Last year was an excellent one for ONEOK (NYSE:OKE). The pipeline giant was one of the best-performing energy stocks in the S&P 500, albeit in a down year for the market, thanks to a big uptick in earnings and cash flow through the third quarter. We'll find out later this week if that trend continued during the fourth quarter, which is one of a few things investors should keep an eye on when the pipeline giant reports earnings.
1. See if its results are on target with guidance
Thanks to a strong first half, ONEOK boosted its full-year guidance last July, which sees the company generating between $2.43 billion and $2.51 billion in adjusted EBITDA along with $1.815 billion to $1.895 billion of distributable cash flow (DCF). ONEOK had already tallied $1.822 billion in adjusted EBITDA and $1.357 billion in DCF through the third quarter. That suggests the company needed to haul in $610 million to $690 million in adjusted EBITDA and $460 million to $540 million of DCF during the fourth quarter to achieve its guidance.
Many of ONEOK's peers have already reported strong fourth-quarter results, with most hitting the high end or exceeding their full-year forecasts. There is thus an expectation that ONEOK will also deliver strong results. If that's not the case, investors should take a close look at what went wrong and if that issue could linger in 2019.
2. Check out its outlook for 2019
In addition to reporting earnings, ONEOK will probably unveil its 2019 guidance. The pipeline giant should forecast healthy earnings growth for the coming year because it recently completed a few expansion projects, made a small acquisition last year, and anticipates completing a couple of larger projects by the end of this year.
An even more important aspect of its outlook to keep an eye on is how the company intends on financing its large slate of expansion projects. ONEOK had $6 billion of projects in its backlog at the end of last year that it expects to finish through early 2021. While the company's free cash flow after paying its high-yielding dividend has been rising, and it has a low leverage ratio leaving it with room to borrow more money, it can't entirely fund its expansions internally. Therefore, it either needs to sell stock, monetize some non-core assets, or bring on a funding partner for some of its projects. While the company doesn't believe it will need to tap any of these sources until the end of 2019, a clear action plan would soothe investors' concerns about how it intends on bridging its funding gap.
3. See whether it locked up any more expansion projects
As mentioned, ONEOK has already secured roughly $6 billion of growth projects since the middle of 2017, which should enable the company to grow earnings and cash flow at a healthy pace through 2021. Those expansions help support its plan to increase the dividend by 9% to 11% annually over that time frame.
However, the company has continued to work on ways to further expand its footprint, including looking to fill some gaps in its portfolio. COO Kevin Burdick noted on ONEOK's second-quarter call that it's interested in making investments in "downstream assets, particularly as it relates to terminalling, storage, transportation of liquid products," adding: "[T]hey don't have to be NGLs[;] it could be crude oil, it could be refined products, it could be petrochemical products. That infrastructure, as well as long-haul crude oil transportation further upstream, could certainly make a lot of sense, and we've been very vocal about that over the past couple of years."
The company noted that it could look to acquire these types of assets or repurpose underutilized pipelines to move other products. Given that stated desire to diversify, investors should see if the company has made any progress in securing investments in these areas.
Check out the latest ONEOK earnings call transcript.
Hoping for a high-end finish to 2018
ONEOK should post strong results to end 2018, with the hope that they'll trend toward the high end of its guidance range, given what its peers have already reported. As long as that's the case, all eyes will be on 2019 and beyond, with the focus on how it will fund its current slate of expansions as well as what else it has coming down the pipeline. If the company has good things to say about both areas, it could give this pipeline stock a jolt.