ONEOK Thriving On Higher Distributions & Growth Projects

On Aug 9, we issued an updated research report on ONEOK Inc. (NYSE:OKE) .

Recently, ONEOK Inc. reported second-quarter 2016 operating earnings of 41 cents per share, missing the Zacks Consensus Estimate of 42 cents by 2.4%. Reported earnings, however, surged 11.1% year over year, primarily backed by fee-based earnings growth at both the natural gas pipeline, and the natural gas gathering and processing segments.

On the other hand, total revenue of $2,134.1 million beat the Zacks Consensus Estimate of $2,059 million by a marginal 3.6%. Revenues were also up slightly from $2,128 million in the prior-year quarter.

The company’s primary growth vehicle is ONEOK Partners (NYSE:OKS) . In the second quarter of 2016, the company obtained $197.5 million as distribution from ONEOK Partners. The partnership’s financial strength, diversified operations, excellent market connectivity and systematic investments in organic projects and strategic acquisitions provide ONEOK Inc. a distinct competitive advantage.

Additionally, ONEOK Inc. continues to develop new projects, mainly in the Williston Basin, Permian Basin and other mineral-rich areas through ONEOK Partners, thereby expanding opportunities to grow long-term fee-based earnings. Higher average fee rates on new natural gas volumes in the Williston Basin and continued contract restructuring efforts in the Rocky Mountains boosted second-quarter results and will keep benefiting the company in the long run.

However, ONEOK Inc.’s operations are subject to various federal, state and local environmental regulations. Utility regulatory authorities in Oklahoma, Kansas and Texas regulate many aspects of the company’s utility operations, including customer service and the rates charged to customers.

The company’s profitability depends largely on its ability to recover costs related to providing energy and other commodities to customers by obtaining the required regulatory approvals. Moreover, ONEOK Inc. expects costs of compliance to be significant. Operational hazards and intense competition in the pipeline space pose persistent threats as well.

Zacks Rank& Key Picks

ONEOK Inc. carries a Zacks Rank #3 Hold). A couple of better-ranked stocks in the same space are Just Energy Group Inc. (TO:JE) and Northwest Natural Gas Company (NYSE:NWN) , both carrying a Zacks Rank #2 (Buy).