ONEOK, Inc. (OKE - Free Report) recently reduced its capital expenditure budget for 2020, thanks to volatility in the commodity price market. Currently, the company expects to spend in the range of $1.60-$2.40 billion compared with the prior guidance of $2.25-$2.73 billion.
The new outlook represents a decline in the mid-point by approximately $500 million. Resultantly, investors have lost confidence in this company, as is evident from the 5.5% decline that its shares experienced on Mar 11.
Post the reduction in guidance, the company will put few major projects under temporary suspension. These projects include the expansion of the West Texas LPG pipeline, Demicks Lake natural gas processing facility, the Demicks Lake III project and related infrastructure in the Williston Basin. Also, expansion of the Elk Creek Pipeline will be put on hold until the price market stabilizes.
Reasons for Budget Cut
Price volatility in the commodity market is the primary reason that compelled ONEOK to cut its capital expense budget. This volatility has been caused by the significant disruption that was witnessed in the demand-supply chain across the globe due to the coronavirus outbreak.
Moreover, lower demand is expected to reduce drilling activities. The resultant rig reduction may put further pressure on pricing environment. This concern has also forced ONEOK to reduce its capital expense guidance.
Moreover, recent project completions might have led to the decision. Evidently, the construction of the Demicks Lake II plant in the Williston Basin was completed in January, while the company expects to complete three additional NGL projects by the end of the first quarter.
ONEOK benefits from its long-term fee-based commitments. Significant growth in the Williston Basin and fully-contracted growth in the Permian Basin will continue to boost the company’s production. ONEOK expects its financial flexibility and strong balance sheet position to enable it to overcome these shortcomings. The company’s cash and cash equivalents at the end of 2019 was $20.9 million, up 75.6% from $11.9 million at the end of 2018.
The U.S. Energy Information Administration (“EIA”) forecasts that the Henry Hub natural gas spot price will begin to rise in the second quarter of 2020. EIA also expects decline in U.S. natural gas production and increase in demand for natural gas. Considering this, we may expect the company to benefit from higher prices in the second half of 2020.
The stock has plunged 46.6% in the past 12 months compared with 20% decline of the industry it belongs to.
Zacks Rank & Stocks to Consider
The company currently has a Zacks Rank #3 (Hold). Some better-ranked players in the energy space are MDU Resources Group (MDU - Free Report) , Sempra Energy (SRE - Free Report) and Atmos Energy Corporation (ATO - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MDU Resources, Sempra Energy and Atmos Energy have trailing four-quarter positive earnings surprise of 7.75%, 6.26% and 1.91%, on average, respectively.
Long-term earnings growth rate of MDU Resources, Sempra Energy and Atmos Energy is pegged at 6%, 5.80% and 7.20%, respectively.
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