Midstream company ONEOK (OKE -0.08%) is sending out mixed signals in the face of a material energy industry downturn. With a massive 11% yield, however, it's worth taking the time to parse through the contradictions here to figure out if ONEOK is worth buying or not. Here are some key facts to help you decide. 

1. Fees are the key to the business

The first thing to remember here is that ONEOK is not like an upstream (energy drilling) oil and natural gas company, where the often-volatile price of energy commodities drives top and bottom line results. It owns a collection of midstream assets. Its collection of pipelines, storage, and processing facilities helps move natural gas from where it is drilled to where it gets used. It largely gets paid for the use of its assets; the price of what's flowing through its system isn't all that important. 

A hand drawing the words risk and reward on a scale

Image source: Getty Images

That's not to suggest that low energy prices won't have an impact, but ONEOK's business is fairly resilient to the ups and downs of the commodities that it helps to move. The biggest impact would show up in less product flowing through its systems and reduced demand for new investment. Both are issues to watch, but neither should completely derail the company's business even in the current environment, which is pretty bad

2. Ample dividend coverage

The next bit of information that dividend investors will want to examine is the safety of ONEOK's dividend. In the first quarter it covered its dividend by roughly 1.35 times. That's roughly in line with its coverage over the last three years, so there's nothing particularly shocking there. Coverage was down slightly (about 6%) year over year in the quarter, but that's not surprising given the energy sector downturn. 

There are other midstream players with more robust coverage, such as industry bellwether Enterprise Products Partners (EPD -0.97%), which was sitting at roughly 1.6 times. But there are also generally well-run midstream peers with lower coverage, such as Magellan Midstream Partners, which is looking at distribution coverage of about 1.1 times. At this point, it doesn't look like there's anything to worry about with regard to ONEOK, but dividend coverage is an issue to monitor just in case. 

3. A troubling trend

That said, there's one thing that investors should be worried about with ONEOK: its balance sheet. A key leverage metric in the midstream space is financial debt to EBITDA. ONEOK's ratio is currently 5.9 times. That's toward the high end of the industry, as noted in the chart below. It's also up from around 4.3 times at the end of 2019. A key piece of this change is the $1.75 billion in debt the company issued in March to ensure it had enough cash to weather the difficulties facing the energy sector today. It sold another $1.5 billion in May, too, so leverage is likely to increase even more.  

MMP Financial Debt to EBITDA (TTM) Chart

MMP Financial Debt to EBITDA (TTM) data by YCharts

The worrying thing here is that ONEOK's leverage has increased materially more than that of its peers. The midstream company has operated with leverage at these levels before, so this isn't an out-of-character move. And you can easily justify the jump, since it is based on ensuring adequate liquidity to survive a difficult period. However, there are repercussions. For example, the company covered its trailing interest expenses 4 times over at the end of 2019, but just 3 times or so at the end of the first quarter. That's toward the lower end of the midstream peer group.

Leverage can limit financial flexibility, and that's not a good thing over the long term. For risk-averse investors, ONEOK's leverage should be a material worry. 

Tough call, but...

ONEOK's management team has historically done a very good job of running the company, and there's no particular reason to believe it will fall flat now. However, the uptick in leverage should be something that causes dividend investors pause. Add to this that there are other midstream players with similarly high yields, more robust dividend coverage, and lower levels of leverage, and there are probably better options available today. ONEOK isn't a bad company, and it's likely to muddle through this period just fine, but right now it's only appropriate for more active investors willing to keep a close eye on the balance sheet. Most others would do well to consider a name like conservative industry bellwether Enterprise Products Partners.