Permian Basin Expansions Will Improve Future Prospects

Key Takeaways

• Strategic acquisitions and infrastructure expansions are expected to drive synergy opportunities, boosting future revenue and earnings while enhancing service offerings.
  
• Increased natural gas and NGL production, coupled with disciplined capital allocation, is projected to improve net margins and financial stability.
  
• Operational disruptions, price trends, and delays threaten revenue and growth, while high leverage and commodity volatility pose risks to margins and earnings stability.

Catalysts

Engages in gathering, processing, fractionation, storage, transportation, and marketing of natural gas and natural gas liquids (NGL) in the United States.

• ONEOK's acquisitions of EnLink and the pending Medallion acquisition are expected to provide significant growth potential by creating a fully integrated Permian Basin platform, expanding service offerings, and establishing new positions in key regions. This integration is expected to drive synergy opportunities, contributing to increased future revenue and earnings.
  
• The company anticipates a substantial increase in its adjusted EBITDA, projecting over double the adjusted EBITDA from five years ago, indicating strong continued growth in earnings due to expansion and acquisition synergies.
  
• ONEOK's strategic infrastructure developments, such as the West Texas NGL pipeline expansion, Elk Creek pipeline expansion, and Medford fractionator rebuild, are expected to be completed soon. These projects are likely to boost the company's revenue by increasing transportation and processing capacity.
  
• Increased natural gas and NGL production in key regions like the Rocky Mountain and Permian Basin, coupled with expected volume growth from new plants and contracts, could enhance ONEOK's fee-based earnings and potentially improve net margins with optimized asset utilization.
  
• With integration and synergies from recent and future acquisitions, along with a disciplined capital allocation strategy, ONEOK expects its total combined EBITDA for 2025 to be comfortably above $8 billion. This projection highlights an expected increase in earnings and a positive trajectory towards targeted leverage reduction, enhancing net margins and overall financial stability.

ONEOK Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ONEOK's revenue will grow by 16.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.0% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $4.4 billion (and earnings per share of $7.08) by about January 2028, up from $2.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.9 billion in earnings, and the most bearish expecting $3.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.7x on those 2028 earnings, down from 21.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 2.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

ONEOK Future Earnings Per Share Growth

Risks

• Operational disruptions such as wildfires in North Dakota have led to outages and production losses, impacting revenue and potentially increasing operational costs.
  
• Delayed completion of third-party processing plants in the Permian Basin might temporarily reduce expected growth in NGL volumes, impacting future revenues.
  
• Recent natural gas and ethane price trends have presented fewer economic opportunities for ethane recovery, potentially leading to lower natural gas liquids revenue.
  
• The high leverage resulting from recent acquisitions implies interest burden risks, which could impact net margins and earnings if not managed effectively.
  
• Commodity price volatility, particularly in natural gas, is a significant determinant of ethane recovery and could impact revenue stability and earnings.

Valuation

• The analysts have a consensus price target of $110.55 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 $89.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $31.6 billion, earnings will come to $4.4 billion, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $100.6, the analyst's price target of $110.55 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.