A Closer Look at ONEOK's Earnings

The diversified energy company ONEOK (NYSE: OKE  ) reported earnings yesterday. In the throws of an energy boom, it is hard to remember that not every energy company is generating record profits. In fact, despite beating the Street, it wasn't a great quarter for ONEOK, or its master limited partnership, ONEOK Partners (NYSE: OKS  ) . As always, there is more to a quarterly report than beating analyst expectations, so let's get started.

General rundown
ONEOK recorded earnings per share of $0.53. Though this beat analyst expectations, it was a slight drop from EPS of $0.55 a year ago. The story was the same with fourth-quarter revenue. The company recorded $3.65 billion, which beat expectations of $3.31 billion, but was down year over year from $4.07 billion.

The worst part, however, was that ONEOK lowered full-year guidance to a range of $350 million-$400 million, after initially expecting to earn $405 million-$500 million.

Let's take a closer look at segment performance to see what went wrong and what went right at ONEOK this quarter.

Q4: Digging deeper
ONEOK has three separate business units: ONEOK Partners, energy services, and natural gas distribution. We'll tackle ONEOK Partners first, an MLP that itself has three business segments. Despite two of the MLP's three business segments showing marked improvement year over year, its contribution to ONEOK fell by $87 million. Let's take a closer look.

In the fourth quarter of 2011, ONEOK Partners' natural gas liquids, or NGL, segment generated $245.1 million in operating income. In 2012, that number plummeted to $125.8 million. The bulk of that loss -- $141 million -- was because of lower NGL price differentials. That's a huge loss, there's no getting around that. However, when prices recover, this segment should perform admirably, as ONEOK has increased gathered and fractionated volumes of NGL and kept operating costs flat year over year. Despite the decline, the segment still generated the most operating income of ONEOK's three business units in the fourth quarter.

Natural gas gathering and processing contributed the second-largest sum at $59.1 million. It marked a $17.2 million increase over 2011's fourth-quarter operating income. Driving the increase was gathered volume growth in the Bakken Shale, as well as the completion of two natural gas processing centers. Not all the news out of this segment was rosy, however. Volumes declined in the Powder River Basin, compression costs rose, and lower realized NGL prices all dinged operating income. Ultimately it was not enough to overshadow the aforementioned gains, but it will be something to watch going forward.

That brings us to the natural gas pipelines segment. Operating income increased $15.2 million compared to last year, rising to $44.7 million. Much of this segment's performance was actually unchanged from last year, but declining operating costs, a pre-tax gain on an asset sale, and slightly higher volumes all combined to push income up.

So that's what happened at ONEOK Partners; now, let's flip back to ONEOK to cover its natural gas distribution and energy services segments.

The natural gas distribution segment climbed nearly 50% year over year, growing from $54.5 million in 2011 to $79.5 million in 2012. Operating costs were down, but so were volumes. The increase comes solely from higher realized rates in Oklahoma, Kansas, and Texas.

The energy services segment generated an operating loss of $10.3 million, down even further from a loss of $5.5 million in the fourth quarter of 2011. Lower margins across the board -- in premium services, storage, and marketing -- really hurt ONEOK this quarter, and the full-year story is even worse. Low natural gas prices and poor hedging strategies are the culprits here, although operating costs also were down.

The dividends
All that lackluster news didn't get in the way of a dividend increase. In January, ONEOK announced that it was increasing its dividend 9% over the previous quarter, from $0.33 to $0.36 per share for the fourth quarter. The company has increased its payout 157% over the last seven years.

That being said, ONEOK's dividend was not spared from the company's revisions. It anticipates a $0.02 increase this July, and ultimately the company estimates it will increase its payout 55%-65% from 2012 to 2015, down from original expectations of 65%-70%.

A look ahead
The aforementioned lowered guidance is largely attributed to lowered expectations for the performance of ONEOK Partners. Specifically, NGL volumes and NGL prices are expected to remain low and have a negative impact on 2013 earnings. Management expects this will change by 2014. It is worth mentioning that another energy company that has significant NGL exposure, Enterprise Products Partners (NYSE: EPD  ) broke all sorts of earnings records this year.

ONEOK lowered its three-year earnings growth rate to 15%-20% annually from 20%-25% annually. That's still a strong performance, and there were some things to like in this report, specifically lower operating costs in nearly every segment, but this is one to watch from a distance for now.

How is it that a company like Enterprise Products Partners can make money when NGL prices are down but ONEOK can't? Business diversity and a superior integrated asset base for starters. To help investors decide whether Enterprise Products Partners is right for their portfolio today, click here now to check out The Motley Fool's brand-new premium research report on the company.

 

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