ONEOK Inc. (OKE) has announced its plan to terminate operations of its energy services segment. Prolonged weak market conditions with no hope of improvement in the near term and narrowed seasonal as well as location natural gas price differentials have led to the termination of this segment. The segment restructuring activity is expected to be settled by Apr 2014.
Further, continuous segmental loss for the last seven quarters forced ONEOK to halt this business. In the first quarter of 2013, the energy services segment reported an operating loss of $4.4 million primarily due to reduction in contracted transportation capacity.
The energy services segment engages in providing premium natural gas marketing services to its customers across the U.S. The segment delivers physical natural gas products and risk management services through its network of contracted transportation and storage capacity, and natural gas supply. Its customers primarily comprise local distribution companies – electric utilities and industrial end-users.
ONEOK intends to complete the segment discontinuation process in a faster pace and will discharge non-affiliated third-party natural gas transportation and storage contracts to the interested parties. The company's ONEOK Partners segment will continue to market natural gas, natural gas liquids and condensate to the customers.
Post restructuring, ONEOK intends to offer positions to the affected employees in its other divisions. Further, if the company fails to offer jobs to the employees, it is bound to provide severance benefits.
As a result of this transaction, ONEOK is anticipated to report non-cash, after-tax write down of roughly $75 million in second-quarter 2013 and up to $25 million within Jul 1, 2013 and Apr 1, 2014. These write downs will take place primarily due to the release of a significant portion of energy services' natural gas transportation and storage contracts to the third parties.
ONEOK expects termination of the energy services segment to negatively impact its full-year 2013 net income due to a pre-tax operating loss of approximately $55 million related to one-time charges. This factor propelled the company to lower its full-year 2013 guidance to $235 – $285 million from its earlier guidance of $350 – $400 million. ONEOK also expects to report a pre-tax operating loss of approximately $15 million in 2014.
We believe the decision to discontinue this loss making segment will enable ONEOK to assign resources and redeploy existing capital as per market conditions and strategic preferences along with identifying own capability for its future growth.
Post restructuring, we believe that ONEOK will focus on achieving reasonable revenue, optimizing cost structure, and maintaining robust margins and strong liquidity position in the future.
ONEOK currently has a Zacks Rank #3 (Hold). The other stocks in the industry that are worth considering include Atmos Energy Corporation (ATO), Chesapeake Utilities Corporation (CPK) and EQT Corporation (EQT) with a Zacks Rank #2 (Buy).
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