Barring a completely unexpected fourth-quarter collapse, 2018 will go down as one of the best in ONEOK's (NYSE:OKE) history. The pipeline company was on pace to haul in $1.86 billion of distributable cash flow at the midpoint of its guidance range, which would put it nearly 34% above 2017's level. That fast-growing cash flow stream enabled ONEOK to increase its high-yielding dividend 12% in the past year, helping fuel a market-beating total return in 2018.
However, as good as last year was, the future looks even brighter. That's because the company has several high-return expansion projects under construction, that should grow its cash flow at a high rate for the next several years. That's just one of the many reasons why ONEOK's best days appear to be ahead of it.
The building boom
What was impressive about ONEOK's growth last year was that the main driver was an uptick in volumes flowing through its legacy systems as drillers completed more wells in areas where ONEOK operates. While the company did finish a few smaller growth projects and acquired full control over one of its pipeline systems, it didn't benefit from any needle-moving expansions.
That will change in the coming years. With the company's legacy systems starting to reach capacity, ONEOK was able to secure enough customer contracts to move forward with several major expansion projects in the past year. Last January, for example, the company sanctioned the $1.4 billion Elk Creek Pipeline project, which is a 900-mile system that will move natural gas liquids (NGLs) from the Bakken Shale of North Dakota to the mid-continent region when it starts service by the end of this year. A few months later, the company gave the green light to the Arbuckle II Pipeline, which will move NGLs from the mid-continent to the Gulf Coast. The $1.36 billion-project should start up in early 2020.
The company would go on to secure several other growth projects, including those that will extend and expand the capacity of Arbuckle II, continue growing the West Texas LPG system it acquired full control over last year, and build two new NGL fractionators in Texas, which will transform raw NGLs into higher-valued products like propane and ethane. Overall, ONEOK has secured more than $6 billion of fee-based expansions since June of 2017 that should come online through the first quarter of 2021. As they do, they'll help significantly grow ONEOK's distributable cash flow from last year's record level.
Cash flow isn't the only number on the rise
ONEOK's growing cash flow stream positions the company to continue increasing its dividend at a high rate in the coming years. The company aims to expand it at a 9% to 11% annual rate through at least 2021. For a stock that already yields more than 5%, that puts ONEOK in a class of its own among dividend payers in the S&P 500.
At the same time ONEOK expects to continue increasing its dividend, the company also anticipates that its already-solid financial metrics will keep improving. The company ended the third quarter with a leverage ratio of 3.8 times, which was a vast improvement from 5.1 times during the second quarter of 2017. While ONEOK does see that number nudging higher in 2019 as it invests in its current slate of expansions, it should improve over the longer term.
Meanwhile, ONEOK's excess cash after paying its dividend has been on the rise even though it has continued increasing the payout. During the second quarter of 2017, for example, it only generated $85 million in excess cash. That number, however, rose to $133 million by the end of last year's third quarter. That's enabling ONEOK to retain more money to finance expansion projects, which will reduce the need to sell stock in the future to fund growth.
Everything points to an even better future
ONEOK is on track to grow its cash flow at a high rate over the next several years thanks to its large slate of expansion projects. That should enable the company to continue increasing its high-yielding dividend even as its financial metrics improve. This combination of growth and strengthening financials should give ONEOK the fuel to continue generating market-beating returns in the coming years.
Check out the latest ONEOK earnings call transcript.