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ONEOK: A Natural in Natural Gas

ONEOK has invested $9 billion in its network over the past decade.

ONEOK (OKE) is a natural gas pipeline and midstream processing company. that boasts an unusually strong dividend history for a high-yield stock, notes income expert Chloe Lutts Jensen, income specialist and editor of Cabot Dividend Investor.

It has over 38,000 miles of natural gas and natural gas liquids (NGL) pipelines, running from North Dakota to Texas and from Kansas to Illinois. ONEOK has invested $9 billion in its network over the past decade, and continues to steadily add processing capacity, well connections and pipeline miles.

Major drivers of growth this year and next will be the addition of almost 400 new well connections in the Williston Basin and the expansion of processing capacity in Oklahoma.

ONEOK has also invested in making earnings more predictable, shifting most customers to fee-based contracts over the past five years, reducing exposure to commodity prices. In 2013, 66% of earnings were fee-based; by the end of this year, that number is expected to reach 90%.

This summer, the company acquired its associated master limited partnership, ONEOK Partners L.P., bringing the two firms’ assets under one roof and lowering their cost of funding. Following the transaction, the combined company raised its dividend to 75 cents per quarter, vaulting its yield over 5%.

The past few years of groundwork have put ONEOK on a solid footing to take advantage of rebounding demand for ethane and other NGLs, driving strong earnings growth. Analysts expect revenues to rise 25% this year and 10% next year. EPS are expected to increase 4% and 22%.

ONEOK has paid dividends consistently since 1989, and has increased the dividend every year since 2003. Over the past five years, dividend increases have averaged 18% per year. Through 2021, management is targeting 9% to 11% dividend growth per year.

ONEOK just reported earnings that beat expectations. Revenues rose 23% year-over-year, beating expectations by $280 million, while EPS beat by one cent. Third-quarter net income hit $165.7 million, thanks to a 16% increase in processing volumes and 5% growth in gas and NGLs transported.

Chloe Lutts Jensen is editor of Cabot Dividend Investor.

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