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ONEOK Partners Surpasses Estimates

PAA OKS

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ONEOK Partners, L.P. (OKS - Analyst Report) reported its third-quarter 2012 earnings of 78 cents per unit, surpassing the Zacks Consensus Estimate of 71 cents. However, quarterly earnings per unit missed the year-ago figure of 84 cents.

Despite marginal rise in total third-quarter 2012 net income to $172.5 million from $172.0 million in the year-ago quarter, ONEOK Partners’ year-over-year earnings per unit decreased due to an increase in the number of units to 219.8 million from 203.8 million in the prior-year quarter.

Total Revenue

Net revenues during the quarter decreased to $2,547.5 million from $2,903.6 million in the year-ago quarter. However, the top line surpassed the Zacks Consensus Estimate of $2,482.0 million.

Operating Results

Total operating expenses, in the third quarter of 2012, increased to $170.9 million from $151.5 million in the comparable prior-year period. The rise was mainly due to an increase in operating and maintenance expenses, higher depreciation and amortization charges and growth in general taxes.

Operating income in the quarter was $248.4 million versus $242.4 million in the year-ago period.

In the quarter under review, equity earnings from investments decreased to $28.6 million from $32.0 million in third-quarter 2011.

Segment Analysis

Natural Gas Gathering and Processing: In third-quarter 2012, this segment reported operating income of $57.0 million compared with $51.8 million in the year-ago quarter. The year-over-year improvement was driven by an increase in volume from the Williston Basin; partially offset by lower natural gas volumes gathered in the Powder River Basin and lower realized prices for natural gas and natural gas liquids (“NGL”) products. 

Natural Gas Pipelines: This segment reported operating income of $33.5 million in the reported quarter compared with $34.0 million in the prior-year quarter. The year-over-year decline in operating income was due to higher employee costs and outside services costs related to maintenance projects; partially offset by higher contracted capacity with natural gas producers on ONEOK Partners’ intrastate pipelines to transport higher volume natural gas supply to the market place. 

Natural Gas Liquids: This segment reported operating income of $158.8 million in the quarter under review compared with $157.1 million a year ago. The year-over-year improvement was driven by an increase in fees from contract renegotiations for ONEOK Partners’ NGL exchange-services activities, higher NGL volumes gathered and fractionated, and higher isomerization margins; partially offset by a decline in optimization and marketing margins, and negative impact of operational measurement losses. 

Financial Condition

As of September 30, 2012, ONEOK Partners had $963.6 million of cash and cash equivalents versus $35.1 million as of December 31, 2011. Significant rise in cash balance was due to the issuance of common units.

In the first nine months of 2012, the partnership’s cash flow from operations was $620.5 million compared with $655.3 million in the prior-year comparable period.

Capital expenditure during the reported quarter was $375.3 million versus $252.2 million in the year-ago period. Year-over-year rise was due to investments in several growth projects in natural gas gathering and processing as well as natural gas liquids segments.

Guidance

ONEOK Partners affirmed its full-year 2012 net income guidance in the range of $860.0 million - $910.0 million.

In addition, the partnership increased its full-year 2013 net income guidance by 10% compared with its present full-year 2012 earnings guidance.

Apart from announcing full-year 2013 net income guidance, ONEOK Partners also provided its full-year 2013 operating income, earnings before interest, taxes, depreciation and amortization (“EBITDA”), and cash distribution guidance in its September 24, 2012 press release.

ONEOK Partners expects its midpoint of full-year 2013 operating income to increase to $1.027 billion from $0.948 billion as per 2012 guidance.

The partnership’s full-year 2013 EBITDA is expected to be in the range of $1.36 billion - $1.48 billion.

ONEOK Partners announced that it will increase its annual distribution to 10% - 15% between 2012 and 2015. In 2013, the partnership’s cash distribution is expected to increase by 2-cents-per-unit-per-quarter.

Peer Comparison

The partnership competes with Plains All American Pipeline, L.P. (PAA - Analyst Report), which is expected to report its third-quarter 2012 earnings results on November 5, 2012. The Zacks Consensus Estimate for the third quarter of 2012 is 47 cents per unit.

Our View

ONEOK Partners beat our third-quarter 2012 earnings and revenue projections primarily owing to higher NGL volumes gathered and fractionated, better performance from the Williston Basin, and increase in contracted capacity with natural gas producers on the partnership’s intrastate pipelines to transport higher volume natural gas.

ONEOK Partners strongly follows internal growth strategy. As per its full-year 2013 capital investment guidance, the partnership plans to invest $5.7 - $6.6 billion primarily in several internal growth projects. ONEOK Partners expects its future growth to primarily come from the Bakken Shale and the Mid-Continent region. The partnership expects these facilities to provide a reliable and cost-effective means of transportation compared to other alternatives, which subsequently reduce ONEOK Partners’ future cost of operations.

However, we are cautious about uncertain weather condition, chances of volatile equity and credit markets and unpredictable commodity prices, which may significantly impact ONEOK Partners’ forthcoming financial results.

ONEOK Partners, L.P. currently has short-term Zacks #3 Rank (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. Currently, the partnership has a market capitalization of $13.28 billion.

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