Pipeline Expansion And Easton Connection Will Solidify US Operations

Key Takeaways

• Expansion and acquisition projects are poised to enhance revenue growth, improve net margins, and drive operational efficiencies.
  
• Strong balance sheet and strategic positioning in U.S. shale basins ensure supply stability and financial resilience.
  
• Exposure to macroeconomic variables and regulatory risks might affect revenue, margins, and future earnings, while needing strategic adjustments for sustained growth.

Catalysts

Operates as a midstream service provider of gathering, processing, fractionation, transportation, storage, and marine export services in the United States.

• Completion of organic growth projects like the West Texas NGL pipeline expansion and the Elk Creek pipeline expansion are expected to boost volumes and subsequently drive revenue and earnings growth.
  
• Acquisition-related synergies, particularly from recent EnLink and Medallion purchases, offer a unique catalyst for earnings growth, not dependent on production volume, which can improve net margins.
  
• Strategic connection projects, such as linking the Easton Energy NGL assets with Gulf Coast infrastructure, are set to enhance operational efficiencies and support earnings growth into 2025 and 2026.
  
• Strong positioning in productive U.S. shale basins with major producers assures supply stability, potentially leading to revenue growth.
  
• Commitment to maintaining a strong balance sheet and investment-grade credit ratings adds financial flexibility, conducive to sustaining earnings even in unfavorable economic conditions.

ONEOK Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ONEOK's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 14.0% in 3 years time.
• Analysts expect earnings to reach $4.5 billion (and earnings per share of $7.02) by about May 2028, up from $3.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.3x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

ONEOK Future Earnings Per Share Growth

Risks

• The absence of earnings from divested interstate pipeline assets, which were used to deleverage the balance sheet, might impact overall revenue and net margins negatively in the short term.
  
• Exposure to macroeconomic variables such as commodity prices and inflationary trends could create volatility, potentially impacting net margins and earnings.
  
• Regulatory developments pose risks that might result in increased compliance costs or operational restrictions, affecting future earnings potential.
  
• Market dynamics, including prolonged shifts in the economic environment, could necessitate adjustments in capital plans, possibly leading to reduced growth and impacting long-term earnings and profitability.
  
• The potential need for meaningful concessions to producers under challenging market conditions could suppress future revenue growth from these segments.

Valuation

• The analysts have a consensus price target of $106.803 for ONEOK based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $147.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $31.9 billion, earnings will come to $4.5 billion, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 6.9%.
• Given the current share price of $79.29, the analyst price target of $106.8 is 25.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.