ONEOK Partners L.P.‘s (OKS) fourth quarter earnings of $1.26 per unit surpassed the year-ago results of 54 cents by quite a margin. Earnings were also higher than the Zacks Consensus Estimate of $1.03 per unit.
The exceptionally strong performance was driven by volume expansion and positive results from the integrated midstream natural gas and natural gas liquids assets besides contributions from fresh projects.
Fiscal 20111 operating earnings of the partnership were $3.35 per unit versus $1.67 per unit in the previous year. The results surpassed the Zacks Consensus Estimate of $3.09.
Total Revenue
Net revenues in the quarter shot up 33.6% to $3.13 billion from $2.34 billion reported in the year-ago quarter, and also surpassed the Zacks Consensus Estimate of $2.77 billion.
Fiscal net revenue was $11.32 billion versus $8.67 billion reported in the previous year. The top line was higher than the Zacks Consensus Estimate of $10.95 billion.
Operating Results
Total operating expense of the partnership, in the quarter and the fiscal year, increased by 15.1% and 10.3% from the comparable prior-year periods. The rise was mainly due to higher operating and maintenance expenses as labor and employee-related costs associated with incentive and benefit plans escalated.
Despite rising expenses, margin expansion was led by solid top-line growth in both the quarter and the fiscal year. Operating income in the quarter almost doubled, rising by 98.9%, while for the fiscal income grew by 60%.
Operating income in the quarter and the fiscal year also benefited from favorable natural gas liquids (NGL) price differentials, increased NGL fractionation and transportation capacity available for optimization activities, higher NGL volumes gathered and fractionated, contract renegotiations and higher isomerization and marketing margins in the Natural Gas Liquids segment.
Equity earnings from investments increased both in the quarter and the fiscal year. The results benefited from ONEOK Partners’ 50% interest in the Overland Pass Pipeline and increased contracted capacity on Northern Border Pipeline, in which the partnership also has a 50% interest.
Segment Analysis
Natural Gas Liquids segment: The Natural Gas Liquids segment reported operating income of $245.1 million in the fourth quarter compared with $80.4 million a year ago. Fiscal 2011 operating income of $628.6 million was lower than $272.3 million reported in 2010.
Natural Gas Gathering and Processing segment: The fourth quarter operating income was $42.3 million compared with $39.5 million in the year-ago quarter. For the fiscal year operating income was $180.6 million versus $153.6 million in 2010.
Natural Gas Pipelines segment: The Natural Gas pipeline segment reported operating income of $29.5 million in the fourth quarter compared with $40.9 million a year ago. Fiscal 2011 operating income of $130.1 million was lower than $163.0 million reported in 2010.
The downside was due to a decline in transportation margins from lower natural gas price location differentials and lower interruptible transportation volumes across several of its pipelines.
Financial Condition
As of December 31, 2011, the partnership had $35.1 million of cash and cash equivalents versus $0.9 million as of December 31, 2010.
Cash flow from operation during the fiscal year was $1.12 billion versus $0.49 billion reported in the previous year.
Long-term debt as of December 31, 2011, was $3.51 billion versus $2.58 billion as of December 31, 2010.
During the year the partnership invested heavily on its projects in the Natural Gas Gathering and Processing and Natural Gas Liquids business. The year-end capital expenditure of the partnership was $1.1 billion versus $0.35 billion at the end of 2010.
Outlook
Based on higher expected earnings in the Natural Gas Liquids segment, ONEOK Partners raised its earnings expectation for 2012 by 9% to a band of $810-$870 million from a prior range of $740-$800 million. The Natural Gas Gathering and Processing segment is expected to be a partial dampener.
The partnership also revised its distributable cash flow target for the year to a range of $925-$985 million versus its previous guidance of $845-$915 million.
ONEOK Partners’ 2012 operating income is forecast at $910 million, up from the prior target of $833 million.
The capital expenditure budget for 2012 is $2.0 billion, comprising $1.9 billion in growth capital and $109 million in maintenance capital.
Peer Comparison
El Paso Corporation (EP), another big operator in the pipeline business, is expected to report its fourth quarter 2011 earnings results on February 28, 2012. The Zacks Consensus estimates for the fourth quarter and fiscal 2011 are 28 cents and $1.02 per share, respectively.
Our View
The strong showing at the Natural Gas Liquid segment helped the partnership to surpass prior-year results as well as our expectation. The partnership continues to make growth investments in different projects, which we believe will bode well in the long run.
Based in Tulsa, Oklahoma, ONEOK Partners is one of the largest publicly traded master limited partnerships and a leader in gathering, processing, storing and transporting natural gas in the United States. ONEOK Partners currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.
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