ONEOK (OKE 1.18%) and Oneok Partners LP (OKS +0.00%) both reported first-quarter results after the market closed on Tuesday. What's interesting is that while all of ONEOK's earnings come from its ownership interest in Oneok Partners, its results weren't affected by the challenging market conditions that cut into the results of Oneok Partners. Instead, ONEOK benefited from the fact that all of its revenue comes from a fairly fixed distribution by Oneok Partners, as opposed to the variable commodity prices that affected the partnership's results.
A look at the numbers
We'll start with ONEOK, which received $95.2 million in distributions from its general-partner interest in Oneok Partners and another $73.3 million in distributions from its limited-partner interest in the MLP. After expenses, that left the company with $152.1 million in cash flow available to pay dividends. While that was down from $211.4 million in the first quarter of 2014, that period was higher because of an additional $82.8 million in cash flow from ONEOK's former energy-services business. If we adjust for that, ONEOK's cash available for dividends increased by $23.5 million over the prior year thanks to a 16% increase in distributions from Oneok Partners.
However, when we turn to Oneok Partners results, we find a bit of a different story. The MLP saw its distributable cash flow drop from $298.2 million in last year's first quarter to $217.2 million this past quarter. The sharp drop in commodity prices negatively affected Oneok Partners' first-quarter results. However, this drop was muted by an increase in the volume of natural gas that was gathered and processed as a result of projects it completed over the course of the year, as well as the West Texas LPG pipeline system acquisition.
Despite this deep drop in distributable cash flow, Oneok Partners continues to pay a fixed-rate distribution that it has raised twice over the past year. Oneok Partners, as a result, paid out much more to its investors, including ONEOK, than it generated in distributable cash flow. In fact, its coverage ratio was just 0.60 in the quarter, meaning it paid out more than it generated in cash flow, after having a very robust 1.28 coverage ratio in the first quarter of last year.
A look ahead
Despite this weakness, Oneok Partners expects to meet its full-year target to generate distributable cash flow in a range of $1.08 billion to $1.26 billion, because the company expects natural gas gathering and processing volumes to ramp up in the second half of 2015 as new wells come online. Further, the company continues to enhance its more stable fee-based asset mix, which should provide more stability to cash flow in the future. Because Oneok Partners doesn't expect to run into any issues meeting its distributable cash-flow guidance for the full year, ONEOK was able to reiterate its guidance as well.
Investor takeaway
While weak commodity prices affected Oneok Partners' results, that weakness didn't flow down to ONEOK, as its revenue is locked in as long as Oneok Partners doesn't cut its distribution. That doesn't appear to be on the horizon, since the partnership expects a much better second half as volumes ramp up. Further, the company is working to add in additional fee-based assets, which would provide more stability to its own cash flow. That way, neither company will be as affected by commodity price volatility in the future.
