We reiterate our Neutral recommendation on ONEOK Inc. (OKE). The company’s first quarter results lagged the Zacks Consensus Estimate as well as the year-ago quarter earnings. This was primarily due to a continuous decline in natural gas prices and lower margins at the Energy Services segment related to lower natural gas storage price differentials.

Businesses dealing with natural gas processing and allied services are weather sensitive and seasonal in nature. ONEOK might face this kind of a challenge in the future. Weather conditions directly influence the volume of natural gas delivered to customers. This may also impact the company’s financial performance in the future.

We have observed that ONEOK’s growth in the last couple of years stems primarily from its ability to acquire assets and integrate them successfully. We believe that ONEOK’s strong cash balance of $781.2 million in the first quarter of 2012 encourages it to pursue asset optimization and expansion, either organically or inorganically. ONEOK also evaluates its existing facilities and frequently divests non-core assets at favorable prices.

We believe the construction of the new 1,300-mile Bakken Crude Express Pipeline is expected to strengthen its pipeline portfolio. The installation of this new pipeline provides ONEOK with a reliable and cost-effective means of transportation compared to other alternatives. It is expected to act as the company’s future growth platform with strong economic feasibility to provide superior services from producers to refiners.

On the flip side, ONEOK’s operations are subject to several federal and state legislative requirements, as well as extensive environmental regulations. The utility regulatory authorities control many aspects of the company’s utility operations, including rates charged to customers. The company’s future profitability depends largely on its ability to recover escalated costs by obtaining the required regulatory approvals.

During the earnings announcement, ONEOK reaffirmed its net income guidance for 2012 in the range of $360 million to $410 million. The Zacks Consensus Estimates for second quarter and full year 2012 earnings are pegged at 35 cents and $1.78 per share, respectively.

ONEOK Inc. currently retains a Zacks #3 Rank (short-term Hold rating).

Based in Tulsa, Oklahoma, ONEOK Inc. is a diversified energy company, operating as a natural gas distributor primarily in the United States. The company competes with OGE Energy Corporation (OGE).

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