On Feb 7, 2013, we downgraded our recommendation on energy company, ONEOK, Inc. (OKE) to Underperform from Neutral. The company currently has a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
The combined negative impact from the sudden discontinuation of ONEOK’s Bakken Crude Express Pipeline project, stringent utility regulations, volatile commodity prices, risks from the local distribution companies, unstable credit and capital markets as well as over dependence on weather conditions forced us to downgrade our recommendation on the stock.
Causes for Concern
ONEOK discontinued its Bakken Crude Express Pipeline project due to weak crude oil demand in the region. The company had already invested a substantial amount in this project and intended to deploy $1.5-$1.8 billion till its completion in the middle of 2015. We expect closure of this project to impact the financials of the company adversely.
Utility providers like ONEOK follow a number of regulations related to customer service and the rates charged to customers, as well as the extensive environmental rules. Utilities generally invest considerable amounts to follow these guidelines. ONEOK’s profitability depends primarily on its ability to realize the costs for providing energy and other commodities to customers by obtaining the required regulatory approvals.
In addition, ONEOK's business and demand of products, particularly propane, is weather sensitive. This seasonality along with variations in weather conditions may cause disparity in the company’s financial results.
Other Stocks to Consider
Apart from ONEOK, Inc., other energy companies Clean Energy Fuels Corp. (CLNE), Sempra Energy (SRE) and The Laclede Group, Inc. (LG), are currently performing well and carry a Zacks Rank #2 (Buy).
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