3 Key Takeaways From ONEOK Partners' Earnings

Tulsa-based ONEOK Partners (NYSE: OKS  ) reported earnings on Tuesday. Now that the dust has cleared, let's take a closer look at three things that stood out in ONEOK's report.

1. NGLs
For the past few quarters, investors have come to expect the havoc that perpetually low natural gas liquids prices have wreaked on company earnings. ONEOK Partners has suffered its fair share, but put up some impressive numbers this quarter in spite of it all. NGL results were only down 4% year over year, as the partnership's move to fee-based contracts mitigated widening losses.

Ethane rejection, which refers to a decision to leave ethane in the natural gas stream instead of processing and selling it separately, cost ONEOK Partners just shy of $15 million this quarter. It is affecting the entire industry, but management was able to adjust and use pipeline previously dedicated to ethane for other NGLs.

The big difference for the partnership this quarter was volume. Year over year, volumes of natural gas gathered increased 23%, processing volumes increased 28%, and NGL volumes increased 6%.

As a result, things weren't nearly as bad this quarter as last. Here's a quick look at the second-quarter operating income from each segment year over year:

Again, NGL prices are down from this time last year, so these results are actually quite strong.

2. Distributable cash flow
Management had great news for shareholders about distributable cash flow, as it rose from $240 million in the second quarter of 2012, to $252 million this year. For the quarter, the distribution coverage ratio was 1.17 times payouts, but it is still sitting below one for the year. CFO Derek Reiners reaffirmed the partnership's goal to maintain a coverage ratio between 1.05 times and 1.15 times distributions, and expects ONEOK Partners will reach a level just above one by the end of the year.

Reaching that coverage ratio is important because, subject to board approval, management expects to grow ONEOK Partners' distribution between 8% and 12% annually until 2015.

3. Forward guidance
Management was extremely thorough updating its guidance for the rest of the year, and in many cases up to 2015 as well. Outside of the numbers, this level of transparency is a big plus for investors.

ONEOK Partners is currently rejecting about 55,000 barrels per day of ethane. It expects ethane rejection to climb to 90,000 barrels per day next year, and fall back to 50,000 barrels per day in 2015. The 2014 financial impact is expected to come in at $83 million for the entire year.

There were some revisions to operating income guidance on a segment-by-segment basis, though total operating income guidance remains about the same, off $2 million from $936 million to $934 million, and net income remains the same at $830 million.

Distributable cash flow guidance was reaffirmed, management still expects to hit between $900 million and $1 billion on the year, on EBITDA of roughly $1.3 billion.

Bottom line
Given the damage that NGL differentials have done to ONEOK Partners in the past, this quarter was ultimately a successful one. Management proves to be adept at navigating the extremely tough environment for NGLs, and continues to execute on the partnership's growth strategy. That is good for OKS unit holders, as well as ONEOK (NYSE: OKE  ) shareholders, as the partnership's contribution to its parent increased 32% year over year.


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