ONEOK (OKE +0.45%) believes it can deliver significant dividend growth for investors over the next several years thanks to the growing stream of cash flow it generates from its expanding portfolio of pipeline and natural gas processing assets. That said, it needs steady volumes flowing through its systems to earn those fees, which might not have happened to the extent it hoped in the third quarter due to Hurricane Harvey. As a result, cash flow might come in a bit under expectations when the company reports third-quarter results on Tuesday evening. However, even if that's the case, it doesn't appear as though one light quarter will derail plans to increase its dividend by 9% to 11% annually through 2021.
Harvey shouldn't hurt too much
ONEOK's current guidance is that it will produce between $1.275 billion to $1.435 billion of distributable cash flow this year. At the midpoint, that's more than enough money to support the company's recently raised dividend by at least 1.2 times. So, even if cash flow comes in a bit light during the third quarter, it won't have any impact on its ability to support the current 5.6% yielding dividend.
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That's excellent news because the odds are pretty good that ONEOK's cash flow will be less than initially anticipated for the quarter, which could force the company to pull back on its full-year guidance range. Driving that view was its announcement at the end of August that some of its assets had been operating at reduced volumes during the quarter because customers couldn't receive the natural gas liquids (NGLs) it processes and transports due to temporary outages resulting from Hurricane Harvey at several refineries and petrochemical plants. Consequently, the company won't collect as much in volume-based fees as it could have if the storm didn't hit.
Instead of dimming, visibility has improved in the past quarter
While it appears that Hurricane Harvey will cause ONEOK's third-quarter volumes and cash flow to come in a bit below expectations, that shouldn't cause any damage to its long-term dividend growth outlook. Not only is it just a one-time blip but the company recently secured another new growth project, which improves the clarity of its growth outlook. That's because the company now has more than $500 million of expansions lined up, putting it another step closer to the $1.5 billion to $2.5 billion of new projects it needs to fuel its dividend growth plan.
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The latest addition came in late October when the company and Martin Midstream Partners (MMLP 7.06%) announced plans to grow their West Texas LPG joint venture. ONEOK and Martin Midstream will invest about $200 million to expand this NGL system into the Delaware Basin by constructing 120 miles of new pipeline that should enter service and start generating cash flow by the third quarter of next year. ONEOK and Martin Midstream secured long-term volumes for this expansion from two new third-party natural gas processing plants that will separate NGLs from natural gas produced in the region. This project could be the first of many for the partners in the area because it is one of the fastest-growing shale plays in the U.S., which positions the joint venture for "significant future NGL volume growth," according to ONEOK CEO Terry Spencer. ONEOK would enjoy the bulk of this growth since it owns 80% of West Texas LPG.
That expansion builds on those ONEOK has secured over the past few months. In June, it signed long-term contracts with EnLink Midstream Partners (NYSE: ENLK) and EnLink Midstream (ENLC +0.00%), which paved the way for it to invest $130 million in expanding its Mid-Continent NGL gathering system and Sterling III Pipeline in Oklahoma. Those expansions will enable EnLink to grow its natural gas processing volume capacity in the region. Meanwhile, in July, ONEOK announced plans to invest up to $165 million so it could double the processing capacity of one of its facilities in that same region. These projects, which will all generate stable cash flow underpinned by long-term contracts, will provide ONEOK with a portion of the fuel needed to support its dividend growth plan.
Cash flow might be down, but that won't dent growth
It seems Hurricane Harvey caused fewer volumes to flow through ONEOK's systems during the third quarter, which will likely result in less cash flow than hoped. However, one light quarter shouldn't have any impact on the company's long-term dividend growth plan since it has ample cushion to continue paying its current rate and recently secured several growth projects that should increase cash flow over the next year. So, any Harvey-related sell-off this quarter would seem to be an excellent opportunity for long-term investors to scoop up more shares of the dividend gold mine.
