Like most other MLPs, ONEOK Partners (NYSE:OKS) and its general partner ONEOK (NYSE:OKE) have seen stock prices surge in the last few months. The company still offers a yield of nearly 8% in an environment of extremely low interest rates where stocks with 3% dividend yields are being snapped up at record values.
The company cleared the distribution coverage ratio during the last couple of quarters to secure the current distribution. ONEOK Partners has paid a quarterly distribution of $0.79 since the start of 2015. As the chart below highlights, the dividend regularly traded closer to 5% in the prior few years making the current yield of nearly 8% still extremely attractive. All achieved without any distribution hikes in six quarters.
OKS Dividend Yield (TTM) data by YCharts
The important part of the story is that the distribution level has held steady over the last year due primarily to unprecedented ethane rejection. ONEOK Partners still reached a distribution coverage level of 1.06x during Q1 despite the prediction that ethane recoveries could add $200 million to earnings.
The company estimates that exports and new petrochemical plants will increase demand for ethane that hit a two decade low back in December (via Reuters). The midstream operator accounts for one-third of all U.S. ethane being rejected. ONEOK Partners has the ability to increase ethane transportation by 200,000 bpd without any incremental infrastructure costs.
The MLP already offers a solid 7.7% yield even if the ethane recovery doesn't play out. ONEOK Partners forecasts $1.4 billion in distributable cash flow for 2016. An approximate $200 million increase in profits would increase the DCF to $1.6 billion providing nearly 15% upside.
The key investor takeaway is that ONEOK Partners offers a large dividend and plenty of upside as natural gas markets start to stabilize. Only a 10% increase in the quarterly distribution leads to the equivalent of an 8.5% yield by 2017.
The MLP remains very appealing at current levels, especially considering the low interest rate environment.
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