Certainly not a great quarter but it will do.
After the close on August 4, ONEOK Partners (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.Â
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 with 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 1.1 times distributions.
Second, ONEOK will see revenue risk 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 on line 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 5, I’m raising my target price to $54 a unit by March 2010. (Full disclosure: I own shares of ONEOK in my personal portfolio.)
I just read an article in IBD (Aug 11) about gas and oil MLPs. It all sounded very possitive until they mentioned tax time. It said we (the share holders) may have to file a tax return for every state the MLP does business in. Are we going to be in for a huge tax filing shock come April 15th???
“Moreover, limited partners might owe taxes on partnership income even if the units are held in a tax-free account, like an IRA.”
http://news.morningstar.com/articlenet/article.aspx?id=203288
What might the tax implications be if one puts the shares in an IRA?
royn: Ah, that would make sense, because upon doing my initial research on the company (to follow up on Jim’s suggestion of the stock), I recall they would have new pipelines coming online.
But a revenue RISK would mean the new pipelines coming online would not belong to them, and they’d be facing competition – which I did not know existed. But a RISE – yes that makes much more sense.
Phew – I like this stock – I think it’s still got a ways to go yet… thank you!
DeficitHawk, I suspect “risk” is a typo for “rise.” I’m pleased with OKS performance so far, including its bounce back from the recent stock offering. If the market does pull back, OKS might do better than many and be good to have for its dividend.
Jim – I’ve read this article a few times (I’m a happy oneok owner) and I still don’t know if I’m just missing my morning coffee here or what. But if I understand your argument, you essentially said “oneok is a little light on cashflow, but I don’t see that being a problem because they’re still making 1.1 times their distributions and (This is the part I don’t understand) they have revenue risk as new pipelines are opening up”. By “revenue risk”, do you mean risk to the upside? If they’re barely covering distributions now and they’re having new pipelines (they don’t own) opening up, well… that’s a reason to be a currently happy, former owner of oneok.
I like the oneok distributions, but I’m still shocked that they are so high relative to current interest rates and typical dividends. I understand that a limited partnership will tend to have higher distributions than a normal stock, but 8.9% still seems mispriced. Maybe it is me that is missing something here.