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ONEOK Lags on Prices, Cuts Guidance

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ONEOK Inc. (OKE - Free Report) reported second-quarter profit of 29 cents per share, ahead of 25 cents per share in the year-ago quarter. The quarterly results lagged the Zacks Consensus Estimate of 34 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.

Total Revenue

Net revenues in the quarter dropped 26.6% to $2.53 billion from $3.45 billion reported in the year-ago quarter. The top line also missed the Zacks Consensus Estimate of $3.47 billion.

Operating Statistics

In the second quarter 2012, cost of sales and fuel was down 32.3% year over year. As a result, gross income rose 5.8% to $548.9 million in the reported quarter from the year-ago level of $518.9 million.

Total operating expenses increased 4.5% year over year, mainly due to higher operations and maintenance expenses of the company.

Operating income increased 8.3% to $234.1 million from $216.2 million in the year-ago quarter.

Interest expenses decreased 5.2% to $71.5 million from $75.5 million in the year-ago period.

Segmental Results

ONEOK Partners: ONEOK Partners' operating income was $228.1 million compared with $202.0 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 $21.7 million in the second quarter compared with $20.2 million in the year-ago quarter. The higher rates and surcharge recoveries in Texas and Kansas benefited results.

Energy Services: The Energy Services segment reported an operating loss of $15.1 million, versus a loss of $5.8 million in the prior-year period.  The wider loss in the reported quarter stemmed from an $8.7 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

Cash and cash equivalents as of June 30, 2012, were $114.9 million versus $66 million as of December 31, 2011.

Cash flow from operation during the quarter was $652.6 million versus $875.6 million reported in the year-ago quarter. Capital expenditure during the quarter was $780.7 million versus $523.8 million in the year-ago quarter.

Long-term debt of the company as of June 30, 2012 was $5.22 billion, higher than $4.53 billion as of December 31, 2011.


Post second quarter earnings results, ONEOK Inc. lowered its net income guidance for 2012 to a range of $345 million to $375 million from the prior range of $360 million to $410 million. The company cut its full year expectation assuming low earnings from its Energy Services and Natural Gas Distribution segments offset marginally by higher expected earnings from ONEOK Partners.

ONEOK’s capital expenditure for 2012 is expected to be $2.3 billion, comprised of approximately $2.0 billion for ONEOK Partners and $304 million on a stand-alone basis.

Peer Comparison

OGE Energy Corp.(OGE - Free Report) , which competes with ONEOK Inc. will announce its second quarter earnings results on August 2, 2012.  The Zacks Consensus Estimates for the second quarter and full year 2012 are 90 cents and $3.53 per share, respectively.

Our View

ONEOK’s performance during the quarter was lower than our projection. 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 prices and natural gas liquids prices.

A warmer-than-normal winter in its service territories in the first half of 2012 also impacted the performance of the company. As temperatures climb this summer, we will eagerly wait to see whether the company can make up lost ground in the second half of the year, even though the revised guidance suggests otherwise.

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.

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