ONEOK Partners in 2Q15: Unit Sale Intended to Reduce Leverage
Analyzing ONEOK Partners’ 2Q15 Earnings and Recent Unit Sale
High leverage levels
ONEOK Partners (OKS) had an adjusted debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 4.5x at the end of 2Q 2015. The ratio is higher than the MLP’s stated long-term target of below 4x. Energy MLPs generally target a ratio below 4x. OKS’s adjusted debt-to-EBITDA ratio was 3.7x at the end of 2014.
The debt-to-EBITDA ratio is often used to assess a company’s ability to repay debt. It’s also commonly used by credit rating agencies. A lower ratio is considered better from a credit perspective.
ONEOK Partners’ capital structure target is to have 50% debt and 50% equity. At the end of 2014, it had 54% debt and 46% equity.
Moody’s affirms OKS’s rating, with negative outlook
On August 13, 2015, Moody’s affirmed ONEOK Partners’ Baa2 credit rating, but it assigned the company a negative outlook. The MLP previously had a Baa2 rating with a stable outlook. The negative outlook reflects the agency’s concerns about the future of commodity prices and OKS’s exposure to them via its Natural Gas Gathering and Processing segment. Read more about the segment and its exposure to commodity prices in ONEOK Partners: How Gas Gathering, Processing Segment Makes Money.
The affirmation of the rating, however, reflects the generally stable, fee-based revenues from other segments of the MLP.
Equity dilution
After the sale of common units to ONEOK Inc. (OKE) that we touched upon in Part 1 of this series is completed, OKS will have 213 million common units outstanding. The company had 181 million common units outstanding at the end of 2014. OKS generated ~$1.1 billion in 2014 through a public offering and ATM (at-the-market) equity program. ATM is a follow-on stock offering used by companies to generate cash on an as-needed basis.
In the second quarter of 2015, OKS issued ~5.5 million common units through its ATM program. In 1Q15, OKS issued ~1.7 million common units through this program. The above graph shows the increase in the number of OKS’s common units outstanding since 2011.
American Midstream Partners (AMID), Boardwalk Pipeline Partners (BWP), DCP Midstream Partners (DPM), and EQT Midstream Partners (EQM) are some other MLPs involved in natural gas gathering and processing.
EQM forms 1.2% of the First Trust North American Energy Infrastructure Fund (EMLP).
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