Special Situation Investing

Saturday, December 02, 2006

Duke Energy (DUK) - Spinoff a Potential Catalyst

Business Week draws out the argument for why Duke's impending spinoff of it's natural gas business may be a boon for the stock. According to Daniel Ford who advised on the spinoff:

The "narrowed management focus, more efficient use of capital, and removal of what appears to be a conglomerate discount on Duke's price will fuel expansion [for both companies],"

He goes on to peg a valuation to Duke:

Ford says that, on a sum-of-the-parts basis, Duke is worth 21 a share, and the gas spin-off 14.

Consider that the stock has traded in the $26-$32 range and it's rated post-spinoff at $35. The stock finished trading on Friday at $31.69, so it will seem the potential upside is less significant than the downside. I personally am going to sit this one out. In spite of my negative opinion given what I have been seeing with the last few spinoffs (WU, SBH, HBI), I would not be surprised if this is a money-maker.

With many spin-offs, the sum-of-the-parts have actually traded several percentage points higher the very day that the spin-off occurs in spite of the fact that the transaction was announced months in advance. How this works absolutely dumbfounds me but there has been easy money to be made on these deals. However, I am just not that kind of investor. Until I see a company being spun-off that is actually reasonably priced and has promising business characteristics I will wait. I already have natural gas investments through Apache and given my inability to pick commodity prices that is enough exposure for me.

3 Comments:

  • I think you are overestimating the gas-spinoff's, Spectra's, dependence on commodity prices. It is a pipeline company, which is considered a natural monopoly and therefore has prices regulated by the federal government. Apache is a production company.

    I think the compelling point about Spectra is the possibility to convert it into a partnership so that it doesn't suffer from double taxation (taxed on earnings at the corporate level and dividends at the individual level).

    I am long Duke. I don't find the valuation all that compelling, but I am not seeing a lot that I find really compelling, so I bought some. After the spin-off, depending on the valuations I will either pile into Spectra or sell out completely.

    By Anonymous Bayard, at 12:40 PM  

  • Good point on the company differences. I am really not an expert on natural gas pipelines but I still see a silimar business risk for them. There is a lot of talk about LNG (liquidified natural gas) coming into play at some point. Would this not render much of the pipeline technology obsolete? Is it all the same infrastructure to move LNG around? Similarly, LNG is my main concern for Natural Gas price. Ultimately, if it were not for that, I would be much more bullish on NG.

    By Blogger spinoff, at 11:24 PM  

  • They have a bunch of different natural gas pipeline operations. There is gathering (from NG fields), transmission (long and big pipelines), and distribution (many little pipes going to customers).

    LNG still has to be piped. The Chairman of Spectra actually talked about adding new capacity for the LNG terminals. I am a little worried though that the decline in natural gas field production will render some of their gathering/transmission pipeline obsolete. I think this event is while out though (and so I am not really accounting for it in my valuation). I think a lower Natural Gas price might not hurt Spectra. It would probably increase transmission volumes as more gas fired power plants were used.

    By Anonymous Bayard, at 1:42 PM  

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