Why ONEOK, Inc. Popped 10% in January (and Could Have Further to Run)

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What happened

ONEOK, Inc. (NYSE: OKE) got off to a scorching hot start to 2018, leaping 10.1% in January, according to data from S&P Global Market Intelligence. Several catalysts fueled the move, including the unveiling of a bullish outlook for the year.

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So what

The natural gas-focused pipeline company started the year with a bang, announcing that it secured enough customer contracts to move forward with the Elk Creek Pipeline, which will move up to 240,000 barrels of natural gas liquids (NGLs) per day from Montana to Kansas. ONEOK expects to spend $1.2 billion in building the 900-mile pipeline and another $200 million on related infrastructure, which should all enter service by the end of 2019. Underpinning this investment are long-term contracts totaling a minimum of 100,000 barrels per day, which should generate between $233 million and $350 million in annual EBITDA, or a multiple of 4 to 6. That's a higher return on investment than many other energy infrastructure projects, which tend to be in the range of 6 to 8.

The company immediately raised the bulk of the cash needed to finance that investment by completing a $1 billion equity offering. As a result, it now has the capital needed to fund its expansion projects well into 2019.

That project and funding announcement led several analysts to upgrade ONEOK's stock last month. Among them was Wells Fargo, which thought that ONEOK's growth projects put it on pace to increase its already generous 5.3%-yielding dividend at an 8.6% annual rate over the next three years. That view is a bit under ONEOK's, which continues to expect dividend growth of 9% to 11% annually through 2021. The company is well on its way to achieving that goal this year, having increased its payout 3% in mid-January.

More dividend growth is likely over the coming quarters, given the company's outlook for the full year. ONEOK said distributable cash flow should be between $1.615 billion and $1.825 billion this year, which at the midpoint would be up about 26% from 2017. Supporting that growth will be an uptick in the volumes flowing through its various pipeline systems because of improving commodity prices and demand.

Now what

Despite the hot start to 2018, ONEOK still has plenty of fuel to keep moving higher because its growth initiatives are just beginning to bear fruit. Overall, it expects to grow its 5%-plus-yielding dividend at a 9% to 11% annual clip, which has the potential to fuel total annual returns in the mid-teens for those who hold for the next few years.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool has a disclosure policy.

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