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We downgrade our recommendation on ONEOK Partners, L.P. ( OKS - Analyst Report ) to Neutral from Outperform owing to the continuous decline in natural gas prices, which adversely impact prices of the product and services offered by the partnership, and slow pace of economic recovery. In addition, prevailing volatility of the equity and credit markets will also impact ONEOK’s ability to obtain necessary financing to acquire new assets and expand its existing operations.
The partnership is exposed to commodity price fluctuations, especially natural gas, crude oil and NGL prices. ONEOK earns a major part of its revenues as payment for gathering, processing, transportation and storage services and from the sale of purified NGL products. A decline in commodity prices may result in lesser payments for ONEOK’s products and services. This will significantly impact the partnership’s financial performance in the future.
ONEOK has geographically diversified gas assets including a collection of gathering, processing and transportation systems. The partnership’s gathering and processing business operates in five distinctly different basins. Apart from its continued focus on adding new supplies, this diversity has helped the partnership to offset a decline in natural gas production in some of its operating basins. The wide array of operations enables the partnership to serve a large number of customers in a better way.
In addition, ONEOK strongly believes in organic growth. For the full-year 2012, the partnership plans to invest $4.7– $5.6 billion in several growth projects. ONEOK expects its organic growth to mainly come from the Bakken Shale and Three Forks in the Mid-Continent region, where it owns and operates a vast majority of its gathering assets. At the same time, the partnership is in the middle of several vital projects including construction of the Garden Creek processing facility and Sterling III NGL pipeline and development of the Bakken Shale assets.
On the flip side, ONEOK does not own all of the land on which its pipelines and facilities are located. The partnership depends on third parties and governmental agencies to construct and operate its pipelines and related facilities. Sometimes, the partnership loses these rights through its incapability to renew the contracts on acceptable terms or ends up incurring higher costs to renew these contracts. Loss of rights and higher renewal expenses adversely affect the partnership’s financial condition, operational results and cash flow.
During its first quarter 2012 earnings release, ONEOK announced its 2012 net income guidance in the range of $810 million – $870 million. The company expects distributable cash flow to be in the band of $925 million – $985 million. The Zacks Consensus Estimate for second quarter and full year 2012 earnings are currently pegged at 71 cents per unit and $2.95 per unit, respectively.
ONEOK Partners, L.P. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
Tulsa, Oklahoma-based ONEOK Partners, L.P. is one of the largest publicly traded master limited partnerships and a leader in gathering, processing, storage and transportation of natural gas in the U.S. The company competes with Plains All American Pipeline, L.P. ( PAA - Analyst Report ) .
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