OKE - ONEOK: 5% Dividend Yield And Growing

Summary

• ONEOK is a large midstream player. About 10% of the US natural gas runs through its network.
• I believe that natural gas prices in 2023 will bounce back. Here's why.
• By my estimates, ONEOK's dividend yield could reach nearly 6% in 2023.

Investment Thesis

ONEOK ( OKE ) is a midstream player. Its main business is gathering and processing producers' natural gas. Consequently, even though OKE is involved and benefits from strong secular demand for natural gas, its operations are not as price sensitive as downstream operators.

Conversely, with natural gas prices plummeting in the last few weeks, OKE won't be dramatically negatively impacted.

Here I lay my bull case, for why investors buying into the stock will get nearly 6% dividend yield.

Near-Term Catalyst Natural Gas Market

The natural gas market has been weak for two reasons.

In the first instance, un-seasonally warm weather both in the US and in Europe has dampened the demand for heating. This was a sudden and unexpected shock.

Secondly, the Freeport LNG facility, which is responsible for exporting 20% of US LNG has been out of use. Some reports state that Freeport LNG will be back up and running in February . With later reports declaring that the end of January is still on the cards .

One way or another, Freeport is about to imminently start, after several months of delays. That's going to see a lot of natural gas being exported out of the US, materially impacting the supply-demand balance of US-based natural gas.

What's more, Europe and the US will start restocking natural gas reserves this spring, in anticipation of the winter ahead.

Altogether this will increase demand for US-based natural gas.

ONEOK to Benefit From Secular Demand for Natural Gas

As I noted in the introduction, OKE is a midstream operator. OKE's business model isn't directly tied to natural gas prices. Rather OKE's business model is tied to natural gas flows through its processing facilities.

OKE has a large network of natural gas liquids (''NGL'') and natural gas pipelines, with more than 10% of the U.S. natural gas production running through its infrastructure.

Therefore, as you can see below, approximately 60% of OKE's guided EBITDA comes from the fees OKE collects from committed volumes running through its pipelines.

Hence, this is my point. If an investor believes that the demand for natural gas will continue to increase over time, as countries around the world seek cheap, reliable, and flexible base load energies, then OKE's investment thesis becomes highly compelling.

But there's more to it than this. Natural gas and natural gas liquids are used in countless points of our daily lives beyond just home heating. Other common uses include food products packaging, clothing, and healthcare products.

And this demand is showing no sign of slowing down.

OKE believes that over the next several years into 2025, NGL demand will be up more than 20%. Put another way, we are highly reliant on NGLs for energy security and high-quality lives.

And that's not going to change any time soon. In the next section, we'll discuss OKE's growing dividend.

Collect +5% Dividend Yield

OKE's dividend yield lies around 5.3%. However, consider OKE's dividend history.

Through countless cycles, OKE has been able to not only maintain the prior year's dividend, but it has regularly raised its dividend too.

With OKE's prospects likely to be in high demand in 2023, I'm inclined to believe that OKE will at least raise its dividend for 2023 by at least 5%.

This would bring its annualized dividend to about $4.00 per share. Note, my assumed hike is materially below its 13% CAGR average, thus providing me with a margin of safety.

Accordingly, I believe that for 2023, investors getting in at current prices will get around 5.7% yield and growing with time.

The Bottom Line

ONEOK is a midstream service provider, that owns gathering and processing assets.

Approximately 10% of U.S. natural gas production is reliant on the utilization of ONEOK’s infrastructure.

OKE has a high dividend yield of nearly 6%. What's more, I believe that this dividend yield could positively surprise further in the coming several months and be raised beyond my expectations.

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