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ONEOK Tops EPS, Sales Miss

OKE OGE

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ONEOK Inc. (OKE - Analyst Report) reported earnings of $1.08 per share in the fourth quarter of 2011, up from 77 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 of natural gas liquids and natural gas.

Fiscal 2011 operating earnings of the company were $3.34 per share versus $3.09 per share in the previous year. The results surpassed the Zacks Consensus Estimate by 2 cents.

Total Revenue

Net revenues in the quarter shot up 24.1% to $4.07 billion from $3.28 billion reported in the year-ago quarter, but lagged the Zacks Consensus Estimate of $5.32 billion.

Fiscal net revenue was $14.80 billion versus $12.68 billion reported in the previous year. The top line failed to meet the Zacks Consensus Estimate of $15.73 billion.

Operating Statistics

Cost of sales and fuel in the quarter and the fiscal year increased a respective 23.2% and 17.0% year over year.

Total operating expenses in the quarter and the fiscal year increased 10.1% and 7.2%, respectively, year over year. The increase in expenses was mainly due to higher operation and maintenance cost.

The growth in revenue in the quarter and in the fiscal year was able to offset the rise in costs. Accordingly, operating income grew 50.7% and 22.9% in the quarter and the fiscal year, respectively.

Segment Results

ONEOK Partners: ONEOK Partners' fourth quarter operating income was $317.5 million compared with $159.7 million in the year-ago quarter. For the fiscal year operating income was $939.5 million versus $586.3 million in 2010.

The upside was primarily attributable to favorable NGL price differentials and increased NGL fractionation and transportation capacity available for optimization activities and higher marketing margins.

Operating costs during the quarter and fiscal year increased due to higher labor and employee-related costs associated with incentive and benefit plans.

Distribution: The Distribution segment reported operating income of $54.5 million in the fourth quarter compared with $62.0 million a year ago. Fiscal 2011 operating income of $197.6 million was lower than $225.1 million reported in 2010.

Energy Services: The Energy Services segment reported an operating loss of $5.5 million versus an operating income of $19.8 million in the prior-year period. Fiscal 2011 operating income of $23.8 million was way short of $225.1 million reported in 2010.

The lackluster performance in both the quarter and the fiscal year was owing to a decline in natural gas transportation margins along with lower storage and marketing margins.

Financial Condition

ONEOK, on a stand-alone basis, ended the year with $842.0 million of commercial paper outstanding, $2.0 million in letters of credit and $347.7 million of natural gas in storage.

As of December 31, 2011, the company had $65.9 million of cash and cash equivalents versus $30.34 million as of December 31, 2010.

Cash flow from operation during the fiscal year was $1.36 billion versus $0.83 billion reported in the previous year.

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

Guidance

ONEOK Inc. increased its net income expectation for 2012 to a range of $360 million to $410 million from the earlier band of $355 million to $400 million, expecting higher earnings at the ONEOK Partners segment, marginally offset by lower earnings expected from the Energy Services segment.

Capital expenditures for 2012 are expected to be approximately $2.3 billion, with approximately $2.0 billion to be spent at ONEOK Partners and $302 million at ONEOK on a stand-alone basis.

The company also guides that subject to its board’s approval it will increase the quarterly dividend rate by 5 cents from July 2012. Initially, the company expected to raise the dividend rate by 4 cents semiannually.

Peer Comparison

OGE Energy Corporation (OGE - Analyst Report), which competes with ONEOK Inc., reported pro forma earnings of 37 cents per share, a couple of cents ahead of the Zacks Consensus Estimate.

In fiscal year 2011, the company reported pro forma earnings of $3.45 per share compared with $3.10 in fiscal 2010.

Our View

The company surpassed our earnings estimates on the strength of its natural gas liquids business. We expect this business to continue to do well in 2012 and aid the company in achieving its new targets.

Based in Tulsa, Oklahoma, ONEOK Inc. is a diversified energy company, operating as a natural gas distributor primarily in the United States. The company presently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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