On December 3, ONEOK, Inc. (NYSE:OKE) and ONEOK Partners LP (OKS) hosted an investors conference to discuss the companies' expected 2015 capital spending and operating results by business sector, and the energy basins where ONEOK Partners provides midstream services. ONEOK, Inc. is a pure-play general partner for MLP ONEOK Partners, so all of the company's business operations take place at the partnership level. I would like to cover two themes from the presentation. The first one covers crude oil exploration and production in the current low crude price environment. ONEOK provided crude price breakeven data for the different basins where it operates. The second part will cover ONEOK's expectations and guidance for 2015.
Drillers Will Focus On The Most Profitable Plays
In the presentation, ONEOK provided the WTI crude price floors provided by drilling companies with which ONEOK has business relationships. At these crude prices, oil producers claim that drilling would still be economically profitable. Here are the crude price economics, basin by basin:
- Williston Basin (North Dakota and Montana): Drilling is economical, with WTI crude oil prices as low as $45 to $60 per barrel.
- Powder River Basin (Wyoming and Montana): Economical, with crude oil as low as $60 to $70 per barrel.
- Mid-Continent (Oklahoma, including the Cana-Woodford and SCOOP plays): Economical, with crude oil as low as $45 to $70 per barrel in the SCOOP.
- Permian Basin (West Texas and New Mexico): Economical, with crude oil as low as $47 to $61 per barrel in the Delaware formation.
ONEOK management discussed their beliefs that the major oil producers in these areas would refocus their drilling activities to the areas of the plays where production costs are lowest and the probability of bringing in highly successful wells is the highest. Drilling activity is not expected to decline, but instead would refocus away from marginal or exploratory drilling areas and add additional wells in the areas that are proven. The discussion also covered how much more efficient drillers are now, compared to just a few years ago. The numbers above show that the efficient energy production companies working in the right plays will still be profitable at the current $65-$70 WTI crude price.
ONEOK Growth Linked to Gas and NGL Services in Crude Oil Plays
The investors conference presentation highlighted how ONEOK Partners' assets provide vertical market coverage for natural gas and NGL gathering, processing, storage and transport to the crude oil producers in the four basins discussed above. ONEOK's service network is focused on the most desirable areas of the basins for low-cost crude production, and the partnership will be able to hook up new wells to its gathering system and generate growing feedstocks to its processing facilities. Much of the discussion revolved around the Williston Basin, where the North Dakota regulators are forcing a reduction in natural gas flaring, producing a growing market for ONEOK even if Bakken drilling operations slow. ONEOK has 50% of the natural gas and NGL servicing market in the Williston/Bakken play.
For 2015, distribution growth guidance was 8% for OKS, and 14% dividend growth for OKE. Past 2015 through 2017, company goals are 6%-8% growth for the OKS distribution, resulting in 12%-15% dividend growth for OKE investors.
The ONEOK presentation provided some more granular data concerning what will happen to drilling activity at the current lower prices for crude. At this point, it appears that there will be more of a shift away from marginal plays to the most profitable plays, rather than a general reduction in drilling activity. If you own energy E&P companies, it would be a good time to review where your holdings are operating.
ONEOK Partners currently yields 6.9%, which looks attractive based on 6% to 8% distribution growth for the next 3 years. That looks like a 50% total return over the 3 years. ONEOK Inc yields 4.4%, so it also appears that 15%-20% annual total returns are possible, with about the same outcome by the end of 2017 as an investment in OKS.
Disclosure: The author is long OKE.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.