ONEOK (NYSE:OKE) is a large, natural gas focused midstream company with a near $17 billion valuation and a 10% dividend. The company’s focus on natural gas means it has additional diversity and reliability versus other companies. As we’ll see throughout this article, the strong fee-based asset base and continued demand for its assets make OKE a valuable investment.
ONEOK has an impressive asset base with a well-integrated natural gas portfolio and market-leading assets.
The company has a competitively positioned asset base with key asset locations integrating major demand hubs like Chicago and major supply hubs like the Williston Basin. OKE has significant basin diversification throughout the United States. The company provides midstream services across the board, highlighting its asset strength.
As long as natural gas remains integral to the United States, and we see that as happening for decades to come, the company’s assets will be essential. The company utilizes this asset base to support its double-digit dividend yield. That’s despite its 50% drop in share price YTD as the company has been lumped into other COVID-19-related oil price drops.
Resilient Business Model
ONEOK has a resilient business model from its asset base that supports its overall commitment to shareholder returns.
Resilient Business Model – Investor Presentation
ONEOK has a solid investment-grade balance sheet with a stable rating consistently affirmed by the rating agencies. The company has $2.5 billion in available borrowings and nearly $500 million in cash and cash equivalents. It has a demonstrated ability to access the capital markets, and no debt maturities prior to 2022, highlighting its financial strength.
The company has distributed customers, with no single customer representing more than 10% of its revenue. The company cut 2020 capital spending significantly and expects growth and maintenance capital expenditures going forward to have a $350 million annual run rate. That’s more than affordable for the company and it highlights its financial strength.
One other important thing to pay close attention to in terms of ONEOK’s ability to handle the collapse is the strong recovery in volumes it’s seen over the past year.
Volumes – Investor Presentation
ONEOK has seen natural gas volumes recover significantly over the past quarter. Rocky Mountain volumes have gone up 30% QoQ with a strong and average bundled rate at $0.28/gallon. Mid-Continent volumes are up nearly 10% and Gulf Coast/Permian volumes are up more than 10%. Across the NGL assets, volumes are up more than 15%.
The company’s natural gas gathering and processing have also gone up ~12%, again with incredibly strong showing in the Rock Mountain region. That strength, especially in the Rocky Mountain, shows the recovery from QoQ. And it highlights the company’s ability to more than handle the effects of COVID-19 on its businesses.
Fee-Based Cash Flow
ONEOK’s financial strength remains strong as a result of its debt issuances.
In early March, the company managed to issue 30-year debt at 4.5%, and by May, its 30-year debt rate for issuances had hit 7.15%. Those rates aren’t great, but they’re still respectable. It does highlight the impact that COVID-19 has had on the business, but it also means that the company can manage to continue performing.
At the same time, the company is working to rapidly cut capital spending, with new maintenance and growth capital spending at roughly $350 million annualized. Annualized DCF is nearly $2 billion, and the dividend is roughly $1.6 billion. The company still has nearly $15 billion in debt, costing it significant but manageable interest.
However, importantly, the DCF is enough to cover its dividend along with its maintenance + growth capital going forward. It won’t have much for debt paydown, which is partially concerning given the recent rates it’s achieved. But it’ll be able to continue paying its 10% dividend to shareholders, driving future return.
It’s also worth noting the company is continuing to partially invest in growth. The returns on this growth can help drive long-term rewards. The reliability of the natural gas industry supports ONEOK going forward.
ONEOK’s risk is the susceptibility of its cash flow to COVID-19-related impacts, specifically in gathering and processing. The company has been able to recover significantly; however, there’s no guarantee that that will continue. Especially with the recent wave in COVID-19, 4Q 2020 or 1Q 2021 numbers could have a difficult time.
Whether or not that will be true remains to be seen, but the company has a tighter dividend coverage ratio than most other midstream companies, meaning in a worst-case scenario, it’s more susceptible to a partial dividend cut.
ONEOK has an impressive portfolio of assets, and the company’s continued ability to issue debt in an incredibly difficult time highlights its continued strength. The increase in the rates the company has had to issue debt at is slightly concerning for interest expenses, but for the worst of the collapse is more than manageable.
Going forward, we expect the company to continue driving strong shareholder rewards. Its dividend is strong, and its natural gas focus isolates it from many oil transportation concerns related to COVID-19. Overall, the company is a valuable investment opportunity that we recommend investing in.
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Disclosure: I am/we are long OKE. 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.