Pipeline stocks have been poor performers over the past year, with most declining in 2017 even though the oil market improved dramatically, and the stock market was red hot. ONEOK (NYSE:OKE) was no exception, with the pipeline company slumping 6.9% in 2017 even though cash flow grew and it made progress on its strategic plan. Because of that, several analysts have upgraded the stock this year on the belief it will outperform from here. Given what it has coming down the pipeline, these upgrades seem well-timed.
Credit Suisse was among the first to voice a bullish opinion on ONEOK this year, initiating coverage more than a week ago with an outperform rating and $62 price target. With the stock around $56.50 a share at that time, it implied 9.7% upside. Add to that a more than 5%-yielding dividend, and investors would score a double-digit total return this year if ONEOK's stock hit that target. Fueling that bullish view is the bank's expectation that ONEOK is one of the best ways to invest in the anticipated recovery in natural gas liquids (NGLs). Those NGLs have become more valuable to drillers as oil prices have recovered and will be in greater demand with new petrochemical plants starting up along the Gulf Coast, including a recently finished $6 billion petrochemical complex operated by Phillips 66 and Chevron.
Wells Fargo followed a few days later by upgrading ONEOK's stock from market perform to outperform and boosting its price target from $58 to $66. The bank made that decision due to the company's "dominant position" in the Bakken Shale and the red-hot STACK shale play in the mid-Continent. The bank estimates that the growth from these two regions will enable ONEOK to increase its dividend at an 8.6% annual rate over the next three years. Though, it's worth noting that this is below ONEOK's guidance that it can increase the dividend by 9% to 11% annually through 2021.
Another upgrade came this week from RBC Capital, which raised its rating from sector perform to outperform, while also boosting the price target from $57 to $68. Driving that upgrade is ONEOK's "attractive asset footprint" in the Bakken, and the fact that it gets more than 90% of its cash flow from stable fees. The bank believes that those two factors should enable the company to deliver 40% EBITDA growth through 2020 without having to sell any more stock to finance future expansions.
Telling us what we already know
In many ways, these analysts seem to finally be coming around to the growth story ONEOK has been describing since it acquired its MLP early last year. At that time, the pipeline company said that the combined entity could generate enough earnings growth to increase the dividend by 15% in 2017 -- which it did -- and at a 9% to 11% annual clip through 2021, fueled by high-return expansion projects across its portfolio. In fact, ONEOK believed that it could secure between $1.5 billion to $2.5 billion in new projects through 2021, which would give it the fuel to deliver that fast-paced dividend growth rate.
However, since that time the company has secured nearly $1.89 billion of projects. The largest is the $1.4 billion Elk Creek pipeline, which will take NGLs away from the Bakken and Powder River Basin regions. The company has already secured long-term contracts for 100,000 barrels per day of the pipeline's planned 240,000 barrel per day capacity, with those agreements alone expected to generate between $233 million to $350 million in annual EBITDA when the line enters service at the end of 2019. Meanwhile, as production volumes from the region increase, ONEOK stands to collect even more cash from this system by securing additional contracts, and could eventually expand its capacity up to 400,000 barrels per day.
ONEOK is still just getting started on locking up future growth projects and already has $1.6 billion to $2.1 billion of additional expansions in development. As it secures these projects and develops new ones, it increases the odds that the company can grow the dividend at, or even above, the high-end of its current guidance range.
The fuel to outperform
ONEOK currently pays a rock-solid 5%-yielding dividend, with increasing visibility that it can grow at a double-digit clip in the coming years. That puts it on pace to deliver total annual returns in the mid-teens, which should provide it with the fuel to outperform the market. That's why this fast-growing high-yield stock has captivated Wall Street, and why you should love it too.
Matthew DiLallo owns shares of Phillips 66 and has the following options: long January 2018 $45 calls on Wells Fargo and short January 2018 $55 calls on Wells Fargo. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool has a disclosure policy.