OKE - ONEOK: Robust Financials And An Attractive Dividend Yield

Summary

• Rising energy prices have provided tailwinds to Oneok’s earnings and operations.
• Positive demand outlook for NGLs and natural gas bodes well for Oneok’s continued growth.
• The stock offers one of the highest yields among the S&P 500 companies.

Investment Rationale

Oneok Inc has recorded impressive results for the third quarter of 2022 continuing its attractive and uninterrupted dividends payment history. Rising energy prices have provided tailwinds to the company's earnings and operations. Improvements in earnings and volumes are indicating increased demand for the company's products in the market. Oneok's strong asset base and its focus on generating attractive shareholder returns make it a suitable candidate for long-term investment.

About the company

ONEOK ( OKE ) is a natural gas transport and infrastructure company that owns natural gas liquids systems connecting NGL supply in the Rocky Mountain, Mid-Continent, and Permian regions. The company transports more than 10% of the U.S. natural gas production. It is involved in natural gas gathering, processing, storage, and transportation, as well as NGL transportation and fractionation. The company operates with three business segments: Natural Gas Liquids, Natural Gas Gathering, and Processing and Natural Gas Pipelines. Around 90% of the company's consolidated earnings were fee-based in 2021.

Strong Financial Base

Oneok Inc is a dividend-paying company showing an improving financial performance over the years. Over the last three years, the company's net income, revenue, and operating income have grown attractively.

Return on Capital Employed, return on equity and profit margins also show a healthy trend over the last three years.

On the balance sheet front, Oneok's lower Debt to Equity ratio and increasing book value indicates a healthy balance sheet. A lower current ratio is owing to an increase in short-term borrowings. The company recently announced a $750 million debt offering to improve its financial position.

Rewarding investors with dividend growth

Oneok has a track record of increasing dividend payments over 25 years as illustrated in the chart below. It has also delivered steady EBITDA growth historically, and looks well-placed to continue growing it. The stock offers a dividend yield of 5.9% as of this writing.

Oneok offers one of the highest dividend yields among the S&P 500 companies.

The company's capex-to-revenue ratio is the lowest among its peers indicating there is more room for the company to increase its capex and further expand its activities.

An impressive Q32022 performance

Oneok reported a 10% rise in net income and a 4% rise in EBITDA underpinned by increased natural gas and NGL volumes in the Rocky Mountain region, higher realized commodity prices, and average fee rates in the natural gas gathering and processing segment, and natural gas liquids segment along with increased storage rates in the natural gas pipelines segment. On the other hand, Q32022 results were also hurt by reduced optimization and marketing activities in the natural gas liquids segment, higher operating costs, and higher income taxes. The following image illustrates the adjusted EBITDA generated by all the segments.

Notably, Oneok reported an improvement in net income despite the impact of $5 million property insurance deductible and around $30 million of losses related to the 45-day business interruption coverage waiting period owing to a fire incident at its Medford plant. On July 9, a fire broke out at Oneok natural gas liquids plant near Medford, Oklahoma. During Q32022, the company received a notice saying that insurers have agreed to pay a $100 million unallocated first installment of insurance proceeds for the Medford incident.

In Q32022, the company saw a 17% improvement in the natural gas liquid volumes as compared to Q32021. The company is focusing on expanding the available as well as additional capacity with minimum capital investments.

On the capital expansion front, ONEOK started a compression electrification project on its Viking Gas Transmission pipeline to enhance operational reliability and provide potential future greenhouse gas emissions reductions on the system. The estimated cost of the project is approximately $95 million and expected completion is in the third quarter of 2023.

Positive NGL demand outlook

The demand for NGLs, a key component of Oneok's operations, is expected to rise steadily over the years driven by demand from the petrochemicals industry, residential sector, and transportation segment.

The positive demand outlook bodes well for Oneok.

Seeking Alpha's proprietary Quant Ratings rate Oneok as "hold." The stock is rated high on profitability and momentum factors, but low on growth factor.

Risks

A portion of Oneok's revenues is derived from the sale of commodities. A drop in commodity prices may hurt the demand for the company's services. The company does not fully hedge its commodity price risk or interest rate risk. This may result in a decrease in the company's revenues, an increase in costs, and a lowering of margins. Hence, the company retains some exposure to commodity prices.

Conclusion

Oneok is operating with a strong asset base along with generating attractive returns for the investors including sustainable and growing dividends. YoY operational and volume growth highlights strong demand for Oneok's products in the market along with new growth opportunities. The stock offers an attractive yield which makes it a solid dividend stock for long-term investors.

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