Decarbonization Trends Will Pressure US LNG Exports Yet Synergies Endure

Published
04 May 25
Updated
20 Aug 25
AnalystLowTarget's Fair Value
US$83.00
9.8% undervalued intrinsic discount
20 Aug
US$74.84
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1Y
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7D
2.5%

Author's Valuation

US$83.0

9.8% undervalued intrinsic discount

AnalystLowTarget Fair Value

Last Update07 May 25
Fair value Decreased 4.60%

Key Takeaways

  • Expanding infrastructure and strategic acquisitions support near-term growth and stable cash flows, but require high capital spending and may face margin pressures.
  • Shifting regulations and accelerated renewable adoption threaten long-term demand and asset value, raising risks of revenue stagnation and lower market valuations.
  • Reliance on hydrocarbons, earnings uncertainty from volatile spreads, and rising debt raise risks amid minimal diversification into alternative energy.

Catalysts

About ONEOK
    Operates as a midstream service provider of gathering, processing, fractionation, transportation, storage, and marine export services in the United States.
What are the underlying business or industry changes driving this perspective?
  • While ONEOK is positioned to benefit from expanding U.S. LNG export capacity and the resulting need for domestic NGL gathering and transport-supported by core assets and new investments like the Texas City LPG export joint venture and incremental Permian projects-continued global decarbonization efforts and tightening emissions regulations could limit long-term demand for fossil fuel infrastructure, constraining revenue growth potential and creating uncertainty around the useful life of new assets.
  • Although the company's high-return organic growth projects, such as pipeline and fractionation facility expansions in high-activity basins (Permian, Bakken, Mid-Continent), and integration of EnLink, Medallion, and Magellan assets, provide clear visibility on near
  • to medium-term synergy-driven EBITDA and margin gains, substantial capital spending is required to both enable this growth and maintain existing infrastructure-as increasingly stringent compliance and replacement costs may pressure net margins and weigh on free cash flow over the long run.
  • While ONEOK's expanded integrated footprint and long-term, largely fee-based contracts support stable cash flows and provide balance sheet strength for debt reduction, the completion of large horizontal drilling projects and consolidation among producers could lead to slower or more volatile volume growth beyond the next wave of expansions, which in turn could reduce operating leverage and earning power.
  • Despite renewable demand remaining a slow threat in the near term, the long-term pace of technology innovation and cost improvements in renewables and battery storage could accelerate displacement of natural gas in the power and industrial sectors, ultimately eroding pipeline utilization rates and reducing revenue visibility for ONEOK's core assets.
  • Integration synergies from the Magellan and EnLink acquisitions have exceeded initial expectations and are expected to boost operating margins and diversify earnings, yet overexposure to hydrocarbon midstream assets and slower-than-expected diversification into lower-carbon alternatives could expose the company to revenue stagnation and lower market valuations if ESG mandates and investor capital shifts materialize more quickly than anticipated, weighing on long-term earnings momentum.

ONEOK Earnings and Revenue Growth

ONEOK Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • This narrative explores a more pessimistic perspective on ONEOK compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
  • The bearish analysts are assuming ONEOK's revenue will decrease by 0.5% annually over the next 3 years.
  • The bearish analysts assume that profit margins will increase from 11.1% today to 13.2% in 3 years time.
  • The bearish analysts expect earnings to reach $3.7 billion (and earnings per share of $6.16) by about August 2028, up from $3.1 billion today. The analysts are largely in agreement about this estimate.
  • In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.5x on those 2028 earnings, up from 15.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.8x.
  • 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 7.85%, as per the Simply Wall St company report.

ONEOK Future Earnings Per Share Growth

ONEOK Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • The company's 2026 earnings guidance was revised downward by around two percent due to tightening spread differentials and lower commodity price assumptions, which reduces EBITDA forecasts and could temper future earnings growth.
  • Management noted ongoing volatility in commodity prices and acknowledged that producer drilling activity and spread improvements are key variables needed to reach guidance midpoints, introducing uncertainty around future revenue and earnings stability.
  • There was frequent discussion about narrower blending spreads in 2025 compared with 2024, reducing the profitability of butane blending and impacting overall net margins-even as ONEOK tries to offset this with higher volumes.
  • High capital expenditures for organic growth (such as the new Permian processing plant) and regular maintenance, combined with recent large acquisitions, increase the risk of elevated debt levels and higher interest expense, which could negatively affect free cash flow and net earnings if commodity markets soften or rates remain high.
  • The long-term outlook depends heavily on ongoing hydrocarbon demand, particularly for natural gas and NGLs, and there is little mention of diversification into renewable or alternative energy infrastructure, exposing the company to longer-term revenue stagnation or decline as decarbonization trends accelerate and energy mix shifts away from traditional hydrocarbons.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The assumed bearish price target for ONEOK is $83.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ONEOK's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  • However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $126.0, and the most bearish reporting a price target of just $83.0.
  • In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $28.4 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 7.9%.
  • Given the current share price of $73.5, the bearish analyst price target of $83.0 is 11.4% 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.

How well do narratives help inform your perspective?

Disclaimer

AnalystLowTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystLowTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystLowTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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