What Is Wrong With Oneok Partners?

| About: ONEOK, Inc. (OKE)
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After a great 2011 and facing a promising finish to 2012, Oneok Partners, L.P. (OKS) has fallen out of favor since the start of November. First, the company provided disappointing commentary on the Q3 earnings call. Second, it announced the decision to not move forward with a Bakken pipeline. The combination turned the market away from this previously hot stock.

The company is one of the largest traded MLPs and a leader in gathering, processing, storage, and transportation of natural gas. ONEOK, Inc. (NYSE:OKE) owns 42.8% of the equity interest.

The stock has plunged from over $60 in early November to just below $53 today. In fact, the stock is now down for the year and approaching a total return near flat. Is it time to buy the stock now or are investors realizing that pipeline MLPs aren't free money?

Bakken Crude Express Pipeline Canceled

In what had to be shocking to all but industry insiders, Oneok Partners announced a few weeks back that it would not proceed with the Bakken Crude Express pipeline that would send crude from the Bakken to the oil hub in Cushing, OK. The pipeline was scheduled to begin construction in early 2014 and be completed by mid-2015.

Considering producers had long complained about the lack of takeaway capacity in North Dakota hurting pricing, it was very shocking that the pipeline didn't attract enough commitments.

Ironically, on the way to finalizing contracts, the rails have taken over in North Dakota as the most attractive alternative. Rail lines such as BNSF now have enough capacity to handle the daily production and the ability to ship the product to the coasts where it is needed more. Instead of shipping directly into a disadvantaged hub where oil would again become congested, a large percentage can now be sent to Phillips 66 (NYSE:PSX) refineries on the East Coast, thereby skipping the middleman. See the great summary of the situation by Michael Fitzsimmons.

Decreasing Dividend Yield

A major warning sign to investors should've been the dramatic decline in the dividend yield since 2009. With the yield falling as low as only 4% in early 2012, the stock has been unable to gain momentum. While that yield still offers a more attractive value than treasuries, it got the point where other yielding investments had more attractive yields. In fact, some of the initial excitement over the potential Bakken pipeline probably caused some irrational buying.

As the chart below shows, the yield is back to a more appealing 5.2% now:

OKS Dividend Yield Chart

OKS Dividend Yield data by YCharts

Capital Expenditure Plans

Despite the focus on the cancelled Bakken pipeline, the company is loaded with other capital projects to complete. The plans still include roughly $4.5B of growth projects between 2011 and 2014. Plus, the company has another $2B backlog of unannounced growth projects.

Considering the company only completed $2B in growth projects in the previous 4 years, enough growth will occur regardless of the high profile project. As the chart below shows, Oneok Partners has over $1.4B worth of natural gas projects in the Bakken to complete:

In fact, the company has three more natural gas gathering and processing plants to be completed in the next two years. The Bakken still has nearly 35% of natural gas production flared due to a lack of gathering and processing plants, so the company is in the sweet spot for future growth.

On top of these projects, the Bakken NGL pipeline is expected in service by Q113 with a planned expansion in Q314. Along with some other NGL projects, the company is spending a total of $2.1B to $2.4B in the Bakken shale.

Clearly the concern over the growth beyond 2015 has come to the forefront with the stock drop. Ultimately, the Bakken crude will need a pipeline for efficient and cost effective transportation. Not to mention, sending inventory to a limited customer base ultimately isn't a great idea. As Michael Fitzsimmons mentions, the costs are much higher on the rails making a pipeline solution provided by Oneok Partners the eventual solution.

Distributions

While the market appears obsessed with the cancellation of an oil pipeline, the company continues to forecast $0.02 quarterly increases in the distribution. The guidance remains for 10-15% annual distribution growth through 2015. As the chart below shows, the distribution guidance for 2013 is $2.96 or a 5.6% yield based on a $53 stock price:

So question for investors: where will the distribution go after 2015? Will the pipeline cancellation completely stall distribution growth?

Based on the low-end guidance of 10% growth in 2014 and 2015, the distribution will hit $3.58 or nearly a 6.8% yield at the current stock price. Not having the Bakken pipeline to fuel growth in 2016 will definitely dent that growth rate, though investors need to be cautious with assuming the worst. Oneok Partners has plenty of time to obtain commitments for the Bakken or derive new projects in that time.

Stock Price

Amazingly, this stock is actually negative for the year after huge gains in 2011. The weakness in natural gas and especially natural gas liquids prices has really hurt the profits and perception of this company.

2-Year Stock Chart - Oneok Partners

Conclusion

The market has clearly turned negative on this MLP. The recent weakness plus forecasted distribution growth should return the yield to an attractive level in 2013. The stock continues to trade weakly, suggesting investors shouldn't rush into it for now. The recent support around $50 might provide the ideal entry point as the existing growth projects lead to strong growth over the next three years.

Nothing appears to be wrong with Oneok Partners other than perception. The MLP should bounce back in 2013, especially as the yield climbs. Now that the canceled Bakken pipeline has freed up capital, don't be surprised when the company unleashes the $2B in unannounced growth projects for 2015 and beyond.

Ultimately, investors shouldn't be surprised when the Bakken pipeline obtains enough commitments to move forward in the next 12 months. Remember that pipelines are cheaper than rail transportation. Once the kinks in the Cushing hub are worked out, oil producers will seek out pipelines and Oneok will be sitting ready to pounce.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Please consult your financial advisor before making any investment decisions.