ONEOK Partners’ 1Q14 earnings analysis: A $6.5 billion capex spend

Market Realist

Assessing ONEOK Partners' 1st quarter earnings for 2014 (Part 2 of 7)

(Continued from Part 1)

ONEOK Partners’ earnings analysis

ONEOK Partners (OKS) released its financial information for 1Q14 on May 6, 2014. The company recorded total revenues of $3.16 billion for 1Q14, down 8.3% from $3.45 billion recorded in 4Q13. Operating income went up by 15.7%, to $292.7 million in 1Q14 compared to $252.9 million in 4Q13. Net income improved by 16.3%, to $265.5 million in 1Q14 compared to the quarter-ago figure of $228.3 million. Net income per common unit went up to $0.81 from $0.67 recorded in the last quarter of 2013. The stock price of OKS has gone down by 2.3% from $54.95 since the day of its latest earnings on May 6, 2014, to $55.06 on May 20, 2014. In the past one year, the company’s stock price has gone up by ~11%.

Natural gas gathered and processed throughput increased in 1Q14 over 4Q13. In 1Q14, OKS processed 1.26 billion British thermal units per day as compared to 1.19 billion British thermal units in 4Q13, an increase of 6.3%. In 1Q14, OKS connected 230 new gas wells versus 210 in 4Q13. NGL sales remained unchanged at ~0.56 million barrels per day in both the quarters. In the Pipelines segment, natural gas transportation contracted increased 4.2%, to 5.86 million dekatherms per day in 1Q14 from 5.63 million dekatherms per day in 4Q13. The improvement in volume resulted from the completion of the capital-growth projects, higher demand for natural gas and NGLs in the last winter; but results were adversely affected by the lower average rate for gas processing and NGL sales.

Terry Spencer, the Chief Executive Officer of OKS, commented in the conference call of 1Q14, “ONEOK’s income from continuing operations attributable to ONEOK was up more than 60%, and reflects higher operating results at ONEOK Partners from higher natural gas volumes gathered, processed and sold, wider natural gas liquids location and product price differentials primarily related to increased seasonal demand for NGLs, and higher natural gas transportation and storage revenues due to increased park-and-loan services due to strong seasonal demand for natural gas in the Midwest.”

Operating costs decreased by 4.6% and depreciation & amortization costs increased by 6.3% in 1Q14 over 4Q13, mainly due to recently completed 30% interest acquisition of the natural gas processing facility in Oklahoma in December 2013. Interest expense increased by 4.1%, to $68.3 million in 1Q14 from $65.6 million in 4Q13.

The improvement in distributable cash flow by ~22% in 1Q14 over 4Q13 is primarily a result of the increased throughput from a number of projects that were completed during the quarter and higher natural gas price. During the latest quarter, OKS completed setting up Sterling III Pipeline. The 55-mile pipeline has an initial capacity to transport 193,000 barrels per day NGL products from the Mid-Continent region to the Texas Gulf Coast. The company also completed the construction of a natural gas processing plant at the Cana-Woodford Shale area in Oklahoma. The plant has a capacity to process 22 million cubic feet per day of natural gas. OKS also set up an ethane-propane splitter plant at its NGL storage facility at Mont Belvieu, Texas, with a capacity to produce 40,000 barrels per day of ethane.

On April 17, 2014, OKS declared a cash distribution of $0.745 per unit, or $2.98 per unit annualized, for 1Q14. This amounts to a distribution yield of 5.5% for a stock price of $53.88 as of May 14, 2014. The distributable cash flow for 1Q14 was $298.2 million with distribution coverage ratio of ~1.3x. In comparison, distributable cash flow for 4Q13 was $245.0 million or a distribution coverage of ~1.0x. The first quarter cash distribution represents an increase of 21.7% compared to the 4Q13 and an increase of 54.3% compared 1Q13.

 

An update on capex

OKS announced approximately $6.0 billion to $6.4 billion in capital-growth projects and acquisitions between 2010 and 2016. By the end of the first quarter 2014, approximately $3.9 billion of the capex has been completed. The company also increased its unannounced project backlog to a range of $3.0 billion to $4.0 billion during the latest quarter from a range of $2.0 billion to $3.0 billion as declared by the end of 2013. Terry K. Spencer, the Chief Executive Officer of OKS, commented in the conference call of 1Q14, “This capital backlog reflects our continued commitment to serve our customers’ needs in the Mid-Continent, Midwest and Gulf Coast regions and in particular, the Williston and Powder River Basins, where the majority of this incremental capital increase is targeted, and where producers continue to successfully develop acreage positions within our asset footprint. As we said previously, once we receive sufficient contractual commitments, we will announce these projects.”

ONEOK Partners, L.P. (OKS) is a master limited partnership operating in the midstream energy space. OKS is also part of Alerian MLP ETF (AMLP), MLP ETF (MLPA), and Global X MLP & Energy Infrastructure ETF (MLPX). OKS is also a component of Alerian MLP Index ETN (AMJ).

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