Tag Archives: alternative

ONEOK: The 2016 Guidance Is Bullish

Summary ONEOK surges 15% after providing its 2016 financial guidance. Dividend is expected to be unchanged from 2015 levels. Free cash flow after dividends is expected to be ~$160 million. Though, ONEOK’s success largely depends on its MLP ONEOK Partners doing well. It is truly amazing just how much volatility there is in the midstream sector right now. Formerly steady stocks like ONEOK, Inc (NYSE: OKE ) have been eviscerated, down 44% since early October, following oil lower. Besides falling oil prices, ONEOK has been hurt by the troubles over at Kinder Morgan (NYSE: KMI ) which forced that company to lower its dividend . However, ONEOK recently surprised the markets by announcing plans to sustain its current dividend for 2016. The same holds true for ONEOK’s MLP ONEOK Partners (NYSE: OKS ). This sent shares of both stocks up 15%. Though, despite this news, the yield on both is still elevated at over 11%, indicating continued investor anxiety. OKE data by YCharts 2016 Outlook is looking strong Looking at ONEOK’s updated guidance, it appears not much will change versus 2015. Cash flow available for dividends is expected to come in at $675 million, or $3.22 per share, up 9% from 2015 estimates. Dividend payments are expected at $515 million, or $2.46 per share, flat from 2015 levels, leaving free cash flow of $160 million, or $0.76 per share. This would also result in a robust 1.3x dividend coverage ratio. Though, there is one major weak spot in ONEOK’s guidance–virtually all cash flow is coming from cash distributions from the LP and GP stakes in ONEOK Partners. If ONEOK Partners were to cut the distribution, ONEOK’s cash flows, and thus the dividend, would drop significantly. However, unlike KMI, ONEOK Partners is not relying on the equity markets to fund the capex budget in 2016. Furthermore, the MLP is projecting to fully cover its distribution in 2016. I’ll have more on ONEOK Partner’s 2016 outlook in a future article. The press release is also unclear as to how ONEOK’s free cash flow will be handled. The company noted that: “Free cash flow after dividends and cash on hand totaling approximately $250 million available to support ONEOK Partners” This implies that ONEOK will be contributing cash directly to its MLP. Earlier this year, ONEOK did help out the MLP by buying 21.5 million common units for $650 million. I would not be surprised if another capital infusion from ONEOK to ONEOK Partners is required next year. Though, I would imagine they would want to use something other than ONEOK Partner’s common equity given the high yield and low unit price. Conclusion While the 2016 outlook is undoubtedly good news for ONEOK, investors need to remember that the dividend is not set in stone. If ONEOK Partners fails to cover the distribution, ONEOK’s dividend will be at risk. Nevertheless, it appears things are not as dire for ONEOK as the stock price and 11% yield implies. I believe the stock will eventually recover to a more reasonable level. Though, short to medium term, the price action will likely be dominated by the general trend in oil as the midstream sector’s fundamentals have been ignored by the market. Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Multialternative Funds: Best And Worst Of November

Mutual funds and ETFs in Morningstar’s multialternative category generally suffered losses in November, with the average fund losing 0.20% for the month. Year-to-date through November 30, the category averaged returns of -1.24%, but over the longer term, multialternative funds have generated three-year returns of +2.95% with a Sharpe ratio of 0.58. That’s not bad, but not all that great, either – particularly when viewed in terms of beta and alpha relative to the Morningstar Moderate Target Risk Index , an index consisting mainly of traditional stocks and bonds. In this monthly review of the best and worst multialternative funds from November, only one of the six featured funds has a track record long enough to analyze its three-year returns – and it was the month’s very worst performer, too. This shows the emerging nature of the category, which typically combines several alternative strategies, often employed by different underlying managers, within a single ’40 Act mutual fund. (click to enlarge) November’s Best Performers The top-performing multialternative mutual funds in November were: The Catalyst Macro Strategy Fund returned an impressive +4.57% in November, but those seemingly stellar returns were barely above its 2015 monthly average. The fund’s one-year return through November 30 stood at a whopping +46.90%, which is an average of roughly 3.90% in gains per month. Even better, for the first eleven months of 2015, the fund averaged gains of roughly 4.76%, with year-to-date returns of +52.40% – wow! But the fund launched on March 11, 2014, and thus it doesn’t have a track record long enough to analyze its three-year returns in terms of beta and alpha. The LoCorr Multi-Strategy Fund also launched recently, on April 6 of this year, to have three years’ worth of returns. In November, it returned +3.14%, making it the second-best multialternative fund to own that month. Finally, the Natixis ASG Global Macro Fund rounded out November’s top three with gains of 1.99%. Year to date through November 30, the fund was down 2.65%. It launched in late 2014, and thus also lacks a sufficient track record to analyze further. (click to enlarge) November’s Worst Performers The two Virtus funds were the second- and third-worst multialternative funds in November, with respective one-month losses of 3.14% (VAIAX) and 2.69% (VSAIX). Both VAIAX and VSAIX have been hampered by the decline in the energy sector. Both funds were launched on the same day in 2014, and thus, they don’t have three-year return data, but they had posted respective one-year returns of -10.27% and -10.35% through November 30. The PSP Multi-Manager Fund was November’s worst-performing multialternative mutual fund, enduring losses of 4.77% for the month. This dropped the fund’s one-year returns through November 30 to a flat 0.00%, while its year-to-date returns through that date were still moderately in the black at +0.69%. Over the longer term, the fund generated annualized returns of +2.55% for the three years ending November 30, with a 0.97 beta and a -3.43 alpha. Its three-year Sharpe ratio stood at 0.32. (click to enlarge) Conclusion As a whole, Morningstar’s multialternative category had three-year returns of +2.59% through November 30. This month’s batch of multialternative funds mostly lacked the track records to evaluate in terms of three-year betas, alphas, and Sharpe ratios – and perhaps that says something about the category and the relative youth of many of the funds in the category. Past Performance does not necessarily predict future results. Meili Zeng and Jason Seagraves contributed to this article.

SCANA Corp. Dividend Stock Analysis

Summary SCANA Corp operates in electric and gas utilities in North Carolina, South Carolina and Georgia. SCANA Corp is a dividend contender having raised dividends for 15 consecutive years and has a Chowder Rule of 5.8. SCANA Corp’s new facility construction in S.Carolina is seeing higher costs and delays resulting in a credit rating downgrade from both Moody’s and Fitch. SCANA Corp (NYSE: SCG ) is an electric and gas utility company operating in North Carolina, South Carolina and Georgia. It owns nuclear, coal, hydro, natural gas and oil, and biomass generating facilities. The major subsidiaries include: South Carolina Electric & Gas – provides electricity and natural gas throughout South Carolina. A regulated public utility and principal subsidiary of SCANA Corporation, SCE&G generates, transmits, distributes and sells electricity to over half a million customers in 24 counties and provides natural gas to customers in 36 counties. PSNC Energy – provides natural gas services in North Carolina. A regulated public utility, PSNC Energy purchases, sells and transports natural gas to more than 508,000 residential, commercial and industrial customers. SCANA Energy – markets natural gas services in Georgia. A leading natural gas marketer, SCANA Energy serves about 460,000 residential, commercial and industrial customers statewide. Other subsidiaries include: SCANA Energy Marketing Inc (markets natural gas and provides energy-related services), SCANA Services Inc (provides administration, management, and other services to SCANA subsidiaries), South Carolina Generating Company Inc (supplies electricity for SCE&G), and South Carolina Fuel Company Inc (fuel supplier for SCE&G). (click to enlarge) (Source: SCANA 2015 Wells Fargo Energy Symposium Presentation ) Corporate Profile (from Yahoo Finance) SCANA Corporation, through its subsidiaries, engages in the generation, transmission, distribution, and sale of electricity to retail and wholesale customers in South Carolina. It owns nuclear, coal, hydro, natural gas and oil, and biomass generating facilities. The company also purchases, sells, and transports natural gas; offers energy-related services; and owns and operates a fiber optic telecommunications network, ethernet network, and data center facilities in South Carolina. In addition, it offers tower site construction, management, and rental services, as well as sells towers in South Carolina, North Carolina, and Tennessee. As of December 31, 2014, the company supplied electricity to approximately 688,000 customers; and provided natural gas to approximately 859,000 residential, commercial, and industrial customers in North Carolina and South Carolina, as well as markets natural gas to approximately 459,000 customers in Georgia. It serves municipalities, electric cooperatives, other investor-owned utilities, registered marketers, and federal and state electric agencies, as well as chemical, educational service, paper product, food product, lumber and wood product, health service, textile manufacturing, rubber and miscellaneous plastic product, and fabricated metal product industries. The company was founded in 1924 and is based in Cayce, South Carolina. A Closer Look SCANA Corp operates both in electric and gas utility sectors. This has been identified in the industry as the path to growth going forward. Other competitors who operated solely in the electric-only business, have started purchasing assets in the gas-utility business in order to diversify and achieve growth. We have seen this lately with the moves from Southern Company (NYSE: SO ) acquiring AGL Resources Inc (NYSE: GAS ); and Duke Energy (NYSE: DUK ) acquiring Piedmont Natural Gas (NYSE: PNY ). The moves are motivated by the fact that electric-only utilities are seeing declining revenues over the years due to a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. In addition, power generating companies are moving to secure natural gas infrastructure as the industry moves to accommodate the US government mandate targeting power plants to cut carbon emissions by 32% (by 2030) on the 2005 levels. Most of the CEOs in the utility industry have accepted the terms and do not intend to fight against the mandate. SCANA has an advantage here as the company is ahead of competition in securing the electric and natural gas infrastructure. In addition, a major part of the company’s power generation comes from zero-emitting sources: hydro and nuclear. The company also has an advantage by operating in North and South Carolina, which is seeing population growth as residents move to these states where cost of living is lower. (click to enlarge) (Source: SCANA 2015 Wells Fargo Energy Symposium Presentation ) SCANA intends to grow earnings in a target range of 3%-6% (95% of which comes from regulated operations) and analysts expect a growth rate of 4.45% over the next five-year period. Credit Rating Downgrades Two rating agencies, Moody’s and Fitch, downgraded SCANA Corp earlier this year. Moody’s gives the company a Baa3 credit rating with a “Negative” outlook ( downgraded in Sep 2015 ). Fitch gives the company a “BBB-” with a “Stable” outlook ( downgraded in May 2015 ). The rating downgrade was mainly due to the delay and cost of the construction of new nuclear reactors in Jenkinsville, South Carolina. The costs are expected to rise to $11B from the initial $9.8B price tag and completion of Unit 2 reactor will be pushed out three years to 2019. SCANA has announced that the delay and related cost increases are due to design and fabrication issues associated with the production of submodules used. Moody’s issued the following statement with the ratings downgrade: “The negative outlooks reflect the projected deterioration in the financial profile across SCANA and its subsidiaries over the next few years” said Ryan Wobbrock, Assistant Vice President. “Although the supportive regulatory environment in South Carolina helps assure the recovery of new nuclear build expenses at SCE&G, we see leverage ratios rising across the family” added Wobbrock. The negative outlooks for SCANA and SCE&G incorporate the 2 September South Carolina Public Service Commission (SCPSC) vote of approval for a revised cost and construction schedule on the Summer new nuclear project. Moody’s views the SCPSC support as a material credit positive because it allows SCE&G to recover increased costs over a protracted time period. Through LTM 2Q15, SCANA and SCE&G produced cash flow to debt metrics of around 14% and 18%, respectively. However, over the next twelve to eighteen months, we expect each company to produce cash flow to debt below 15%, as capex for the nuclear spend reaches its highest levels (i.e., as of the 2Q15 Base Load Review Act (BLRA) filing, new nuclear gross construction capex is projected to be around $776 million for the 2015 period, $1,077 million for 2016, and $1,003 million for 2017), accompanied by an increasing debt load. We see the annual BLRA revenue increases, which recover Construction Work in Progress costs, as insufficient to improve the current negative trend of financial performance through 2019. Dividend Stock Analysis: Financials Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations. (click to enlarge) (Source: Created by author. Data from Morningstar) (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The utility industry is resilient and has seen steadiness over the years. However, revenue has continued to face some pressure over the years although the earnings have seen steady rise since 2011. The debt load is stable over the course of time although high at $6.3B (vs. equity of $5.4B) resulting in a debt/equity of 1.16. The company’s balance sheets show a current ratio of 0.90. Credit ratings: S&P gives it a “BBB+” credit with a “Stable” outlook. Moody’s gives the company a Baa3 credit rating with a “Negative” outlook (downgraded in Sep 2015). Fitch gives the company a “BBB-” with a “Stable” outlook (downgraded in May 2015). SCANA’s yield to maturity is as shown below: (click to enlarge) (Source: Morningstar) Dividends and Payout Ratios Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. SCANA is a Dividend Contender having raised dividends consecutively for 15 years. The 1-, 3-, 5-, and 10-year dividend CAGRs are 3.3%, 2.6%, 2.2%, and 3.8% respectively. Coupled with a current dividend yield of 3.61%, SCANA has a Chowder Rule number of 5.8. The current payout ratio is 41%. Outstanding Shares Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The number of shares have steadily increased over the years. Book Value and Book Value Growth Expected: Growing book value per share. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The book value has trended upwards at a good pace over the years. Valuation To determine the valuation, I use the Graham Number, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here . The Graham Number for SCANA with a book value per share of $37.92 and TTM EPS of $5.27 is $67.05. SCANA’s average yield over the past five years was 4.39% and over the past 10 years was 4.44%. Based on the current annual payout of $2.18, that gives us a fair value of $49.66 and $49.10 over the 5- and 10-year periods, respectively. The average 5-year P/S is 1.42 and average 10-year P/S is 1.21. Revenue estimates for next year stand at $34.41 per share, giving a fair value of $48.86 and $41.63 based on 5- and 10-year averages, respectively. The consensus from analysts is that earnings will rise at 4.45% per year over the next five years. If we take a more conservative number at 4%, running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $92.86. The following charts from F.A.S.T. Graphs provide a perspective on the valuation of SCANA. (click to enlarge) (Source: F.A.S.T. Graphs ) The chart above shows that SCANA is slightly overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be 3.88%, confirming that the valuation is high. (click to enlarge) (Source: F.A.S.T. Graphs ) Conclusion Electric utilities in general have seen slower sales industry-wide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. Coupled with the new regulations from the US government to reduce carbon emissions, electric utilities have started focusing a shift away from dirty fuels such as coal. SCANA has operations concentrating on the nuclear field and already owns a lot of the natural gas infrastructure. However, the capex costs from the construction of new nuclear facilities in South Carolina are ballooning and has resulted in ratings downgrade from both Moody’s and Fitch; and chances of an upgrade anytime soon are low. Earnings are expected to grow at 4.45% over the next five years and dividend growth will lag a bit, although the company has some leeway to grow those dividends making the investment lucrative. The company appears slightly overvalued based on the valuation metrics used above. If we give equal weight to all metrics used above, we get a fair value of $57.95. An added risk for investors is the rise of interest rates by the US Fed. Bond substitutes such as utility stocks suffer in a rising rate environment and investors should stay weary. Full Disclosure: None. My full list of holdings is available here .