ONEOK (NYSE:OKE) is having a strong year in 2018, which was evident once again in the company's recent third-quarter report, which showed earnings and cash flow both surging more than 25% year over year. The company expects that success to continue, which was one of the clear themes running through its third-quarter conference call. While management discussed several items on that call, three things in particular stood out as things they didn't want investors to miss.
1. We're growing our expansion projects
CEO Terry Spencer led off the call and gave an overview of the company's progress during the quarter. One of the things he pointed out was that the company has "announced additional capital growth projects anchored by long-term customer commitments," over the past quarter. These included:
... the second expansion of our West Texas LPG pipeline to serve the continued growth in the Permian; another NGL fractionator in the Gulf Coast MB-5; another processing plant in the Williston Basin, Demicks Lake II; and an expansion of the Arbuckle II pipeline which has already begun construction.
What's noteworthy about these projects is that they're all expansions of assets that the company recently completed or just started building. ONEOK, for example, just finished expanding the West Texas LPG pipeline during the third quarter, but it was able to secure another expansion project, which will grow that system's capacity even further, as well as its earnings. Meanwhile, earlier this year, the company announced that it planned to spend $1.94 billion to build MB-4 -- which is a fractionator that separates raw natural gas liquids (NGLs) into other products like ethane and propane -- and the Arbuckle II pipeline. However, it's now investing another $750 million to build a fifth NGL fractionator as well as $300 million to extend Arbuckle II into Oklahoma's STACK shale play and increase its capacity.
By expanding these assets, ONEOK is "building off of our extensive asset base," which will allow the company to earn even more attractive returns. Further, they're "providing clear visibility to strong earnings growth in 2019 and accelerating thereafter," according to the CEO.
2. Our free cash flow is rising
CFO Walt Hulse took over the call from there and ran through the numbers on the quarter. One of the highlights was that the company "generated $133 million of distributable cash flow in excess of dividends paid in the third quarter, a 6% increase compared with the second quarter 2018." That means the company produced enough cash to cover its 5.6%-yielding dividend with more than $100 million to spare, which works out to a 1.4 times dividend coverage ratio. That not only put ONEOK's payout on an even firmer foundation, it also provided the company with some of the money it needs to fund its growing backlog of expansion projects.
Overall, Hulse noted that the company is now on pace to "generate more than $500 million of distributable cash flow in excess of dividends" this year, which it plans to "reinvest in the business to fund our capital growth program." That excess cash flow is going to become increasingly important for the company considering that it now has $6 billion of growth projects under way.
3. We're staying out in front of our funding requirements
With a growing backlog of projects, ONEOK has a large funding commitment it needs to address. While its rising stream of free cash flow will help bridge the gap, the company needs outside funding to finish these projects. The good news is that the company already has a head start on securing the required funds since it issued $1.6 billion in equity over the past year. That led CFO Walt Hulse to conclude that the company has "satisfied our expected equity needs for our announced capital growth projects through the remainder of 2018." Further, he noted that "we expect to benefit from increasing cash flows from operations in 2019 and expect any additional equity financing to be considered in the latter part of 2019."
Because of that, the company has plenty of time to secure the funding it needs. It's also worth noting that in addition to selling more stock toward the end of next year, the company could also sell non-core assets or bring on joint-venture funding partners if that would create more value for shareholders.
Full speed ahead
ONEOK is having a great year as the improvements in the oil market, when combined with recently completed expansion projects, have fueled significant volume growth across its systems, propelling earnings and cash flow much higher. The company expects those trends to continue in the future given the increasing number of expansion projects it has under way as well as the fact that it's staying out in front of its financing needs. Because of that, it's looking increasingly likely that ONEOK can boost its 5.6%-yielding dividend at a 9% to 11% annual rate through 2021, which puts it in a class of its own.