EP EL Paso Corp. (Holding Co.)

Master limited partnership ONEOK Partners L.P. (OKS) reported exceptionally strong third quarter results, reflecting a year-over-year earnings growth of 56%. The partnership’s earnings for the quarter came in at 84 cents per unit compared to 54 cents earned in the year-ago quarter.

Earnings for the quarter also compared favorably with the Zacks Consensus Estimate of 64 cents, implying a positive surprise of 31.3%.

The exceptionally strong results were driven by solid results at its natural gas liquids segment, due to higher natural gas liquids price differentials as well as higher natural gas liquids volumes gathered and fractionated.

Operating Results

Total revenue of $2.9 billion in the quarter improved 40% from last year’s $2.07 billion.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were $312.6 million, up 32% from the year-ago period.

Operating income rose 51% to $242.4 million in the quarter, driven by favorable natural gas liquids (NGL) price differentials, increased NGL fractionation and transportation capacity available for optimization activities, higher NGL volumes gathered and fractionated, contract renegotiations, contract renegotiations, and higher isomerization margins in the natural gas liquids segment.

Equity earnings from investments climbed $2.6 million to $32.0 million, driven by increased contracted capacity on the Northern Border Pipeline (50% interest ownership). Additionally, ONEOK Partners' 50% interest in the Overland Pass Pipeline is accounted for in equity earnings from investments, effective September 2010.

Operating costs increased $8.5 million to $106.3 million, primarily driven by higher labor and employee-related costs associated with incentive and benefit plans, higher property taxes, and higher expenses for materials and outside services associated primarily with scheduled maintenance at the partnership's NGL fractionation and storage facilities.

Distributable cash flow (DCF) totaled $233.4 million, up 50% compared with $156.0 million last year.

Segment Analysis

Natural Gas Liquids segment: Operating income for the Natural Gas Liquids segment increased $73.9 million to about $157.1 million, as a result of favorable NGL price differentials, increased NGL fractionation and transportation capacity available for optimization activities between the Mid-Continent and Gulf-Coast markets, an improvement in NGL volumes gathered and fractionated, higher isomerization margins and higher storage margins as a result of favorable contract renegotiations.

Natural Gas Gathering and Processing segment: Operating income at the Natural Gas Gathering and Processing segment increased 35.6% year over year to $51.8 million. Results at this segment benefited from higher net realized NGL and condensate prices, higher natural gas volumes processed in the Williston Basin, and favorable changes in contract terms, offset partially by lower volumes in Kansas due to natural production declines and lower natural gas volumes gathered primarily in the Powder River Basin.

Natural Gas Pipelines segment: Natural Gas Pipelines segment’s operating income dipped by $5 million to $34.0 million, on account of lower transportation margins and lower realized prices on its retained fuel position. Transportation margins decline mainly due to narrower natural gas price location differentials that reduced contracted transportation capacity on Midwestern Gas Transmission and reduced interruptible transportation volumes across its pipelines.

Capex

Capital expenditures increased to $252.2 million, compared with $104.1 million in the third quarter 2010, due to growth projects in the natural gas gathering and processing and natural gas liquids segments.

Outlook

Based on higher expected earnings in the natural gas liquids segment, ONEOK Partners raised its earnings expectation for 2011 by 15% to be in the $740 - $770 million range, compared with the previous guidance of $630 - $660 million. The partnership also revised its distributable cash flow target for the year to be in the range of $850 - $880 million, versus its previous guidance of $735 - $765 million.

ONEOK Partners' 2011 operating income is guided to be approximately $870 million, compared with its previous guidance of $752 million.

Capital expenditure budget for 2011 is $1.2 billion, comprising $1.1 billion in growth capital and $97 million in maintenance capital.

Our View

Based in Tulsa, Oklahoma, ONEOK Partners is one of the largest publicly traded master limited partnerships and a leader in gathering, processing, storing and transporting natural gas in the United States.

ONEOK Partners currently retains a Zacks #3 Rank (short-term Hold rating). We maintain our long-term Neutral rating on the stock. The major peers of the partnership are El Paso Corp. (EP) and Enbridge Inc. (ENB).

 
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