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How Will ONEOK’s Segments Perform in 1Q16?

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Natural Gas Liquids segment

ONEOK (OKE) operates as a pure-play general partner of ONEOK Partners (OKS). To analyze OKE’s earnings drivers, we need to look at OKS’s operating segments.

OKS carries out its operations through three reportable segments:

  • Natural Gas Liquids
  • Natural Gas Pipelines
  • Natural Gas Gathering and Processing

ONEOK’s Natural Gas Liquids segment contributed 77% to its 4Q15 EBITDA (earnings before interest, tax, depreciation, and amortization). The segment’s EBITDA grew 21% year-over-year driven by increased volumes of NGLs (natural gas liquids) gathered, fractionated, and transported.

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The segment may continue to see increased NGL gathering and fractionating volumes in 1Q16 as well from the recently connected natural gas processing plants in the Williston Basin, Powder River Basin, and Mid-Continent region. NGL transportation volumes may be higher primarily from the West Texas LPG pipeline system in the Permian Basin.

The above graph shows the contribution by segment to ONEOK’s quarterly EBITDA since the start of 2014. ONEOK forms ~2% of the PowerShares High Yield Equity Dividend Achievers ETF (PEY).

Natural Gas Gathering and Processing segment

ONEOK’s Natural Gas Gathering and Processing segment contributed only 6% to the company’s 4Q15 EBITDA. The segment’s percent-of-proceeds contracts expose it to commodity price risks. OKE is focusing on working with producers to convert its existing percent-of-proceeds contracts to include a larger fee component.

“In 2015, ONEOK Partners took important steps to reduce commodity risk through initiatives such as contract restructuring in the Williston Basin and the completion of strategic capital-growth projects that will provide primarily fee-based earnings,” said Terry K. Spencer, president and chief executive officer of ONEOK during the 4Q15 earnings release.

The challenging commodity price environment may impact the upcoming results of gathering and processing MLPs. EQT Midstream Partners (EQM) and DCP Midstream Partners (DPM) are scheduled to report their 1Q16 results on April 28 and May 4, respectively.

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