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Why Continued Low Commodity Prices May Prevent an ONEOK Revival

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Correlation with commodity prices

ONEOK’s (OKE) stock price and the near-month WTI crude oil futures price have had a correlation coefficient of 0.64 over the last 15 years. This indicates a positive correlation between the two. The correlation between WTI prices and OKE shares is even higher at 0.92 since the start of 2014. Crude oil prices have fallen sharply since mid-2014.

The correlation coefficient between OKE and natural gas prices, on the other hand, over the last 15-year period is -0.33. The coefficient has switched to positive 0.84 since the beginning of 2014.

Natural gas prices have lost 54% since the start of 2014. The above graph shows the normalized prices for OKE’s stock, natural gas, and WTI (West Texas Intermediate). ONEOK forms ~2% of the PowerShares High Yield Equity Dividend Achievers ETF (PEY).

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OKE seems to be driven more by crude oil prices. This is due to OKE’s exposure to NGL (natural gas liquids) prices, which are mainly driven by crude oil prices. A recovery in oil prices could mean a higher stock price for OKE. But this also means that OKE shares would remain under pressure as long as crude oil prices remain weak.

Commodity price sensitivities

ONEOK’s Natural Gas Gathering and Processing segment is exposed to fluctuations in commodity prices. Let’s look at some key highlights of OKE’s sensitivity analysis for the year ending December 31, 2016.

  • A $0.01 per gallon change in the composite price of NGLs would change its 12-month net margin by ~$1.8 million.
  • A $1.00 per barrel change in the price of crude oil would change its net margin by ~$1.3 million.
  • A $0.10 per MMBtu (million British thermal units) change in the price of residue natural gas would change its net margin by ~$3.3 million.

So given that crude oil has fallen ~62% and natural gas has fallen ~54% since the start of 2014, it’s not surprising that OKE has fallen ~62% over this period.

Low commodity prices have impacted most infrastructure MLPs, including Plains All American Pipeline (PAA), Magellan Midstream Partners (MMP), and Enbridge Energy Partners (EEP).

Apart from oil prices, how ONEOK’s stock performs in the future will depend on two crucial factors:

  1. its ability to bring down leverage
  2. its ability to grow EBITDA even in the challenging commodity price environment

OKE’s initiative to minimize commodity price exposure in its Gathering and Processing segment is one step toward meeting the second objective.

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