Morningstar has a new research report out stating they believe the fair value of these units is 26 bucks. They are using a distributable cash flow figure of 1.06 billion for 2016 vs managements guidance of 1.08 - 1.26 billion. That implies at coverage ratio of just .74, which they take to mean a distribution cut is in order unless pricing/volume gets stronger sooner rather than later. Their estimate is a cut of 16% to bring the coverage ratio back up to 1.05. that implies a yield of just under 10% at the current price, or 10.2% at 26 bucks. I have to think we're at or near bottom here.
Yes, distribution coverage is under 1.0. They have a decent balance sheet and steps to increase fee based flow I believe will bring coverage back to 1.0 as management has alluded. They are executing well on their strategy. The unit prices have just gotten too cheap. there is so much more value here than the market is giving them credit for. I averaged down at the close yesterday. If it goes any lower, i'll be buying more. It'll take some time to pay off, but I think the payoff will be well worth the wait.
Good Luck to All.
Sentiment: Strong Buy
Great buy on your part. I've been itching to hold my nose and pull the trigger on more. Missed that pricing. Just saw the earnings release. Things are trending pretty much on track to what management had stated earlier in the year. Coverage ratio back to .88. Looks like they might pull off a return to 1+ by year end. I'm going to listen to the call tomorrow morning, if there are no surprises, i'll probably pick up some more and average down.
This was a spec for me. After 3 years of being dead money, I officially threw in the towel this morning. Capital losses continue to wipe out the dividend. Best of luck to everyone else.
I am surprised to see just how low this thing has fallen. The market is without a doubt pricing in a distribution cut and essentially projecting that based on the terrible distribution coverage ratio of .60 in the last quarter. Basically, it's the market's opinion vs management's projections and right now the market is winning. According to the transcript, management states there will be significant volumes coming on in Q3 and Q4 which will essentially bring the distribution ratio back to 1+ by year end. If in fact that is gospel, we are then witnessing a great buying opp. If it is not gospel, go with worst case scenario and you're looking at a 40% distribution cut to 1.90 or a 5.5% yield at the current price, which tells me it's already baked in. If a cut were to happen, i don't think the shares would fall much further. I don't believe a cut is coming, much less one as deep as what i would consider worst case. They've got the right assets and the right footprint. Even morning star believes the shares are trading at a 21% discount to fair value. With fee based revenues increasing and the fact that commodities prices will eventually head back up (the cure for low prices is low prices), I think the risk reward ratio is in our favor if your investment horizon is more than a year or two. I'm getting close to adding to my position as we've now fallen below my cost basis.
Good Luck to All.
Honestly its hard to predict pricing on such a transaction. I think both entities will see a boost in price as the street would likely view the transaction in a positive light. As to the bottom, my gut tells me we're pretty close give or take a few points. I was kicking myself for not loading up back at the early stages of the great recession. I won't make the same mistake this time around. Management has done a helluva job through rough patches and I expect this won't be much different. It is pretty interesting to see ETE's offer for WMB though. Things are getting interesting...
I agree. The likely scenario is OKE being merged into OKS. This will maintain the tax benefits of the LLP structure as well as maintain the distribution while simultaneously shoring up the coverage ratio and reducing the overall cost of capital. I'm sure there are some additional complexities, however in my opinion this seems to make the most sense for both entities and their shareholders alike.
I'd be lying if i said i wasn't afraid of a cut in distribution. They can't run below a 1.0 coverage ratio forever. That said, incorporating the cash flows from the new assets and new projects set to come on board, there is a good possibility they get back to 1.0 before the year is out. I'm in a holding pattern right now waiting to see how the results come in over the next couple quarters...which will hopefully bring an improving distribution coverage ratio. If we see solid improvement i'm likely to add to my position. If the stock continues to tank, as I said early, it eventually gets to a point where the underlying assets are not being valued appropriately due to the distribution cut fears. At that point, i'll have to hold my nose and buy more as well. They have some of the best assets in the industry, eventually the market will value them correctly. If it doesn't someone else will come in and attempt a buyout.
I think the most likely scenario is they merge with the OKE. A merger of the two would likely bring down the cost of capital and generate cost savings. Same rational in the KMI mergers as well as williams companies. The lower OKS share price falls, the higher the yield, the more a merger makes sense. I'm holding my position at this point. If it goes much lower, I'll bite my lip and and to my position.
I'm not sure where you're getting your information from, but here's a recent take from S&P.
"We have a favorable view of SO's $16.5 billion
three-year capital spending plan, which includes
spending on environmental controls,
transmission and distribution investments, two
new nuclear units (Vogtle 3 & 4) and an integrated
coal gasification combined cycle power
Comments not indicative of a pending credit downgrade. All of the major rating agencies see earnings growth for the foreseeable future. Also not indicative of a pending credit downgrade. SO is caught up in some negative headlines around Kemper and Vogtle. It's also caught up in the negative trade related to the prediction of an interest rate hike later in the year. Both currently serve as drivers which open up a very good entry point in SO's shares. If you go back through history and look at SO's yield during periods of higher rates, you'll notice at the low point in the stock (high point in the yield) we're right in line with what historically turned out to be great entry points. I get it, you're short the stock over the short term, (no pun intended) and it's your right to try and make as much money as you can on that position. Ultimately, I believe you will as the pendulum usually swings too far in either direction. Perhaps the price goes a bit lower though there's no guarantee. For those who have a time horizon greater than 12 months, SO presents a pretty good value right now.
Best of luck to all.
This is what caused the move. Williams Company and Partners merger announcement. Folks think the same would be a good option for OKS, however the though process is OKS taking over OKE would be a better transaction for tax purposes. I wouldn't be surprised to see that.
Looking at the Heinz deal, they paid about 22 times prior year's earnings of 3.26, which gets the buyout price of 72.50. Using that logic, you get an offer price on KRFT of 69.30 (22*3.15). Using this year's estimated earnings of 3.47, you're looking at an offer price of 76.34.
Heinz was bought at a 20% premium over the price prior to announcement. Using that logic, you get an offer price on KRFT of 73.20.
Heinz was bought at a 30% premium over the one year average share price. Using that logic, KRFT's average share price over the last 12 months was 59.38, so you get an offer price of 77.19.
That tells me we're looking at a potential offer price somewhere between 70 and 80 bucks a share, realistically. I think 75 bucks a share gets this deal done, if in fact both sides are serious. Just one man's opinion of course. Best of luck to all.
LOL! I think you're right. SO will never pay a dividenT. However, they will continue paying dividenDs!
Sentiment: Strong Buy
Also, the "big" concern right now is interest rates going up. The theory goes, when rates go up, utilities shares go down because they are bond proxies in a low rate environment. While in the short term, that premise holds true, the stock reacts negatively to talk of higher rates. However, if you go back to times where rates were much higher than they are now, SO typically yields between 4.75 and 5%, putting the current price based on yield pretty much at it's historical average. PE is a tad on the high side, though increasing earnings will mitigate that risk. SO also has something going for it, that other utilities do not. Their coverage areas overall are growing in population, as well as attracting more industrial and manufacturing businesses which will all increase power demand. Don't get me wrong, this isn't a high flying stock, but if you're looking for slow steady grown and a solid and steadily growing dividend, SO's the place to be. I'm holding my shares, and will certainly look to add if the price gets much lower than this.
exactly. i picked up ETP a while back when they were in a similar situation. Yielding over 8%. Had to wait and be patient, which wasn't hard collecting that distribution, but it certainly paid off. I expect the same here. OKS also has some very distinct and valuable assets. it wouldn't surprise me if someone else were to come in with a takeover attempt. Outside of that, OKE also has the option of doing a KMI type consolidation transaction as well which would likely be beneficial to all parties involved. Time will tell. Until then, I'm content to sit back and collect my distributions.
Good Luck to All.
I think their average price estimates are a little on the low side. To me, it appears they are setting themselves up in a position to beat guidance.
OKS did better than i expected. Was expecting 2015 guidance to be revised, but not as bad as i thought. Will be adding to my position again if there's a big sell off.
Best of luck to all.