Last year was a brutal one for the energy sector as oil prices crashed 40% from their peak and 19% for the year. Because of that, most of the energy stocks in the S&P 500 slumped last year, with the average one declining 20.6%, with only two managing to deliver positive returns. While an oil producer took the crown as the top performer overall, natural gas pipeline giant ONEOK (OKE -0.81%) was the best of the bunch among nonproducing energy stocks.

Overall, ONEOK's stock eked out a 1% gain, though its total return was 6.3% after factoring in the company's high-yielding dividend, which was well ahead of the S&P 500's negative total return of 4.4%. That's down from the more than 35% total return the company produced through the third quarter due to its strong financial performance. While shares gave up those gains due to the market's fourth-quarter meltdown, they could claw them back and then some in 2019.

Oil pumps, a natural gas well, and solar panels with the sun setting in the background.

Image source: Getty Images.

How ONEOK won in 2018

ONEOK delivered banner results through the third quarter of last year on all fronts. Distributable cash flow, for example, was up more than 33% compared to the same period of 2017, driven by higher volumes of natural gas and natural gas liquids (NGLs) flowing into the company's systems thanks in part to higher oil prices, which fueled more drilling by producers. The company was on pace to exceed its financial guidance for the year.

Meanwhile, improvements in the energy markets enabled ONEOK to secure several new expansion projects, which position it to grow at a fast pace over the next several years. The company also shored up its balance sheet by selling stock early in the year, which not only pushed its leverage ratio down to a very comfortable level but gave it the funds needed to finance expansions through most of 2019. ONEOK also acquired full control of the West Texas LPG pipeline system, and it continued increasing its dividend to shareholders, boosting it 11% overall.

Why ONEOK could deliver an even bigger win in 2019

ONEOK's success in 2018 should carry over into the new year. For starters, the company finished up several projects late last year, including expanding West Texas LPG and the Sterling III pipeline, which should fuel results in early 2019. On top of that, it bought the 20% of West Texas LPG that it didn't already own, which will also provide some incremental income this year. Meanwhile, the company expects to finish three capacity expansions on its natural gas pipelines during the first quarter of this year and complete its major Elk Creek Pipeline as well as a large natural gas processing complex by year end, providing another dose of cash flow as they come online.

The cash flow boost from those expansion projects should give ONEOK the fuel to continue increasing its dividend, which will likely rise by double digits again in 2019. Even with another big-time dividend boost, ONEOK's financial metrics should remain strong in 2019. While leverage will likely increase from its currently low level as the company finances its large slate of expansion projects, its excess cash after paying the dividend should continue rising, providing further support for that payout as well as more money to fund expansions.

Meanwhile, ONEOK is well positioned to continue enhancing its growth prospects in 2019. Not only is it likely that the company will secure additional expansion projects across its strategically located footprint, but it's the best-positioned pipeline company to make acquisitions. That's because ONEOK's stock trades at a higher valuation than most peers since it didn't plunge last year, though shares are cheaper than they were at the start of 2018 due to earnings rising much faster than the stock price. Still, ONEOK's premium valuation means it can use its stock as a currency to buy assets or rival pipeline companies.

Set up for an even stronger year

While ONEOK likely won't expand earnings by 30% again this year, the company is well positioned to continue growing profits thanks to the growth projects it has coming down the pipeline, so to speak. Add that to its strong financial position and cheaper valuation heading into 2019, and ONEOK has the potential to deliver market-beating performance again this year.

Check out the latest ONEOK earnings call transcript.