But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Must-know: Inflation remains muted at the wholesale level
Inflation at the wholesale level has been typically taken to predict inflation at the consumer level. In a normal business environment, producers pass these increased costs to consumers, which would decrease disposable income if wages didn’t rise accordingly. So a little inflation is considered a good thing.
The front-month Ginnie Mae TBAs were roughly flat as bonds rallied four basis points. Ginnie Mae TBAs began the week at 105 28/32 and fell to 105 27/32.
Fannie Mae MBS sold off a bit on a weak bond market. The Fannie Mae 4% TBA started the week at 104 29/32 and lost about 5 ticks to close at 105 3/32.
The dominant event for bonds was the FOMC meeting last week. The Fed decided to continue to reduce asset purchases and held the Fed Funds rate constant.
The FOMC met last week. There were no major surprises on the interest rate front. But the dot graph, shown below, did change from the June meeting. FOMC members raised their forecast for the federal funds rate at the ends of 2015 and 2016.
The upcoming week has a lot of real-estate related data, with existing home sales, the FHFA Home Price Index, mortgage applications, and new home sales. We’ll also hear from homebuilder KB Home (KBH).
Producers currently receive higher market prices for crude oil and NGLs (or natural gas liquids) compared to natural gas. So many producers have focused their drilling activity in NGL-rich shale areas rather than areas that produce dry natural gas.
ONEOK Partners (OKS) plans on spending $7.0 to $7.5 billion in growth projects from 2010–2016. Approximately $4.1 billion of that money will be spent in the natural gas gathering and processing segment, while $3.2 billion will be spent in the natural gas liquids (or NGLs) segment.
Now that we’ve looked at various sources of margin across ONEOK Partners’ (OKS) business segments, let’s delve deeper into the margin mix within these segments.
Natural gas, crude oil, and NGL (or natural gas liquid) supply is affected by several factors that could be supply related or demand related.
Energy Transfer Partners (ETP) is the largest company by enterprise value (or EV). Williams Partners (WPZ) is the largest company by market capitalization among its peers.These peers include ONEOK Partners (OKS), Plains All American Pipelines (PAA), and Spectra Energy Partners (SEP).
For 2Q14 (or the second quarter of 2014), ONEOK Partners’ (OKS) natural gas gathering and processing segment reported an operating income of $66.1 million, which was 20% higher year-over-year (or YOY). Natural gas volume growth in the Williston Basin and Cana-Woodford Shale attributed to the increase.
ONEOK Partners (OKS) reported second quarter revenue of $3 billion, missing the Wall Street analysts’ estimate of $3.5 billion. Revenues were higher by approximately 11% year-over-year (or YOY).
Price differentials between ethane and natural gas have resulted in ethane rejection at most of ONEOK Partners’ natural gas processing plants. Ethane rejection is also being seen in customers’ gas processing plants that are linked to OKS’ natural gas liquids assets.
While all three of ONEOK Partners’ (OKS) business segments provide predominantly fee-based services, OKS’ sources of margin (or revenue) include income based on commodity prices and price differentials.
Producers require gathering and processing services to market their natural gas and NGL (or natural gas liquid) production. Producer demand is affected by seasonal demand, economic conditions, and the demand associated with various industries that utilize the commodity. For instance, butane and natural gasoline are used as blending stocks for motor fuel and diluents for heavier crude oil by the refining industry.
Earlier this year, ONEOK (OKE) created a new stand-alone publicly traded company called ONE Gas (OGS), separating its natural gas distribution business into a separate dedicated company. The company believes that by having two separate companies, each of the companies will have a greater focus on its individual strategy, financial strength, and growth potential.
ONEOK Partners’ (OKS) natural gas pipelines segment owns and operates regulated interstate and intrastate natural gas pipelines and natural gas storage facilities.
ONEOK Partners’ (OKS) natural gas liquids segment provides natural gas liquid gathering, fractionation, transportation, marketing, and storage services to its producers.
ONEOK Partners’ (OKS) natural gas gathering and processing segment provides natural gas gathering, compression, treatment, and processing services to natural gas producers.