Looking for high yield opportunities in the natural gas midstream industry? Natural gas futures have risen 84% in the past quarter, and we may be headed for a colder winter this year, thanks to La Nina.

ONEOK Inc. (OKE) engages in gathering, processing, storage, and transportation of natural gas in the United States. It operates through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. The company owns natural gas gathering pipelines and processing plants in the Mid-Continent and Rocky Mountain regions. (OKE site)

Earnings:

Q3 2020 saw a 34% increase in NGL volume for OKE, at 215K barrels/day, which was a bit higher than its pre COVID-19 level of 211K bpd. Management has recently completed several expansion projects, which have an additional 135 bpd potential, based upon drilled uncompleted wells, DUCs being completed, more rigs returning to activity, and flaring recapture:

(OKE site)

The technology has improved for recapturing more flared natgas, which will reduce the amount lost from flaring, and increase efficiencies:

(OKE site)

While revenue was down -3.93% in Q3 2020, EBITDA grew 22.78% in Q3 ’20, DCF was up 12.48%, and net income rose 1%:

Those positive numbers stand in stark contrast to OKE’s Q1-3 2020 figures, which, like most companies, were mostly down due to Q1-2 COVID-19 pressures. However, adjusted EBITDA did grow 9.88% in Q1-3 2020, better than the 5.42% growth seen in 2019.

Like most midstream firms, OKE cut way back on capex in 2020, scaling it back by ~30%, vs. a major 79.7% push in 2019.

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OKE’s share count rose by 7.2% in Q2 2020 – in June it did a public offering of 26 million shares of its common stock at a price to the public of $32.00/share, which grossed ~$832.0 million.

Dividends:

OKE just went ex-dividend last week for its quarterly $.935/share payout. It should go ex-dividend next ~1/22/21. At $28.85, OKE yields 12.96%. It has an attractive five-year dividend growth rate of 10.85%.

Taxes:

OKE stockholders receive an annual IRS Form 1099-DIV reflecting their dividend income.

Analysts’ Price Targets and Estimates:

There’s quite a spread of target prices for OKE. At $28.85, OKE is 15.4% above analysts lowest price target of $25.00, and 15.5% below the $34.14 average price target.

Earnings estimates have been rising for OKE over the last 30 and seven-day periods:

The current average estimate for 2020 is $2.55, which is -17% below 2019’s figure of $3.07. The 2021 average estimate is $2.68, which would be 5% growth vs. the $2.55 2020 estimate.

(YahooFinance)

Options:

Although the most recent ex-dividend date just passed, you could still make some income from OKE, via selling options. If you’re skeptical of that $35.00 average price target, OKE’s January $30.00 call option is worth considering.

OKE’s January ex-dividend date isn’t until after the January option expiration date, but the $30.00 call strike option has a very attractive bid of $2.45, an 8.5% return in ~11 weeks, or 40.78% annualized.

If your shares get assigned, you’d have an additional short term capital gain of $1.15.

Conversely, If you want to achieve a lower breakeven entry point, the OKE January $27.50 put option strike pays $1.80, giving you a $25.70 breakeven, which is just 2.8% above analysts’ lowest price target of $25.00 for OKE.

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NOTE: We use annualized yields in our options tables, so users can compare trades of varying lengths.

You can see more details for these two trades on our Covered Calls Table and our Cash Secured Puts Table.

Performance:

Although OKE has outperformed the Energy Select Sector SPDR Fund (NYSEARCA:XLE) and the S&P over the past month and quarter, it still trails both over the past year and year to date.

Valuations:

OKE’s price/sales is cheaper than industry averages, while its P/book is in line. EV/EBITDA is higher than average. Price/DCF is one of the lower valuations we’ve seen in midstream firms.

Profitability and Leverage:

OKE’s ROA and ROE look much better than industry averages, while its EBITDA margin is lower. Although its debt/equity leverage is lower than average, its net debt/EBITDA is on the high side of midstream leverage figures we’ve seen recently.

However, OKE has strong liquidity, with a clear $2.5B credit facility, plus $447M in cash, and no debt maturities until 2022:

(OKE site)

All tables by DoubleDividendStocks.com, except where noted otherwise.

Our Marketplace service, Hidden Dividend Stocks Plus, focuses on undercovered, undervalued income vehicles, and special high yield situations.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OKE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.



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