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ONEOK Inc. (OKE - Analyst Report) reported third-quarter profit of 31 cents per share, ahead of 28 cents in the year-ago quarter. The quarterly results nominally lagged the Zacks Consensus Estimate of 32 cents per share.

The year-over-year growth was attributable to higher margins at ONEOK Partners, which stemmed from better natural gas gathering and processing and natural gas liquids business. Besides, the timely completion of growth projects also contributed to the upside.

Total Revenue

Net revenues in the quarter dropped 14.2% to $3.03 billion from $3.53 billion reported in the year-ago quarter. The top line also missed the Zacks Consensus Estimate of $3.24 billion.

Operating Statistics

In the third quarter 2012, cost of sales and fuel was down 17.4% year over year. As a result, gross income rose 4.0% to $553.9 million in the reported quarter from the year-ago level of $532.6 million.

Total operating expenses increased 9.7% year over year, mainly due to higher operations and maintenance expenses.

Operating income decreased 2.6% to $242.9 million from $249.3 million in the year-ago quarter.

Interest expenses decreased 3.4% to $71.3 million from $73.8 million in the year-ago period.

Segmental Results

ONEOK Partners: ONEOK Partners' operating income was $248.4 million compared with $242.4 million in the year-ago quarter. Strength at natural gas gathering and processing and the natural gas liquids business boosted the results of the segment.

Natural Gas Distribution: The Distribution segment reported operating income of $15.7 million in the third quarter compared with $19.8 million in the year-ago quarter. The year-over-year decline was primarily due to higher share-based compensation costs offset partially by higher rates.

Energy Services: The Energy Services segment reported an operating loss of $21.8 million versus a loss of $12.7 million in the prior-year period.  The wider loss in the reported quarter stemmed from a $9.8 million decline in transportation margins due to lower hedge settlements in 2012 and a $2.1 million dip in premium-services margins due to lower demand fees.

Financial Condition

The company strengthened its financial position in the first nine months of 2012. Cash and cash equivalents as of September 30, 2012, were $978.8 million versus $66 million as of December 31, 2011.

Cash flow from operation during the first nine months of 2012 was $762.9 million versus $1,029.7 million reported in the year-ago quarter. Capital expenditure during the quarter was $1,238.9 million versus $862.3 million in the year-ago quarter.

Long-term debt of the company as of September 30, 2012 was $6.52 billion, higher than $4.53 billion as of December 31, 2011.

Guidance

ONEOK Inc. reaffirmed its 2012 net income guidance in a range of $345 million to $375 million.

Peer Comparison

OGE Energy Corp. (OGE - Analyst Report), which competes with ONEOK Inc., will announce its third quarter earnings results on November 7, 2012.  The Zacks Consensus Estimates for the third quarter and full year 2012 are $1.83 and $3.55 per share, respectively.

Our View

ONEOK’s string of lackluster results continued into the third quarter. Despite gathering and processing higher volumes of natural gas than the prior-year comparable period, the shortfall was primarily due to the continuous decline in realized natural gas and natural gas liquids prices.

We maintain our long-term Neutral recommendation on ONEOK shares, supported by the company’s short-term Zacks #3 Rank (Hold).

Based in Tulsa, Oklahoma, ONEOK Inc. is a diversified energy company, operating as a natural gas distributor primarily in the United States. With a market capitalization of $9.67 billion, the company has 4,795 full time employees.

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