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Why ONEOK Stock Cratered 67% in March

By Matthew DiLallo – Apr 3, 2020 at 12:25PM

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A steep plunge in crude oil prices has investors worried about the pipeline company's customers.

What happened

Shares of ONEOK (OKE -1.42%) plummeted 67.3% in March, according to data provided by S&P Global Market Intelligence. Weighing on the pipeline company was a more-than-50% nosedive in the price of oil. 

So what

Crude oil prices cratered last month because of the COVID-19 outbreak and the collapse of Russia's market support agreement with OPEC. That's causing investors to grow concerned about how the plunge in oil prices will affect the U.S. oil industry. 

A bright red arrow going down.

Image source: Getty Images.

Currently ONEOK doesn't anticipate that the oil market downturn will have much impact on its 2020 outlook. While the company did cut $500 million from its capital project budget last month, reducing the range to between $1.6 billion and $2 billion, it still expects its earnings to be within its previous guidance. Further, the company was able to raise $1.65 billion of new debt in early March to refinance existing borrowings and help fund its expansion projects.  

However, while ONEOK still anticipates that its earnings will surge 25% this year due to its expectations for volumes, that could change as more of its customers feel the stress of lower prices. One of them has already filed for bankruptcy. While that company has the cash to continue operating and paying its vendors, investors are growing concerned that a wave of producers could go under, which might force pipeline companies like ONEOK to cut their rates. If that happens, the company will generate less cash flow, which could ultimately hurt its dividend.  

Now what

There's an enormous amount of uncertainty in the energy sector these days. Investors are worried that the slump in oil prices will destroy the finances of oil and gas producers, driving many into bankruptcy, which could force pipeline companies to renegotiate their rates. Given ONEOK's outsize exposure to some financially weaker companies, investors might want to hold off on buying its stock until there's more clarity on how much the downturn will affect its cash flow.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends ONEOK. The Motley Fool has a disclosure policy.

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