Things Are OK for OneOK

08/05/2009 2:48 pm EST


Jim Jubak

Founder and Editor,

Certainly not a great quarter, but it will do.

After the close on August 4th, ONEOK Partners (NYSE: OKS) announced second-quarter earnings of 81 cents a unit. (This is a master limited partnership rather than common stock.) That was down from $1.46 in the second quarter of 2008.

But with most of its capital spending budget about to go from a drag on cash flow to a contributor to revenue, I'm going to hold onto these units and up my target price a tad.

With a master limited partnership, which gets special tax treatment because it passes most of its cash flow on to investors, the issue is always cash flow and whether it's enough to cover distributions or not.

ONEOK came up short in the first half of 2009, with cash flow from operations of $189 million and cash distributions of $242 million. The company was able to make up the difference from cash balances and by selling debt. I wouldn't like to see that go on for very long.

The second-quarter numbers suggest it won't, for two reasons. First, although distributable cash flow continued its decline—dropping 26% from the second quarter of 2008—the rate of decline is slowing. And it's slowing with the company still on the right side of the cash flow ledger. Distributable cash flow for the quarter was 1.1x distributions.

Second, ONEOK will see revenue rise over the next few quarters as new pipelines come into use. The Arbuckle pipeline went into use this quarter, increasing capacity out of the Barnett shale formation in Texas. The Piceance lateral pipeline is expected to come online in the third quarter. The company projects distributable cash flow for 2009 in the range of $505 million to $545 million. In reaching its projections, the company used oil at $64 a barrel and natural gas at $4.

As of August 5th, I'm raising my target price to $54 a unit by March 2010. (Full disclosure: I own shares of ONEOK in my personal portfolio.)

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