) assets, operations, and various growth drivers. However, the company has some operational concerns that may impede growth or performance in the future. We’ll discuss these concerns in detail in this article and the next article.
A substantial part of Spectra Energy’s assets and operations are based in Canada. The company’s Distribution segment, operating through Union Gas, and the Western Canada Transmission & Processing segments together accounted for ~33% of Spectra Energy’s 3Q14 EBITDA.
Effect of currency movement on profits
If the Canadian dollar weakens relative to the US dollar, Spectra Energy’s profit margin decreases. According to the company’s estimates, a 10% devaluation of the Canadian dollar would result in a $45 million net loss to the company in 2013.
For example, the Canadian dollar to the US dollar increased to 1.09 in 3Q14 from 1.04 in 3Q13 on average. This affected Western Canada Transmission & Processing segment’s EBITDA negatively. The segment’s EBITDA decreased 10% during the period.
The Distribution segment’s EBITDA also fell marginally, led by the Canadian dollar’s adverse movement against the US dollar. Spectra Energy is a component of the Energy Select Sector SPDR ETF (XLE).
Currency movement may also affect profitability of the Canadian midstream major TransCanada Corp. (TRP). It will also affect profitability of energy companies like Exxon Mobil (XOM) and Chevron Corp. (CVX), which have significant assets in international locations.
Recent trend in currency movement
As noted in the graph above, the US dollar has been strengthening versus the Canadian dollar since 2011. The US dollar’s value has increased sharply against the Canadian dollar in the past six months. The recent economic indicators suggest the US dollar may rise further against most international currencies in the near future.
If the Canadian dollar loses value against the US dollar, this may affect Spectra Energy’s profitability in the future.
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