ONEOK (NYSE:OKE) recently released fourth-quarter results that were just above the midpoint of its guidance range, putting the wraps on a fine year. With that, and the company's bullish outlook for 2018, its high-yielding dividend looks like it's on solid ground. During the fourth-quarter call, ONEOK's management team outlined why they believe the company can raise the payout at a 9% to 11% annual rate through 2021.
Merger is paying off big-time from a strategic standpoint
CEO Terry Spencer led off the call by going through all the company's accomplishments in the past year:
2017 was an important year for ONEOK. We completed the ONEOK and ONEOK Partners merger transaction in June. And the benefits of that transaction are paying off to ONEOK and its shareholders, particularly as we invest more than $4 billion in strategic expansions ... with more favorable access to the financial markets as a result of the merger and our continued focus on generating attractive returns. That was proven by an extremely successful traditional equity offering in early January that pre-funded the projects that we have recently announced.
One of the main strategic aims of the company's merger with its former MLP was to lower its cost of funding and improve its access to the capital markets, so it could more cheaply finance future expansion projects. That plan worked: The company was able to raise more than $1 billion in cash earlier this year by selling stock at a time when pipeline peers like Kinder Morgan (NYSE:KMI) have avoided selling more shares to finance growth because they trade at much lower valuations than ONEOK.
Cash flow is more than enough to pay the high-yield dividend and fund an increase
CFO Walt Hulse, meanwhile, underscored the strength of the combined company's distributable cash flow, noting that ONEOK hauled in "nearly $1.4 billion in 2017." That was enough money so that the company delivered "dividend coverage of more than 1.3x, [which] was well above our guidance of 1.2x or greater for the year." That healthy coverage gave the company the confidence to recently boost the dividend, which the CFO noted was a "25% increase compared with the same period in 2017." Further, he said that "management still expects to recommend dividend increases of 9% to 11% annually and maintain our target for annual dividend coverage of 1.2x or greater."
Expansion is faster than expected
The company has increasing confidence it can deliver on that outlook. "[W]e have announced more than $4 billion of new capital growth projects since June," Hulse pointed out. That's well above the $1.5 billion to $2.5 billion of projects the company had under development when it initially signed the merger agreement, and as a result ONEOK will invest $700 million more this year than its initial guidance. Hulse noted that these investments should "generate adjusted EBITDA multiples of 4x to 6x and are backed by a combination of long-term fee-based contracts, volume commitments, or acreage dedications." Those would be excellent returns, and higher than what Kinder Morgan, for example, expects to earn on its current $12 billion backlog; Kinder's projects have an average EBITDA multiple of 6.5. (A lower multiple signifies better returns.)
All funding is in place for at least the next year
With a much larger project backlog to finance, Hulse walked investors through the company's progress in locking up the funding it needs:
In the fourth quarter, we received net proceeds of $384 million through an ATM [at-the-market] equity program and completed a $1.2 billion public common stock offering in January, resulting in total combined net proceeds of approximately $1.6 billion. With the expected significant cash generated from operations in excess of dividends, and ample borrowing capacity, we don't expect to issue any equity in 2018 or well into 2019. Following the equity offering in January, ONEOK's pro forma debt to EBITDA on a last 12 months' basis improved to just under 4x and put us at our target a year earlier than we expected.
In other words, the company has all the money it needs for at least the next year, which means it can pick its spots to secure the rest of the financing.
ONEOK is set through 2020 and has options to continue expanding
ONEOK's current slate of projects should come on line over the next three years, with the largest ones wrapping up in late 2019 and early 2020. However, that prompts the question of what's next, which CEO Terry Spencer addressed on the call by saying that "as we look beyond 2020 ... many of our projects are being designed with the ability to expand immediately with minimal capital investments." He also said that the company would "continue to develop opportunities in and around our asset footprint to expand even further." In other words, the embedded expansion potential of recently captured projects plus the ability to expand its legacy assets provide the company with dual potential growth engines, so it can keep increasing the dividend well past 2020.
The clouds of uncertainty have cleared quickly
When ONEOK announced that it planned to increase its dividend at a 9% to 11% annual rate through 2021, there were some concerns about its ability to achieve that ambitious target since it didn't have very many projects in its backlog. However, as the company's management team outlined on the call, it has since gone on to secure the bulk of the projects and the capital needed to achieve that forecast. Thus, it looks increasingly likely that ONEOK can increase its already high-yielding dividend at a high rate for the next several years.