ONEOK Misses on Both Lines
ONEOK Inc. (OKE) reported first-quarter profit of $1.16 per share, down by 3 cents from the year-ago quarter. The quarterly results also lagged the Zacks Consensus Estimate of $1.31 per share.
The year-over-year decline was attributable to lower margins at the Energy Services segment, which stemmed from lower realized seasonal natural gas storage price differentials. The continuous decline in natural gas prices also impacted profitability.
Total Revenue
Net revenues in the quarter dropped 9.2% to $3.41 billion from $3.76 billion reported in the year-ago quarter. The top line also disappointed the Zacks Consensus Estimate of $4.69 billion.
Operating Statistics
In the first quarter 2012, cost of sales and fuel was down 11.5% year over year. As a result, gross income rose 2.2% to $643.6 million in the reported quarter from the year-ago level of $629.9 million.
Total operating expenses (excluding the goodwill impairment) rose 2.1% year over year, mainly due to higher depreciation and amortization expenses.
Operating income decreased 0.7% to $325.9 million from $328.3 million in the year-ago quarter. This was due to the combined impact of higher expenses and lower revenues on a year-over-year basis.
Interest expenses decreased by 4.5% to $75.8 million from $79.4 million in the year-ago period.
Segmental Results
ONEOK Partners: ONEOK Partners' operating income was $256 million compared with $177.6 million in the year-ago quarter. Operating costs were $115.9 million compared with $108.7 million in the first quarter of 2011. The increase was due to higher materials expenses and scheduled maintenance costs.
There was an accident at the company’s NGL fractionation facility in Medford, Oklahoma. The accidental release of brine and propone from a storage well disrupted operations for 10 days and expenses incurred to rectify the damage lowered the net margin by $10 million.
Natural Gas Distribution: The Distribution segment reported operating income of $98.8 million in the first quarter compared with $103.1 million a year ago. The reduction in demand due to warmer weather in Kansas and Oklahoma lowered the transportation margin of this division.
During the quarter the company sold its retail natural gas marketing business to Constellation Energy Group, Inc. for $32.0 million.
Energy Services: The Energy Services segment reported an operating loss of $31 million versus an operating income of $48 million in the prior-year period.
The operating loss during the reported quarter was due to a $65.3 million decrease in storage and marketing margins stemming from lower realized seasonal natural gas storage price differentials. The continuous decline of natural gas prices also affected results.
Operating costs were $4.8 million versus $8.0 million in the prior-year period. The decline was mainly due to lower employee-related expenses.
Financial Condition
Cash and cash equivalents as of March 31, 2012, were $781.2 million versus $66 million as of December 31, 2011.
Cash flow from operation during the quarter was $426.1 million versus $647.8 million reported in the year-ago quarter.
Long-term debt as of March 31, 2012 was $5.22 billion, higher than $4.53 billion as of December 31, 2011. The increase in the debt level was due to the issue of $700 million 4.25% notes due 2022.
Guidance
ONEOK Inc. reaffirmed its net income guidance for 2012 in the range of $360 million to $410 million.
Our View
ONEOK’s performance during the quarter fell short of our projection. The shortfall was primarily due to the continuous decline of natural gas prices and the warmer winter in its service territories.
During the quarter, the board of directors has authorized a two-for-one split of ONEOK common stock, subject to shareholder approval. If approved, the share count of the company will increase to 600 million from the present level of 300 million. We consider this to be a smart move that would bring in more investors.
We maintain our long-term Neutral recommendation on ONEOK shares, supported by the company’s short term Zacks #3 Rank (Hold). The company’s primary competitors include Dynegy Inc. (DYN) and OGE Energy Corp. (OGE).
Based in Tulsa, Oklahoma, ONEOK Inc. is a diversified energy company, operating as a natural gas distributor primarily in the United States.
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