EUR 850.00 For Business Accounts Only

Morningstar | Oneok Reports Strong Results; Amid Fractionation Constraints We're Raising our FVE to $66. See Updated Analyst Note from 31 Oct 2018

Oneok's third-quarter results were strong, as the firm benefited from a blowout in differentials between Conway, Kansas and Mont Belvieu, Texas. We are raising our fair value estimate to $66 per share from $62 to reflect Oneok's higher 2018 guidance, and after incorporating its $1.5 billion in project announcements. The major reason for the blowout is a shortage of fractionation capacity at Mont Belvieu to handle the growing volumes of natural gas liquidsbeing produced in the Permian, the Rockies, and Scoop/Stack, among other areas. We also believe Oneok's Sterling pipelines that move propane (and other purity products) from Conway, Kansas and Mont Belvieu are maxed out, but pipelines that transport y-grade (or mixed NGLs) are not. In short, shippers faced with fractionation constraints at Mont Belvieu are increasingly fractionating NGLs at Conway, Kansas, then facing pipeline constraints transporting the purity products to Texas. To some extent, these issues are being made worse with the Mariner East II pipeline being delayed, which has caused additional propane to be railed to Conway from the Marcellus. We expect it may take until early 2020 to fully address these constraints.  The demand-pull for these purity products is increasingly propane exports, and ethane needed for U.S. Gulf Coast steam crackers starting up.

For Oneok, this is a great situation as it has ample opportunities to capitalize. First, it has an opportunity to capture the wider differentials via its marketing operations, particularly as its asset network is strongest in the Midcontinent. Second, it benefits from higher volumes on its pipelines. Third, it has new investment opportunities, including expanding Sterling III pipeline, which will be complete by the end of 2018, and building two new fractionators in Mont Belvieu that are expected to be complete by early 2021.

These investments are part of a $6 billion growth capital expenditure program announced since June 2017, as Oneok has other related investments such as gathering and processing opportunities as well. At a 4-6 times EBITDA multiple, these projects should generate very good returns. We do now assume a $1 billion equity issuance in late 2019 to fund these projects in order to keep Oneok's leverage to reasonable levels.

However, we do expect results to be very strong over the near to medium term. The natural gas liquids segment reported a 36% year over year increase in EBITDA and NGL and fractionation volumes were up 18% and 21%, respectively. Overall EBITDA increased 26% to $650 million, and Oneok raised its 2018 mid point EBITDA guidance 5% to $2.47 billion.

For more on our NGL forecast, please see our July Energy Observer "The Natural Gas Liquids Rubik's Cube Solved."