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Update ONEOK (OKS)
03/05/2012 6:32 pm EST
I understand the anxiety—this master limited partnership is selling 8 million units in a public offering and another 8 million units in a private placement (to its general partner). That will put 11% more units on the market. The fear, of course, is that this dilution will cut the price of the units because it will cut into the cash payout ONEOK can make to its unit holders.
I wouldn’t worry—if fact, while dilution generally isn’t something to embrace with open arms, in this case I think it’s a sign that ONEOK has identified new investment opportunities that make raising cash a smart move here. And with management saying that it will ask the board of directors to approve a 2.5 cents a quarter increase in distributions, I don’t think investors need to worry about a drop in cash distributions because of the offering.
Here’s what I think is going on. ONEOK decided not so long ago that the real investment opportunity in the natural gas space where it operates isn’t in its traditional natural gas pipelines but in transporting the natural gas liquids that are being produced from tight shale plays in the Permian Basin and the Bakken formation. Investing in that part of the natural gas distribution system paid off big in the fourth quarter of 2011—and in fact in all of 2011. In the fourth quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 70% year to year and 28% sequentially from the third quarter. About 95% of that increase, Morningstar calculates, was due to natural gas liquids. For the year operating income from natural gas liquids tripled. In its guidance for 2012 ONEOK raised its forecast of cash flow by $75 million from its previous estimate.
The dividend yield on this master limited partnership has gradually lost ground as the unit price has climbed until the current trailing 12-month yield is down to 4.07%. The proposed increase in cash distributions would raise the dividend yield to 4.6% on today’s price of $58.15.
I’m going to keep this one in my dividend income portfolio for a while yet. I like master limited partnerships with a clear roadmap of future investment opportunities. Raising capital and then investing it is the way that master limited partnerships grow cash flow for distribution to investors.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of ONEOK as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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