Seeking Alpha: ONEOK Partners Looks Undervalued, But There Are Reasons Why

A lot of things have gone wrong with ONEOK Partners, LP (NYSE:OKS), but not all of them are management's fault. Constructing a business model with meaningful commodity price risk was a choice (or gamble, depending upon your point of view) that looked better when NGL prices were stronger, but few were calling for the sharp decline in energy prices that occurred over the past year. A bigger concern now is whether ONEOK (NYSE:OKE) will offer any relief to the high incentive distribution rights that are depleting cash flow and distribution coverage, particularly as ONEOK Partners will almost certainly need to issue more units to fund its growth projects.

ONEOK Partners is basically a leveraged bet on natural gas, with a particular focus on the Williston Basin (the Bakken) and NGL prices. A sharp turnaround in gas prices and drilling activity in the Bakken would help ONEOK Partners more than most, but then there is the real risk that this MLP's distribution growth will lag its peers due to low coverage today and the need to fund additional growth projects. It's a more speculative call within MLPs and as is the case with Enbridge Energy Partners (NYSE:EEP), there are reasons why the yield stands out on the high side.

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ONEOK Partners Looks Undervalued, But There Are Reasons Why

Seeking Alpha: Oneok Partners Still Looking At Significant Growth Opportunities

Growth capex is one of the major trends in the energy MLP space, and ONEOK Partners, L.P. (OKS) is no exception. Already a top player in gas gathering and processing and NGL fractionation in the Mid-Continent and Rockies, ONEOK still has over $2.5 billion of growth projects on the docket as well as up to $4 billion in unannounced projects - much of which will go towards gathering and processing the growing output of the Williston and Powder River basins.

ONEOK Partners offers good distribution coverage and double-digit cash flow growth potential, though actual distribution growth is likely to be more in the mid-to-high single digits as the general partner ONEOK Inc (OKE) takes a sizable cut and the partnership issues additional units to fund its growth targets. ONEOK Partners still offers some upside in a somewhat expensive MLP space, but it's no longer notably cheap.

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Oneok Partners Still Looking At Significant Growth Opportunities

Seeking Alpha: Amidst Rate And Commodity Worries, Oneok Partners Looks Interesting

Master limited partnerships (MLPs) aren't like most stocks. You don't generally buy these stock (technically, units) for multi-bagger appreciation potential, but rather for meaningful distributions (dividends) that also typically come with significant tax advantages. While I don't suggest that ONEOK Partners, L.P. (OKS) is one of those aforementioned multi-baggers, I do believe the shares are at least 20% undervalued today. What's more, the company's sizable natural gas and natural gas liquids capacity is tough to match, and multiple ongoing growth projects should lead to greater distributions down the road.

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Amidst Rate And Commodity Worries, Oneok Partners Looks Interesting

Investopedia: Growth And Quailty Don't Come Cheap At Oneok Partners

As one of the lower-yielding master limited partnerships (MLPs) (on a relative basis), investors may just pass over Oneok Partners (NYSE:OKS) in favor of other partnerships with more impressive yields. That could be a mistake. While Oneok Partners carries a higher premium than most of its comparables, it also has one of the best systems, growth profiles and stories in its group. While paying up for a company like this has its risks, growth seldom comes cheap in this space.

A Premier System
Oneok Partners is an MLP that engages in the business of gathering, transporting, fractionating, and processing of natural gas and natural gas liquids. Oneok Partners' system connects robust supply from the Mid-Continent and Rockies (and soon the Bakken as well) to key markets centers. Not only does Oneok Partners' system handle about one-fifth of the gas that the U.S. imports from Canada, but it also supplies major petrochemical companies like Dow (NYSE:DOW) and Exxon Mobil (NYSE:XOM). (For related reading, see Peak Oil: What To Do When The Wells Run Dry.)

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http://stocks.investopedia.com/stock-analysis/2012/Growth-And-Quality-Dont-Come-Cheap-At-Oneok-Partners-OKS-OKE-DOW-XOM0320.aspx

Investopedia: 2011 In Review - Utilities

Utilities have a long-held reputation as being safe havens during difficult economic times. After all, while demand for utilities does show some correlation with economic activity, the bottom doesn't usually fall out when times are tough. While it is not fair to say that utility investing was a risk-free way of earning market-beating returns in 2011, it was not hard to find winners in this broad sector.


Deals Drive Results
One thing that quickly jumps out from the list of top performers in the past year is the heavy impact of mergers in the sector. Utilities continue to consolidate as the regulatory and financing burden of new capacity construction works against smaller players, and the benefits of operating efficiency become more significant.

Central Vermont (NYSE:CV), Constellation Energy (NYSE:CEG) and Progress Energy (NYSE:PGN) all posted solid above-market returns this year on the back of buyout bids (from Gaz Metro, Exelon (NYSE:EXC) and Duke Energy (NYSE:DUK), respectively). (To know more about acquisitions, read Analyzing An Acquisition Announcement.)


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Investopedia: Southern Union Now A Hot Property

The world of pipelines, gas gathering and midstream assets is usually a pretty sleepy place that offers a lot more in terms of income than in headlines and excitement. With at least two bidders now fighting for Southern Union (NYSE:SUG), though, this quiet patch of the income world has gotten a lot more interesting. (To learn more about he oil and gas industry, check out Oil And Gas Industry Primer.)



Williams Companies Brings the Cash
While Southern Union and Energy Transfer Equity (NYSE:ETE) had previously come together on a somewhat convoluted merger agreement, at $33 a share (for Southern Union), Williams Companies (NYSE:WMB) has shaken things up with an all-cash bid of its own that values Southern Union at $39 per share. Now let the squabbling via press release begin!

When Energy Transfer Equity made its original offer, it was a reasonable premium to the recent trading price of Southern Union, but still a rather good bargain for ETE. Making matters worse, it was a convoluted offering - Southern Union shareholders would receive Series B units that would yield at least 8.25%, but there was a somewhat complicated decision tree that could result in shareholders eventually getting cash, ETE common, Energy Transfer Partners (NYSE:ETP) common, or continuing to hold those Series B units. Some of these permutations would give SUG shareholders a tax-free acquisition premium.


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Investopedia: Can Pipelines Still Deliver The Goods?

In many respects, pipelines are great businesses for patient investors who like collect to dividends. They allow investors to leverage the growing demand for energy with far less exposure to commodity prices than is the case for integrated energy companies or exploration and production companies. Instead, they act as toll collectors with very little operating risk on a week to week basis.

The nature of the business also gives certain inherent advantage to these companies. It takes a great deal of capital to build networks of pipelines, terminals, storage facilities and the like, but once they are in place there is seldom much competition for their services. What's more, because the tax-advantaged MLP structure is so common in the space, these companies often pay substantial dividends (technically called distributions in most cases). (For more, see Power In Pipelines.)

The Downside
It is not all perfect in the industry, though. Because companies that opt for the MLP structure cannot retain any significant amount of their earnings, these companies must borrow extensively to meet their capital needs. So while these companies have clearly benefited from the low interest rate environment (which has also made the yields on these stocks quite attractive), the risk of higher rates is particularly significant here. That is all the more relevant when considering the fact that many companies are looking to expand their networks to better access areas like the Bakken and Marcellus Shales.

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