Running out of gas

ONEOK Partners still attractive, but near-term concerns weigh it down

By Jim J. Jubak Nov 10, 2009 4:27PM

Jim JubakMaster limited partnership units of ONEOK Partners (OKS) have run through my target price of $54 a share by March 2010 and just kept on going.

I still like this natural gas pipeline play for its yield of 7.5% (as of Monday), so I'm keeping it in my Dividend Income Portfolio. 

But I just can't see more than a couple of bucks more in price appreciation in the next year, and that would limit the total return on these units. So, I'm selling them out of my 12- to 18-month Jubak's Picks portfolio with this post.

On November 3rd, the master limited partnership reported third-quarter earnings of $1 a unit, beating Wall Street estimates by 13 cents. Revenues, however, fell 30% from the third quarter of 2008 to $1.56 billion. That was significantly short of the $1.86 billion expected by Wall Street. 

ONEOK Partners did raise guidance earnings for all of 2009 to a range of $3.40 to $3.60 per unit, above the analyst consensus. The previous guidance from the company was for $3.25 to $3.65 per unit. 

The near-term worry is that depressed natural gas demand as the U.S. only slowly comes out of recession will leave some of the company's pipelines operating at less than full capacity.

OKS has added significant new capacity out of the Barnett shale region of Texas, for example, but reduced drilling and production in that field could mean that it will take a year or more before the new pipelines are running at full load. 

The Arbuckle pipeline, which went into service in July, operated at about half-capacity in the third quarter, for instance. (For more on the US natural gas glut, see my November 3rd post).

With interest rates low, the partnership should, however, have no problem funding its plans to invest $300 million to $500 million annually in new capital projects through 2015.

I'm selling these units with a 40% capital gain and interest income of about 8% since I added them to the portfolio on October 7, 2008.

Jim Jubak plans to sell his personal position in ONEOK Partners three days after this is posted. 

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