Tag Archives: oneok

ONEOK: The 2016 Guidance Is Bullish

Summary ONEOK surges 15% after providing its 2016 financial guidance. Dividend is expected to be unchanged from 2015 levels. Free cash flow after dividends is expected to be ~$160 million. Though, ONEOK’s success largely depends on its MLP ONEOK Partners doing well. It is truly amazing just how much volatility there is in the midstream sector right now. Formerly steady stocks like ONEOK, Inc (NYSE: OKE ) have been eviscerated, down 44% since early October, following oil lower. Besides falling oil prices, ONEOK has been hurt by the troubles over at Kinder Morgan (NYSE: KMI ) which forced that company to lower its dividend . However, ONEOK recently surprised the markets by announcing plans to sustain its current dividend for 2016. The same holds true for ONEOK’s MLP ONEOK Partners (NYSE: OKS ). This sent shares of both stocks up 15%. Though, despite this news, the yield on both is still elevated at over 11%, indicating continued investor anxiety. OKE data by YCharts 2016 Outlook is looking strong Looking at ONEOK’s updated guidance, it appears not much will change versus 2015. Cash flow available for dividends is expected to come in at $675 million, or $3.22 per share, up 9% from 2015 estimates. Dividend payments are expected at $515 million, or $2.46 per share, flat from 2015 levels, leaving free cash flow of $160 million, or $0.76 per share. This would also result in a robust 1.3x dividend coverage ratio. Though, there is one major weak spot in ONEOK’s guidance–virtually all cash flow is coming from cash distributions from the LP and GP stakes in ONEOK Partners. If ONEOK Partners were to cut the distribution, ONEOK’s cash flows, and thus the dividend, would drop significantly. However, unlike KMI, ONEOK Partners is not relying on the equity markets to fund the capex budget in 2016. Furthermore, the MLP is projecting to fully cover its distribution in 2016. I’ll have more on ONEOK Partner’s 2016 outlook in a future article. The press release is also unclear as to how ONEOK’s free cash flow will be handled. The company noted that: “Free cash flow after dividends and cash on hand totaling approximately $250 million available to support ONEOK Partners” This implies that ONEOK will be contributing cash directly to its MLP. Earlier this year, ONEOK did help out the MLP by buying 21.5 million common units for $650 million. I would not be surprised if another capital infusion from ONEOK to ONEOK Partners is required next year. Though, I would imagine they would want to use something other than ONEOK Partner’s common equity given the high yield and low unit price. Conclusion While the 2016 outlook is undoubtedly good news for ONEOK, investors need to remember that the dividend is not set in stone. If ONEOK Partners fails to cover the distribution, ONEOK’s dividend will be at risk. Nevertheless, it appears things are not as dire for ONEOK as the stock price and 11% yield implies. I believe the stock will eventually recover to a more reasonable level. Though, short to medium term, the price action will likely be dominated by the general trend in oil as the midstream sector’s fundamentals have been ignored by the market. Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

ONEOK Continues To Be Dragged Down By Its MLP

Summary ONEOK reports its Q2 2015 results. Numbers were inline with guidance. However, the stock still fell on the news. ONEOK will not recover until its MLP ONEOK Partners achieves sustainable levels of cash flows. As a holder of several large cap midstream MLPs and General Partners, the performance of ONEOK, Inc (NYSE: OKE ) has been extremely disappointing. When I bought the stock, it had just provided some very bullish Increase guidance for 2015 . Yet, due to the collapse seen in commodity prices late last year, the company slashed its dividend growth estimates considerably. Add to that the general market sell off, ONEOK has been a house of pain to hold. Last week, ONEOK reported its Q2 2015 results. All things considered, these were strong numbers. Net income was $76.5M, up 24% from $61.6M last year. On a per share level, net income was $0.36, up a similar 24% from $0.29 per share last year. Distributions declared from ONEOK Partners (NYSE: OKS ), which constitute the vast majority of ONEOK’s cash flows, were $171.2M, up 9% from $156.5M last year. As for Cash flow available for dividends, this key metric was $149.6M, up 15% from $130.0M last year. This left ~$23M in excess cash flow and resulted in a strong 1.18x dividend coverage ratio, versus ~$11M in excess cash flow and 1.09x coverage last year. (click to enlarge) Guidance remains unchanged As for ONEOK’s guidance, not much has changed. The company expects cash flow available for dividends to range from $570M to $650M (~$153M per quarter), and excess cash flows to range from $90M to $120M (~$26M per quarter). Given these are close to the numbers posted for the first half, this guidance does not seem very hard to achieve. Results from ONEOK Partners need to improve ASAP While ONEOK numbers were good, the same could not be said for the MLP ONEOK Partners. This is important given that the vast majority of ONEOK’s cash flows come from this unit. For the quarter, ONEOK Partners posted $387.3M in adjusted EBITDA, a key metric for profitability in MLPs, $276.9M in DCF, and a 0.88x coverage ratio. This compares to adjusted EBITDA of $360.9M, DCF of $272M, and a coverage ratio of 1.02x, last year. In other words, ONEOK Partners did not fully cover its distribution in Q2 2015, though it did see an improvement from the 0.60x coverage ratio for Q1 2015. This shortfall is largely a result of weak commodity price, mainly NGLs and natural gas. While the revenues for the MLP are mostly fee-based, the commodity margin based contracts have taken a beating, resulting in much weaker profits. ONEOK Partners is trying to grow its way out of its problem, hoping to expand volumes on its systems by bringing online flare gas and adding processing and gathering capacity to underserved fields. However, in order to grow, ONEOK Partners needs to spend money on its capital programs. This has forced the company to issue units via its ATM program, selling 5.5M units for $208.1M in the quarter. With the yield above 10%, this is some very expensive capital to raise. Nevertheless, ONEOK Partners is expecting its adjusted EBITDA to tick higher in the next few quarters, with the guidance range for the full year reaffirmed at $1.51B to $1.73B, or a midpoint of ~$405M per quarter, up 5% from the Q2 numbers. Assuming a similar DCF to adjusted EBITDA ratio, this increase should put the company closer to a 1.00x coverage ratio. Conclusion While the numbers from ONEOK were strong, ONEOK Partners is the reason the stock is not trading higher. As long as the MLP remains underwater with its distribution, the market will continue to price both with additional risk as shown by the near 7% yield for ONEOK and 10% yield for ONEOK Partners. One way ONEOK could solve its problems is via a consolidation similar to that of Kinder Morgan (NYSE: KMI ) or Williams Companies (NYSE: WMB ) (NYSE: WPZ ). However, I do not see a move like this coming anytime soon given the weak commodity price environment. Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision. Disclosure: I am/we are long OKE, OKS, WMB, KMI. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.