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ONEOK, Inc. (NYSE: OKE) is a diversified energy company. OKE is the general partner and owns 43.4% of ONEOK Partners, L.P. (NYSE: OKS), one of the largest publicly traded master limited partnerships, which is a leader in the gathering, processing, storage and transportation of natural gas in the U.S. and owns one of the nation's premier natural gas liquids (NGL) systems, connecting NGL supply in the Mid-Continent and Rocky Mountain regions with key market centers. ONEOK is among the largest natural gas distributors in the United States, serving more than 2 million customers in Oklahoma, Kansas and Texas.

Oneok continues to increase earnings even though the price of natural gas is near historic lows due to a glut of supply in the U.S. Oneok is well positioned to outperform the market through its growth projects through 2015.

Oneok Inc.'s third-quarter earnings rose 8.1% on strength at its Oneok Partners LP unit. Weakened natural gas prices amid a glut of supply have been a challenge for Oneok, which distributes natural gas through utilities in Oklahoma, Kansas and Texas. The strong earnings were attributed to the performance of Oneok Partners to completed growth projects that provided increased natural gas volumes.

For the third quarter, Oneok reported a profit of $65.2 million, or 31 cents a share, up from $60.3 million, or 28 cents a share, a year earlier. Analysts polled by Thomson Reuters expected earnings of 32 cents a share. The company enacted a two-for-one stock split in June.

The partnership has announced approximately $2.4 billion to $2.9 billion for natural gas liquids projects including:

Approximately $610 million to $810 million for the construction of a 570-plus-mile, 16-inch NGL pipeline - the Sterling III Pipeline - expected to be completed in late 2013, to transport either unfractionated NGLs or NGL purity products from the Mid-Continent region to the Texas Gulf Coast with the initial capacity of 193,000 bpd and the ability to expand to 250,000 bpd; and the reconfiguration of its existing Sterling I and II NGL distribution pipelines to transport either unfractionated NGLs or NGL purity products.

In September 2012, ONEOK indicated that it expects to increase its total dividend by approximately 65 to 70 percent between 2012 and 2015, including dividend increases of 3 cents per share semiannually in 2013, subject to approval by its board of directors. It also affirmed a long-term dividend payout target of 60 to 70 percent of recurring earnings.

Since January 2006, the company has increased the dividend 14 times, representing a 136-percent increase during that period. OKE has a current dividend yield of 2.98% with a 5-year average dividend growth rate of 12.9%.

In 2013, we project revenue growth of 16.1%, on new projects entering service, higher volumes, stabilizing gas prices and customer growth. Also in 2013, we see lower per-revenue nongas operating costs, partly offset by slightly higher per-revenue cost of gas. We expect pretax margins of 8.4% in 2012 and 8.6% in 2013, versus 2011's 6.6%. We see interest expense slightly lower in 2012, but higher in 2013.

We believe OKE's gathering and processing segment, which has controlling ownership of OKS, will boost the company's cash flows and earnings growth. OKS has announced about $3.0 billion of growth projects through 2015. At the same time, we expect steady earnings and solid cash flows from its utility.

Our 12-month target price of $55 is 24X our 2013 EPS estimate or 24% above its current price of $44. This is a premium valuation to natural gas utility peers which average 21X. We view this as appropriate as we see superior EPS and dividend growth and strong cash flows, partly offset by higher risk at the smaller unregulated trading and marketing business.

Source: Look For ONEOK To Produce A 24% Gain In 2013

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