When ONEOK (NYSE: OKE) announced its five-year growth plan earlier this year, it was a bit light on the details. The company said that by merging with its MLP, it could increase its dividend by 21% this year -- which it delivered in July -- and then at a 9% to 11% rate from 2018 through 2021. Supporting that view was its belief that it could complete $1.5 billion to $2.5 billion of high-return growth projects over that time frame, which would provide it with the cash flow needed to support dividend growth.
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That said, unlike most rivals, ONEOK didn't have that backlog locked down, which increased the risk that it could fall short. However, the company has since secured more than $500 million of expansion projects, including announcing plans to expand its West Texas LPG joint venture with Martin Midstream Partners (NASDAQ: MMLP). Because of that, it's looking more likely that ONEOK will be a goldmine for income investors.
The latest step
ONEOK and Martin Midstream Partners announced this week that they would invest about $200 million in expanding their natural gas liquids (NGL) system into the Delaware Basin side of the Permian Basin. ONEOK will shoulder the lion's share of this investment since it owns an 80% stake in the West Texas LPG joint venture, with Martin Midstream holding the other 20% interest.
The partners plan to construct 120 miles of new pipeline that will have 110,000 barrels per day of initial capacity. Further, they plan on building two new pump stations and pipeline looping along the existing West Texas LPG system to handle the incremental volumes. Supporting the project is long-term dedicated NGL production from two planned third-party natural-gas processing plants in the Delaware Basin, which should produce 40,000 barrels per day.
This project should enter service in the third quarter of next year. Further, it could be just the first of many, since the Delaware Basin is one of the fastest growing shale plays in the country. As such, ONEOK's CEO Terry Spencer stated that this extension of the West Texas LPG system into that region positions it for "significant future NGL volume growth."
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More projects mean improving clarity
This latest project announcement builds on ONEOK's success in securing new expansions this year. In June, for example, the company announced plans to expand its Mid-Continent NGL gathering system and existing Sterling III Pipeline. Supporting these projects were long-term contracts with EnLink Midstream Partners (NYSE: ENLK) and EnLink Midstream (NYSE: ENLC), which need the pipeline infrastructure to support current and future natural-gas processing plants they have in the high-growth STACK play of Oklahoma. ONEOK expects to spend $130 million on the projects supporting EnLink's growth and anticipates that they'll enter service by the end of next year.
Meanwhile, in July, ONEOK announced plans to double the natural-gas processing capacity at its Canadian Valley facility in the STACK play. The company anticipates spending $155 million to $165 million on the project, which should also enter service by the end of next year. Further, like the other projects, long-term, fee-based contracts underpin this expansion.
When combined with a couple of smaller projects in the STACK, ONEOK has secured $345 million to $355 million of growth-focused investments in that region this year. Add to that its share of the $200 million expansion into the Delaware Basin with Martin Midstream and the company has locked up more than $500 million in expansion projects that should enter service by the end of next year.
On top of that, the company continues connecting more wells to its systems as producers complete them, which should drive incremental fee-based income from those volumes in the coming years. Put it all together, and these projects should help increase the clarity of its growth potential, which should bolster investor confidence in ONEOK's dividend plans.
High returns yield high-end growth
One reason for that belief is that these projects represent expansions of existing systems, which tend to deliver higher returns on investment than new system builds. In fact, ONEOK estimates that its expansion projects should yield adjusted EBITDA multiples of five to seven times, or a roughly 14% to 20% cash flow yield.
Because of those lucrative returns, ONEOK appears poised to grow cash flow at a healthy clip over the next 1 1/2 years, which makes it more likely that it can deliver dividend increases toward the high end of its guidance range, at least in the near term. That's exactly what income-focused investors want to see and why ONEOK continues to look like an excellent option for dividend seekers.
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