ONEOK has put up a strong run in recent years and is now fresh off a multibillion dollar deal in the Midland Basin, which naturally raises a sharper question for investors about whether the current share price is properly anchored in the cash flows the business can generate. With the focus squarely on its pipelines, plants and fee-based contracts, the key issue is how those assets translate into long term cash generation that lines up with where the stock trades today.
- Over the past 5 years, ONEOK has returned 83.9%, which puts a lot of accumulated optimism on the line if the underlying cash flows do not keep pace.
- The completed US$4.425b acquisition of Brazos Midstream's Midland Basin assets may support higher and more stable future cash flows through expanded gathering and processing capacity backed by long term fixed fee contracts.
- What if you looked at ONEOK through its earnings instead? See what ONEOK's 15.9x P/E says about the price.
The issue now is whether ONEOK's current share price around US$92.42 is adequately supported by the intrinsic value suggested by its cash flows.
If you want more ideas built around cash flow support for valuations, a focused screen of 35 high quality undervalued stocks.
Is ONEOK a Bargain on Cash Flow?
The Discounted Cash Flow (DCF) model here looks at the cash ONEOK can return to shareholders over time and discounts it back to today. On the latest twelve month view, the group generated roughly $2.7b of free cash flow, and the model assumes this moves into a growing profile over the next decade rather than a shrinking one. That shift from the current base to higher projected cash flows is what creates the gap between the DCF estimate and the share price of $92.42.
Those projections lean on ONEOK maintaining multi billion dollar annual free cash flow, supported by large scale midstream assets instead of one off windfalls. The completed $4.425b purchase of Brazos Midstream's Midland Basin system fits that picture because it brings more fee based gathering and processing capacity into the portfolio. This helps explain why the discounted cash flow view sits substantially above where the stock trades today. Find out what ONEOK could be worth using our Discounted Cash Flow (DCF) estimate.
The ONEOK Narrative: What Would Justify Today's Price?
Simply Wall St Narratives pick up where the valuation puzzle around ONEOK leaves off. They explain in plain terms what would need to happen to ONEOK's future growth, margins and earnings for the stock to be worth materially more or materially less than it is today. Each narrative ties a fair value to a specific mix of potential catalysts and risks so you can monitor over time which version of the story is actually unfolding on the Community page.
Community views on ONEOK are split between those who see more upside in the build out and those who think expectations already price that in.
Bull case: 9% undervalued
"Growing exposure to export markets through the Texas City LPG export joint venture, which is being built for 200,000 barrels per day of capacity and is already 80% contracted with long term customers, is expected to increase export related fee income and support earnings and cash flow as volumes ramp…"
Discover why this Narrative puts ONEOK at 9% undervalued.
Bear case: roughly fairly valued
"Although ONEOK is using its integrated multi-molecule footprint to support capital-efficient volume growth across NGLs, gas, crude and refined products, recent margin pressure from lower fee ethane barrels and contract repricing in the Mid Continent suggests that future throughput gains could add less incremental EBITDA than prior projects…"
Explore why this Narrative puts ONEOK at roughly fairly valued.
Before acting on ONEOK’s valuation, there is one more piece to check
Pipelines and cash flows tell only part of the story for ONEOK, because the people setting priorities and the way they are rewarded can pull the business in very different directions. See who runs ONEOK and how they are paid.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com