Oneok Partners: High Yield MLP

08/28/2015 8:00 am EST

Focus: STOCKS

Tim Plaehn

Investment Research Analyst, Investors Alley

Our latest featured buy recommendation is a large, financially stable MLP focused on the full spectrum of natural gas midstream services, explains Tim Plaehn, editor of Tax-Smart Income Hunter.

Oneok Partners LP (OKS) operates primarily as a natural gas and natural gas liquids (NGL) midstream services company. It is the ninth largest MLP by market cap.

It has about one-third of its operating margin dependent on energy prices and price differentials; as such, the company's cash flow growth will not be linear.

Currently, distribution growth has been suspended, but the near 10% distribution yield makes OKS attractive as an income source that will resume growth when capital projects come online and energy prices start to recover.

Oneok's natural gas gathering and processing operations are located in a dozen different shale plays in Texas, Oklahoma, the Rockies, and North Dakota.
Oneok's services allow these production companies to generate additional revenues from the gas and NGLs that are by-products of crude oil wells.

The current focus area for growth is the Bakken play in North Dakota, which has little gas processing and new laws that force drillers to eliminate gas flaring at the wells.

The natural gas liquids segment processes the gathered NGLs from the wells into commercially marketable gases such as butane, ethane, propane, and natural gasoline.

Oneok stores and delivers via pipeline the fractionated NGL products. This segment accounts for 68% of the company's operating income. Operating margins are dependent on product prices and price differentials.

Oneok's cash flow results will cycle with changing energy commodity prices. This means that while distributions may stay flat as we work through the bottom of the cycle, OKS can produce near 10% distribution growth rates when prices turn higher.

Overall, Oneok is a large, financial stable MLP with more than 20 years of operating through energy price cycles.

The current MLP sector bear market has driven down the OKS unit price and the yield up to almost 10%.

I view that level of income a nice wage to collect while waiting for the growth project completions and energy price increases that will allow Oneok Partners to resume a high single digit level of annual distribution growth.

A return to distribution growth should result in a market price driven lower yield, producing an attractive total return. We recommend accumulating the shares as part of an MLP income portfolio.

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