ONEOK (NYSE:OKE) recently reported solid second-quarter results as rising volumes and fees pushed earnings higher. That said, the real story this quarter was closing the acquisition of its MLP because it sets the company on a path to significantly improve in its balance sheet while also delivering healthy dividend growth. The deal is already starting to pay dividends for the company and investors, which was evident from the comments of management on the accompanying quarterly conference call. Here are four things they wanted investors to know about the progress they made on their long-term growth plan during the quarter.
No. 1: We've completed our merger and are ready to execute on our growth strategy
CEO Terry Spencer led off his prepared remarks by pointing out:
Our second quarter ended with the completion of the ONEOK and ONEOK Partners merger transaction, which included the acquisition of all of the common units of ONEOK Partners we did not previously own. ONEOK is even better positioned to execute our long-term growth strategy for the benefit of both our legacy and new ONEOK shareholders.
ONEOK accomplished its primary objective by closing the purchase of its MLP. The rationale behind this transaction is that it would lower the combined company's cost of funding by eliminating fees and complexity, which should improve cash flow and its access to the capital markets. Those factors would put it in a stronger position so it could deliver on its strategy to create lasting value for investors.
No. 2: Our balance sheet is getting better
The transaction is already starting to pay off. CFO Walter Hulse noted on the call:
The successful completion of the ONEOK and ONEOK Partners merger transaction, combined with the proactive steps we've taken to improve our leverage position and balance sheet, are being recognized. In July, ONEOK received credit rating upgrades to investment grade from both S&P and Moody's. Both agencies also have established stable outlooks on the company.
Hulse further pointed out that the company's leverage ratio was down to 4.9 times at the end of the quarter after adjusting for one-time transaction costs. That's a significant improvement from a peak of 6.7 times in 2013 and down from the 5.1 times average of last year. Meanwhile, the company is on pace to hit its target to get leverage below 4.0 times by the end of next year or early 2019, driven primarily by increasing earnings through the completion of high-return growth projects it has in development.
Meanwhile, the credit rating upgrade has already had an impact on its access to lower-cost funding. In July, the company issued $500 million of 10-year notes at 4% and $700 million of 30-year notes at 4.95%. It used that money to refinance existing debt, including redeeming all $87 million of its 6.5% notes due in 2028.
No. 3: The dividend is on rock-solid ground
Hulse also pointed out that thanks to the company's strong financial results in the quarter, it boasted a "healthy dividend coverage of approximately 1.5 times for both the second quarter and through the first half of 2017." In an industry where many of its rivals push the envelope by maintaining coverage ratios closer to 1.0 times, it suggests that ONEOK's payout is on rock-solid ground. Further, that robust coverage ratio enabled the company to boost its dividend by 21% after closing the merger deal, which is exactly what it said it would do.
No. 4: Growth projects are starting to develop
Another thing the company said it would do as a result of closing the merger is increase the payout by a 9% to 11% annual rate from 2018 through 2021 while maintaining a 1.2 times coverage ratio. While it currently has some room in the coverage ratio to continue increasing the dividend, it still must secure high-return growth projects to give it the cash flow needed support that forecast. However, that's not something Spencer is worried about:
We have many opportunities for organic growth across our businesses through our diversified and integrated midstream asset footprint in some of the nation's most active shale plays. We can provide our current and new customers with full service of midstream capabilities. As I've said before, growth opportunities continue to develop in the areas we operate.
In fact, several came to fruition over the past few months. In June, the company announced plans to expand its Mid-Continent natural gas liquids gathering system and Sterling III pipeline, backed by long-term agreements with EnLink Midstream Partners (NYSE:ENLK) and EnLink Midstream (NYSE:ENLC). Overall, ONEOK expects to invest $130 million in these projects, which should enter service by the end of next year and support EnLink's growth in Western Oklahoma. In addition to that, the company plans to expand its Canadian Valley gas processing plant in the region after securing additional customer contracts. The $155 million to $165 million project should enter service and start generating cash flow by 2019. These recently secured growth projects enhance the likelihood that ONEOK can achieve its dividend growth forecast.
Full speed ahead
ONEOK's solid second-quarter results, along with management's comments, confirm that the company is right on track with its growth strategy. That increases the likelihood that the company can deliver healthy dividend growth along with an improving financial position over the next several years. That's great news because it means the company's eye-catching 5.7% yield is not only sustainable, but should only get better in the years ahead, making it an excellent option for income-seeking investors.