ONEOK Gains From Fee-Based Earnings and Strategic Investments

ONEOK (OKE) is benefiting from a strategic focus on fee-based earnings, with 88% of 2024 earnings and over 90% of 2025 revenues expected to be fee-based, driven by strong NGL and processing volume growth. The company is investing $2.8-$3.2 billion in 2025 capex for organic growth, including a joint venture with MPLX LP to construct a large-scale LPG export terminal and pipeline in Texas. Despite these positive drivers, ONEOK faces risks from competition in the pipeline sector and potential cost increases related to land usage for its pipelines.

Analysis

ONEOK is strategically enhancing its earnings stability, with fee-based earnings constituting 88% of the 2024 total and projected to exceed 90% of 2025 revenues. This shift is supported by robust historical growth, evidenced by a five-year annual increase of over 20% in natural gas liquid volumes and 10% in natural gas processing volumes from the Rocky Mountain region. The company is actively pursuing organic growth through substantial capital expenditures, estimated between $2.8 billion and $3.2 billion for 2025. A key strategic initiative includes a joint venture with MPLX LP to develop a new 400,000 barrel-per-day LPG export terminal and an associated pipeline in Texas, signifying a move to bolster its market presence and service offerings. However, ONEOK faces operational headwinds, primarily the risk of increased costs or disruptions related to land usage rights for its pipelines, as it does not own all the land. Furthermore, the natural gas and NGL pipeline sector remains intensely competitive, with ongoing pressure from established players and new master limited partnership entrants. Despite these growth initiatives, ONEOK's stock has appreciated 6.1% over the past year, lagging the broader industry's 14.1% growth, and maintains a Zacks Rank #3 (Hold), indicating a neutral near-term outlook.

Key Decisions for Investors

• Investors should acknowledge ONEOK's strengthening revenue profile due to its high and increasing reliance on fee-based contracts, but remain cognizant of project execution risks associated with its significant 2025 capital expenditure program and the new LPG export terminal joint venture.
• Careful monitoring of the competitive landscape within the midstream sector and developments concerning pipeline land rights is crucial, as these factors present material risks to ONEOK's operational continuity and profitability.
• Given ONEOK's stock underperformance relative to the industry (6.1% vs 14.1% industry growth) and its current Zacks #3 (Hold) rating, prospective investors might consider a cautious approach, evaluating its valuation and prospects against better-ranked peers like ET, RGCO, and OII, which exhibit strong comparative growth metrics detailed in the report.