A Partnership That Has No Limits

11/14/2012 7:45 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

This energy company is sporting a common stock that is getting a rating and safety boost from its prospering limited partnership, notes Roger Conrad of Utility Forecaster.

Utility Forecaster buy targets are based on how companies stack up on our “0” (riskiest) to “8” (safest) Safety Rating System and prospective returns as measured by yield plus dividend growth. I boost buy targets when ratings and/or returns rise.

Longtime holding ONEOK (OKE) earns a ratings boost to “6” this month. The reason is vastly increased reliance on fee-based income due to the continuing buildout of ONEOK Partners' (OKS) Bakken Shale energy assets.

ONEOK’s general partner interest and holdings of ONEOK Partners’ units now contributes 75% of its overall income. And this share will rise as ONEOK Partners spends $5.7 billion to $6.6 billion on new assets over the next four years, all earning revenue under long-term contracts with little or no direct exposure to commodity prices.

Put another way, two-thirds of every incremental dollar earned at ONEOK Partners flows to ONEOK as a distribution increase that’s mostly tax-deferred. And coupled with steady income at gas distribution operations, that has minimized overall exposure to energy prices.

As for growth, ONEOK Partners now expects at least 10% distributable cash flow growth in 2013 and a 13% hike in distributions. For ONEOK, that means dividend growth of 18% as well as free cash flow to cut debt (the company has no maturities before June 2015), buy back stock, and make additional investments in ONEOK Partners.

ONEOK’s current yield is just 2.8%. But it will rise at least 65% to 70% by the end of 2015. And that’s on top of a 146% increase since 2006, backed by a payout ratio of 60% to 70%.

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