ONEOK Partners, L.P. o - Washburn University · Financial dashboard o EBIT and NOPAT are increasing...
Transcript of ONEOK Partners, L.P. o - Washburn University · Financial dashboard o EBIT and NOPAT are increasing...
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ONEOK Partners, L.P.
Applied Portfolio Management
ONEOK Partners, L.P. (NYSE:OKS)● Publicly traded partnership formed in 1993
o Headquarters: Tulsa, Oklahoma● A leading transporter of natural gas and natural gas
liquids (NGLs) in the Mid-Continent area to market centers in the U.S.
● Owns a 50% equity interest in a major transporter of natural gas imported from Canada to the U.S.
● Owns a 50% equity interest to construct a pipeline to transport natural gas from Texas to Mexico
Investment Thesis● Macro 2015 Outlook
o Sector rotation Quality dividend stocks with low beta
● Financial dashboard o EBIT and NOPAT are increasing at a faster rate than revenueo High dividend growth rate of 9.1%
● OKS is one of the largest independent service provider in mid continento 60% stake in Williston Basin
50% equity interest in transport pipelines, Canada to US, US to MX● Margins
o two third of the margins are fixed fee based gas storage and transportation services OKS Cushion in recent drop in oil and gas prices
● Growth Projects Underway and entering 2015● Given the strong growth potential and large dividend yield, we believe that OKS will be a great
addition to student portfolio.
Segments Breakdown
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Assets Overview
● Largest Independent Operator, serving 60% of the 5 million acres.
● Approx. half of producers’ rigs are drilling on OKS area.
● One of the top 5 reserves with over 2 dozen oil & gas wells.
● Well positioned to supply gas to MX.
Drilling economical with WTI as low as $45.
Drilling economical with WTI as low as $47.
Well Positioned for Shale Gas Plays
OKS - Dividend & Yield Historical Performance
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Earnings & Margins Consideration
Predominantly Fee Based Margins● 2015 guidance revised down from
$2.6 B to $2.3 B● Portion of margins from fees are
expected to increase in 2015● NGP: More than 2,000 contracts
on books● Pipelines: 92% of transportation
capacity contracted, 76% of storage capacity contracted
● Avg contract length is about 7 years
Liquidity & Debt Consideration
Debt Quality
BBB & Baa2 (Stable)
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Profitability, CAPEX & EVA Capital Growth Projects
Purpose of Capital Growth Projects● The first-ever NGL pipeline to transport NGLs out of the Williston Basin● 24% of North Dakota’s natural gas production is flared
○ North Dakota Industrial Commission (NDIC) policy targets: Reduce flaring to 15% by 1Q2016 and 5% – 10% by the 4Q2020
● The Environmental Protection Agency’s CO2 limits for power plants are likely to accelerate the decline of coal for electricity generation
● Increased demand for natural gas-fired electric generation● Approximately 35 existing coal-fired, electric power generation plants
within 20 miles of OKS’ natural gas pipelines● Growth in export demand to Mexico and in LNG
NOTE: Projects are predominantly fee based, and are announced after commitments from producers/processors/end-users are secured NGP/NGL Volume Growth
NGP
NGL
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Gas Production and Imports Outlook Gas Consumption Outlook
Gas Storage Capacity Outlook Electricity Fuel Sources Outlook
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Gas Prices Outlook Henry Hub Gas Price Outlook
Hedging
● Commodity Price Risk● Only commodities and
differentials are hedged
● About 1/3 of revenues come from commodities and differentials
Hedging Activities
This table sets forth OKS’ Natural Gas Gathering and Processing segment’s hedging information for the period indicated:
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Income Statement Forecasts Balance Sheet Forecasts
Balance Sheet Forecasts WACC
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Financial Analysis & Valuation Dividend Discount Valuation Model
Note: If we leave the beta unchanged and forecast no dividend growth, the Intrinsic Value comes to $84.76, with a required return of 3.6%.
Estimated Target Vs Current Price SIF Snapshot
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Right Stock for the Portfolio Because...● Key Metrics
o Reasonable P/E o Low Beta
● DDM: Dividend yield of 7.5%o Strong commitment to increasing dividends
● Expected Growth Well positioned to take advantage of expansion in use of natural gas (especially Mexico)
● A great dividend play during late expansion cycleIncreasing projected dividend yield in future
● Recommended Entry Price: $40
Recommendation: BUY
Questions?
Porter’s Five Forces Analysis
New Competition
Huge investment required Highly regulated sector Difficult industry to start up
Threat level: Low-Medium
Substitute Products Substitutes are available,
but NGL will lead Other energy sources will
take years before it is as affordable
Threat level: Low
Supplier Power
Contracted through producers
Has a monopoly in their market
Threat level: High
Buyer Power
B2B model Has lot of options Monopoly in their
geographic locations
Threat level: Medium
Competitive Rivalry
Texas deal to move Natural gas
Maintains monopoly in Natural Gas industry
Threat level: Medium
SWOT Analysis
Strength
Pipelines are the cheapest method of Transportation
High domestic availability of Gas Tax advantage for MLP Recurring revenue business
Weakness
Low geographic diversification Heavily regulated on what they can
charge on fees
Opportunity
➢ Low price helps increase demand for natural gas
➢ Expanding natural gas demand
Threat
MLP regulations may change, which would result in loss of tax advantages
Volatile commodity prices
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Industry - Midstream Gas Sector Contract Mix by MarginsNGP NGL
Socially Responsible● Does not extract oil and gas using fracking techniques● Provides cheapest and safest way to transport gas to
consumers● Helps environment by reducing the amount of gas
flaring● Helps electric generation companies to reduce CO2
emission and follow EPA rules● Helps economy by creating more than 2200 jobs
Tax advantages of MLPMLP
● MLPs do not pay corporate taxes on profits
● Owners of a partnership are taxed only once
● Gains are considered as ROC● Capital gain taxes are deferred
until the unitholder sells the units
Corporation● C-Corps pay corporate taxes on
the profits● Shareholders in a corporation
face double taxation● Gains are considered as profits● Profits are taxed in the year the
distribution is made in form of dividends
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Short Term Energy Outlook Hedging Estimates● a $0.01 per-gallon change in the composite price of NGLs would
change 12-month forward net margin by approximately $3.0 million;
● a $1.00 per-barrel change in the price of crude oil would change 12-month forward net margin by approximately $1.6 million; and
● a $0.10 per-MMBtu change in the price of residue natural gas would change 12-month forward net margin by approximately $5.2 million.
Map of Pipeline Projects Major Pipelines-Keystone XL Pipeline
-Pipeline would carry about 830,000 barrels of tar sands crude each day.-Energy East Pipeline
-Pipeline would carry about 1.1 Million barrels of tar sands crude each day (More than Keystone XL)-Alberta Clipper Expansion Pipeline
-Already in the process of increasing the capacity of the existing Alberta Clipper pipeline from 450,000 to 570,000 barrels per day
-Currently seeking to increase the pipeline’s capacity to 880,00 barrels per day (More than the capacity of Keystone XL)
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Company Comparison - DDM Company Comparison - DCFKMI MMP OKS
Projected Future Dividend Yields
Base price = $41Current annual dividend = $3.07
Relative Valuation & Industry Comparison
Comparison with Industry Peers