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Will 3Q15 Results Change ONEOK Partners’ Valuation?

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Oct. 27 2015, Published 4:24 p.m. ET

ONEOK Partners’ forward yield

ONEOK Partners’ (OKS) forward distribution yield of 9.6% is ~125 basis points higher than its selected peer average. Peers included in the average calculation are Enbridge Energy Partners (EEP), Targa Resources (NGLS), and Enterprise Products Partners (EPD). Forward distribution yield is calculated as estimated distribution per share for the current fiscal year divided by market price per share.

The Alerian MLP Index (AMZ) currently trades at a yield of 7.7%. Low distribution coverage, high leverage, and low expected distribution growth contribute to ONEOK Partners’ relatively higher forward yield. ONEOK Partners had an adjusted debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 4.5x at the end of 2Q15.

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The above graph compares the forward distribution yields of the four MLPs relative to their expected distribution growth. To learn more about EEP’s high yields, read Will 3Q15 Results Change Enbridge Energy Partners’ Valuation? Other MLPs with natural gas gathering and processing assets include Southcross Energy Partners (SXE) and Summit Midstream Partners (SMLP).

Expected distribution growth

For the next two years, ONEOK Partners is expected to have a compounded distribution growth of just 1.5%. In comparison, EEP, NGLS, and EPD are expected to have distribution growths of 4.5%, 1.6%, and 6.0%, respectively. ONEOK Partners’ higher yield seems to be justified by its lower-than-average forward distribution growth among selected peers.

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EV-to-EBITDA multiple

ONEOK Partners’ EV-to-EBITDA (enterprise-value-to-EBITDA) ratio using a trailing 12-month EBITDA is 11.3. In comparison, the ratios for EEP, NGLS, and EPD are 13.6, 10.5, and 15.0, respectively.

ONEOK Partners’ forward EV-to-EBITDA multiple is 9.6. The forward ratio is based on the estimates for the current fiscal year’s EBITDA. This indicates expectations of higher EBITDA in the third and fourth quarters of 2015.

Impact of IDRs

It should be noted that the EV-to-EBITDA ratio can be misleading when you’re trying to understand the unit valuation of limited partner units. This is because the entire EBITDA in the EV-to-EBITDA ratio calculation may not be available to limited partners.

ONEOK Partners has IDRs (incentive distribution rights) in its structure. It currently operates in the highest distribution tier with a 50% split. This split means its general partner gets 50% of incremental cash flows above $0.47 distribution per unit.The presence of IDRs is also reflected in OKS’s relatively higher yields. OKS forms ~1% of the Guggenheim Multi-Asset Income ETF (CVY).

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