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ONEOK Inc. Remains Neutral

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We reaffirm our Neutral recommendation on ONEOK Inc. (OKE - Free Report) due to stringent utility regulations, over-reliance on weather patterns, fluctuating commodity prices and volatile credit markets. We believe these negatives may be to some extent mitigate the company’s strong financial position, steady progress at its several growth projects and continuous effort toward strengthening its existing businesses through strategic acquisitions.

In the third quarter of 2012, ONEOK’s earnings per share and revenue fell short of the Zacks Consensus Estimates, primarily owing to lower sales numbers from all of its operating segments, lower realized natural gas and natural gas liquids prices, and decline in storage and marketing margins.  

Utility providers like ONEOK follow several federal, state, and local regulations associated with customer service and the rates charged to customers, and extensive environmental rules. The companies invest substantial amounts to follow those guidelines. ONEOK’s profitability principally depends on its ability to realize costs associated with providing energy and other commodities to customers by obtaining the required regulatory approvals.

In addition, ONEOK's business and demand of products, particularly propane, is weather sensitive. This seasonality along with variations in weather conditions may cause disparity in the company’s financial results.

On the flip side, ONEOK maintains a strong financial position, equipped with structured and flexible growth through either organic or inorganic route. Steady cash flow generation from the company’s operating segments provide it flexibility along with more investment options.

Considering positive and negative factors, we prefer ONEOK Inc. to have a short-term Zacks #3 Rank (Hold rating). One of its peers OGE Energy Corp. (OGE - Free Report) has a short-term Zacks #4 Rank (Sell rating).

Tulsa, Oklahoma-based ONEOK Inc. is a diversified energy company, operating as a natural gas distributor, primarily in the U.S. With a market capitalization of $8.85 billion, the company has 4,795 full-time employees.

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