ONEOK: solid performance; A new era for dividends (NYSE:OKE)

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introduction

After ONEOK (OKE) spent 2020 battling to maintain its extremely high dividends throughout the severe recession, the outlook for another wave of Covid-19 in 2021 has seen these risks persist, as explained my previous post. As more than six months have now passed, this article provides an updated analysis that reviews their financial performance in 2021 as well as their forecast for 2022, both of which see their surprisingly strong performance driving a new era for their dividends, which currently offer a moderate yield of 5.52%.

Executive summary and ratings

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

ONEOK Ratings

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*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 financial situation.

Detailed analysis

ONEOK cash flow

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After seeing their operating cash flow decline not only during the severe downturn in 2020 but also in 2019 compared to 2018, it was very surprising to see it not only improve in 2021 but actually hit a whopping 2,546 billion, which is a very impressive 34.08% higher year over year compared to their previous result of $1.899 billion in 2020. When a mature midstream company sees such dramatic improvement, this often stems from temporary working capital movements, but even if these have been removed, their underlying operating cash flow in 2021 actually still increases slightly to $2.688 billion, representing an increase of 30.49% year over year compared to their equivalent result of $2.06 billion in 2020.

Even though they entered 2021 expecting strong earnings growth over 2020 that was expected to translate into comparatively higher cash flow from operations, these results still far exceeded those expectations. Their initial guidance for 2021 predicted that their adjusted EBITDA would be $3.2 billion at the midpoint and therefore represented an increase of approximately 17.47% year-over-year from their previous result of 2.724 billion in 2020, according to my previously linked article, which is only about half of the increase that their operating cash flow enjoyed.

When their very strong operating cash flow is combined with their significantly lower capital expenditures of $696.9 million, which is only about a third of their previous level of $2.195 billion in 2020, this eventually saw enough free cash flow to provide an adequate dividend. 109.75% coverage in 2021. If sustained, it will remove what was the primary source of risk to their dividends and thus usher in a new era for their dividends and thankfully as we head into 2022 it seems that their very good performance is ready to continue with their tips pointing to further gains, as shown in the table below.

ONEOK orientation for 2022

ONEOK Fourth Quarter 2021 Results Presentation

It can be seen that their 2022 forecast calls for an adjusted EBITDA of $3.62 billion at the midpoint, which is another solid increase of 7.11% year over year compared to their result of $3.38 billion in 2021, according to their fourth quarter 2021 results announcement. Given its positive correlation with their operating cash flow, this means that they too should experience a similar increase to around $2.725 billion in 2022. Meanwhile, their 2022 capital expenditure forecast forecasts a share $750 million mid-term growth and a maintenance share. of $225 million at the midpoint, for a total of $975 million, which is a modest increase from their capital expenditure of $696.9 million in 2021.

When these two parts of their forecast are combined, that leaves their estimated free cash flow for 2022 at around $1.75 billion. Given that their dividend payouts are only $1.667 billion per year, this indicates that they should once again provide adequate dividend coverage of around 105% in 2022, ushering in a new era for their dividends which will see more durable coverage. While the gap between their estimated free cash flow and dividend payments nonetheless remains narrow and therefore leaves no room for dividend growth, it could potentially widen in 2023 and beyond if their capital expenditures of growth continue to push their operating cash flow upwards. Either way, their dividend payouts are already consuming around 60% of their estimated operating cash flow for 2022, which, for example, is higher than the equivalent of around 50% seen by their midstream counterpart. , Kinder Morgan (KMI), according to figures provided in my other article. While a 10% difference might not seem too big, since they are in a capital-intensive industry that requires constant capital expenditures, it still significantly reduces their room for future dividend growth.

Capital structure of ONEOK

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It was also positive to see that not only did 2021 mark a new era for their dividend coverage, but as a result it also seemed to end their steadily increasing net debt each year, ending in 2021 at $13.497 billion. and therefore slightly below its previous level of $13.711 billion at the end of 2020. In 2022, the small gap between their estimated free cash flow and dividend payments will leave very little for deleveraging, relatively speaking. Meanwhile, their cash balance fell to $146.4 million at the end of 2021 after ending 2020 at a much higher $524.5 million, reducing their liquidity discussed later but not not necessarily rare as it was often even lower before the Covid-19 pandemic at just $12 million and $21 million at the end of 2018 and 2019 respectively.

ONEOK leverage ratios

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Thanks to their very good financial performance, their leverage has improved considerably on all fronts, with their net debt/EBITDA ratio falling from 5.10 at the end of 2020 to only 4.04 and thus in the middle of the high territory between 3 ,51 and 5.00. Meanwhile, their net debt to operating cash flow has also dropped to 5.30 and while that remains above the 5.01 threshold for the very high territory, it is no longer as concerning as its previous much higher result of 7.22 at the end of 2020. While this still sees their leverage split between high and very high territories, this at least marks a noticeable improvement and should continue to decline throughout 2022 given their higher earnings forecasts. Combined with their interest coverage improving to 3.71 from its previous result of 2.96 at the end of 2020, this sees their financial situation in the healthiest shape in years, removing what was the secondary source of risk for their dividends.

ONEOK liquidity ratios

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Following the decrease in their cash balance in 2021, their liquidity has softened, with their cash and cash ratios both decreasing to 0.75 and 0.05 respectively, which is significantly lower than their previous results of 1 .39 and 0.39 respectively at the end of 2020. While these only warrant an adequate rating compared to their former high rating, fortunately as one of the larger mid-tier companies they should see easy access to debt markets, thereby providing additional liquidity and the ability to refinance debt maturities as needed, even as central banks tighten monetary policy.

Conclusion

When their healthier financial situation is combined with their newfound ability to fund their dividend payments without resorting to debt, the two biggest problems with their stocks as an income investment are removed, ushering in a new era for their dividends. While there isn’t much room for dividend growth yet due to their existing payments already consuming a significant portion of their operating cash flow, their very strong performance is nonetheless surprising and hints at slightly higher dividend prospects. higher in the years to come. While I am undoubtedly positive, I continue to believe that maintaining my holding rating is appropriate as their stock price is already approaching all-time highs.

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

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