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Why ONEOK’s Leverage Is a Key Concern for Investors

High Leverage Drives ONEOK Stock Down: Investors Are Concerned

(Continued from Prior Part)

ONEOK’s debt-to-equity ratio

ONEOK’s (OKE) current debt-to-equity ratio is 2.2x. In comparison, midstream companies Spectra Energy (SE), Enterprise Products Partners (EPD), Enable Midstream Partners (ENBL), and Enbridge Energy Partners (EEP) have debt-to-equity ratios of 1.4x, 1.1x, 0.4x, and 0.8x, respectively.

ONEOK had a total outstanding debt of $8.7 billion at the end of 3Q15. Despite a decrease in the last two quarters, ONEOK’s debt-to-equity ratio is still above 2.0x.

Net debt-to-EBITDA ratio

The above graph shows ONEOK’s quarterly debt-to-equity and net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratios over the last four years. ONEOK’s net debt-to-EBITDA ratio is 6.2x. In comparison, SE, EPD, Kinder Morgan (KMI), and Williams Companies (WMB) have net debt-to-EBITDA ratios of 5.2x, 4.4x, 7.2x, and 7.4x, respectively.

Debt-to-EBITDA ratios are often used to assess a company’s ability to repay debt. It’s commonly used by credit rating agencies to determine a company’s credit rating. A lower ratio is considered better. OKE forms 0.9% of the WisdomTree Dividend ex-Financials ETF (DTN). The ETF invests in high-dividend-yielding companies outside the financial sector.

Debt and equity issuances

On August 12, 2015, ONEOK agreed to buy 21.5 million common units of ONEOK Partners (OKS). ONEOK is the general partner of OKS. The transaction increased OKE’s ownership in OKS by 4.4% to 41.2%. OKE issued $500 million of senior notes to fund the transaction.

OKS also sold 3.3 million of its common units to funds managed by Kayne Anderson Capital Advisors for ~$100 million. The combined offerings generated net cash proceeds of ~$749 million to OKS.

In the second quarter of 2015, OKS issued ~5.5 million common units through its ATM (at-the-market) program. In 1Q15, OKS issued ~1.7 million common units through this program. The net proceeds from the two issuances were ~$281.6 million. In March 2015, OKS completed an underwritten public offering of $800 million of senior notes.

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.

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