Pipeline Expansions And Synergies Will Support Future Resilience

Key Takeaways

• Strategic infrastructure expansions and acquisitions are poised to drive significant future revenue and earnings growth for ONEOK.
  
• Strong financial discipline and a diversified network contribute to ONEOK's resilience and ability to maintain stable revenues despite economic challenges.
  
• ONEOK faces revenue and earnings risks due to volatility in macroeconomic indicators, asset divestitures, integration challenges, and external market factors impacting projects.

Catalysts

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

• ONEOK's focus on completion of organic growth projects and acquisition-related synergies is expected to support future earnings growth, influencing earnings positively.
  
• Progress on several high-return synergy projects, including connecting Easton Energy NGL assets with Gulf Coast infrastructure, will likely drive revenue growth in late 2025 and into 2026.
  
• Strategic expansions in the West Texas NGL pipeline from the Permian Basin and the Elk Creek pipeline from the Rocky Mountain region are anticipated to ramp up volumes, which would contribute positively to revenue and earnings.
  
• Despite macroeconomic challenges, ONEOK's diversified geographic footprint and strong relationships with well-capitalized producers suggest resilience and the ability to maintain stable revenues and net margins.
  
• Commitment to maintaining a strong balance sheet with investment-grade credit ratings and a focus on returns through disciplined capital allocation should safeguard net margins and financial flexibility, which are vital in uncertain environments.

ONEOK Future Earnings and Revenue Growth

Assumptions

• 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 grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.1% today to 14.3% in 3 years time.
• The bearish analysts expect earnings to reach $4.0 billion (and earnings per share of $6.61) by about July 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 price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.9x on those 2028 earnings, up from 17.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 6.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

ONEOK Future Earnings Per Share Growth

Risks

• ONEOK is exposed to volatility in macroeconomic indicators such as commodity prices, producer activity, inflationary trends, and regulatory developments, which could negatively impact revenue and earnings.
  
• The absence of earnings from divested interstate pipeline assets in 2025 could lead to a potential decrease in net margins and earnings.
  
• There is reliance on synergies and growth projects to drive future EBITDA, which introduces execution risks that could impact earnings if not realized as planned.
  
• The dependence on the successful integration and performance of recently acquired assets from EnLink and Medallion carries risks related to operational and strategic execution, potentially affecting revenue growth.
  
• External market factors like potential tariffs on LPGs could influence the profitability of ONEOK's anticipated LPG export project, impacting future revenue and earnings.

Valuation

• The assumed bearish price target for ONEOK is $87.0, 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 $147.0, and the most bearish reporting a price target of just $87.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $27.7 billion, earnings will come to $4.0 billion, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of $81.67, the bearish analyst price target of $87.0 is 6.1% 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.