ONEOK: good and bad gas prices (NYSE: OKE)

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Introduction

Despite ONEOK (NYSE:OKE) struggling to keep their dividends heavily elevated during the severe recession of 2020, fortunately 2021 saw surprisingly strong performance bringing about a new era for their dividends, as my previous article discussed. It raised hopes their moderate dividend yield of 5.77% would see better sustainability going forward, especially as the first half of 2022 saw operating conditions in the energy sector reach their best in years. many years. Although digging into the moving parts of their earnings, the pros and cons of rising gasoline prices temper that view, as shown in this follow-up analysis which also examines their recently released results for the second quarter of 2022.

Executive summary and ratings

Since many readers are likely short on time, the table below provides a very brief summary and ratings for the main criteria assessed. This Google document provides a list of all my equivalent grades as well as more information regarding my grading system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.

ONEOK Ratings

Author

*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their situation financial.

Detailed analysis

ONEOK cash flow

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Following the dramatic improvement in their cash performance in 2021, it is positive to see that 2022 has not been a disappointment so far, as the first half saw their operating cash flow landing at 1, $25 billion versus their previous first half result of $1.078 billion. of 2021. This represents an impressive increase of 15.92% YoY, slightly more than double the 7.11% YoY increase expected in the previous analysis, given their forecast for the 2022 Adjusted EBITDA, according to my previously linked article. Despite this impressive start to 2022, their dividend coverage was only 84.24% in the first half of the year and therefore down from their adequate coverage of 109.75% for the year 2021, which according to my previous analysis, would bring about a new era for their dividends with better sustainability.

Fortunately, this disappointment should only be temporary as they traditionally see more of their weighted operating cash flow towards the second half of the year. Looking back to 2021, they saw $1.078 billion of their operating cash flow in the first half, which was just 42.34% of their $2.546 billion annual result. While 2020 saw $736.4 million in the first half, which was relatively even less at just 38.78% of their annual result of $1.899 billion. Meanwhile, their capital expenditure was also another factor as the first half of 2022 saw $559.3 million, which is just over half of even the upper bound of their forecast for the year. full $1.05 billion, according to my previously linked article. When combined, these indicate that the second half of 2022 should see higher operating cash flow than the first half, while also likely to see less capital expenditure and therefore, as a result, their dividend coverage should improve to an adequate level of 100% and above by then. the year is ending.

The first half of 2022 has seen booming operating conditions in the energy sector following the otherwise tragic Russian-Ukrainian war, particularly in the second quarter and therefore raises the question of whether the second half could see their profits accelerate even faster, especially with gas prices above $9 mbtu. While it certainly doesn’t hamper their financial performance, after digging into the moving parts of their earnings, one can see that rising gas prices are a double-edged sword, as seen in the slide below.

ONEOK Q2 2022 adjusted EBITDA

ONEOK Presentation of the results of the second quarter of 2022

It can be seen that they have seen a number of positive and negative moving parts influence their earnings during the second quarter of 2022 compared to the first quarter, as gasoline prices have climbed to levels not seen for many years. many years. Adding together the benefits of higher gas prices, this increases their Adjusted EBITDA by $62.2 million, consistent with items 1, 2 and 3 in the slide above. Meanwhile, there were also associated costs resulting from these booming operating conditions that helped propel industry-wide inflation, which totaled $50.7 million, according to the items 4, 5 and 6 from the slide above. After subtracting the latter group from the former, that brings the net benefit of rising gas prices down to just $11.5 million.

While there were other factors at play that influenced their earnings, these are related to other operating factors outside the scope of rising gas prices, which was central to this talk. In my view, investors should not rely on higher gas prices to provide a significant boost, especially since even gross profit before associated costs was still only relatively low given the size from their existing earnings base which forecast 2022 Adjusted EBITDA guidance of $3.62 billion. mid-term, as per slide twelve of their Q2 2022 results presentation.

Capital structure of ONEOK

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In the previous analysis, it was hoped that 2022 would end their steadily increasing net debt each year, but alas, the first half saw their net debt slightly higher at $13.633 billion from its previous level of $13.497 billion. by the end of 2021. If their operating cash flow recovers in the second half as expected, this slight increase should reverse and see the year end with net debt back at its or even slightly lower, although their temporary movements in working capital may distort this result.

ONEOK leverage ratios

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Despite their slightly higher net debt, their indebtedness further decreased after the first half of 2022 thanks to their better financial performance, as expected when carrying out the previous analysis. This now sees their net debt to EBITDA and net operating cash flow at 3.93 and 4.91 compared to their previous respective results of 4.04 and 5.30 at the end of 2021. While their net debt to EBITDA was already comfortably below the 5.01 threshold for the very high territory by the end of 2021, the same could not have been said for their net debt to to operating cash flow. Fortunately, their latest result is now below this threshold and therefore represents a modest improvement which is helping to strengthen their financial position, with the second half of 2022 likely to see further small improvements as their net debt will hopefully recede.

ONEOK liquidity ratios

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Besides the modest improvement in their leverage, it was also positive to see a comparable improvement in their liquidity, as seen by their current ratio rising to 0.83 after the first half of 2022 from its previous result of 0.75 at the end of 2021. while their cash ratio is still low at just 0.04, their liquidity remains adequate as, as one of the largest intermediary companies, they should retain access to debt markets as required for refinancing, etc., even if the central banks are still tightening their monetary policy.

Conclusion

The 2022 gas price spike has created the best operating conditions for the energy sector in many years, although in this situation they have both good and bad implications for their financial performance, thus resulting in an intangible advantage. Fortunately, their financial performance has nevertheless been strong in 2022, helping to improve their leverage and liquidity, with the second half set to see better dividend coverage. Although future years may see slightly higher dividends, their barely adequate hedging leaves relatively little room for growth and so I again believe that maintaining my holding rating is appropriate.

Notes: Unless otherwise stated, all figures in this article are taken from ONEOK’ SEC Filingsall calculated figures were performed by the author.

About Tina G.

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