analysts: christopher carson, mark latimer, applied ... · balance sheet. financial dashboard...
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Applied Portfolio ManagementAnalysts: Christopher Carson, Mark Latimer,
Harshad Phadke and Dakota McMahon
Report Date: 5/8/2015Market Cap (mm) $9,642 Annual Dividend $3.07 2-Yr Beta (S&P 500 Index) 0.82Return on Capital 9.8% Dividend Yield 7.7% Annualized Alpha -31.3% Compared With:
EPS (ttm) $2.33 Price/Earnings (ttm) 17.0 Institutional Ownership 4.2% Williams Companies, Inc.Current Price $39.63 Economic Value-Added (ttm) $627 Short Interest (% of Shares) 3.1% Kinder Morgan, Inc.
12-mo. Target Price $45.00 Free Cash Flow Margin -3.6% Days to Cover Short 8.4 and the S&P 500 Index
Business Description
Total Revenue 2.5% Free Cash Flow -293.9%EBIT 6.7% Total Invested Capital 25.8%
NOPAT 6.7% Total Assets 17.8%Earnings Per Share -11.4% Economic Value-Added -2.5%
Dividends Per Share 9.1% Market Value-Added -22.6%
2010 2011 2012 2013 2014
6.5% 8.3% 9.4% 7.5% 9.4%1.6% 0.6% -6.0% -7.8% -3.6%4.4% 5.8% 5.6% 4.5% 5.9%5.7% 4.1% 5.0% 5.5% 7.7%
2010 2011 2012 2013 2014
1.75 3.35 3.04 2.35 2.332.25 2.37 2.69 2.89 3.072.71 4.55 4.35 3.90 4.635.43 0.80 (4.21) (3.04) (4.88)
Datasource: Capital IQ
ONEOK Partners, L.P. Sector: Energy BUYOKS
ONEOK Partners, L.P. engages in the gathering, processing, storage, and transportation of natural gas in the United States. It operates in three segments: Natural Gas Gathering and Processing; Natural Gas Liquids; and Natural Gas Pipelines. The Natural Gas Gathering and Processing segment gathers and processes natural gas produced from crude oil and natural gas wells located in the Mid-Continent region; and gathers and processes natural gas in the Williston Basin, which spans portions of Montana and North Dakota, and the Powder River Basin of Wyoming. The Natural Gas Liquids segment gathers, treats,
Investment Thesis
ANNUALIZED 3-YEAR CAGR
Since we believe that US economy is reaching the peak of expansionary cycle, we seek to overweight our portfolio with few quality dividend stocks from risk-off sectors. OKS is one such stock that grabbed our attention with its proven record of high dividend yield and healthy balance sheet. Financial dashboard indicates that OKS has gained operating efficiency in recent years, as EBIT and NOPAT are increasing at a faster rate than the revenue. What is even more impressive is the dividend growth rate has trumped the margins. This shows management's commitment towards increasing distribution to its investors. In recent years OKS has positioned itself for growth in the midstream sector by focusing on natural gas liquids. We believe that cash flows from increased capital investment and acquisitions will soon start adding to the bottom line profits. As one of the largest
Margins and Yields
Operating Margin
Per Share Metrics
Earnings
NOPATFree Cash Flow
Dividends
Free Cash Flow MarginEarnings YieldDividend Yield
-30%-25%-20%-15%-10%
-5%0%5%
10%15%20%
OKS ^SPX
-30%-20%-10%
0%10%20%30%40%50%
OKS WMB KMI
020406080
100120140160180200
2009 2010 2011 2012 2013 2014
Price/Earnings Price/Free Cash Flow
$0
$200
$400
$600
$800
$1,000
$1,200
2009 2010 2011 2012 2013 2014
EBIT Net Operating Profit After Tax
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
$0$100$200$300$400$500$600$700$800
2009 2010 2011 2012 2013 2014
Economic Value-Added Market Valued-Added
0%
5%
10%
15%
20%
25%
2009 2010 2011 2012 2013 2014
ROA ROE ROIC
Recommendation: Buy Market Cap: $10,647.5 million
Current Price: $39.63
Sector: Energy Dividend Yield: 7.53% 12‐Month Target: 45.00
Annual Dividend: $3.07 P/E Ratio: 17.00 Beta: 0.31
Highlights
Low 1‐yr Beta of 0.31 with a P/E within reasonable range of 12‐18
Strong commitment to increasing dividends
High Dividend yield of 7.53%, due to a sharp price drop in recent year
Well positioned to take advantage of expansion in use of natural gas
New pipeline construction from Permian Basin to Mexico to open a huge market
At a current price of $42, and an intrinsic value of $77.93 for FCF model and $159 for DDM,
OKS is undervalued by 85.55% and 378.57% respectively
Macroeconomic Outlook
There is strong evidence that the
employment picture in the United
States continues to improve. A strong
dollar is weighing on exports which may
hurt domestic producers, however,
cheap commodities is working to
suppress an increase in trade deficit.
Manufacturing sales, personal income,
non‐farm payrolls and industrial
production are all signaling that
currently the economy is in a state of expansion. However, consumer sentiment has a role to play
in the direction of the economy going forward. If consumers are happy with economic conditions
they will act like it by ramping up purchases etc. The reading of consumer sentiment gives us
pause, coupled with a rise in unit labor cost gives us an indication that we are in the middle of an
expansion cycle, means that while things are going to keep growing, we predict that they will
grow at a slower rate, but that we do not expected an actual decline in the near future ‐ which is
what our diffusion index say. While we do have our hesitations about the future, nothing
indicates a certain immediate impending disaster. Our conclusion would be that we are in the
middle of an expansion, but should be vigilant in continuing to monitor leading indicators.
Business Description
ONEOK Partners, L.P. engages in the gathering, processing, storage, and transportation of natural
gas in the United States. It operates in three segments: Natural Gas Gathering and Processing;
Natural Gas Liquids; and Natural Gas Pipelines. The Natural Gas Gathering and Processing
segment gathers and processes natural gas produced from crude oil and natural gas wells located
in the Mid‐Continent region; and gathers and processes natural gas in the Williston Basin, which
spans portions of Montana and North Dakota, and the Powder River Basin of Wyoming. The
Natural Gas Liquids segment gathers, treats, fractionates, and transports natural gas liquids
(NGLs), as well as stores, markets and distributes NGL products primarily in Oklahoma, Kansas,
Texas, New Mexico, and the Rocky Mountain region.
This segment also owns the Federal Energy Regulatory Commission (FERC)‐regulated NGLs
gathering and distribution pipelines in Oklahoma, Kansas, Texas, New Mexico, Montana, North
Dakota, Wyoming, and Colorado; terminal and storage facilities in Missouri, Nebraska, Iowa, and
Illinois; and FERC‐regulated NGLs distribution and refined petroleum product pipelines in Kansas,
Missouri, Nebraska, Iowa, Illinois, and Indiana. The Natural Gas Pipelines segment owns and
operates regulated natural gas transmission pipelines and natural gas storage facilities; and
provides interstate natural gas transportation and storage services. This segment’s interstate
natural gas pipeline assets transport natural gas through FERC‐regulated interstate natural gas
pipelines in North Dakota, Minnesota, Wisconsin, Illinois, Indiana, Kentucky, Tennessee,
Oklahoma, Texas, and New Mexico. It also transports intrastate natural gas through its assets in
Oklahoma; and owns underground natural gas storage facilities in Oklahoma, Kansas, and Texas.
ONEOK Partners GP, L.L.C. serves as the general partner of ONEOK Partners, L.P. The company
was founded in 1993 and is headquartered in Tulsa, Oklahoma.
The adjacent graph shows the sharp
drop in stock price of OKS in last one
year. OKS stock has lost about 21%,
whereas S&P 500 index gained over
10% during the same period.
Investment Thesis
Since we believe that US economy is reaching the peak of expansionary cycle, we seek to
overweight our portfolio with few quality dividend stocks from risk‐off sectors. OKS is one such
stock that grabbed our attention with its proven record of high dividend yield and healthy balance
sheet. Financial dashboard indicates that OKS has gained operating efficiency in recent years, as
EBIT and NOPAT are increasing at a faster rate than the revenue. What is even more impressive
is the dividend growth rate has trumped the margins. This shows management's commitment
towards increasing distribution to its investors. In recent years OKS has positioned itself for
growth in the midstream sector by focusing on natural gas liquids. We believe that cash flows
from increased capital investment and acquisitions will soon start adding to the bottom line
profits. As one of the largest independent service provider in midcontinent, OKS is well positioned
to take advantage of American energy revolution. Its legacy assets include a large system of gas
gathering and transportation assets in the Mid‐Continent.
As more than two third of the margins are generated through fixed fee based gas storage and
transportation services, OKS’ margins have a little cushion against recent drop in the oil and gas
prices. Since the commodity risk is only partially hedged, we see stressed profit margins in near
future, but the long term growth story is still intact. Through its ownership in six key oil and gas
basins, natural gas gathering processing units, and vast network of pipelines and storage systems,
OKS has become a dominant market supplier of natural gas to the domestic and international
buyers. With more than $5 billion in growth projects underway and entering service through
2015, OKS will further cement its position as a dominant player in NGL midstream services. Given
the strong growth potential and large dividend yield, we believe that OKS will be a great addition
to student portfolio.
Overview of OKS Assets
The following image below depicts prominent shale gas plays and basins in the mid‐continent of
North America. Given OKS’s revenues are solely from the United States, it is important to
understand OKS’s operations within the mid‐continent region. A particular focus will be centered
on the Williston basin in North Dakota and the Permian Basin in Texas.
The red line to the left leads to the
Williston Basin which will be the topic
of discussion for this paragraph. OKS
has a strong foothold in the Williston
Basin which is one of the largest
untapped Basins in North America.
Specifically, OKS is the largest
independent natural gas gatherer and
processor in the Williston Basin
serving 60% of the five million acres.
Approximately half of producers rigs
in the Williston Basin drill in OKS 3
million acre plot. Furthermore, drilling
is economical in the Williston Basin
with crude oil prices (WTI) as low as
$45 per barrel. OKS has 1.4 to 1.9
billion in capital investments
underway in the Williston basin to be
completed by Q3 of 2016. These investments will help OKS establish its pipeline infrastructure
and increase its volume fee based earnings.
Williston Basin: which will be the topic of discussion for this paragraph. OKS has a strong foothold
in the Williston Basin which is one of the largest untapped Basins in North America. Specifically,
OKS is the largest independent natural gas gatherer and processor in the Williston Basin serving
60% of the five million acres. Approximately half of producers rigs in the Williston Basin drill in
OKS 3 million acre plot. Furthermore, drilling is economical in the Williston Basin with crude oil
prices (WTI) as low as $45 per barrel. OKS has 1.4 to 1.9 billion in capital investments underway
in the Williston basin to be completed by Q3 of 2016. These investments will help OKS establish
its pipeline infrastructure and increase its volume fee based earnings.
Permian Basin in west Texas: The Permian Basin is one of the top five reserves in North America
with more than two dozen oil and gas wells in current operation. Similar to the Williston basin
above; drilling is economical in the Permian Basin with crude oil prices (WTI) as low as $47 per
barrel. More recently, OKS has established itself within this region to take advantage of exporting
supplied gas to untapped markets in northern Mexico.
Potential Years of Drilling: Following the
discussion above of OKS and the shale gas plays
and basins the company has established itself in;
an understanding of the potential years of drilling
in each of the Basins is crucial for any sustainable
competitive advantages for the company. The
Bakken shale and Williston Basin in North Dakota
are estimated to provide up to 35 years of
potential drilling. In addition, The Permian Basin in
west Texas is estimated to provide 80 years of
drilling. As a result, both of these regions leave
OKS well positioned for future growth.
Historical Performance
3YR Compound Average Growth Rates
With EBIT and NOPAT growing
faster than total revenue OKS
show operating and tax
efficiencies. Earnings per share
post a value of ‐11.4%. This is due
to the fact that net income
growth has been outpaced by the growth in the number of Total Common Shares over the last 3
years. Dividends per share is a strong value of 9.1% further indicating OKS’s commitment to
increasing dividends. Free cash flow has a three year CAGR of roughly ‐300%. With total invested
capital around 26% and a NOPAT of 6.7%, we would expect Free Cash Flow to be negative but
not to the extent of 300%. Later in the paper will be a discussion on why this is the case for OKS
and how the capital growth projects for OKS will provide. Lastly, although Economic Value‐Added
has decreased, Market Value‐Added has taken a more substantial hit providing a more
undervalued entry point for investors.
Revenue and Margins Analysis
The above graph depicts five key metrics for OKS over an eight year span. To begin, revenue
growth for OKS has been positive each year with the exception of 2009 and 2012. It is important
to note that despite the fluctuations in revenue growth, OKS has been able to maintain relatively
stable gross, EBIT, and net income margins over this same span. The increase in EBIT and gross
margin from 2013 to 2014 indicates that a greater percentage of revenue is available to flow
toward bottom line profits, then to free cash flow that support OKS intrinsic value, and back to
investors in the form of dividends. Furthermore, the graph illustrates OKS strong commitment to
dividends as the company has been increasing dividends per share each year over the past eight.
Effect of Capital Projects on Profitability and Value addition
ROA, ROE, and ROIC have been on a downtrend since 2011. This is a result of net income being
outpaced by an increase in total assets, shareholder equity, and NOPAT respectively. These
metrics are currently near historical averages in 2009 and 2010. With large increases in total
invested capital from 2012 to 2014, outpacing the values for NOPAT, free cash flow has taken a
dive in this period. MVA has followed in a similar suit to EVA until 2014. The substantial fall in
MVA compared to EVA provides a more undervalued entry point for investors.
Debt and Liquidity Analysis
The above graph exhibits six key figures of OKS’s balance sheet for the duration of past 10 years.
It is evident from the graph that both total equity and total debt are on a secular uptrend during
this period. What is important is notice is that OKS has successfully maintained the debt‐to‐equity
ratio in a tight range of 1.24 to 1.78. At the end of FY 2014, this ratio was 1.39. This shows that
OKS’s management is committed to maintain the debt at a manageable level. Next looking at
debt‐to‐asset ratio, which remained constant over the last ten years, we can confirm that most
of the debt is used on purchase tangible capital assets, and not to pay the dividends or share
repurchase program of OKS. The current ratio has come down to 0.46, which is historically at the
lowest point in last decade. But for the company like OKS this should not be a point of concern.
With a $1.7 billion open line of credit that can be extended to $2.4 billion (matures in 2019), OKS
has access to plenty of short term liquidity. Lastly, the times interest covered ratio is a measure
of a company's ability to honor its debt payments. It may be calculated as EBIT divided by the
total interest payable. According to company’s latest 10‐K report, OKS’s management is
committed to keep this ratio above level of 4. With such high level of interest coverage ratio, we
are confident that OKS can honor its interest payment obligations and there is no threat of
bankruptcy at least in the foreseeable future.
Capital projects
Completed and planned capital projects
OKS completed $8 bil of capital
growth projects and acquisitions from
2006 – 2014. There are nearly $3 bil
capital‐growth projects in progress.
OKS has not only continued to
complete capital growth projects on
time and on budget, but also doubled
unannounced capital growth projects
in 2014.
Purpose of the Capital Projects
There are several reasons why OKS is heavily investing in these capital projects. Few of these
reasons are explained below:
OKS is building the first‐ever NGL pipeline to transport NGLs out of the Williston Basin. 24% of
North Dakota’s natural gas production is flared, and North Dakota Industrial Commission (NDIC)
has set policy targets to reduce flaring to 15% by 1Q2016 and 5% – 10% by the 4Q2020. OKS
controls 60% of the 5 million acres are of the Williston basins, and is a natural monopoly in the
region.
The Environmental Protection Agency’s CO2 limits for power plants are likely to accelerate the
decline of coal for electricity generation, which will increased demand for natural gas‐fired
electric generation. OKS will be greatly benefited due to these capital projects, as approximately
35 existing coal‐fired, electric power generation plants within 20 miles of OKS’ natural gas
pipelines.
OKS is also one of the very few midstream gas sector companies to get the access to West Texas
natural gas region and is well positioned to take advantage of the increasing demand of natural
gas in Mexico.
SWOT Analysis Strengths
Pipelines are the Cheapest Transportation Method
Pipelines that transport liquid across great distances are 30% cheaper than rail transportation
and 90% cheaper than transportation by trucks. Pipeline use cuts down on greenhouse gases and
expenses, which should decrease the cost and demand the demand for liquid that are
transported by pipeline.
High Domestic availability of Natural Gas
Plenty of natural gas is found in the United States. This geographic advantage make natural gas
a realistic wholesale solution to domestic fuel needs. It also limits the need for imported fuels,
which save money for government and industries. "Domestic Geographic Locations" will have a
long‐term positive impact on this entity, which adds to its value.
Advantages of Master Limited Partnership
MLPs do not pay corporate taxes on profits which is a huge advantage over corporately
structured companies. Secondly, owners of a partnership are taxed only once and not multiple
times as in the corporate model. Capital gains are considered returns on capital. Lastly, Capital
gain taxes are deferred until the unitholder sells the units.
Recurring Revenue Business
A fee based business in a volatile industry, or recurring revenue businesses in general, can reduce
risk and make business planning easier over the long term. Services to companies in volatile
industries will have lower risk, because they spread the risk over a group of customers that have
even more diverse products under them.
Weaknesses
Low Geographic Diversification (Located only in North America)
Diversification into other countries would involve currency headwinds.
Charges on fees
OKS is limited to what it may charge for its services and fees. OKS make a majority of it’s profit
from fees and services.
Opportunities
Low Price Helps Increase Demand for Natural Gas
As natural gas production becomes more efficient and the EPA imposes more restrictions on
carbon dioxide measures, which directly affects alternatives to natural gas like coal, natural gas
will become more widespread.
Expanding Natural Gas Demand
The discovery of techniques to get natural gas out of shale formations is leading to a boom in
supply, which is decreasing the price of natural gas. When the price of natural gas decreases,
especially relative to the price of oil, demand increases, because consumers switch to the lower
cost fuel.
Low Prices for Natural Gas
The lower natural gas prices go, the more competitive it becomes versus coal on a BTU (energy)
level.
Threats
MLP Regulations
MLP’s may change at any point, which would result in loss of tax advantage.
Volatile Commodity Prices
Volatile commodity prices increase the risk to the company, since a sudden change in commodity
prices can hurt profits. It also makes long‐term forecast more difficult and long‐term investments
to meet demand more difficult. According to OKS’s 10‐K report, 33% of its commodities are
hedged. So this is less of a problem for OKS, but still something to be concerned about.
Porter Five Forces Analysis
Potential of new entrants into industry (Threat Level: Low‐Medium)
OKS has an advantage in how much is needed to create a similar company. A huge investment is
required so this would be a barrier for new entrants. This particular sector is also highly regulated,
meaning for a company to become involved, they must have a great deal of understanding on
how the industry works in order to be successful.
Threat of substitute products (Threat Level: Low)
The threat level of substitute products are low. Substitutes are available, but natural gas will lead.
Other energy sources will still take years until it can be made as affordable as Natural Gas. The
EPA has also stepped up enforcement against carbon dioxide emissions which will benefit the
natural gas sector and dissolve the demand for coal.
Power of suppliers (Threat Level: High)
The high threat for power of suppliers is due to how contracts are negotiated. OKS is contracted
through producers and the producers could choose to work with another company other than
OKS. Since OKS is seen as a monopoly in the industry this could attract the attention of the
government and potentially place restrictions on OKS.
Power of customers (Threat Level: Medium)
A majority of business that OKS does is business to business. Businesses could have more
influence rather than single individuals. Buyers could seek alternative means of transportation
other than what OKS provides which could also be a problem. Fortunately, OKS has a monopoly
in their geographic locations which allows them attract more businesses than a lower level
company.
Competition in the industry (Threat Level: Medium)
OKS secured a deal in Texas for exclusive rights to move Natural Gas. OKS also secured rights to
the Williston Basin in South Dakota in which the own a 60% interest in untapped wells. OKS
currently has a non‐governmental monopoly within the natural gas sector.
U.S. Energy Information Administration Short Term Energy Outlook
The chart on right shows short term
outlook of the Natural Gas Production
and Imports in the United States. As the
net imports expected to keep
decreasing through 2016, the
production of Natural Gas is expected
to keep increasing, though at a slower
rate. Most of this production increase is
expected to come from the non‐Gulf of
Mexico areas, and production from the
Federal Gulf of Mexico is expected to remain almost constant. The total production is expected
to continue to grow through 2016 which is a good sign for OKS.
The chart on left shows the Natural
Gas consumption in the United
States. We can see that the energy
consumption peaks in the winter due
to colder weather, and drops in the
summer as the weather warms up.
EIA forecasts that the Natural Gas
Consumption will continue to
increase in near future. This increase
will be mainly driven by the increase
in the usage of natural gas in electric power generation and industries. The usage of natural gas
in residential and commercial space is expected to decrease.
The chart on the right shows the Natural
Gas Storage in the United States. Again
we can see a wave with peaks in storage
being in the summer when less gas is
being used, and drops in the winter
when more energy is used for heating.
OKS receives about ⅔ of its total
revenue from the fees charged for the
transportation and storage of the
natural gas. The stable outlook of the
natural gas consumption and storage shows that OKS will continue to generate stable fee based
revenues at least in the foreseeable future.
On the left is a chart showing the United
States Electricity Generation by fuel
sectors and forecasts the next 2 years.
The share of Coal powered electricity
generation has dropped around 10%
over the last 7 years. About 7% of this
share has been replaced by natural gas
powered electricity generation. As
natural gas displaces coal for power
generation, the usage of natural gas is
expected to continue to rise over the next year and half.
On the right is the chart of the United
States Natural Gas Prices from Jan
2011 to Jan 2017 (projected). The
chart has two components:
Residential price and Henry Hub spot
rate. Henry Hub spot rate is used for
the commodity derivatives contract
pricing. Again, the Residential
natural gas prices come in waves
peaking in the summer and dropping
in the winter. But as you can see, there is no correlation between the Residential prices and the
Henry Hub spot price.
This chart on left shows that the
Henry Hub natural gas spot price
averaged $2.83/MMBtu in March. EIA
expects monthly average spot prices
to remain less than $4/MMBtu
through the remainder of the
forecast. Current options and futures
prices imply that market participants
place the lower and upper bounds for
the 95% confidence interval for July
2015 contracts at $1.90/MMBtu and $4.00/MMBtu, respectively.
This chart shows the West Texas
Intermediate Crude Oil Prices. Oil
companies provide natural gas, the
important commodity for OKS, which
is why it is important to keep an eye on
the WTI oil prices. From the chart we
can see that the WTI prices are
expected to remain stable now
through Jan 2017. Another positive
factor for OKS stock.
Hedging Activities
OKS is sensitive to changes in natural gas, crude oil
and NGL prices. The chart on the right shows the
gross margins for OKS over the last 5 years and also
the company report forecast for 2015. OKS derives
their revenues in two ways; sales of natural gases
they collect and process and their fee based
operations. As you can see a majority of OKS gross
margin comes from fee based operations, which
derive from storage and transportation services.
Commodities are the gross margins from the sale of
natural gases they collected and processed.
Differentials represent the portion of commodities
that are transformed into other gases such as
Butane, Propane and Ethane. Commodities and differentials make up less than a third of OKS’s
gross margin but, as you can see from the chart below, they only hedge 80% of that third. This
means OKS only hedges around 27% of their gross margins. The rest of their income is from fees,
which can’t be hedged. OKS’s revenue from fees are based on contracts that has an average
length of 7 years, so they are in no danger of losing income in their fee based revenue.
The table above sets forth OKS’ Natural Gas Gathering and processing segment’s hedging
information for the period indicated:
OKS has forecast for how they believe the change in commodity prices will affect their margins.
Their forecasts are as follows: a $0.01 per‐gallon change in the composite price of NGLs would
change 12‐month forward net margin by approximately $3.0 million; a $1.00 per‐barrel change
in the price of crude oil would change 12‐month forward net margin by approximately $1.6
million; and a $0.10 per‐MMBtu change in the price of residue natural gas would change 12‐
month forward net margin by approximately $5.2 million.
Forecasting Assumptions
Revenue Growth: Revenues for OKS’s NGL’s segment are derived primarily from nondiscretionary
fee‐based services that they provide to their customers and from the physical optimization of
their assets. Their fee‐based services have increased due primarily to new supply connections;
expansion of existing connections; and the completion of capital projects, including the Bakken
NGL Pipeline and the West Texas LPG acquisition. However, NGL storage revenue may be affected
by price volatility and forward pricing of NGL physical contracts versus the price of NGLs on the
spot market. We’ve kept a conservative margin of safety with our revenue growth expectation.
Gross Margin: We observed in OKS’s past that gross margin has been pretty stable. We believe
this trend will continue into the future and the gross margin will not fluctuate too much from the
mean, this is why we kept it at a 16% average.
Operating Margin: From 2010 to 2014 OKS’s operating margin has stayed within a 6.5% to 9.4%
range. We believe that the historical average of 8.2% is sufficient in our forecasting of operating
margin.
Net Margin: As you can see, OKS’s net margin has stayed within a tight range with minimal
movement in either direction. We expect Net Margin to fluctuate very little based off of the
historical performance, which is why we left it at 5.1%.
Common Shares Growth: There was no indication in the 10‐K that OKS will aggressively sell or
buy‐back shares so we kept it at the historical average 5.3%.
Dividend Growth: OKS’s 10‐K reported a 14% increase in expected dividend growth in 2015,
dividends declared compared with 2014. Projected 2.25‐cent‐per‐share‐per‐quarter increase for
2015.The 10‐K also reported a 12% to 15% expected average annual dividend growth between
2014 and 2017.
Cash and equivalents: We have forecasted cash and equivalents to slightly increase based on
their investments beginning to generate money. Therefore, we have raised cash and equivalents
from 0.1% to a perpetual growth rate of 1.5%.
Total Receivables: Based off of the 10‐K we do not foresee any increase or decrease in total
receivables and based off of the historical trend only 2014 has been an outlier. Following the
same rates other than 2014, we believe that total receivables will remain around the historical
average of 8.4%
Inventory: Since OKS is an energy company it requires minimum inventory so any fluctuations
will be small and not really affect the average. As you can see from 2010 to 2014 that inventory
has only dropped 2.1% overall. We expect inventory to remain close to the historical average of
2.3%.
Total Current Assets: OKS has shown no nominal expectations to increase or decrease its total
current assets, so we left it at its historical average of 13.4%
Net PPE: OKS has currently invested 500 Million into its Texas pipeline. For this reason we have
increased Net PPE in 2015 to 100%, and as more of its other pipelines and assets become
operational we see Net PPE to stay around a long term rate of 105%.
Total Assets: In unison with Net PPE, we’ve increased total assets to 125% in 2015. We expect
total assets to briefly increase then level off until 2019 as OKS’s pipeline investments come online.
This is why we a long term rate of 130%.
Payables and Accruals: There was an overall fluctuation of 2.0% from 2010 to 2014. This small
movement within a 5 year period shows that payables and accruals are stable and we do not
expect any major jumps from the historical average. This is why we left it at 10.3%.
Total Current Liabilities: We forecast that OKS will begin decreasing its total current liabilities
starting in 2015 at 21% then leveling off at 11% in 2019.This trend is shows what will happen
when OKS starts to pay back its short term debt.
Total Debt: We expect OKS to decrease its total debt starting in 2015. Beginning at 66% in 2015
and dropping to 55% in 2019. OKS’s total debt will continue decrease as revenue begins to pick
up. OKS’s 10‐K indicates that revenue will increase in 2015/2016 which correlates well with the
expected drop in total debt.
Total Equity: We bumped up total equity to 50% based off of OKS retiring some of its current
debt and the forecasted increase of revenue in the near future.
Weighted Average Cost of Capital
When calculating OKS’s cost of capital, we decided to use a risk free rate of 1.895%, which is
based on the most recent 10‐Year yield of U.S. Treasury Bonds. The 5‐Year beta of 0.29 was lower
than the 2‐Year beta of 0.82 so we modified our beta to 0.50 for a more realistic modeling
assumption. We set the market risk premium to 6.0% based off current market conditions. We
also used a conservative 2.0% long‐term growth rate to stress the model. Using information from
OKS’s most recent 10‐K report we calculated the cost of debt to be 4.0%, and cost of equity to be
4.895%. This leaves us with a low WACC of 4.492%.
Free Cash Flow Valuation
As you can see from the FCF valuation model, OKS has a current expected undervaluation of
$36.89 in 2015. Bear in mind this FCF analysis is based on extremely conservative estimates, so
hypothetically this the minimum undervaluation. Also, notice that OKS has consistently been
undervalued since 2009, but this could be a characteristic of this particular sector.
Dividend Discount Model Valuation
As per the DDM above, OKS is currently undervalued by $118.11, which is an undervaluation of
74%. This relatively high undervaluation even includes a more conservative 0.50 alternative beta
and not the 0.29 5‐Year beta. This stresses the model and allows for a better understanding of
how this model shapes up. As you can see the Dividend Yield is a favorable 7.7% with a low
required return of 4.9%. When OKS was compared to other companies in the sector, OKS
currently has the best risk adjusted returns.
OKS. Datasource: CapitalIQ Income Statement Forecast, Page 1 of 1 Copyright Robert A. Weigand, Ph.D., 2013
OKS ONEOK Partners, L.P. Sector Energy2009 2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E
Total Revenue 6,474 8,676 11,323 10,182 11,869 12,192 13.5% N/A 12,435 12,684 13,192 13,719 13,994Cost of Goods Sold 5,355 7,531 9,745 8,540 10,222 10,089
Gross Profit 1,119 1,145 1,577 1,642 1,647 2,103 14.9% 16.0% 1,990 2,029 2,111 2,195 2,239SG&A Expense 362 363 414 433 465 599R&D Expense 0 0 0 0 0 0Dep. & Amort. 164 174 178 203 237 291Other Oper. Exp. 5,931 8,108 10,382 9,226 10,980 11,049
Operating Income 544 568 940 956 889 1,142 8.2% N/A 1,022 1,043 1,084 1,128 1,150Interest Expense (206) (204) (223) (206) (237) (282)Other Non-Oper. Exp. 107 106 127 142 151 57
EBT ex-Unusuals 445 470 844 892 803 917
Total Unusual Exp. 3 19 (1) 7 12 7Earnings Before Tax 448 488 843 899 815 924
Income Tax Expense 13 15 13 10 11 13Net Income 338 355 682 660 528 566 5.1% N/A 639 652 678 705 719
Basic EPS 1.80 1.75 3.35 3.04 2.35 2.33 2.49 2.41 2.38 2.35 2.28Total Common Shares 188 203 204 217 225 243 5.3% N/A 256 270 284 300 316Dividends Per Share 2.18 2.25 2.37 2.69 2.89 3.07 7.1% N/A 3.16 3.19 3.23 3.29 3.39
2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E
1. Revenue Growth 34.0% 30.5% -10.1% 16.6% 2.7% 13.5% 2.0% 2.0% 4.0% 4.0% 2.0%2. Gross Margin 13.2% 13.9% 16.1% 13.9% 17.3% 14.9% 16.0%3. Operating Margin 6.5% 8.3% 9.4% 7.5% 9.4% 8.2%4. Net Margin 4.1% 6.0% 6.5% 4.4% 4.6% 5.1%5. Common Shares Growth 8.1% 0.5% 6.5% 3.5% 8.3% 5.3%6. Dividend Growth 3.4% 5.1% 13.7% 7.4% 6.2% 7.1% 3.0% 1.0% 1.0% 2.0% 3.0%
4. Net Income 5. Total Common Shares 6. Dividends Per Share
Historical Growth and Margins Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values
1. Total Revenue 2. Gross Profit 3. Operating Income
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OKS. Datasource: CapitalIQ Balance Sheet Forecast, Page 1 of 2 Copyright Robert A. Weigand, Ph.D., 2013
OKS ONEOK Partners, L.P. Sector EnergyASSETS 2009 2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E
Cash and Equivalents 3 1 35 537 135 43 1.4% N/A 12 63 132 137 210Short-Term Investments 0 0 0 0 0 0
Total Cash & ST Invest. 3 1 35 537 135 43
Total Receivables 657 820 926 930 1,112 744 8.4% N/A 1,051 1,072 1,115 1,159 1,182Inventory 218 317 202 236 242 190 2.3% N/A 282 288 300 312 318Prepaid Expenses 0 0 0 0 0 0
Total Current Assets 1,102 1,279 1,306 1,892 1,583 1,086 13.4% N/A 1,669 1,702 1,770 1,841 1,878
Gross PPE 6,354 5,857 6,964 8,585 10,755 13,378Accumulated Depr. (972) (1,100) (1,260) (1,441) (1,653) (1,842)
Net PPE 5,381 4,757 5,704 7,144 9,102 11,536 69.3% 105.0% 12,435 13,318 13,851 14,405 14,693
Long-Term Investments 765 1,188 1,223 1,221 1,230 1,133Goodwill 397 397 397 397 489 489
Total Assets 7,953 7,920 8,947 10,959 12,863 14,635 101.3% 130.0% 15,544 16,489 17,149 17,835 18,192
LIABILITIES AND EQUITY 694 882 1,090 1,210 1,396 1,003Accounts Payable 694 852 1,049 1,058 1,303 911 Note: Forecasting Payables + Accruals together in row 19 belowAccrued Expenses 0 30 41 152 93 92 10.3% N/A 1,285 1,311 1,363 1,418 1,446Short-Term Debt 523 430 0 0 0 1,055
Total Current Liabilities 2,047 1,974 1,889 1,570 1,706 2,336 17.7% N/A 2,611 2,537 2,243 1,921 1,539
Long-Term Debt 2,822 2,582 3,516 4,804 6,045 6,038 44.4% N/A 8,207 8,372 8,311 8,232 7,696Pension Benefits 0 0 0 0 0 0 3,345 3,011 3,516 4,804 6,045 7,094
Total Liabilities 4,943 4,643 5,500 6,496 7,864 8,516 Note: Forecasting ST Debt + LT Debt together in row 22 above
Preferred Equity 0 0 0 0 0 0Common Stock & APIC 2,942 3,171 3,386 4,406 4,882 5,831Retained Earnings 0 0 0 0 0 0Treasury Stock 0 0 0 0 0 0Total Common Equity 2,920 3,177 3,334 4,306 4,824 5,739
Total Equity 3,010 3,277 3,447 4,464 4,999 6,119 40.9% 50.0% 6,218 6,342 6,596 6,860 6,997Total Liab. and Equity 7,953 7,920 8,947 10,959 12,863 14,635
2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E1. Cash and Equivalents 0.0% 0.3% 5.3% 1.1% 0.3% 1.4% 0.1% 0.5% 1.0% 1.0% 1.5%2. Total Receivables 9.5% 8.2% 9.1% 9.4% 6.1% 8.4%3. Inventory 3.7% 1.8% 2.3% 2.0% 1.6% 2.3%
Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values
2. Total Receivables1. Cash and Equivalents 3. Inventory
$0$100$200$300$400$500$600
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OKS. Datasource: CapitalIQ Balance Sheet Forecast, Page 2 of 2 Copyright Robert A. Weigand, Ph.D., 2013
2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E4. Total Current Assets 14.7% 11.5% 18.6% 13.3% 8.9% 13.4%5. Net PPE 54.8% 50.4% 70.2% 76.7% 94.6% 69.3% 105.0% 100.0%6. Total Assets 91.3% 79.0% 107.6% 108.4% 120.0% 101.3% 130.0% 125.0%7. Payables and Accruals 10.2% 9.6% 11.9% 11.8% 8.2% 10.3%8. Total Current Liabilities 22.8% 16.7% 15.4% 14.4% 19.2% 17.7% 21.0% 20.0% 17.0% 14.0% 11.0%9. Total Debt 34.7% 31.0% 47.2% 50.9% 58.2% 44.4% 66.0% 66.0% 63.0% 60.0% 55.0%10. Total Equity 37.8% 30.4% 43.8% 42.1% 50.2% 40.9% 50.0%
7. Payables and Accruals 8. Total Current Liabilities 9. Total Debt
10. Total Equity
4. Total Current Assets 5. Net PPE 6. Total Assets
Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values
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OKS. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5 Copyright Robert A. Weigand, Ph.D., 2013
OKS ONEOK Partners, L.P. Sector Energy Report Date 5/8/2015 2009
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Total Revenue 6,474 8,676 11,323 10,182 11,869 12,192 12,435 12,684 13,192 13,719 13,994Gross Profit 1,119 1,145 1,577 1,642 1,647 2,103 1,990 2,029 2,111 2,195 2,239Operating Income 544 568 940 956 889 1,142 1,022 1,043 1,084 1,128 1,150Net Income 338 355 682 660 528 566 639 652 678 705 719Retained Earnings 0 0 0 0 0 0 (171) (382) (621) (902) (1,252)Total Common Shares 188 203 204 217 225 243 256 270 284 300 316Total Diluted Shares 188 203 204 217 225 243 256 270 284 300 316Earnings Per Share $1.80 $1.75 $3.35 $3.04 $2.35 $2.33 $2.49 $2.41 $2.38 $2.35 $2.28Dividends Per Share $2.18 $2.25 $2.37 $2.69 $2.89 $3.07 $3.16 $3.19 $3.23 $3.29 $3.39
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Cash and Equivalents 3 1 35 537 135 43 12 63 132 137 210Total Receivables 657 820 926 930 1,112 744 1,051 1,072 1,115 1,159 1,182Inventory 218 317 202 236 242 190 282 288 300 312 318Total Current Assets 1,102 1,279 1,306 1,892 1,583 1,086 1,669 1,702 1,770 1,841 1,878Net PPE 5,381 4,757 5,704 7,144 9,102 11,536 12,435 13,318 13,851 14,405 14,693Total Assets 7,953 7,920 8,947 10,959 12,863 14,635 15,544 16,489 17,149 17,835 18,192Payables and Accruals 694 882 1,090 1,210 1,396 1,003 1,285 1,311 1,363 1,418 1,446Total Current Liabilities 2,047 1,974 1,889 1,570 1,706 2,336 2,611 2,537 2,243 1,921 1,539Total Debt 3,345 3,011 3,516 4,804 6,045 7,094 8,207 8,372 8,311 8,232 7,696Total Equity 3,010 3,277 3,447 4,464 4,999 6,119 6,218 6,342 6,596 6,860 6,997
Historical Income Statement Highlights Forecasted Income Statement Highlights
Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights
$0$2,000$4,000$6,000$8,000
$10,000$12,000$14,000$16,000
Total Revenue
$0$100$200$300$400$500$600$700$800
Net Income
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01,0002,0003,0004,0005,0006,0007,0008,0009,000
01,0002,0003,0004,0005,0006,0007,0008,000
Total Equity Total Debt
$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00
Earnings Per Share Dividends Per Share
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OKS. Datasource: CapitalIQ Financial Analysis & Valuation, Page 2 of 5 Copyright Robert A. Weigand, Ph.D., 2013
Margins 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Gross Profit Margin 17.3% 13.2% 13.9% 16.1% 13.9% 17.3% 16.0% 16.0% 16.0% 16.0% 16.0%Operating Profit Margin 8.4% 6.5% 8.3% 9.4% 7.5% 9.4% 8.2% 8.2% 8.2% 8.2% 8.2%Net Profit Margin 5.2% 4.1% 6.0% 6.5% 4.4% 4.6% 5.1% 5.1% 5.1% 5.1% 5.1%Free Cash Flow Margin 0.0% 12.7% 1.4% 0.0% 0.0% 0.0% 0.2% 0.7% 3.5% 4.0% 5.5%
Liquidity and Debt 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Days Sales Outstanding 37.04 34.51 29.86 33.34 34.21 22.29 30.84 30.84 30.84 30.84 30.84Inventory Turnover 29.76 27.36 56.00 43.17 48.97 64.18 44.02 44.02 44.02 44.02 44.02Total Debt to Equity 111.1% 91.9% 102.0% 107.6% 120.9% 115.9% 132.0% 132.0% 126.0% 120.0% 110.0%Total Debt to Assets 42.1% 38.0% 39.3% 43.8% 47.0% 48.5% 52.8% 50.8% 48.5% 46.2% 42.3%
Profitability 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Total Asset Turnover 0.81 1.10 1.27 0.93 0.92 0.83 0.80 0.77 0.77 0.77 0.77Equity Multiplier 2.64 2.42 2.60 2.46 2.57 2.39 2.50 2.60 2.60 2.60 2.60Return on Assets 4.2% 4.5% 7.6% 6.0% 4.1% 3.9% 4.1% 4.0% 4.0% 4.0% 4.0%Return on Equity 11.2% 10.8% 19.8% 14.8% 10.6% 9.3% 10.3% 10.3% 10.3% 10.3% 10.3%Return on Capital 9.5% 11.0% 16.0% 12.4% 9.5% 9.8% 8.1% 7.7% 7.6% 7.6% 7.6%
2.252.302.352.402.452.502.552.602.652.70
0.00.20.40.60.81.01.21.4
Total Asset Turnover Equity Multiplier
010203040506070
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10152025303540
Days Sales Outstanding Inventory Turnover
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Total Debt to Equity Total Debt to Assets
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OKS. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 5 Copyright Robert A. Weigand, Ph.D., 2013
Capital, NOPAT & FCF 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
NOWC 183 256 73 493 94 -26 61 113 183 190 264Net Fixed Assets 5,381 4,757 5,704 7,144 9,102 11,536 12,435 13,318 13,851 14,405 14,693Total Invested Capital 5,565 5,014 5,777 7,637 9,196 11,510 12,496 13,431 14,034 14,596 14,957Effective Tax Rate 2.9% 3.1% 1.5% 1.1% 1.3% 1.4%NOPAT 528 550 926 945 877 1,127 1,008 1,028 1,069 1,112 1,134Free Cash Flow N/A 1,101 163 -914 -682 -1,187 22 93 466 551 773NOPAT Per Share 2.82 2.71 4.55 4.35 3.90 4.63 3.93 3.81 3.76 3.71 3.60FCF/Share N/A 5.43 0.80 -4.21 -3.04 -4.88 0.08 0.35 1.64 1.84 2.45Return on Capital 9.5% 11.0% 16.0% 12.4% 9.5% 9.8% 8.1% 7.7% 7.6% 7.6% 7.6%
Intrinsic Value of FCFs Valuation ModelValue Creation 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Economic Value-Added 278 325 667 602 464 610 447 425 439 456 462Market Valued-Added 2,834 4,782 8,322 7,260 6,830 3,523 13,754 14,689 15,416 16,042 17,133PV of Future FCFs 20,532 20,353 21,105 22,967 24,681 26,977 28,167 29,339 30,191 30,996 31,616Value of Non-Oper. Assets 3 1 35 537 135 43 12 63 132 137 210Total Intrinsic Firm Value 20,535 20,354 21,140 23,504 24,815 27,019 28,179 29,402 30,323 31,133 31,826Intrinsic Value of Equity 17,190 17,343 17,624 18,700 18,771 19,925 19,972 21,031 22,012 22,902 24,129Per Share Intrinsic Value $91.62 $85.54 $86.47 $86.12 $83.55 $81.89 $77.93 $77.90 $77.41 $76.46 $76.47 0.14050619Year-End Stock Price $31.15 $39.75 $57.74 $53.99 $52.65 $39.63 $41.04Over (Under) Valuation/Sh ($60.47) ($45.79) ($28.73) ($32.13) ($30.90) ($42.26)% Over (Under) Valued -194.1% -115.2% -49.8% -59.5% -58.7% -106.6%
Cost of Capital 2014 Weight % Cost Wgt CostEquity Capitalization 9,642 57.6% 4.9% 2.8%
Total Debt 7,094 42.4% 4.0% 1.7%Preferred Stock 0 0.0% 0.0% 0.0%Value of All Securities 16,736 100.0%Effective Tax Rate 1.4% Long-Term Growth Rate:Risk-Free Rate 1.895% 2.0%5-Yr Beta 0.288 Alternative Beta:Market Risk Premium 6.00% 0.50CAPM Cost of Equity 4.895%
4.492%
(Tax rate from last historical year used in forecasts)
Weighted Average Cost of Capital:
$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,000
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Total Invested Capital Net Fixed Assets
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OKS. Datasource: CapitalIQ Financial Analysis & Valuation, Page 4 of 5 Copyright Robert A. Weigand, Ph.D., 2013
Relative Valuation 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Stock Price/Intr. Value $31.15 $39.75 $57.74 $53.99 $52.65 $39.63 $77.93 $77.90 $77.41 $76.46 $76.47Price to Earnings 17.3 22.7 17.2 17.8 22.4 17.0 31.3 32.3 32.5 32.5 33.6Price to Free Cash Flow N/A 7.3 72.2 N/A N/A N/A 924.4 225.2 47.2 41.6 31.2Price to Sales 0.9 0.9 1.0 1.2 1.0 0.8 1.6 1.7 1.7 1.7 1.7Price to Book 0.7 1.0 1.3 1.1 0.9 0.7 1.3 1.3 1.3 1.3 1.3Earnings Yield 5.8% 4.4% 5.8% 5.6% 4.5% 5.9% 3.2% 3.1% 3.1% 3.1% 3.0%Dividend Yield 7.0% 5.7% 4.1% 5.0% 5.5% 7.7% 4.1% 4.1% 4.2% 4.3% 4.4%Free Cash Flow Yield N/A 13.7% 1.4% -7.8% -5.8% -12.3% 0.1% 0.4% 2.1% 2.4% 3.2%
Relative Valuation Pricing Model Adjust 2015E Target Dividend Discount Valuation Model 2015E Ratio Ratio Ratio Metric Price OKS ONEOK Partners, L.P.
Price to Earnings 31.3 18.0 $2.49 $44.87 3.0% 1.0% 1.0% 2.0% 3.0%Price to Free Cash Flow 924.4 24.0 $0.08 $2.02 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019EPrice to Sales 1.6 $48.52 $77.93 $2.18 $2.25 $2.37 $2.69 $2.89 $3.07 $3.16 $3.19 $3.23 $3.29 $3.39Price to Book 1.3 $60.65 $77.93
1-Yr Div Growth 6.2% PV Dividends 1-4 $11.43 Dividend Yield 7.7%2015E 3-Yr Div Growth 9.1% PV Perpetual Div. $147.72
Current Price $41.04 5-Yr Div Growth 7.1% Intrinsic Value $159.15 If Purchased For: $41.04PV of Free Cash Flows $77.93 Risk-Free Rate 1.90% Current Price $41.04 Expected Return = 47.6% 44.48%Dividend Discount Model $159.15 5-Yr Beta 0.29 ($41.04) $3.16 $3.19 $3.23 $182.12 $178.83Price to Earnings $44.87 Market Premium 6.0% Analyst Notes:Price to Free Cash Flow $2.02 Required Return 4.9% Based on a current dividend of $3.07, expected growth as shown above and an equity requiredPrice to Sales $77.93 Alternative Beta 0.50 return of 4.9%, OKS is worth $159.15 per share, vs. a current price of $41.04.Price to Book $77.93
Compared With: Compared With:
Williams Companies, Inc. S&P 500 Index
Kinder Morgan, Inc.
Expected Dividend Growth Rates
Estimated Target Prices vs.
May 8, 2015Annual Dividend
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$100$120$140$160$180
Current Price PV of FreeCash Flows
DividendDiscount
Model
Price toEarnings
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Price to SalesPrice to Book
Estimated Target Prices vs. Current Price
-30%-20%-10%
0%10%20%30%40%50%
OKS WMB KMI
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OKS ^SPX
OKS. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 5 Copyright Robert A. Weigand, Ph.D., 2013
Piotroski Financial Fitness Scorecard (10-point scale) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Positive Net Income 1 1 1 1 1 1 1 1 1 1Positive Free Cash Flow 1 1 0 0 0 1 1 1 1 1Growing ROA (% change NI > % change TA) 1 1 0 0 0 1 0 0 0 0Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1Total Assets Growing Faster Than Total Liabilities 1 1 1 0 0 0 1 1 1 1Increasing Liquidity (Current Ratio) 1 1 1 0 0 1 1 1 1 1% Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1 1 1 1 1 1 1Expanding Gross Margin 0 1 1 0 1 0 0 0 0 0Asset Turnover (% change sales > % change assets) 1 1 0 0 0 0 0 0 0 0Total Liabilities to Operating Cash Flow (EBIT) < 4.0 0 0 0 0 0 0 0 0 0 0Piotroski Score 8 9 6 3 4 6 6 6 6 6
Altman Probability of Bankruptcy Z-Score Weight 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
(Current Assets-Current Liabilities)/Total Assets 1.200 -0.1054 -0.0782 0.0352 -0.0115 -0.1025 -0.0728 -0.0607 -0.0331 -0.0054 0.0223Retained Earnings/Total Assets 1.400 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 -0.0146 -0.0312 -0.0488 -0.0694Earnings Before Interest & Tax/Total Assets 3.300 0.2365 0.3469 0.2879 0.2280 0.2576 0.2170 0.2086 0.2086 0.2086 0.2086Market Value Equity/Total Liabilities 0.600 1.0414 1.2838 1.0828 0.9025 0.6794 1.2848 1.2435 1.2515 1.2520 1.2932Sales/Total Assets 0.999 1.0943 1.2643 0.9282 0.9219 0.8322 0.7992 0.7685 0.7685 0.7685 0.7685Altman Score 2.27 2.82 2.33 2.04 1.67 2.23 2.15 2.16 2.17 2.22
The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23
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Altman Probability of Bankruptcy Z-Score