All Eyes on Energy Substituting Majors, of which ONEOK a Special Guest

With Russia’s effectively announcing establishment of petroruble in its energy exports, it’s the right time to bet on global companies capable of substituting parts of the former’s petrocarbon (hydrocarbons) deliveries. Natural gas prices are now at a 5-year high, and are showing absolutely no signs of retreat. With Europe having a full-blown energy crisis, the demand for energy is rapidly soaring in the region and beyond.

ONEOK (OKE) is a U.S. owner of natural gas pipelines and processing plants. It's a midstream service provider, that owns collecting, processing, storage, and transportation divisions. It owns extensive assets in the midcontinent, Permian, and Rocky Mountain regions. ONEOK provides midstream services to producers and processors of natural gas, crude oil, and NGL (these are hydrocarbons). Approximately 10% of U.S. natural gas production is reliant on the utilization of ONEOK’s infrastructure.

After fighting to sustain their remarkably large dividends during 2020 and the start of 2021, ONEOK has since seen surprisingly strong performance. The company’s guidance for 2022 sees an adjusted EBITDA of $3.62 billion at the midpoint, meaning a rather solid for a resource company increase of 7.11% YoY versus their result of $3.38 billion during 2021, as per their Q4 2021 results announcement. Given its positive correlation to their operating cash flow, this means that the latter should also see a similar increase to the area of $2.725 billion during 2022.

ONEOK is valued at approximately 12x EBITDA minus total capex, which is at the lower end of its peers’ multiples. Their dividend payout already consume a sizeable ~60% of their estimated operating cash flow for 2022, which for example is higher than the equivalent approximate 50% seen by their midstream peer, Kinder Morgan (KMI). The soft point about this company is that ONEOK carries a significant amount of leverage. As of Q4 2021, its net debt-to-EBITDA was 4x. Nevertheless, management intends on getting its balance sheet to 3.5x in the near term.