When pipeline giant ONEOK (NYSE: OKE) acquired its master limited partnership (MLP) in 2017, the company's growth prospects weren't all that clear. While it had a few hundred million dollars of expansion projects under construction and another $1.5 billion to $2.5 billion in development, the pipeline operator didn't have the firm backlog in place to support its view that it could increase its dividend at a 9% to 11% annual rate through 2021.
However, a lot has changed since then, as it has gone on to secure $6 billion of high-return capital projects that should enter service through early 2021. That's an enormous backlog, especially for a company that invested only $9 billion into expanding its footprint from 2006 through 2016. This investment wave gives investors a myriad of reasons to be excited about what lies ahead.
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Drilling down into what's coming through the pipeline
ONEOK's growth prospects started to become clearer during the second half of 2017, as it secured several small-scale expansion projects. In late June, for example, it signed a long-term contract with fellow midstream company EnLink Midstream (NYSE: ENLC) to support the expansion of its mid-continent natural gas liquids (NGLs) gathering system and Sterling III Pipeline. The company expected to invest $130 million into these projects to help support the growth of EnLink Midstream. ONEOK followed that up in the next few months with two more project announcements, a $155 million to $165 million investment to expand its Canadian Valley natural gas processing plant in Oklahoma and a $200 million project on its West Texas LPG Pipeline joint venture. The company expected all these projects to enter service in late 2018 through early this year.
ONEOK would go on to dramatically increase the odds of achieving its ambitious dividend growth plan early last year, when it secured enough shippers to move forward with the Elk Creek Pipeline. The pipeline giant plans to invest $1.4 billion in building more than 900 miles of new pipeline as well as related infrastructure to transport NGLs from Montana to Kansas. That project should start up by the end of this year. The company followed that up the next month by giving the green light to $2.3 billion of investments to build additional NGL and natural gas infrastructure in the U.S., including constructing the Arbuckle II pipeline and plants to process both natural gas and NGLs.
The pipeline company continued moving forward with additional projects last year to increase the scale of Arbuckle II, construct more processing plants, boost its natural gas pipeline capacity, and expand West Texas LPG again, as well as buy out its joint-venture partner on that system. Add it all up, and ONEOK has now secured $6 billion of expansions that should all start service by the first quarter of 2021.
ONEOK's large backlog of expansion projects position to the company to deliver significant earnings growth over the coming years since long-term contracts back these expansions. In the company's view, it should earn an average return of 5 times EBITDA on these investments, which means that for every $1 billion invested, the project should produce about $200 million in annual EBITDA. The math here implies that ONEOK's $6 billion in investments should generate $1.2 billion of incremental EBITDA on an annualized basis once these assets ramp up to their contracted capacity post-2021. Considering ONEOK anticipated that it would produce $2.4 billion in EBITDA at the midpoint of its 2018 guidance range, the company is on pace to expand earnings 50% over the next few years.
That fast-paced earnings growth should provide ONEOK with plenty of fuel to support its dividend plan while also enabling the company to generate an increasing supply of excess cash that it can reinvest into expansion projects. This rising stream of free cash flow will help reduce the amount of stock ONEOK needs to sell in the future to fund expansions projects, enabling the company to grow at a faster per-share rate.
Significant growth visibility ahead
ONEOK promised fast-paced dividend growth when it acquired its MLP but didn't have all that much in the pipeline to back up that view. However, after securing $6 billion of expansion projects since closing that transaction, the company should have more than enough fuel to deliver on its dividend plan. That could enable ONEOK to continue producing market-beating total returns over the next few years, which is one of the many reasons investors should be excited about this company's prospects.
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