Saturday, December 6, 2008

Stock Update: ONEOK (OKE)

I started purchasing shares of ONEOK (OKE) which is pronounced One Oak back in November of 2005 at around $27 a share. The stock performed very well over the next few years and hit over $50 a share in mid 2008. OKE has now retreated to around $26 a share. I think OKE looks like a great value and a fairly safe dividend yield of 5.8%. Here is an excellent recent write up of OKE by DIV-Net's Eric J. Fox of the Stock Market Prognosticator and founder of Brittain Capital Management, LLC. Oneok May Be The One (OKE)

Oneok Inc. is a diversified energy company with two segments: Energy Services and Distribution. The company also owns a 47.7% stake in Oneok Partners L.P. (OKS), a master limited partnership that owns pipeline and processing infrastructure.

Energy Services
The Energy Services segment markets natural gas and related services to residential and commercial customers. Operating income here is more volatile and has declined from a peak of $229 million in 2006 to the $93 million guidance that Oneok is giving for 2008. Operating income is heavily dependent on the Rockies-to-Mid-Continental price differential in natural gas.

Growth Area
The company achieves growth through its partial ownership of Oneok Partners L.P. The partnership owns gathering and processing assets to service the nation's growing need for natural gas. Assets include 14,500 miles of natural gas and natural gas liquids pipelines, and 13 processing plants with 725 MMcf/day of capacity. Oneok is the general partner of the limited partnership.

The company had $2 billion of internal growth projects that have been, or will be completed through 2009, and there are $300-500 million per year in new projects planned for 2010 to 2015. Projects expected to be completed in the fourth quarter of 2008 or 2009 include gas gathering and processing projects in the Williston Basin, and a natural gas pipeline extension between Wisconsin and Illinois.

Although high growth usually means high risk, 60% of the profit at Oneok Partners is fee based, lending stability to the company's earnings.

Slow and Steady Wins the Race
The distribution business is the company’s legacy business. This unit is a traditional local distribution company (LDC), and it handles two million customers in Texas, Oklahoma and Kansas. The rates that Oneok charges are regulated by the state authorities in the respective states that Oneok does business in. The unit is expected to have $2.1 billion in revenues in 2008, and the company is guiding to $186 million in operating income in 2008.

Some investors have criticized the company for keeping what is considered a slow growth business. However, because its business is heavily regulated, it has consistent and stable cash flows.

Financials
Oneok had $335 million in cash at October 31, 2008, and a total debt to equity of 56%. The company paid a 40 cent dividend last quarter, and its trailing yield is 5.4%. Oneok has increased its dividend at a compound annual growth rate of 16% since 2004. Other companies with high dividend yields in this space include Enterprise Products Partners (EPD) with a trailing yield of 9.9%, and TEPPCO Partners (TPP) with a trailing yield of 13.3%.

Risks
These types of companies are not without risk. In July 2008, SemGroup Energy Partners LP (Nasdaq:SGLP), lost 50% of its value in one day after its parent company and large shareholder revealed that it made a large losing bet on the direction of Oil prices. SemGroup Energy Partners LP was heavily dependent on its parent for a large percent of its revenues.

Oneok is a safer bet during the Energy bear market due to its legacy distribution business, and high dividend yield.

Disclosure: The Div Guy owns shares of OKE at the time of this post

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