New Projects And Acquisitions Will Expand Operations And Improve Resilience

Key Takeaways

• Strategic acquisitions and expanded operations in key regions are expected to drive higher volumes and revenue growth.
  
• Organic growth projects and a focus on innovation will boost future revenue, margins, and earnings.
  
• Execution risks from synergy dependence and potential project delays threaten revenue and profit, while market fluctuations could affect financial stability and margin growth.

Catalysts

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

• ONEOK has expanded its integrated operations with strategic acquisitions, diversifying its product mix and geographical presence, including increased exposure in the Permian Basin and Louisiana, which is expected to drive higher volumes and revenue growth.
  
• The company has increased its operational scale through a 60,000-mile pipeline network, enhancing connectivity with producers and markets, potentially improving earnings through resilience across market cycles.
  
• ONEOK is pursuing organic growth opportunities with significant projects, such as NGL pipeline expansions and LPG export ventures, expected to bolster future revenue and adjusted EBITDA.
  
• There is a focus on innovation and synergies, where ongoing and new projects are expected to optimize asset interconnections and expand natural gas infrastructure, which could improve net margins and earnings.
  
• The commitment to returning value to shareholders via share repurchases and dividend growth, coupled with sustained growth in adjusted EBITDA, is expected to enhance earnings per share significantly.

ONEOK Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ONEOK's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.0% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $4.5 billion (and earnings per share of $6.91) by about March 2028, up from $3.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, up from 20.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 2.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

ONEOK Future Earnings Per Share Growth

Risks

• The high level of capital expenditures anticipated in 2025, ranging between $2.8 billion to $3.2 billion, reflects significant commitments and investments necessary for growth and maintenance, which, if not managed effectively, could pressure cash flows and impact net margins.
  
• There are concerns about the potential overbuilding in the LPG export market which could affect spot rates and competitiveness, posing a risk to future revenue streams from the planned export terminal.
  
• Dependence on synergy realization from recent acquisitions, such as Magellan, Medallion, and EnLink, poses execution risk. If not achieved, anticipated revenue and net income growth targets for 2025 and 2026 could be impacted.
  
• Project delays, particularly with significant initiatives like NGL pipeline expansions and the LPG export terminal, could defer expected revenue and EBITDA increases, affecting financial projections and investor sentiment.
  
• The reliance on favorable market conditions and continued activity in the Permian and other regions for volume growth underscores a vulnerability to market downturns and fluctuations in commodity prices, potentially impacting revenue and profit margins.

Valuation

• The analysts have a consensus price target of $111.55 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 $100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $33.1 billion, earnings will come to $4.5 billion, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of $102.38, the analyst price target of $111.55 is 8.2% 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.