ONEOK Issues 2011 Outlook - Analyst Blog

Diversified energy utility ONEOK Inc. (OKE) recently put forward its 2011 earnings expectations and for its master limited partner (MLP) ONEOK Partners L.P. (OKS). At the same time, the company also reiterated its earnings forecast for 2010 while it provided higher 2010 forecasts for its MLP.

ONEOK stated that its net income for 2010 will stand at the high-end of its previously provided guidance range of $320 - $335 million. However, the company said net income at ONEOK Partners will now range from $470 million to $475 million, slightly above the previous guidance range of $450 - $470 million.

The company also said distributable cash flow at ONEOK Partners is now expected to be at the high end of the previously guided range of $570 - $590 million.

ONEOK's 2011 Guidance

ONEOK Inc. expects 2011 net income to come in the $325 - $360 million range on higher earnings in its ONEOK Partners segment, offset partially by lower earnings in the Energy Services segment. The company's projected 2011 guidance is consistent with the targeted 8%-10% earnings growth in the 2011-2013 periods, announced in October 2010.

For 2011, ONEOK's operating profit is expected to be $977 million (mid-point), reflecting increased operating income contribution from the ONEOK Partners segment. On a segmental basis, ONEOK guided 2011 operating profits of $656 million at ONEOK Partners segment, $231 million at the Distribution segment and $91 million at the Energy Services segment.

In 2011, increased fee-based earnings at ONEOK Partners, due to increased NGL volumes gathered and transported and higher natural gas volumes processed, is expected to contribute largely to the company's operating income.

However, operating income in 2011 is expected to be hurt by narrower transportation differentials, lower seasonal natural gas storage differentials and reduced market volatility, which will affect profits in the Energy Services segment; and relatively unchanged operating income in the Distribution segment.

ONEOK believes its overall earnings growth reflects benefits of the investments made in the ONEOK Partners segment, which sums to more than $2 billion. Going forward, the company has plans to invest about $1.5 - $1.8 billion over the next three years in ONEOK Partners' growth projects in the Bakken Shale, Cana-Woodford Shale and the Granite Wash plays, which will further strengthen ONEOK's position as an attractive investment for shareholders.

ONEOK's 2011 earnings guidance also includes semiannual dividend increases of 4 cents per share during the year, subject to board approval. This dividend increase is consistent with the company's expected 50% to 60% dividend increase between 2011 and 2013.

On a stand-alone basis, ONEOK expects capital expenditures for 2011 to be roughly $246 million and cash flow before changes in working capital of $727 million (mid-point). The company expects cash flow before changes in working capital to exceed capital expenditures and dividends by $235 - $275 million.

ONEOK Partners' 2011 Guidance

Separately, ONEOK also said that net profit at its MLP, ONEOK Partners L.P., is projected to be in the range of $525 - $575 million. The midpoint of ONEOK Partners' 2011 operating income is expected to be $656 million, with EBITDA guided in the range of $925 - $975 million. The partnership's 2011 earnings guidance is in sync with its annual EBITDA growth target of 14% to 18% from 2011 to 2013.

On a segmental basis, ONEOK Partners guides operating income of $182 million at the Natural Gas Gathering and Processing segment, $148 million at the Natural Gas Pipelines segment and $326 million at the Natural Gas Liquids segment.

Equity earnings from investments are estimated at $106 million in 2011, reflecting the deconsolidation of the Overland Pass Pipeline, in which the partnership now owns a 50% interest after selling a 49% interest in September 2010.

ONEOK Partners' 2011 earnings guidance also includes a 1 cent per quarter increase in unitholder distributions, while maintaining a minimum coverage ratio of 1.05 times distributable cash flow. The partnership reaffirmed that it expects to increase its distributions by 5% to 10% annually between 2012 and 2013.

In 2011, ONEOK Partners expects its distributable cash flow (DCF) to be in the range of $625 - $675 million. The partnership's capital expenditures for the year are expected to be roughly $1.1 billion, comprising $1.0 billion in growth capital and $105 million in maintenance capital.

Our Take

Oklahoma-based ONEOK Inc. and ONEOK Partners L.P. are expected to release their fourth-quarter and fiscal 2010 results on February 21, 2011.

ONEOK Inc. presently has a Zacks #2 Rank (short-term Buy rating). ONEOK Inc. has a strong presence in the mid-continent natural gas market and has capacity to grow earnings above its industry peers through organic developments. However, given the volatile credit markets, utility regulations, and ONEOK's dependence on weather and unpredictable commodity prices, we maintain a Neutral rating on the stock.

ONEOK Partners currently retains a Zacks #3 Rank (short-term Hold rating). We maintain a Neutral rating on the stock.