Diversified energy company ONEOK Inc. (OKE) has completed the separation of its natural gas distribution business following the approval granted by its board of directors last month. The new company, ONE Gas, Inc. (OGS) has begun to trade on the New York Stock Exchange (NYSE) from Feb 3, 2014.
Post Spin-Off Structure
Following the spin-off ONEOK will continue to hold general partner and limited partner interests in ONEOK Partners, L.P. (OKS), which together comprise 41.2% of outstanding partnership interests. ONE Gas will consist of Kansas Gas Service, Oklahoma Natural Gas Company and Texas Gas Service.
Why the Spin-Off?
The rapidly rising demand for natural gas in the U.S. has kindled demand for efficient midstream services. ONE Gas currently serves more than 2 million customers in three states. Post separation, the spun-off entity can solely concentrate on the expansion of its distribution business and hence capitalize on the favorable market trends.
We believe the spin-off will also allow ONEOK to reduce its outstanding debt. Post separation, ONEOK will receive a one-time cash payment of $1.13 billion from ONE Gas. This cash payment will allow ONEOK to reduce its long-term debt level to $1.1 billion.
Shareholding
ONEOK shareholders of record at the close of business on Jan 21, 2014 received one tax-free share of ONE Gas Inc. for every four shares of ONEOK. No fractional shares were issued, but those eligible for fractional shares received cash compensation.
Our Take
Primarily, this separation will allow ONEOK to substantially lower its existing debt and strengthen its financial position, which should help the company gain better credit rating. The spin-off will not only unlock hidden value of its nat-gas business but also help ONEOK to focus more on its strategic goals and core operations.
ONEOK Inc. currently has a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Energy Transfer Equity, L.P. (ETE) with a Zacks Ranked #2 (Buy).
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