Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

ONEOK's Earnings Growth Engine Sputters

By Matthew DiLallo - Oct 30, 2019 at 8:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The pipeline giant remains on track to accelerate in 2020.

ONEOK ( OKE 2.67% ) hit a speed bump during the third quarter, causing earnings to slip while cash flow barely budged. That's quite a reversal from the energy company's fast-paced growth earlier this year. The primary issue was some weakness in its natural gas liquids (NGLs) segment resulting from lower prices and higher expenses.

However, the company remains on track to deliver on its full-year guidance. It also expects to reaccelerate next year, thanks to the upcoming completion of several expansion projects.

Drilling down into ONEOK's third-quarter results

Metric

Q3 2019

Q3 2018

Year-Over-Year Change

Adjusted EBITDA

$649.8 million

$650.2 million

(0.1%)

Distributable cash flow

$480.9 million

$472.1 million

1.9%

Distribution coverage ratio

1.31 times

1.39 times

(5.8%)

Data source: ONEOK.

Driving ONEOK's mixed quarter was the lackluster results of its NGLs segment:

ONEOK's earnings by segment in the third quarter for 2019 and 2018.

Data source: ONEOK. Chart by author.

Overall, earnings in the company's key NGLs segment declined by about 8% year over year even though volumes increased 3%. The main issues weighing on its results during the quarter were the wide differences in regional NGL prices and higher operating costs resulting from the timing of routine maintenance expenses.

The company partially offset those problems with growth in its natural gas-focused businesses. The gathering and processing segment delivered roughly 10% growth thanks in part to a 7% increase in volumes, driven mainly by production growth in the Williston Basin and STACK/SCOOP regions. ONEOK's natural gas pipeline business, meanwhile, delivered a 15% year-over-year increase in earnings, primarily a result of recently completed expansion projects.

Pipelines laid out for construction at sunset.

Image source: Getty Images.

A look at what's ahead for ONEOK

With three quarters in the books, ONEOK now has a better idea of how the rest of the year will play out. That led it to update its full-year guidance ranges:

Metric

Original Guidance

Midpoint Growth Versus 2018

Updated Guidance

Midpoint Growth Versus 2018

Adjusted EBITDA

$2.5 billion to $2.7 billion

6.2%

$2.56 billion to $2.64 billion

6.2%

Distributable cash flow (DCF)

$1.82 billion to $2.06 billion

6.5%

$1.96 billion to $2.08 billion

10.8%

Data source: ONEOK.

As that table shows, while ONEOK narrowed its adjusted EBITDA range, it still anticipates 6.2% growth at the midpoint. DCF, meanwhile, is now on track to grow at a faster pace this year.

The company also continued to make excellent progress on its expansion program during the third quarter. As a result, CEO Terry Spencer noted that "our capital-growth projects remain on or ahead of schedule." He further stated that "we recently completed the Demicks Lake I plant in the Williston Basin, expect line fill activities to begin on the northern section of the Elk Creek NGL pipeline in November 2019, and expect a portion of our MB-4 fractionator in Mont Belvieu to be completed in the fourth quarter 2019." That timeline is worth noting, because "these projects will provide immediate earnings and volume uplift in 2020 and stable fee-based growth for years to come," according to Spencer. It leads the company to believe it can deliver "greater than 20% earnings growth in 2020," he said.

That outlook, when combined with the company's solid financial profile, should enable ONEOK to continue increasing its dividend. Overall, it has boosted the payout by 7% in the last year, which has helped push the yield up to 5.1%.

Gearing up for the reacceleration

ONEOK's growth engine sputtered during the third quarter because of higher costs and weaker commodity prices. However, that bump in the road won't derail the company from achieving its full-year forecast. Meanwhile, the excellent progress it made on its growth projects has it poised to stomp on the accelerator in 2020. As a result, ONEOK should have plenty of fuel to continue rewarding dividend investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

ONEOK, Inc. Stock Quote
ONEOK, Inc.
OKE
$61.44 (2.67%) $1.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
656%
 
S&P 500 Returns
144%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.