Sempra Energy (SRE) to Sell Stake in Unit, Focus on LNG Growth

Sempra Energy SRE recently signed an agreement to divest 20% stake of its Sempra Infrastructure Partners (SIP), which represents the combined businesses of Sempra LNG and IEnova, to KKR, a global investment firm. This transaction is in line with the company’s earlier revealed strategy of selling its non-controlling interests in Sempra Infrastructure Partners, with the aim to simplify its non-utility infrastructure investments.

The transaction is expected to get completed by mid-2021, subject to customary closing conditions.

Rationale Behind the Deal

In December 2020, Sempra Energy announced that it intends to sell some non-controlling interests of its SIP business unit in an attempt to fund its North American LNG export expansion plans.

Notably, the impact of coronavirus has created a challenging environment for adding new liquefaction capacity, especially in the United States, where LNG exporters or developers generally rely on banks or investment partners to offer funds. This capital crunch might have driven Sempra Energy to opt for the divestment strategy.

Benefits of the Deal

Per the terms of the agreement, Sempra Energy will get cash worth $3.37 billion from KKR following the closure of the divestment, which should enable the company to boost its proposed expansion of Cameron LNG in Louisiana and construction of Port Arthur LNG in Texas and its recently sanctioned Energia Costa Azul export project in Mexico,

Proceeds from the sale will also be used to help fund growth across Sempra Energy's $32 billion capital program, which is centered on its U.S. utilities, thereby bolstering its future earnings.

The latest divestment deal will put Sempra Energy one step ahead in its mission to become North America’s premier energy infrastructure company, as the company plans to use the sale proceeds to fund growth of its U.S. utilities and strengthen its balance sheet.

Growth Prospects of Utilities

We believe U.S. President Joe Biden’s latest infrastructure plan worth $2 trillion has come as a boon for utility players like Sempra Energy that are expanding their operations through multiple efforts. Notably, the infrastructure plan includes a $100 billion investment in the power grid, including tax credits to incentivize the deployment of at least 20 GW of high-voltage capacity power lines, along with extending and expanding tax credits for clean energy resources.

Interestingly, with LNG being a much less carbon emitting fossil fuel than others, Sempra Energy’s LNG business should get a boost in the coming days. Meanwhile other utilities like MDU Resources MDU, National Fuel Gas NFG and American Electric Power AEP are also expected to benefit from Biden’s infrastructure plan through their varied operational efforts.

Notably, MDU Resources’ subsidiary, Knife River Corporation, completed the acquisition of Mt. Hood Rock on Apr 1. Mt. Hood Rock provides construction aggregates in the eastern Portland and has an estimated 20 years of reserves, which will enhance Knife River’s presence in the market.

National Fuel Gas recently announced its goals to reduce greenhouse gas (GHG) emissions by 75% within 2030 and 90% by 2050 from the 1990 base figures for its utility segment National Fuel Gas Distribution Corporation. This outpaces the targets set under the Climate Act by the state of New York.

In early March, American Electric announced that its subsidiary, AEP Energy Partners is seeking renewable energy purchase agreements of 10, 12 or 15 years for solar, repowered wind facilities, and stand-alone or co-located Battery Energy Storage Systems, which will commence operations between 2021 and 2024.

Zacks Rank & Price Performance

Currently, Sempra Energy carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of the company have gained 10% in the past year, underperforming the industry’s rise of 18.4%.

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