EP EL Paso Corp. (Holding Co.)

ONEOK Partners L.P.’s (OKS) first quarter earnings of 91 cents per unit surpassed the year-ago split-adjusted results of 58 cents. Earnings were also higher than the Zacks Consensus Estimate of 79 cents per unit.

The year-over-year growth was driven by positive natural gas liquids (NGL) price differentials and higher NGL volumes gathered and fractionated.

Total Revenue

Net revenues during the quarter increased 3.8% to $2.59 billion from $2.50 billion reported in the year-ago quarter. However, the top line fell short of the Zacks Consensus Estimate of $3.06 billion.

Operating Results

Total operating expense, in the quarter, increased 9.0% from the comparable prior-year period. The rise was mainly due to a 5.5% year-over-year increase in operating and maintenance expenses.

Operating income in the quarter was $256 million, up 44% from the year-ago quarter. It benefited from favorable NGL price differentials, increased NGL fractionation and transportation capacity available for optimization activities, higher NGL volumes gathered and fractionated, and favorable contract renegotiations in the Natural Gas Liquids segment. 

Equity earnings from investments increased to $34.6 million from $32.1 million in the first quarter of 2011.

Segment Analysis

Natural Gas Liquids: The Natural Gas Liquids segment reported operating income of $174.5 million in the reported quarter compared with $100.7 million a year ago. The results were driven by favorable NGL price differentials and improved volumes.

There was an accident at the company’s NGL fractionation facility in Medford, Oklahoma. This accident disrupted normal operations for 10 days and thus lowered net margins by $10 million.

Natural Gas Gathering and Processing: The first quarter operating income was $47.6 million compared with $39.4 million in the year-ago quarter. The results were driven by higher natural gas volumes gathered, processed and sold in the Williston Basin.  

Natural Gas Pipelines: The Natural Gas Pipeline segment reported operating income of $33.0 million in the first quarter compared with $36.8 million a year ago. The downside was due to lower realized natural gas prices and a decline in natural gas storage margins.

Financial Condition

As of March 31, 2012, the partnership had $746.7 million of cash and cash equivalents versus $35.1 million as of December 31, 2011.

Cash flow from operation during the reported quarter was $219.2 million versus $277.5 billion reported in the prior-year quarter.

Capital expenditure (capex) during the reported quarter was $280.8 million versus $144.8 million in the yea-ago period. The investment made in its Natural Gas Gathering and Processing and Natural Gas Liquids segments resulted in the $136 million year-over-year rise in capex.

Outlook

The partnership reaffirmed its 2012 net income guidance range of $810 million to $870 million and its distributable cash flow (DCF) in the band of $925 million to $985 million.

The partnership has decided to invest $4.7 billion to $5.6 billion in growth projects during the 2011 to 2015 timeframe. The investment will be made to build new pipelines and natural gas processing facilities and further develop its existing bases in its service territories.

Peer Comparison

El Paso Corporation (EP), another big operator in the pipeline business, is expected to report its first quarter 2012 earnings results on May 3, 2012. The Zacks Consensus Estimate for the first quarter is 27 cents.

Our View

The strong showing at the Natural Gas Liquid segment helped the partnership to surpass prior-year results as well as our expectation. The partnership continues to make significant investments in varied projects, which we believe will enable it to meet the increasing demand from natural gas producers.

Based in Tulsa, Oklahoma, ONEOK Partners is one of the largest publicly traded master limited partnerships and a leader in gathering, processing, storing and transporting natural gas in the United States. ONEOK Partners currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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