ONEOK Will Benefit From Continued Strength In Natural Gas Demand

Summary

ONEOK operates in the natural gas business, one with a much longer growth and demand pipeline than crude oil.

The company has a strong dividend yield of 6% that it’s been able to maintain for 25 years., and we expect it’ll be able to continue.

The company has been capturing efficiency across its system leading to higher volumes and income.

We expect the income to provide reliable long-term cash flow and modest growth, making it a reliable investment in an expensive market.

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Susan Vineyard/iStock Editorial via Getty Images ONEOK (NYSE: OKE ) is a leading midstream corporation service provider with an almost $28 billion market capitalization and a 6% dividend yield. The company has a reliable and integrated portfolio with continued expected growth, making it a unique investment. As we’ll see throughout this article, the company will benefit from continued natural gas demand. ONEOK Asset Portfolio

ONEOK has an exciting and well distributed asset portfolio worth paying close attention to. ONEOK has a 40 thousand mile network of natural gas liquids and natural gas pipelines. The company’s network here moves more than 10% of the U.S. natural gas production or more than 10 billion cubic feet/day. The company provides midstream services to producers, processors, and customers across the network here while also supplying NGL to the petrochemical industry.

This impressive and hard to duplicate portfolio of assets includes export centers and storage centers. ONEOK Consistent Earnings Growth

ONEOK has turned these assets into consistent earnings growth. ONEOK Earnings Growth – ONEOK Investor Presentation

ONEOK has managed to achieve sustainable EBITDA growth through a variety of WTI price fluctuations. From 2024-2021, the company’s EBITDA has almost doubled with >10% annual EBITDA growth. The company sees significant future momentum from recently completed projects as seen by its 2020-2021 EBITDA growth.

It is worth noting a reasonable percentage of this growth has been due to debt. The company’s long-term debt has increased from $7 billion to $14 billion. The company’s annualized interest expenditures are roughly $750 million or around 5% interest rate. That’s equivalent to ~30% of the company’s DCF or a relatively significant amount. ONEOK New Volume Capture

ONEOK has focused on improving the efficiency of its platform with new volume capture. ONEOK New Volume Capture – ONEOK Investor Presentation

ONEOK has focused on significant improvement from its asset portfolio, capturing efficiency at every stage of the process.

Using the Williston Basin as an example, the company has the ability to increase capture of flared gas, increasing production by roughly 15%. The company can maintain that production at roughly 25 average well completions per month, which is roughly in line for what the company averaged in 2020, which was an incredibly tough time period.

That means the company could see volumes increase from there. At 45 average well completions per month, the company could see gas from the basin increase 20-30% over the next year. That could help it increase cash flow significantly. ONEOK Shareholder Return Potential

Putting everything together, ONEOK has the potential to generate continued and reliable shareholder returns.

The company earns ~$2.4 billion in annual DCF. That’s a ~9% DCF yield. From there, the company’s dividend uses all except ~$800 million. The company from there can choose how to utilize its extra cash. The company is investing ~$600 million in total capital expenditures, of which ~$400 million is growth capital.

We expect the company to continue providing 6% in reliable long-term dividends. From this, we expect the company to generate mid-to-high single earnings growth as it continues to find incremental add-on exposures for things such as reducing flaring. The company has a ~9% DCF yield that can all go towards shareholder returns.The company has used its debt for growth over the past several years, so its current debt yield is manageable; however, we don’t expect it’ll be able to use significant additional debt for growth. Despite this, the company is a valuable long-term investment due to its reliable and sustainable cash flow at the high-single digits.That matches the S&P 500’s long-term returns, but with higher dividends, and less volatility. ONEOK Risk ONEOK’s risk is two-fold. First, the company’s reliable earnings potential and substantial dividend means it has a much lower FCF yield than many other companies. The company has a high-single digit FCF yield, which is respectable as a long-term reliable investment; however, it’s not anything spectacular.The […]

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