Sempra Energy: With risk comes reward

Posted Jul 16th 2007 9:16AM by Hilary Kramer
Filed under: Hilary On Stocks

Founded in 1998 when two well-established California utilities merged, Sempra Energy (NYSE: SRE) develops energy infrastructure, operates utilities and provides natural gas and energy services to more that 29 million consumers in the U.S., Canada, Mexico, Europe, South America and Asia. Headquartered in San Diego, it is the city's largest Fortune 500 Company and its growth is aggressive.

Its huge size is one of its best assets, allowing it to be competitive in markets here and abroad. It also has been smart in its foray into liquefied natural gas, and in its use of cash. Instead of offering a big dividend, it has reinvested its cash into investments with high yields. So, in addition to servicing the largest customer base of any energy utility in the U.S., it also sells energy commodities, builds and runs energy infrastructure, and provides asset risk management. It is building three liquefied natural gas import facilities in North America, and has formed a smart pipeline partnership with Kinder Morgan Energy Partners LP (NYSE: KMP) to bring natural-gas from the Rocky Mountains, where it is abundant, to the Midwest.

It also is getting into the fast-growing renewables field. In late June, SRE's subsidiary, Sempra Generation, announced it is entering the renewable-energy-development business. Its first project is a 250-megawatt wind-power generation facility in Baja California, Mexico.

Because it is embarking on roughly $11 billion worth of projects, including the pipelines and LNG import facilities, the next five years will be a burden on its cash supply. But I think this could pay off handsomely. What's more, last week, it announced its joint venture with the Royal Bank of Scotland Group to significantly expand its commodity-marketing business. Growth and working capital, as well as credit support, will be provided by the bank, which should help free up some of SRE's cash flow. The deal should allow SRE grow its global commodities business much faster.

Type of stock: A higher risk utility but one with much higher rewards if things go its way, as Sempra not only works in the regulated energy business but also in the unregulated liquid natural gas market, renewable energy, and in energy and metals trading.

Price target: Trading at $58 and weight points off of its high for the past 52 weeks, I think this is a solid pick for those who are risk adverse and want a stock to stick in the portfolio for the long term. Sempra is a company making smart, bold moves with natural gas and commodities trading. The reward could be great and buying and holding for the longer term will pay-off.

Hilary Kramer is a financial editor and money coach for AOL and an authority on investing. Visit her at www.hilarykramer.com.

Tags: Hilary on Stocks, HilaryOnStocks, KMP, SRE

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Reader Comments (Page 1 of 1)

7-16-2007 @ 9:41AM

Sheldon L said...

You mention risk several times but do not discuss what that risk is. What is the risk? Sempra looks like a value play not a risk vs reward play.

Then you go on to say..."I think this is a solid pick for those who are risk adverse"

I agree with your premiss, but you have said nothing to support it. Please explain where the pitfalls are, if you see some.