ONEOK (NYSE:OKE) and ONEOK Partners (NYSE:OKS) have both just declared dividends effective for Q4 2015. OKE will be paying out a $0.615 per share dividend, while OKS is paying out a $0.79 per unit distribution. These amounts are unchanged from Q3 2015 levels. That both OKE and OKS would maintain their payout is a clear bullish sign for the midstream sector. Shares of both companies rallied hard on Thursday, likely a combination of higher oil prices and strong results from Kinder Morgan (NYSE:KMI).
Full coverage for Q4 2015 and full year 2016
Besides the dividend news, OKS came out with some fairly bullish guidance for Q4 2015.
"ONEOK Partners' board of directors and management team expects to report distribution coverage of greater than 1.0 times in the fourth quarter 2015," said Terry K. Spencer, president and chief executive officer of ONEOK Partners. "Even in this challenging commodity price environment, our integrated business model continues to deliver strong performance, and therefore, we're maintaining the partnership's current distribution of 79 cents per unit."
In other words, the company is expecting a 1.0x coverage ratio for Q4 2015. This is also a major improvement from the 0.91x coverage for Q3 2015 and the YTD coverage of 0.80x. Looking at the numbers, this guidance also implies that OKS will see ~$510 million in adjusted EBITDA and ~$380 million in DCF for the quarter.
For 2016, OKS is accepting adjusted EBITDA of $1.88 billion, DCF of $1.39 billion, and a 1.0x coverage ratio. This implies 18% and 16% y/y growth, respectively.
As to what is driving OKS' improved performance, the company has added significant volumes of natural gas onto its system. OKS has been building out gathering and processing capacity in the Williston Basin and Mid-Continent area, capturing previously flared gas volumes. Total system volumes were up 10% in 2015 and are expected to grow 16% in 2016.
Furthermore, OKS has benefited from shifting its contracts over from commodity-based pricing to fee-based, up to 85% EBITDA in2016 versus 75% in 2015.
OKS' 2016 and short-term liquidity concerns were also addressed when OKS landed a $1 billion 3-year unsecured term loan agreement at a term of just 130 basis points above LIBOR. After paying down the maturing $650 million in senior notes, OKS would be left with another $350 million from this loan. Coupled with free cash flow from OKE, the $460 million 2016 capex budget is fully funded.
As for OKE, it was hardly at risk of not covering its dividend. Indeed, its financial position was strong enough to even support its MLP with a $650 million cash infusion earlier in 2015.
As the pure-play General Partner of OKS, OKE's cash flows are stable as long as OKS pays its distributions and IDRs. Coverage for Q3 2015 was an impressive 1.34x and 1.24x YTD. Expect more of the same for Q4 2015.
For 2016, OKE is expecting to generate $675 million in cash available for dividends, or $3.22 per share, up 9% from 2015 estimates. This leaves ~$160 million, or $0.76 per share, of free cash flow and a 1.30x coverage ratio. As I noted in a previous article, I expect most of this free cash being deployed into the MLP to help fund the capex budget.
Given just how much positive news is out from OKE/OKS, it is shocking that these two stocks still sport double-digit yields. Yes, the outlook for oil is extremely bearish. However, this company is much more exposed to natural gas demand and supply growth, not commodity prices. I expect both stocks to rally now that the yield is locked in for yet another quarter.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: I am/we are long OKE, KMI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.