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ONEOK Partners, L.P. (OKS - Analyst Report) posted second-quarter 2012 earnings of 69 cents per unit compared with 67 cents per unit in the year-ago quarter. The year-over-year growth was primarily driven by positive natural gas liquids (“NGL”) price differentials and higher NGL volumes gathered and fractionated related to recent expansion of Mid-Continent NGL gathering system.
 
The quarter’s earnings missed the Zacks Consensus Estimate by a penny.

Total Revenue

Net revenues during the quarter decreased 23.7% to $2.1 billion from $2.8 billion reported in the year-ago quarter. However, the top line fell short of the Zacks Consensus Estimate of $2.8 billion.

Operating Results

Total operating expense, in the quarter, increased 11.0% to $174.4 million from the comparable prior-year period. The rise was mainly due to increase in operating and maintenance expenses, higher depreciation and amortization charges and growth in general taxes.

Operating income in the quarter was $228.1 million, up 13% from the year-ago quarter. It benefited from favorable NGL price differentials, increased NGL fractionation and transportation capacity available for optimization activities, higher NGL volumes gathered and fractionated. These were partially offset by decline in realized natural gas and NGL product prices.

In the quarter under review, equity earnings from investments decreased to $29.2 million from $29.5 million in the second quarter of 2011.

Segment Analysis

Natural Gas Gathering and Processing: In second-quarter 2012, this segment reported operating income of $46.7 million compared with $47.0 million in the year-ago quarter.

The results dropped due to lower realized natural gas and NGL product prices, mainly ethane and propane, lower natural gas volumes gathered in the Powder River Basin, increase in compression costs, and higher third party transportation and processing costs related to volume growth. These were partially offset by higher natural gas volumes gathered, processed and sold in the new Garden Creek plant at Williston Basin.

Natural Gas Pipelines: This segment reported operating income of $32.6 million in the reported quarter compared with $29.8 million in the prior-year quarter.

The year-over-year operating income was driven by growth witnessed in natural gas storage margins for contract renegotiations, higher short-term storage activity due to higher demand of electricity, and higher transportation margins for increase in contracted capacity with natural gas producers. This was partially offset by decline in realized natural gas prices on the retained fuel position and lower contracted capacity on Midwestern Gas Transmission.

Natural Gas Liquids: The Natural Gas Liquids segment reported operating income of $149.1 million in the quarter compared with $125.7 million a year ago.

The results were driven by higher NGL volumes gathered and fractionated in the Mid-Continent and Rocky Mountain regions, growth in NGL volumes gathered at Texas, NGL contract renegotiations with higher fees, favorable NGL price differentials as well as added transportation capacity available due to completion of Arbuckle and Sterling I pipelines. These positives were partially offset by lower volumes fractionated in Texas due to scheduled maintenance at Mont Belvieu in Texas and lower isomerization volume.
 
Financial Condition

As of June 30, 2012, the partnership had $92.2 million of cash and cash equivalents versus $35.1 million as of December 31, 2011.

Cash flow from operation during the reported quarter was $430.0 million compared with $501.0 million in the prior-year quarter.

Capital expenditure (“capex”) during the reported quarter was $355.4 million versus $265.3 million in the year-ago period. The partnership made investments in several growth projects in natural gas gathering and processing, and natural gas liquids segments, resulting in $90.1 million year-over-year rise in capex.

Guidance

ONEOK increased its 2012 net income guidance to $860 million - $910 million from the previous guidance range of $810 million to $870 million. This net income revision was primarily driven by higher anticipated earnings in the partnership's NGL, but might be partially offset by lower expected earnings from natural gas gathering and processing segment.

The partnership’s mid-point 2012 operating income guidance increased to $948 million compared with the previous midpoint guidance of $910 million. Natural gas gathering and processing segment's 2012 mid-point operating income guidance decreased to $220 million from the previous guidance of $247 million. ONEOK’s midpoint of operating income guidance in 2012 remains $135 million. The midpoint of the natural gas liquids segment's 2012 operating income guidance has been increased to $593 million from the previous guidance of $528 million.

The partnership increased its distributable cash flow (“DCF”) to the band of $975 million - $1,025 million compared with the previous guidance range of $925 million - $985 million.

The partnership revised its 2012 mid-point earnings before interest, tax, depreciation and amortization (“EBITDA”) to $1,289 million compared with its earlier guidance of $1,249 million.

In 2012, the partnership’s mid-point capital expenditures of approximately $2.0 billion, includes approximately $1.9 billion in growth capital and $108 million in maintenance capital.
 
The partnership has increased its earlier planned investment level in several internal growth projects to $5.7 billion - $6.6 billion from $4.7 billion - $5.6 billion during the 2011 to 2015 timeframe. The investment will be made to build new pipelines and natural gas processing facilities and further develop its existing bases in its service territories.

ONEOK’s 2012 earnings guidance projected an increase of 2.5 cents per unit per quarter in unitholder distributions. Actual declarations are subject to the partnership’s board approval.

Peer Comparison

The partnership competes with Plains All American Pipeline, L.P. (PAA - Analyst Report), which is expected to report its second-quarter 2012 earnings results on August 6, 2012 after the market close. The Zacks Consensus Estimate for the second quarter 2012 is $1.63 per unit.
 
Our View

Although ONEOK Partners failed to beat our projection, but we appreciate the partnership’s geographically diversified gas assets in five distinctly different basins. This diversity enables the partnership to mitigate a decline in natural gas production in some of its operating basins and to serve a large number of customers. In addition, the partnership continues to make significant investments in varied projects under its organic growth program, which we believe will help it cater to the growing demand from natural gas producers. We also expect the partnership’s organic growth to primarily 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.

However we are skeptical about uncertain weather condition, volatile credit markets and unpredictable commodity prices. These factors may significantly impact the partnership’s financial results in the future.

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, storing and transporting of natural gas in the U.S.
 

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