ONEOK Inc. (OKE) and its limited partnership ONEOK Partners L.P. (OKS) updated the earnings guidance for 2010. ONEOK Inc. raised its net income expectation for 2010, while ONEOK Partners lowered its earnings expectation for the same period.
ONEOK Inc. Guidance
The midpoint of ONEOK’s operating income expectation for 2010 is $942 million, down by $16 million from the previous guidance of $958 million. The decline in earnings expectation was mainly due to lower contribution from the ONEOK Partners segment.
Segment Operating Income
Distribution: The midpoint of the operating income guidance for this segment has been increased to $232 million from $223 million earlier, which takes into account the expected cut in operating expenses.
Energy Services: The operating income guidance, at the midpoint, for this segment has been increased to $126 million from $107 million. The lift is based on higher storage margins due to increased realized seasonal storage differentials and marketing margins.
ONEOK Partners: The operating income guided range, at the midpoint, for this segment has however been lowered to $586 million from the previous guidance of $625 million. The reduction was due to lower NGL volumes gathered and transported and lower-than-expected NGL optimization margins due to reduced capacity available for optimization in the partnership’s natural gas liquids business. The reduced guidance also reflected lower-than-expected volume growth and weak commodity prices in the partnership’s natural gas gathering and processing business.
Other Revisions
Interest Expenses: The midpoint of the guidance for 2010 has been reduced to $295 million from $312 million earlier reflecting lower interest costs, as a result of ONEOK Partners receiving $424 million from Williams Partners L.P. (WPZ) for increasing ownership interest in Overland Pass Pipeline, and lower short-term borrowing costs.
Net Income: The company increased the low end of the guided range for 2010 net income by $20 million. The new guidance range spans from $320 million to $335 million, up from the previous range of $300 million to $335 million. The new guidance takes into consideration the anticipated higher earnings in the Distribution and Energy Services segments, offset partially by lower-than-expected earnings in the ONEOK Partners segment.
ONEOK is planning to make further investment in the latter half of the year and has increased the midpoint of the capital expenditure guidance for 2010 to $697 million from the previous guidance of $603 million.
ONEOK also updated its expectation for cash flow before the changes in working capital for 2010 to $699 million from the previous expectation of $584 million.
ONEOK Partners’ Guidance
ONEOK Partners lowered the midpoint of the operating income expectation for 2010 to $586 million from $625 million earlier. The cut in the guidance resulted from lower income contribution from the Natural Gas Liquids and Natural Gas Gathering and Processing segments, which was partly offset by higher income from the Natural Gas Pipeline segment.
Segment Operating Income
Natural Gas Pipeline: The midpoint of the operating income guidance for this segment has been increased to $165 million from $156 million earlier, which was primarily due to higher demand for the “park and loan” transportation services.
Natural Gas Liquids: The operating income guided range, at the midpoint, for this segment has been lowered to $267 million from $297 million due to lower-than-expected NGL volumes gathered and transported, and lower NGL optimization margins due to reduced capacity available for optimization during the first half of 2010.
Natural Gas Gathering and Processing: The guidance at the midpoint for this segment has been lowered to $155 million, from the previous guidance of $172 million, reflecting lower-than-expected natural gas gathering and processing volume growth and lower commodity prices expected for the balance of the year.
Other Revisions
Interest Expense: The midpoint of the guided band for 2010 has been reduced to $208 million from $222 million, reflecting lower interest costs as a result of ONEOK Partners receiving $424 million from Williams Partners for increasing ownership interest in Overland Pass Pipeline and lower short-term borrowing costs.
Equity Investments: The midpoint of the equity earnings from investments guidance has been increased to $101 million, from the previous guidance of $80 million. The increase in earnings takes into consideration higher anticipated earnings from Northern Border Pipeline and equity earnings from Overland Pass Pipeline.
Net income: ONEOK Partners narrowed its net income expectation for 2010 to a band of $450 million to $470 million from $450 million to $490 million. ONEOK Partners lowered the top end of the guidance range by $20 million due to lower earnings expectation from the Natural Gas Gathering and Processing segment and the Natural Gas Liquids segment offset somewhat by anticipated increase in earnings in the Natural Gas Pipelines segment.
Management raised the midpoint of the capital expenditure guidance to $462 million from $362 million, mainly due to higher investment in the Natural Gas Gathering and Processing segment, while the Natural Gas Pipelines and Natural Gas Liquids segments are expected to see reduced spending in 2010.
Our Take
The guidance revision at ONEOK Inc. was more or less expected given the better-than-expected performance of the company during the first half of 2010.
ONEOK Inc. currently retains a Zacks #3 Rank (short-term Hold rating). ONEOK Inc. has a strong presence in the mid-continent natural gas market and has capacity to grow earnings above its industry peers through organic developments. However, given the volatile credit markets, utility regulations, and ONEOK’s dependence on weather and unpredictable commodity prices, we maintain a Neutral rating on the stock.
ONEOK Partners currently retains a Zacks #3 Rank (short-term Hold rating). We maintain a Neutral rating on the stock.
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