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Master limited partnership ONEOK Partners L.P. (OKS - Analyst Report) scored excellent earnings in the first quarter of 2011 with an earnings increase of 103% year over year to $1.16 per unit. Earnings for the quarter also compared favorably with the Zacks Consensus Estimate of $1.02, implying a positive surprise of 13.7%.

Operating Results

Total revenue of $2.4 billion in the quarter was short of the Zacks Consensus Estimate of $2.6 billion. However, revenues improved 9% from last year’s $2.2 billion.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were $254.2 million, up 36% from the year-ago period.

Operating income rose 47.8% to $177.6 million in the quarter, driven by favorable natural gas liquids (NGL) price differentials, increased NGL fractionation and transportation capacity available for optimization activities and contract renegotiations in the Natural Gas Liquids segment, and higher net realized commodity prices and changes in contract terms at the Natural Gas Gathering and Processing segment.

Equity earnings from investments climbed $11.0 million to $32.1 million, driven by increased throughput in the Northern Border Pipeline (50% interest ownership). Additionally, ONEOK Partners' 50% interest in the Overland Pass Pipeline is accounted in equity earnings from investments, effective September 2010.

In the first quarter, operating costs increased $12.4 million to $108.7 million, primarily due to higher employee-related costs associated with incentive and benefit plans administered by ONEOK and higher property taxes. Depreciation and amortization expense, however, dipped $1.2 million from last year to $42.7 million.

ONEOK Partners’ units outstanding at the end of first quarter 2011 increased 2.2 million to 101.9 million compared with 99.7 million in the year-ago period.

Distributable cash flow (DCF) totaled $184.5 million compared with $122.3 million last year.

Segment Analysis

Natural Gas Liquids segment: ONEOK Partners’ operating income increased 129% year over year to $100.7 million in the Natural Gas Liquids segment, driven by higher NGL optimization margins from favorable NGL price differentials and increased NGL fractionation and transportation capacity available for optimization activities between the Mid-Continent and Gulf-Coast markets; higher NGL gathering volumes and contract renegotiations; and higher storage margins as a result of contract renegotiations, offset partially by the deconsolidation of the Overland Pass Pipeline in September 2010.

Natural Gas Gathering and Processing segment: Operating income at the Natural Gas Gathering and Processing segment increased 22% year over year to $39.4 million. The increase was driven by higher commodity prices, changes in contract terms and higher natural gas volumes processed in the Williston Basin, offset by lower natural gas volumes gathered due to continued production declines and reduced drilling activity in the Powder River Basin in Wyoming.

Natural Gas Pipelines segment: Natural Gas Pipelines segment’s operating income dipped 18% to $36.8 million, on account of lower transportation margins due to lower contracted transportation capacity on Midwestern Gas Transmission and lower interruptible transportation volumes due to narrower natural gas price differentials; and the effect of lower natural gas prices on its retained fuel position, offset by higher natural gas storage margins.

Dividend and Capex

ONEOK Partners increased its quarterly cash distribution to $1.15 per unit from $1.14 per unit, payable on May 13, 2011, to unit-holders of record as of April 29, 2011.

Capital expenditures increased to $144.8 million, compared with $35.8 million in the first quarter 2010, due to construction costs related to the partnership’s growth projects.

Outlook

ONEOK Partners reaffirmed its 2011 earnings guidance in the $525 - $575 million range. Distributable cash flow is targeted in the range of $625 - $675 million for 2011.

Capital expenditure budget for 2011 is $1.1 billion, comprising $1.0 billion in growth capital and $105 million in maintenance capital.

ONEOK Partners’ interest expense is expected to increase by $12 million to reflect the financing of the Overland Pass Pipeline at the partnership level instead of the joint-venture level that was assumed in the guidance.  This amount will be offset by a $12 million increase in equity earnings for the Overland Pass Pipeline.

Our View

Based in Tulsa, Oklahoma, ONEOK Partners is one of the largest publicly traded master limited partnership and is a leader in gathering, processing, storage and transportation of natural gas in the United States.

ONEOK Partners currently retains a Zacks #2 Rank (short-term Buy rating)). We maintain our long-term Neutral rating on the stock. The major peers of the partnership are El Paso Corp. and Kinder Morgan Energy Partners L.P. (KMP - Analyst Report).

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