Rocky Mountain Success And Calculated Acquisitions Set To Boost Market Position And Financial Health

Key Takeaways

• Expansion in the Rocky Mountain region and strategic acquisitions are driving revenue and EBITDA growth, with a focus on improving operational efficiency.
  
• Long-term commitments and solid operating performance promise a stable revenue stream, with financial strategies aimed at supporting earnings growth and shareholder returns.
  
• ONEOK's financial performance is susceptible to market volatility, operational risks, and regulatory changes affecting volume commitments and the demand for refined products and crude.

Catalysts

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

• Record volumes in the Rocky Mountain region and ongoing acquisition synergies are expected to drive revenue and EBITDA growth in the near future.
  
• Expansion of pipeline services and new projects, such as the refined products pipeline expansion to Denver, are anticipated to increase capacity and demand, positively impacting revenue.
  
• The acquisition of NGL pipeline systems from Easton Energy, alongside organic growth opportunities, is poised to enhance operational efficiency and create value downstream, improving net margins.
  
• Long-term volume commitments and strong operating performance underline a stable and potentially growing revenue stream, also supporting future earnings growth.
  
• The strategic leveraging and balance sheet strengthening efforts, including debt reduction and a disciplined capital allocation strategy, aim to improve financial health and potentially support dividend growth and share repurchases, positively influencing earnings per share.

Assumptions

• Analysts are assuming ONEOK's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.4% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $6.74) by about September 2027, up from $2.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.3 billion in earnings, and the most bearish expecting $3.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.8x on those 2027 earnings, up from 20.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 9.8x.
• Analysts expect the number of shares outstanding to grow by 30.47% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Risks

• The reliance on producer activity in the Bakken and other regions for volume commitments could lead to variability in processing and transportation volumes, impacting revenue.
  
• Market fluctuations or changes in producer behavior regarding ethane recovery could affect the company's earnings due to the volatile nature of ethane pricing and demand, influencing net margins.
  
• Execution risk associated with significant capital projects like the Medford rebuild and refined products pipeline expansion to Denver, which might impact earnings if there are delays or cost overruns.
  
• The potential for operational disruptions from natural events, as mentioned with Hurricane Beryl, could pose risks to the safe and reliable operation of ONEOK's assets, possibly affecting net income.
  
• Changes in demand for refined products and crude segment, particularly with evolving energy markets and environmental regulations, could influence the company's revenue and profitability in this segment.

Valuation

• The analysts have a consensus price target of $92.01 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 $103.0, and the most bearish reporting a price target of just $81.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $30.6 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 7.8%.
• Given the current share price of $91.06, the analyst's price target of $92.01 is 1.0% 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.