We reiterate our Neutral recommendation on ONEOK Inc. (OKE). In second-quarter 2012, the company’s earnings per share and revenue fell short of the Zacks Consensus Estimates, primarily due to continued pressure from the Energy Services segment.
We know that ONEOK’s operations are subject to several federal, state, and local regulations, as well as extensive environmental rules. The utility regulatory authorities in Oklahoma, Kansas and Texas regulate many aspects of the company’s utility operations including customer service and the rates charged to customers. ONEOK’s profitability principally depends on its ability to realize costs associated with providing energy and other commodities to customers by obtaining the required regulatory approvals.
In addition, ONEOK's business and products, particularly propane is weather sensitive. This seasonality along with deviations in weather conditions may cause variation in the company’s earnings and short-term cash requirements.
Apart from these negative factors, ONEOK maintains a strong financial position, equipped with structured and flexible fund growth, either organically or inorganically. Strong cash flow generation from its operating segments provides the company flexibility along with pursuing more investment options.
We know that transportation of crude oil or natural gas to the marketplace through rail or truck, specifically in the Williston Basin, is challenging due to harsh and volatile weather. We believe installation of Bakken Crude Express Pipeline will provide ONEOK with a reliable and cost-effective means of transportation compared to other alternatives. It is expected to act as the company’s future growth platform with strong economic feasibility to provide superior services to producers and refiners.
In addition, we believe that ONEOK’s future financial performance should get a boost from deployment of $1 billion in additional projects and strong contribution from the ONEOK Partners segment.
However, we are concerned about volatile credit markets and unpredictable commodity prices, which might negatively impact the company’s future financial and operational performance.
ONEOK Inc. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
Tulsa, Oklahoma-based ONEOK Inc. is a diversified energy company, operating as a natural gas distributor, primarily in the United States. The company competes with OGE Energy Corp. (OGE).
OGE ENERGY CORP (OGE): Free Stock Analysis Report
ONEOK INC (OKE): Free Stock Analysis Report
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