ONEOK (OKE 2.25%) is off to a fast start in 2018. The pipeline and processing giant has benefited from the improvement in the oil market because drillers are completing more wells, which are flowing into its system. However, as good as the first quarter was, it's only the beginning for investors, which management made clear on the accompanying conference call with the following points:
1. We're making progress on our expansion projects
With the oil market improving, drillers in the U.S. have returned to growth mode. Because of that, ONEOK has been able to secure $4 billion in growth projects over the past year to expand system capacity to meet those needs and supply the company with a growing stream of cash flow. Given their importance to the company, CEO Terry Spencer made it clear that the focus "the next couple of years will be about executing on these growth projects." He then stated that "we're making good progress so far." He pointed out that the company has already started working with stakeholders to secure the land for its two large pipeline projects, Elk Creek and Arbuckle II, and that the company "expect[s] to begin construction later this year on both projects." That time frame puts them on pace to start generating cash by early 2020.
2. We're comfortably growing our dividend
With cash flow heading higher, ONEOK has been able to grow its dividend at a fast pace over the past year. CFO Walt Hulse stated on the call that the company "announced another 3% increase" during the quarter and has now raised the payout 29% since acquiring its MLP last year. Hulse further noted that even with this massive boost, "we generated more than $115 million of distributable cash flow in excess of our dividends paid in the first quarter," which resulted in "healthy dividend coverage of nearly 1.4 times." Because of that, the company remains well on its way to increase the payout at a 9% to 11% annual pace through 2021, while maintaining a conservative coverage ratio.
3. We're in excellent financial shape
Hulse also noted that the company "successfully completed a $1.2 billion equity offering" earlier in the year, which "pre-fund[ed] a significant portion of our more than $4 billion capital growth program." The offering, when combined with its fast-paced earnings growth, helped reduce the company's leverage ratio from an elevated 5.1 times in last year's second quarter to 3.5 times. But Hulse did note that the company "expect[s] our leverage to increase modestly as we move through the construction cycle on the larger capital growth projects we've announced this year. But we continue to view leverage of 4.0 times or less as an important target for ONEOK over the long term." Further, he believes the company won't need to issue any more equity through well into 2019, if at all.
4. We're looking to develop export capabilities
While ONEOK is one of the largest energy infrastructure companies in the country, one thing others have that it lacks is an export terminal. An analyst on the call pointed this out and asked how aggressively the company was pursuing exports given that rivals Enterprise Products Partners (EPD 1.07%) and Energy Transfer Partners (NYSE: ETP) recently signed joint ventures (JVs) to build new export terminals. In Enterprise's case, it signed a JV to construct an ethylene export facility to move the key petrochemical to market centers. Meanwhile, Energy Transfer secured a JV to build an ethane export facility. Both projects should start up in 2020 and supply these companies with steady cash flow for years via long-term, fee-based contracts.
Spencer took this question, answering: "We've been thinking about exports for many years. And so, we've been very actively engaged in developing opportunities." He noted that while the company was close on a JV before, it "didn't materialize as the economics eroded significantly." However, he stated that "we continue to work the export side" and remain interested in both modifying existing facilities or pursuing a greenfield project. Though he did add this about export capability: "It's not absolutely essential that we have it, because we have international relationships in markets and market access today."
5. We have a few more expansion projects in the pipeline
While the company hasn't lined up any export projects, it does have other expansions in development. Management noted that fast-paced growth in the Permian Basin and STACK shale play of Oklahoma was starting to create some capacity issues. Because of that, the company is in "active discussions with several companies out there to utilize our WesTex system and also the Roadrunner system to potentially move gas bidirectionally," according to Spencer, which would enable the company to move it in both directions to help ease some of the market issues. According to COO Kevin Burdick, those projects would be "very low capital, very quick time frames. We're talking weeks or months, not years," meaning the company could quickly earn some incremental cash flow at very high returns. ONEOK hopes that it will have some additional project announcements as soon as it can get the necessary customer commitments.
Looking better by the day
When ONEOK bought its MLP last year, the company unveiled an ambitious plan to grow its dividend at a 9% to 11% annual pace over five years, fueled by the growth it saw coming down the pipeline. While the company was initially light on the details, it has quickly filled them in by securing new projects and the financing needed to grow at a brisk pace. Because of that, it's becoming increasingly likely that ONEOK will achieve its dividend growth plan, making it an ideal option for income-seeking investors to hold for the next few years.