Headlines never tell the whole story, and that's certainly the case when looking at ONEOK's (OKE +0.93%) fourth-quarter headline numbers. Those numbers, which were reported after the closing bell on Monday, showed strong 17.2% year-over-year growth in cash flow available for dividends, and a rock-solid dividend coverage ratio of 1.29 times. However, beneath the surface, there were a couple of issues at the company's MLP, ONEOK Partners (OKS +0.00%), that need to be closely watched in 2016.
A look at the numbers
ONEOK's only source of income are the distributions that it receives from ONEOK Partners. As mentioned, those distributions are up 17.2% year over year, due, in part, to the fact that ONEOK owns more of its MLP's units than it did a year ago.
Because that income is the lifeblood of the company, it's just as important for investors to take a closer look at ONEOK Partners each quarter to see if there are any signs of trouble on the horizon. Overall, ONEOK Partners' adjusted EBITDA was up 8% year over year, while distributable cash flow jumped 11%, helping the company maintain a 1.03 times distribution coverage ratio, which is a vast improvement from its 0.91 times coverage ratio last quarter. Fueling this increase was strong volume growth, with NGL volumes gathered jumping 44% for the year, while fractionated volumes increased 6%. Meanwhile, natural gas volumes gathered and processed increased double digits.
However, a snapshot of how its segments performed during the fourth-quarter shows a slightly less rosy picture:
|
|
Operating Income |
| |
|---|---|---|---|
|
Segment |
4Q15 Actuals |
4Q14 Actuals |
Growth (YOY) |
|
Natural Gas Liquids |
$217.7 million |
$179.5 million |
21.3% |
|
Natural Gas Pipelines |
$46.1 million |
$52.3 million |
-11.9% |
|
Natural Gas Gathering and Processing |
($21.7 million) |
$71.7 million |
N/M |
Data Source: ONEOK.
As that chart shows, ONEOK Partners Natural Gas Liquids segment was strong, with its operating income benefiting from an increase in fee-based revenue due to increased volumes at recently connected natural gas processing plants in the Williston Basin, Powder River Basin, and Mid-Continent Region. Unfortunately, the narrative quickly changes when looking at the results at the company's Natural Gas Pipelines segment, which saw operating income slump due to lower short-term natural gas storage services.
Worse yet were the results at ONEOK Partners Natural Gas Gathering and Processing segment, which was affected by a non-cash impairment charge, and lower commodity price realizations. While both segments bear watching in 2016, the bottom line for the fourth quarter is that ONEOK Partners was able to overcome softness at two of its segments due to the strength of its Natural Gas Liquids segment.
A look at the outlook
Despite the negative impact from lower commodity prices, both ONEOK and ONEOK Partners expect to make it through 2016 without any major issues. In fact, both companies reiterated their full-year guidance, with ONEOK expecting $675 million in cash flow from dividends, and a 1.3 times dividend coverage ratio, while ONEOK Partners still sees distributable cash flow coming in at $1.39 billion. This should enable the company to maintain a distribution coverage ratio of 1.0 times or better in 2016.
Industry conditions have continued to weaken, which could put additional pressure on ONEOK Partners in 2016. However, one reason ONEOK remains confident that it can maintain its dividend and ONEOK's distributions in 2016 is because ONEOK currently has a strong liquidity position.
At the end of last quarter, ONEOK had $92.5 million in cash on hand, and nearly $300 million available under its credit facility. Further, after dividends, the company expects to generate $250 million free cash flow in 2016. That's a lot of liquidity that could be used to support ONEOK Partners if it needed help, while still enabling ONEOK to maintain its own dividend rate.
Investor takeaway
While the continued weakness of commodity prices didn't directly impact ONEOK's fourth-quarter results, it did ding results at its MLP. However, thanks to strong growth in its Natural Gas Liquids segment, the company was able to more than overcome weakness in its other segments. Those weak spots bear watching in 2016, because even though both companies reaffirmed their guidance, it's still very possible that there's more downside yet to come in the energy sector.
