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Oneok provided solid guidance for 2016 that boosted the stock over the last two trading days. The energy infrastructure play is positioned to meet distribution goals next year without an equity offering. The high yield at Oneok highlights the risk, but the company is positioned to survive in the current environment. Anybody reviewing the chart of Oneok (NYSE: OKE ) will see a stock that recently completed a round trip over the last four years. The stock went from roughly $20 to start 2011 to over $65 by 2014 and all the way back to below $20 recently. (click to enlarge) The company is the general partner of Oneok Partners, L.P. (NYSE: OKS ) , one of the largest publicly traded MLPs. With the sector under pressure after several years of strong performance, an opportunity likely exists in the sector now. The stock got a big bump on Monday and early Tuesday from positive 2016 guidance that claims the distribution is safe. With a dividend yield sitting at 13% prior to the announcement, a big rally isn’t a huge surprise. The question now is whether investors should chase the new 10.5% yield? On the surface, the guidance for 2016 suggests stability and the ability to cover distributions. The key tenants of the guidance were these points: FCF after dividends for Oneok. Cash on hand of $250 million at Oneok to support Oneok Partners. No public equity offering for Oneok Partners until well into 2017. Oneok Partners’ distribution coverage at 1.0x or better in 2016. The key to the whole distribution forecast is that NYMEX future strip pricing of $40 to $45 per barrel of crude doesn’t slip lower. The current price of oil won’t support the distributions. As with most energy plays including some infrastructure plays that have recently cut dividends, the whole issue of forecasts are the reliance on unstable commodity prices. With a 41.2% ownership stake in Oneok Partners, Oneok is highly reliant on the business that obtains the majority of profits from natural gas liquids. The remaining business comes from the gathering, processing and transmission of natural gas via pipelines. As with most domestic energy infrastructure plays, the business is set up for long-term growth. Low natural gas prices are set to fuel demand growth and facilitate the export of LNG around the globe. The company expects to see immediate growth from the Williston Basin where a substantial amount of gas is flared due to a previous lack of pipelines. At the same time, one-third of all ethane being rejected comes from the Oneok Partners system again providing more upside when petrochemical plants on the Gulf Coast are completed by 2017. The whole problem with an investment in Oneok is surviving the drastic fall in energy prices combined with sizable debt loads. With the shift to more fee-based contracts in 2016 and the extra cash at Oneok to support Oneok Partners survive the brutal pricing environment for commodities, the stock is a solid long-term investment in a very diversified portfolio that can absorb the risk. The recommendation is for investors to not chase Oneok higher today. Let the stock come back down before starting a position as the MLP sector likely faces more strains as other industry players undoubtedly cut dividends. Scalper1 News
Scalper1 News