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ONEOK Inc. (OKE - Analyst Report) reported third-quarter 2013 adjusted earnings per share of 35 cents, surpassing the Zacks Consensus Estimate of 29 cents by 20.7%. On a year-over-year basis, earnings increased 12.9% due to steady rise in natural gas and natural gas liquids (“NGL”) volume as a result of completion of several projects.

Excluding a non-cash after-tax charge of 5 cents at the Energy Services segment, the company reported earnings from continuing operations of 30 cents per share compared with 31 cents per share in the prior-year quarter.

Total Revenue

ONEOK Inc. reported revenues of $3,571.9 million, 3.6% above the Zacks Consensus Estimate of $3,448 million. Quarterly revenues also increased 17.9% year over year.

Segmental Highlights

The company’s ONEOK Partners L.P. (OKS - Analyst Report) segment reported operating income of $240.1 million, down 3.3% year over year. ONEOK Inc.’s another segment Natural Gas Distribution’s operating income jumped 12.1% year over year to $17.6 million. The Energy Services segment incurred a quarterly operating loss of $24.7 million compared with a loss of $21.8 million in the year-ago quarter.

Operating Highlights

In the quarter under review, ONEOK Inc.’s total operating expenses increased 6.6% year over year to $331.1 million due to higher operations and maintenance expenses, and a rise in depreciation expenses and general taxes.

The increase in revenues was more than offset by the rise in total operating expenses. In the reported quarter, operating margin contracted 6.4% from 8.0% in the year-ago quarter.

Financial Condition

ONEOK Inc., on a stand-alone basis, ended the quarter with $515.3 million of commercial paper outstanding, $1.9 million in letters of credit and $682.8 million available under the $1.2 billion credit facility.

Cash and cash equivalents as of Sep 30, 2013 were $779.5 million compared with $583.6 million as of Dec 31, 2012.

As of Sep 30, 2013 long-term debt was $7,757.2 million versus $6,515.4 million as of Dec 31, 2012.

Cash provided by operating activities during the first nine months of 2013 was $1,021.5 million, higher than $762.9 million in the year-ago comparable period.

During the first nine months of 2013, ONEOK Inc. invested $1,597.8 million in capital expenditure. A 29.0% rise in capital expenditure was primarily due to investment in several projects at the company’s ONEOK Partners segment.

Guidance

ONEOK Inc. narrowed its full-year 2013 net income guidance to $245 - $275 million from the earlier projection of $235 - $285 million. This was due to lower-than-expected earnings from the company’s natural gas liquids (“NGL”) business related to narrower NGL location price differentials. In addition, lower-than-anticipated non-cash charges related to the accelerated wind down of the Energy Services segment also propelled the company to revise its net income estimate.

ONEOK Inc. intends to increase its capital spending program for the period 2010 - 2015 to $5.3 - $5.6 billion from the previous estimate of $4.7 - $5.2 billion. This is due to an investment of $305 million for the acquisition of the Sage Creek plant and allied natural gas gathering and NGL infrastructure, and roughly $135 million to upgrade and develop natural gas gathering and processing related infrastructure, build new NGL pipeline infrastructure and attach the Sage Creek natural gas processing plant to the company’s Bakken NGL Pipeline.

Other Company Releases

Chesapeake Utilities Corporation (CPK - Snapshot Report) is slated to release its third-quarter earnings on Nov 7. The Zacks Consensus Estimate is 37 cents.

South Jersey Industries, Inc. (SJI - Snapshot Report) is slated to release its second quarter earnings on Nov 12. The Zacks Consensus Estimate is 24 cents.

Our View

The company intends to streamline its existing operations. The company announced its plan to terminate operations of the Energy Services segment as part of its business realignment strategy. We believe that the prolonged weak market conditions with no hope of improvement in the near term and narrowed seasonal as well as location natural gas price differentials have led to this decision of terminating the segment.

In addition, ONEOK Inc. intends to split its natural gas distribution business into a separate publicly traded company, ONE Gas, Inc. The company’s natural gas distribution business has a proven record of stable performance. This initiative will enable both the entities to redeploy funds as per their priorities besides strengthening their presence in the region.

However, we are cautious about weak NGL pricing, stringent utility regulations and volatile commodity prices, which may to some extent, challenge the company’s future performance.

Tulsa, Okla.-based ONEOK Inc. is a diversified energy company, operating as a natural gas distributor primarily in the United States. The company currently has a Zacks Rank #3 (Hold).

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