ONEOK, Inc. Investment Report

Introduction

These are just a few excepts from a final investment report I wrote over ONEOK, Inc. That being said, I have not added all of the in depth financial considerations. I'm proud of this report and wanted to share the key findings and thought with my LinkedIn family! Let me know what you think.

What I've included hear is:

What the analysis is and what resources were used in the analysis

A quick background of ONEOK, Inc.

A description of the Midstream Section of the Oil and Gas Industry

&

My executive summary of the entire report

The Analysis

In this analysis I will compare ONEOK Inc. to Magellan Midstream Partners through various qualitative and quantitative lenses. Because I believe quantitative data never lies this will be the primary focus of the report. I’ve used the PSC provided in this class as the main base for financial analysis. I will provide the interpretation of the data, and then provide that data in the appendix immediately following the report.

The following data has all been collected through a semester’s worth of research. Specific financial and company information for this analysis is from the years 2017 to 2018, and has come from Annual Reports, 10-Ks, Proxy Statements, and company websites for ONEOK Inc. and Magellan Midstream Partners. All other research has been done by utilizing different notable sources. I also used our textbook to obtain information about various business normalcies. Finally, using the PSC provided, I was able to input financial data to generate graphical and other comparative data.

ONEOK, Inc. Background

ONEOK Inc. (“ONEOK”) was founded in 1906 as an intrastate natural gas pipeline business in Oklahoma. Today, ONEOK is one of the nation's premier midstream companies involved in the natural gas and natural gas liquids business. ONEOK connects natural gas liquids or NGL supplies in the Rocky Mountains, Mid-Continent and Permian regions to key market centers with an extensive network of natural gas gathering, processing, storage and transportation assets. ONEOK controls assets running all the way from North Dakota to southern Texas and from Wyoming to central Tennessee making up one of the largest infrastructures in the United States. ONEOK’s NGL gathering system is connected to 90% of the processing plants located in the midcontinent. Because ONEOK has such an expansive infrastructure, they have extreme value in the oil and gas industry. These midstream companies didn’t start spinning off into their own companies until the 1980’s, but now we are starting to see a few that are really growing into larger and larger corporations.       

ONEOK prides itself in five key values: ethics, quality, diversity, value, and service. I feel that most companies will say that they adhere to a set of values very similar if not exactly like these that were listed and showcased by ONEOK. That being said, I don’t believe ONEOK has invented the next sliced bread here, but what they have done is realized and aligned with some key values that any company needs in order to be successful. 

The Midstream Section of the Oil and Gas Industry

The midstream industry is the function of the oil and gas industry that provides the vital links between producing areas and the population centers where industrial, refining, and residential customers are located. The major assets for the companies in this industry are transmission pipelines, processing plants, and field gathering stations. There are also other transportation assets including trucking fleets, railroads, and even marine vessels for some. There are also storage units throughout this supply chain.

Some of the key characteristics of the midstream industry are that it’s low risk, it’s extremely regulated, the health of the upstream and downstream affects investment in assets, and oil and gas prices affect demand. This business of transporting oil and gas around is considered a very safe business with low capital risk. Historically, this portion of the oil and gas business was considered a small aspect in the whole industry. It was in the 1980’s that these small segments broke off into individual publicly traded firms or partnerships. This small segment is highly regulated, but not by commercial regulation. It is the Federal Energy Regulatory Commission (FERC) that regulates everything in this sector. As far as asset investment it’s extremely dependent on the supply from both upstream and downstream. Put simply, if no one is trying to move oil and gas they don’t need to use all of the assets these midstream companies are built on. If there is no supply nothing gets moved because there’s nothing to move; if there’s no demand, then nothing needs to be moved. Therefore, the midstream sector is extremely dependent on the health of the other sections of the entire industry of oil and gas. 

Moving on, there are four major operating components in the midstream industry. The first one is gathering. All of the different products that are moved through the different assets mentioned earlier are sourced from the earth and moved to field stations where the product is refined and made ready for the market it’s going to. Second is fractionation. Fractionation is where different products are separated from each other in order to pull out multiple different products from one source. This is intertwined with the gathering process. Third is the transportation of all of this product. Treated oil and natural gas is delivered to several different areas through a massively complex infrastructure made up of different transportation methods including pipelines. Fourth and finally is the storage of all of this. This part is pretty simple. With different products there are slightly different ways to store, but in general all of these products are put in a container of sorts and put somewhere safe for that specific product.

Executive Summary

This report has earthed substantial information about both our target company, ONEOK Inc., and our benchmark company, Magellan Midstream Partners. What we can see here is a management team and Board of Directors that has a plethora of experience not only in the oil and gas industry, but also in the business world in general. Like mentioned above, this top management team has a combined 129 years of experience working inside of ONEOK. This number obviously doesn’t include past positions in other companies and different industries all together. As the data shows, this management team and Board of Directors sees great long-term opportunities and they are making moves to capitalize on those.

The midstream segment itself has shown strong growth in size and importance in the oil and gas industry. Massively powerful and wealthy key players in the oil and gas industry have to look to midstream providers such as ONEOK to provide the invaluable connection from them to the end buyer. Because of this simple fact in how the industry works, midstream providers are reaping the benefit by allowing major players to use midstream assets. As we can see in the financial considerations ONEOK is growing. ONEOK is now focused on midsized natural gas companies, and at this rate, ONEOK will continue to grow and work with larger and larger companies. 

Moving on to the financial considerations. Researching and interpreting this data showed in the end exactly what I thought was going on, ONEOK is a really solid and growing company. What’s really comforting here is that there are multiple variables working in conjunction together to tell the story of ONEOK.

Let’s begin with the revenue per employee. At just around 2,700 employees at the time of this 2017-2018 report, ONEOK was producing $4.6 million in revenue per employee. This efficiency blew our benchmark company, Magellan, out of the water! Another couple of variables I found really important were the correlations between revenues, profit margins, and the productivity of assets. Looking at the asset ratios we can see that for every $1.00 of assets ONEOK is producing $0.69 in revenue. This is actually a decrease from the year prior, but we also have to keep in mind that this company is also growing and investing more money into more revenue generating assets. We can see that the total value of long-term assets from the previous year to the current year is increasing. ONEOK is spending more money now to obtain more long-term assets, so in the short-term perspective, new asset integration is minorly affecting asset productivity. Being that ONEOK is investing substantial amounts into new long-term assets we can see that the total value of debt to the total value of assets is decreasing. This is indicating good growth and profitability over the lifetime of an investment in ONEOK. I also mentioned profit margins as a point of interest. In the financial reports we can see, ONEOK generated just over $12 million in revenues in 2017. We now know that the previously owned assets as well as new additions have been extremely productive at generating those revenues, but a company has to earn a profit to continue investing in itself. When we look at the profit to asset comparison, we can see that ONEOK is behind on profit productivity. This could be a red flag if someone didn’t understand that ONEOK during the time of this analysis was investing a lot into acquisition of new assets, and primarily long-term assets. With these changes taking effect right now, I would except ONEOK to climb in value in the years to come.

When looking at payout rates and dividends we find nothing but good information. As we looked at earlier, the dividend yield is increasing at good sustainable rates. Note, ONEOK has a history of over 25 years of dividend stability and growth. Then we connect this data to the information we found in the dividend payout ratio section. Even though there have been steady increases in dividend yield, that percentage amount compared to net income is decreasing. That’s great news for the company. Some may see this as a signal that the company isn’t paying its shareholders enough, but what I’m seeing is that ONEOK is able to pay its shareholders more than previously while also being able to invest more in its own growth.

In conclusion, I believe ONEOK Inc. is a solid company to invest in for the long term. Everyone has a different investment strategy, but if a long-term sustainable and growing company sounds like a good investment to you, well, ONEOK is a good place to start researching for yourself. This is a company I currently am invested in, and I would suggest you do the same before it’s to late. When it comes to long-term investing, the opportunities to invest in a company that is just about to burst are few and far between, so be an early adopter and help propel this company into the exosphere.