ONEOK 3Q Mixed, Lifts View

ONEOK Inc. ( OKE - Analyst Report ) reported earnings of 57 cents per share, up from 51 cents per share in the year-ago quarter. The quarterly results surpassed the Zacks Consensus Estimate by 2 cents.

The year-over-year growth was propelled by a solid performance at the ONEOK Partner segment. The segment benefited from strong natural gas liquids (“NGL”) price differentials and higher volumes.

Total Revenue

Net revenues in the quarter shot up 22.2% to $3.59 billion from $2.94 billion reported in the year-ago quarter, but still lagged the Zacks Consensus Estimate of $4.58 billion.

Operating Statistics

In the third quarter 2011, cost of sales and fuel increased 22.9% year over year. Total operating expenses rose 1.6% year over year, mainly due to a 1.7% escalation in the operation and maintenance cost of the company.

Despite an increase in operating expenses from the year-ago quarter, operating income of the company gained 33.1% year over year largely due to higher NGL optimization and increased NGL fractionation and transportation capacity available for optimization activities.

Interest expenses at the company grew 3.7% year over year to $79.3 million from $76.5 million in the prior-year level.

Segment Results

ONEOK Partners: ONEOK Partners' operating income was $242.4 million compared with $160.5 million in the year-ago quarter. Operating costs were $151.5 million compared with $141.6 million in the third quarter of 2010.

The higher operating cost resulted from an increase in material costs and higher employee-related costs associated with incentive and benefit plans administered by ONEOK besides steeper property taxes.

Distribution: The Distribution segment reported operating income of $19.4 million in the third quarter compared with $19.6 million a year ago.

Energy Services: The Energy Services segment reported an operating loss of $12.7 million versus an income of $6.9 million in the prior-year period. The results during the quarter were primarily affected by lower natural gas transportation margins.

Financial Condition

ONEOK, on a stand-alone basis, ended the third quarter with $650.0 million of commercial paper outstanding, $2.0 million in letters of credit, $20.5 million of cash and cash equivalents, $415.3 million of natural gas in storage, with $548.0 million available under its new credit facility.

As of September 30, 2011, the company had $148.4 million of cash and cash equivalents.

Cash flow from operation during the first nine months of the fiscal year was $1.02 billion versus $0.7 billion reported in the year-ago period.

Long-term debt of the company as of September 30, 2011 was $4.53 billion, higher than $3.68 billion as of December 31, 2010.

Guidance

ONEOK's operating income guidance for 2011, at the midpoint, has been increased to $1,121 million from the prior expectation of $1,012 million. ONEOK Partner is expected to contribute $870 million to operating income, while the Distribution segment and Energy Services are expected to chip in with $209 million and $42 million, respectively.

ONEOK Inc. increased its net income expectation for 2011 to a range of $345 million to $365 million from the earlier band of $325 million to $345 million, expecting higher earnings at the ONEOK Partners segment.

Capital expenditures for 2011 are expected to be approximately $1.5 billion, with approximately $1.2 billion to be spent at ONEOK Partners and $271 million at ONEOK on a stand-alone basis.

Peer Comparison

Dynegy Inc. ( DYN - Snapshot Report ) , which competes with ONEOK Inc., expects to announce third quarter operating earnings on November 7, 2011. In the sequentially preceding quarter Dynegy’s loss of 31 cents was lower than the Zacks Consensus loss estimate of 47 cents.

The Zacks Consensus Estimate for the third quarter 2011 is a loss of 19 cents per share.

Our View

We appreciate the initiatives taken by the company to increase shareholder value during the quarter by virtue of a hiked dividend and the completion of a shareholder program worth $300 million from Barclays Capital, the investment banking arm of Barclays Plc. ( BCS - Snapshot Report ) .

The company presently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Based in Tulsa, Oklahoma, ONEOK Inc. is a diversified energy company, operating as a natural gas distributor primarily in the United States.