Recent Buy

buyI wasn’t sure I’d be engaging in any more activity this month. The initiation of a position in Walt Disney Co. (DIS) just last week was, in my view, a great long-term investment at the current valuation. And I was very content with that being it for the month, due to the fact that I have to stay pretty vigilant on rebuilding my emergency fund after raiding it for stocks over the last couple of months.

But the energy sector continues to get hammered and some stocks within that sector are getting very interesting here. I think the odds are somewhat high for continued volatility over the near term, but you never really know where these things are going to end up. The best one can do is value a company based on all known information and try to buy in with a margin of safety.

Some of the largest supermajors are starting to trade near my cost basis in them, which means continued weakness will allow me to average down. The opportunity to pay less for equity in a high-quality company is always welcome.

However, I noticed one particular stock in my portfolio was down more than 8% yesterday after already pulling back rather substantially over the last few months. This seemed to be an opportune time to add to my position.

I purchased 20 shares of ONEOK, Inc. (OKE) on 12/10/14 for $44.56 per share.

Overview

ONEOK, Inc. is a diversified energy company. It is the sole general partner and 38.3 percent owner of ONEOK Partners L.P. (OKS). OKS is a leader in the gathering, processing, transportation, and storage of natural gas. It also owns and operates a large natural gas liquids system, connecting NGL supply in the Mid-Continent and Rocky Mountain regions with key market centers.

OKS is a midstream master limited partnership. OKE, on the other hand, operates as normal corporation. Its a pure-play general partner, whose purpose is to own the GP and limited partner units in OKS. Its growth is highly tied to OKS’s growth.

The MLP owns and operates more than 18,000 miles of natural gas gathering pipelines. They also own and operate 19 active processing plants. For NGLs, they own and operate more than 4,000 miles of NGL gathering pipelines, six fractionators, and eight NGL product terminals.

Fundamentals

OKE is a vastly different company today than it was just a decade ago. Up until 2004, it was primarily a utility company. However, in 2004 it purchased the majority of the general partner of Northern Border Partners, the precursor to OKS. In 2006, it became the sole general partner and renamed Northern Border under the ONEOK banner.

As such, it’s difficult for me to use 10-year numbers because the business has transformed so much. In addition, OKE’s growth is fueled by OKS. Lastly, net income isn’t really a good barometer for an MLP’s financial stability or growth due to substantial depreciation charges. So, like a REIT, EPS is not really accurate for valuing an MLP. When looking at MLPs, one would be wise to look at the distributable cash flow (DCF), which measures how much cash flow the partnership is generating, and the distributions themselves.

Most importantly, as the general partner, OKE is entitled to incentive distribution rights. If you’re unsure as to what the IDR is or how it works, this site includes a nice explanation. The IDR ensures the GP receives a growing piece of the cash flow pie as the partnership grows. This is accomplished through tiers:

  • 15 percent of amounts distributed in excess of $0.3025 per unit
  • 25 percent of amounts distributed in excess of $0.3575 per unit
  • 50 percent of amounts distributed in excess of $0.4675 per unit

The top tier has already been reached, meaning OKE will continue to collect the lion’s share of DCF. In addition, they collect distributions through their ownership of limited partner units in OKS. I’ll show you what that looks like.

So we’ll look at some numbers and see what we’re working with here. OKE’s fiscal year ends December 31.

First, we’ll look at revenue over the last five years for OKE. It increased from $11.112 billion in fiscal year 2009 to $14.603 billion by the end of FY 2013. That’s a compound annual growth rate of 7.07%.

The distributions, which funds OKE’s dividends, have grown substantially. Notably, the GP interest has accounted for more of that growth. In 2010, the total distributions declared from OKS to OKE amounted to $311 million. Of that, $120 million was the GP interest, while $191 million was the LP interest. Fast forward to 2014, and total distributions declared from OKS to OKE should finish at $636 million. Of that, $351 million was the GP interest and $285 million was the LP interest. So you can see the growth there, especially in the GP interest. Over that five-year period, that’s a CAGR of 19.58%.

Management states succinctly and accurately how the growth of OKS will especially benefit OKE:

Nearly two-thirds of every incremental ONEOK Partners adjusted EBITDA dollar, at current ownership level, flows to ONEOK as ONEOK Partners distributions.

OKE has increased its dividend over the last 12 consecutive years.

But perhaps more impressively is the rate at which the dividend has increased. The dividends paid for 2010 amounted to $0.91 For 2014, that total came out to $2.125. That’s a compound annual growth rate of 23.54% over that period. You’ve got to love a dividend that more than doubles over the course of five years.

And the dividend growth is anticipated by management to continue at an aggressive rate. Through a combination of acquisitions (like the recent acquisition of NGL assets in the Permian Basin) and growth projects that are coming online between now and 2017, OKE expects to grow the dividend by 14 percent in 2015. It has also estimated annual dividend increases of 12 percent to 15 percent between 2014 and 2017.

Factoring in a yield of 5.3% here, and you can see where the investment and income case is compelling.

OKE is targeting a long-term dividend coverage ratio of 1.0x to 1.1x.

OKE and OKS are both heavily leveraged, as these are capital-intensive businesses with a lot of exposure to large, expensive, and long-life assets. As such, there’s a lot of debt on the balance sheets. OKE sports more than $7.7 billion at the GP level and OKS records more than $6 billion. However, OKE maintains investment-grade ratings: Baa2/BBB.

Qualitative Aspects

OKE is a long-term bet on natural gas’s future, in my view. It’s a fairly clean source of energy, and I think we’ll be using it for the foreseeable future and beyond. Demand projections vary substantially depending on the source, but, like most other forms of energy, it appears fairly obvious to me that energy needs will increase over time. You combine an increasing global population with increasing access to wealth and thus energy from rising middle classes across emerging and developing markets, and that leads you to increased energy demand.

I think it’s possible the forecasts may actually be on the light side, like the most recent report from the US Energy Information Administration. For an instance where the prediction was woefully inaccurate, NaturalGas.org cites:

The Energy Information Administration, in its Annual Energy Outlook 2011, projects that natural gas demand in the United States could be 26.55 trillion cubic feet (Tcf) by the year 2035.

But you can see we’ve already surpassed this.

A substantial competitive advantage lies in the barriers to entry, as ONEOK’s pipeline assets can not be easily replicated. Furthermore, their size gives them economies of scale, and the geographical locations are fantastic. The MLP has been heavily concentrating on the Bakken, and approximately half of producers’ rigs currently operating in the Williston Basin are drilling on acreage dedicated to OKS’s systems. So their position is firmly entrenched to where it would be exceedingly unlikely that a competitor could come in and replace them.

Their natural gas gathering growth has been substantial, up from 1,067 BBtu/d to an estimated 1,720 BBtu/d from 2010 to 2014. And OKE is predicting 2,010 BBtu/d for 2015. This growth will come from current exposure as well as new projects. OKS has $3 billion in growth projects in various stages of completion as well as a backlog north of $4 billion.

Perhaps most remarkable, the majority of ONEOK’s cash flow is based on long-term, fee-based contracts. So this insulates the partnership somewhat from wide swings in commodity pricing. And it gives them long-term visibility on cash flow and its ability to pay and increase distributions and dividends, which is why you see growth projections going out a few years.

Risks

There are a number of risks to consider here with OKE, and I consider it a rather aggressive investment from a standpoint of risk and reward. Primarily, the MLP structure could come under pressure if there are any material changes at the federal government level insofar as taxation. Though highly unlikely, it’s a risk that, if it were to occur, could have a substantial effect on the business (and others like it). Rising interest rates are also a risk, due to the amount of debt that OKE and OKS carry. Although OKE is largely insulated from major swings in commodity prices, they are exposed through their processing business. In addition, lower natural gas prices can reduce demand for transportation. One other potential risk is a dividend cut, as like a lot of other MLPs, the dividend coverage is pretty tight. Finally, I view black swan events as a risk, such as a fire or other disaster at one of their pipelines or plants.

Valuation

Though ONEOK has corporate history dating back more than 100 years, its current structure and business model is somewhat new for them. That said, they’ve been incredibly successful with it over the last decade.

As aforementioned, net income isn’t a viable way to gauge profitability. So I won’t be using the P/E ratio for comparative purposes here.

I valued shares using a dividend discount model analysis with a 10% discount rate and a 6% long-term growth rate. That rate seems particularly conservative considering we know it’s highly likely going to exceed that for at least the foreseeable future. However, I like to always model in a margin of safety. The DDM analysis gives me a fair value of $62.54.

So shares appear substantially undervalued here, as the stock has corrected more than 35% over the last three months. OKE was trading above $70 not that long ago. As I stated above, there could be continued volatility moving forward, but I believe OKE has fallen too far in too short a period, especially considering that their business isn’t tied heavily to oil prices and natural gas is higher now than it was three years ago. In management’s predictions, they cite that commodity pricing shouldn’t have a large impact on their results, though they do release forecasts with varying prices on oil, NGLs and natural gas. Even the low-end numbers result in significantly higher DCF year-over-year.

Conclusion

I first initiated a position in OKE last summer around this same price and the stock kind of took off from there. I never got a chance to really add to my stake in the company until just now. I’m certainly glad to have the chance to add to one of the premier midstream MLPs at what I feel is a severe discount. This purchase was smaller than my usual transaction amount due to being a bit light on cash after a buying spree over the last few months, but I think this was sufficient seeing as how the intrinsic risk is somewhat elevated in comparison to most of the companies I invest in. However, I believe the valuation compensates for that risk.

This is one of the few stocks on the market where you can get yield and a growth rate that are both well above the average. Furthermore, it appears the valuation also offers a margin of safety.

I’m going to include a couple of other valuation opinions below, as I use these to concentrate my reasonable valuation estimate:

Morningstar rates OKE as a 4/5 star value, with a fair value estimate of $59.00.

S&P Capital IQ rates OKE as a 2/5 star “sell”, with a fair value calculation of $50.80.

This purchase adds $47.20 to my annual dividend income, based on the current $0.59 quarterly dividend.

I’ll update my Freedom Fund in early January to reflect this recent purchase.

Full Disclosure: Long OKE.

Have you looked at OKE here? What are your thoughts? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

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103 Comments

  1. Fire sale on oil/energy stocks! So many to choose from, most are at or near their 52 weeks low. I am considering initiating positions in COP or BBL in the next month or two.

    I already own full positions in WMB and KMI, WMB was one of my top purchases in the past two years.

  2. Awesome. You are on a buying spree that’s for sure. The last couple of months have been full of buys. Dare I say one more buy before 2014 is over? OKE is a name that I have heard of but never really followed nor did much research on. Thanks for bringing it back to my forefront. I know all these energy names will be back in a big way going forward. It’s just a very, very tough climate now for any driller, refiner, pipeline, etc. company. Thanks for sharing.

  3. Hi DM,

    Very gutsy move! I agree that you never know when it will stop, and if I had capital I would have deployed a little bit on some energy companies that interest me.

    My smaller energy companies have also suffered strong price drops… If this situation remains for an extended period I will have my chance of increasing my positions at much lower prices.

    I would be careful when investing on highly leveraged energy companies at this point. The US economy is picking up and I wouldn’t be surprised to see interest rates being increases soon, if coupled with that, the prices stay low for an extended period, some of the more indebted players might not survive for the rebound. However, ONEOK is a natural gas play, which not only has remained a lot more stable, but it is also the source of energy that promises more growth into the future. There’s potential for a massive upside here!

    Best,
    Dividend Venture

  4. DM,

    Seems like a logical pick considering KMI was also the GP for (kmr,kmp & EPB) Great yield with growth aspects what’s not to like. Energy is where the value is in this market! Thanks for the update, keep up the good work.

    All the best,

  5. Another buy! You are on a roll 🙂 looking forward to seeing your year end balances, and what your plans for next year consist of 🙂

  6. No risk, no reward – or so the saying goes. I like it. It’ll give you something to look back on and say “Damn, glad I did that” once it starts paying dividends (clumsy pun very much intended).

  7. Nice purchase. I wasnt planning on buying anymore stocks either but I couldnt resist and bought 25 shares of BBL. Patience is a virtue!

  8. You know, I just knew you were going to pick up ONEOK when I saw the 8% drop the other day. I ended up going a different way and hitting AT&T while it was down. Also, I just found this site, and in the past month started on my DI journey. Thanks for all the great advice and guidance on where to start my path Jason!

  9. Hey, Jason.
    You’re OKE is very close to home for me living in Southwestern OK.

    Energy is so tempting that I initiated my DGI today with:

    30 shares of RDS.B
    50 shares of BP
    50 shares of KMI
    25 shares of XOM
    30 shares of COP
    50 shares of BBL

    That was to spend most of our 2014 ROTH contributions.
    I’ll see where these go over the next few months and add to them or round out with some CLX, MCD, KO or other consumer-based companies.

    I guess you can officially welcome me to the world of DGI

  10. Until Saudi Arabia says they are going to cut the production of oil, expect to see further declines in anything related to oil/energy.

    Their current stance right now is: “Why should I cut production?”

  11. Another solid buy! While we may not know when the bottom will come in energy, it’s easy to see some nice value presenting itself in the market, in an otherwise costly time. I’ve been very tempted to add to some of my energy co. but haven’t pulled the trigger on a larger purchase yet, as I don’t want to dip in E funds yet. I have been scooping up some smaller amounts in COP and XOM. Thanks for sharing and I hope this buy works very well for you!

  12. What a month….We had many opportunities for Xmas shopping……I went crazy and killed my emergency funds with additions in CVX,XOM, NOV, BBL and COP? I wish I had more money for OKE.

    What laughable is that people are already thinking about the demise of this corporations..

    What do you think about Nucor? I am thinking of PNR as well….

    Take care.

  13. Nice buildup of a position. There are a couple energy companies I think are still pretty solid trading very low that I would love to add to if I could. Utility companies have their rates pretty well locked in and yet they still got hammered recently. And the small rally today probably made you feel pretty good about buying yesterday 🙂

  14. I have lots of natural gas. lol. Sorry- I couldn’t resist.

    I like that the dividend grew roughly 59% over last year.

    Joel

  15. Man, I can’t agree this is a good buy. Looking at the last quarters: negative cash-flow, earnings declining, dividends > earnings last year, total equity flat…
    At least, is just my opinion on this company, looking at numbers at finance.google
    I don’t know the company, since I live in Portugal.

    Cheers

  16. EWB,

    There is definitely some interesting picks in the energy sector. Some are more obvious values than others, and it seems to me that OKE has gotten disproportionately hammered. Fine by me, however. 🙂

    Great job there with WMB. I took a look at Williams a while back and had a hard time with some of the numbers. But they’re doing fantastic and the recent moves with Access Midstream seem to be solid for long-term shareholders. If I were to pick up one more stock in the midstream area it would be Willliams. Not sure if I have room, though.

    Thanks for stopping by!

    Cheers.

  17. DivHut,

    Ha. I’d love to make one more purchase, but I honestly doubt that’s going to happen. I just don’t have much cash at this point. First world problems. 🙂

    Energy is definitely getting hammered right now. It’s particularly interesting against a backdrop of an otherwise elevated broader market. Certainly some opportunities here and there, of which OKE seems to be one of them. We’ll see how it turns out.

    Take care!

  18. DV,

    I agree. Rising rates could be a problem for OKE/OKS, but they certainly wouldn’t be alone. I think that would cause more of a slowdown in growth than anything else, which, with a yield this high, isn’t really a big deal. You don’t need much growth to turn this into a satisfactory investment. Of course, more is always better. 🙂

    The good news is that the assets they already own and operate should be in demand for a long, long time. I think at some point all of these midstream plays will slow down, as they require new projects to grow so fast. But, like I said, even much slower growth means they should still offer acceptable returns.

    Thanks for dropping by!

    Best regards.

  19. j-harr,

    It’s certainly not out of the realm of possibility that other firms will follow in Kinder’s footsteps. I imagine they’ll wait to see how that plays out, however. Either way, if that happens, owning the GP will be the way to go. In the meantime, I’m excited for some juicy dividends and some potentially strong dividend growth over the next few years. 🙂

    Thanks for the support!

    Best regards.

  20. Nicola,

    I’m on more than a roll than I planned to be, but it feels good to set up 2015 pretty nicely. 🙂

    Thanks for dropping by! I hope you’re finishing up 2014 just as you’d like to.

    Take care.

  21. Steve,

    You’ve got it. A little risk goes a long way.

    I’m hoping this pays those literal and figurative dividends for many years. 🙂

    Hope all is well with your journey as well!

    Best wishes.

  22. Curtis,

    Wow. Nice. You started off with a bang there. Not only did you catch some of those at some really good prices (particularly BBL, in my opinion), but you also have a very healthy yield there. I’d definitely try to diversify away from energy a bit as you move forward, but you have to go where the value is.

    Glad to have you in the world of DGI. 🙂

    Cheers!

  23. Scott,

    Yeah, there’s probably more volatility on the horizon across energy. I think the best one can do is value a company conservatively, buy in with a margin of safety, and stick with quality.

    Best regards!

  24. G,

    Nice move there. I think BBL is one of few obvious home runs available right now. I didn’t plan on it being anywhere near a large position, but I may have to buy just a little more early next year if it stays this low.

    Patience is indeed a virtue. 🙂

    Cheers!

  25. Agent,

    Yeah, tough to really know where some of these stocks are going to go in the short term. But I think many of them will be just fine over the long haul, especially those of high quality that have been through some major volatility before.

    I hope we both have even more cash with which to buy stocks in early 2015. 🙂

    Best regards.

  26. DW,

    Yeah, I noticed the pop. Though, plenty of stocks popped today. Obviously, not a real concern either way over the short term. I think some of these stocks are in the bargain bin right now, so I’m happy to add a little more aggressively to energy than I planned on. Maybe down the road the value will shift elsewhere, and we’ll be able to shift our attention there. We’ll see how it goes!

    Thanks for dropping in. 🙂

    Cheers.

  27. Joel,

    Ha. I think we all do. 🙂

    Yeah, the dividend growth was monstrous this year. And the spin-off of OGS was nice as well, which pays its own dividend. Things are looking up!

    Take care.

  28. Amit,

    Wow. Way to go. Looks like Santa already came to town for you. 🙂

    The demise? That’s obviously ridiculous considering how low some of these commodities have been in the past. This recent volatility is really not that bad.

    Not a big fan of Nucor. Just not my cup of tea. The dividend raises have been pretty poor over the last few years. I think one has to be careful about going too crazy with commodity plays as well. Energy is already a bit heavy for me at 15% of the portfolio. No big deal to go temporarily out of whack to pursue value, but I wouldn’t want to expose myself too heavily.

    Best regards.

  29. Nuno,

    “Lastly, net income isn’t really a good barometer for an MLP’s financial stability or growth due to substantial depreciation charges. So, like a REIT, EPS is not really accurate for valuing an MLP. When looking at MLPs, one would be wise to look at the distributable cash flow (DCF), which measures how much cash flow the partnership is generating, and the distributions themselves.”

    Cheers!

  30. I was waiting for you to write something on Energy since yesterday. I thought about dropping you a comment yesterday.

    Energy sector is having a crazy movement. It’s like a Black Swan event. Oil price is dropping like crazy since summer from over $110 to under $60.

    There are so many bargains out there. I had been doing so much research since last week and created watch list by priority. OKE is on my watch list but I couldn’t pull trigger yesterday at around $44 because I was scared.
    I have about 10 Energy name on my watch list by priority but I am afraid to pull the trigger just yet.

    But I did buy lot of CVX under $104, little XOM under $89 and very little BP under $38 yesterday.

  31. AJ,

    I think the cheaper, the less scary. I’m not particularly interested in CVX or XOM quite yet. Both are trading above my cost basis, and I was able to buy into both not all that long ago for a cheaper price with higher oil (thus less volatility). So I’m hoping we see some lower prices, which would present better values. Of the two, I’d like XOM a bit more, just from an allocation perspective. XOM is arguably the better company, though CVX offers more income.

    BP is up there on the risk/reward scale. I’m not sure how ~$60 oil plays out for them, as I remember seeing their reports assuming ~$100 oil for their projections. I guess we’ll see.

    Best regards!

  32. Great job on picking up OKE. I looked at it a while ago and decided to hold off…I can see why you like it and picked it up. Im sure the company will do well for your portfolio. Keep it up!

    R2R

  33. R2R,

    The growth profile is impressive. Energy is volatile right now, so I’m sure the ride will be rocky. But I’m confident this boat will get me to where I eventually want to be. 🙂

    Thanks for the support!

    Best wishes.

  34. “” — Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.”

    He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that’s not the whole story. The original quote is believed to be “Buy when there’s blood in the streets, even if the blood is your own.“ —

    So, Jason, good buy on OKE and other quality energy companies. Best, Dan

  35. Hi Jason,

    Looks as though we’re all having our version Black Friday, many good names on sale, WTI touched 59 Bucks a barrel last night, have just bought some more Shell and BP this morning, with nobody knowing the bottom in oil I figured I’d just average down every 10$ drop in oil, I really didnt think I’d be buying again so soon, next buy point 49$ per barrel 🙂

    Cheers,

    Dave…

  36. MLP is something I didn’t knew until now, I read the investopedia definition.
    I’m now awared that it cannot be analised like a “regular” company, but I’m it seems to have a greater risk that most of your stocks. Although, you’re are now ready to risk a little bit more since the core of your portfolio is very solid.

    Cheers!

  37. Jason, what do we have here?

    A company that’s
    – basically not growing: annual EPS growth of 3.8% (2011-2015e)
    – horribly overvalued (PE of 33)
    – horribly indebted
    – with a payout ratio of beyond 100%
    – in an industry where all the rules are changing, where they have to re-define the entire game, where you can get companies worth hundreds of billion of dollars for a PE of about 10

    And yet everybody’s congratulating you on this “gutsy” move. Seriously, sometimes I don’t get this blog. Is being supportive and kind really so much more important than being critical and honest?

    I think this is a really bad investment, and I hope none of your readers will follow you down this path.

    Good luck, though!

  38. Klaus,

    You don’t get it because you’re trying to analyze this MLP as a through traditional stock valuation methods. It doesn’t work. As Jason mentioned to an earlier poster (whom I congratulate for subsequently doing the additional research), MLP’s are a different animal. Almost as different as Stocks vs. Bonds. With all due respect, research their structure and then come back enlightened.

  39. Of course, this brings to mind my favorite investing quote of all time, It is often attributed to Buffett, but since we both read the biography, know that it’s actually Benjamin Graham’s:

    Be fearful when others are greedy and greedy when others are fearful.

  40. Read through his post again and he explains why an MLP has to be treated differently from a regular stock. especially in regards to EPS vs. DCF (Distributable Cash Flow). He explains this very thoroughly in the post.

  41. Just initiated starter position in SE at $34.34. OKE is on my watch list. I will pull trigger on it sometime next week if it goes lower.

  42. Hey DM, I like your averaging down on OKE. I think there is good value in the energy sector right now. ONEOK is a name that is fairly prominent here in the oil patch in North Dakota. I also took advantage of the recent deline in the energy sector by adding to my position in HCLP, which is a large supplier of Fracking sand here in the Bakken. It was down 46% since I first bought it back in June. More of a spec play in my portfolio, but I am confident that energy prices won’t stay this low forever.

  43. Just curious, does a Master Ltd. Partnership like OKE work in an IRA account or should it be in a taxable account only. Thanks in advance.

  44. Hi DM – I’ve enjoyed your blog for a couple years now. Congrats on all the recent purchases and your whole DGI journey. I don’t have a specific comment about this purchase, but I have a general question about the oil/gas sector in light of the recent price price plunge. It seems to me that if the price of the product that a company sells falls by 40%, shouldn’t we be worried about the price of that stock also falling by 40% or more (when you subtract out production costs, profit percentage drops even more)? Thus, even though companies like CVX, COP, BP are “on sale” now, they’re not exactly 40% off! I can’t quite pull the trigger on these companies, as I fear a sustained low price of oil will seriously hurt the bottom line. Pipeline companies, on the other hand, seem to be a good play at this point. Any thoughts?
    -Ken

  45. Hi Jason,

    I’m currently thinking about buying Chevron or Exxon. I read that you think that Exxon is the better company of the two. Could you explain why you prefer Exxon? Which company is growing faster and growing dividends at a faster pace? Have a nice weekend!

  46. I have almost always avoided energy companies as individual investments. I guess I am just afraid of that whole industry (expect solar). I just let them be owned through ETFs and mutual funds. For my early retirement accounts, I should probably pay closer attention to your articles and find some nice energy sector dividend stocks.

  47. Another purchase! You’re on a roll! I’m in the same boat as you. I didn’t expect to make any purchases in December and ended up making two, hahaha.

    Personally, I’ve never looked much at OKE, though it looks interesting. I’ll put it on the watchlist, but probably will stick to the supermajors for now, as all I’ve got in my portfolio is CVX and this volatility in energy seems like a really good opportunity. Really interested in XOM since it dipped below $90.

    Also, I stumbled across your SA article about your DIS purchase the other day. I don’t read through comment threads often, but I did glance through the one following your recent buy article and saw an unfortunate comment. Don’t let the trolls get you down!!! Sticks and stones 🙂

  48. I am loving the discount in energy prices right now! It is sort of amusing to see people acting as if the world is ending, while investors are scooping up the sales! I can’t wait to see you break that 200k mark. I am going to average into more CVX myself once it drops a bit more.

  49. Dan F.,

    Ahh, the Rothschild family. Lot of money there. I think they’re in pretty much everything these days, aren’t they?

    I’m not sure if there’s blood in the streets right now, but there might be a small puddle. However, there are some solid discounts here and there in energy. OKE is paying out substantially more money right now and collecting quite a bit more natural gas across a bigger network, yet it’s priced pretty much the same as where I bought it last year. And I thought I got a pretty good deal last year. I was just looking at XOM and I think it’s maybe around 10% undervalued. If it drops another 10% I’d be very interested in looking to buy more.

    Thanks for the support. And may we continue to inch closer to those Rothschilds. 🙂

    Best wishes.

  50. Dave,

    That’s a good strategy. Nobody knows where the bottom is. They don’t exactly ring a bell or something when the bottom hits. Averaging in allows you to continue building the income and you’ll naturally catch some near the bottom anyway. The key is really to model your valuation fairly conservatively when there’s a lot of volatility like this and then try to buy in with a margin of safety below that.

    Happy shopping! 🙂

    Cheers.

  51. Nuno,

    Right. MLPs are a different breed. Like REITs in the regard to using earnings to evaluate. Not every stock is the same, which is important to remember.

    I mentioned the amplified risks a couple times in the article, so I would agree with you that this is probably a bit higher on the risk/reward scale than, say, a Coca-Cola. Though, one could argue with the valuation, income, and growth that the risk actually isn’t that great. Either way, I definitely wouldn’t want the core of my portfolio built around MLPs or energy companies in general. I’m a bit heavy now with about 15% of the portfolio in energy, as I’d prefer somewhere around 10% to 12%. But that’ll adjust over time.

    Glad you’re able to see where the numbers are coming from now. 🙂

    Best regards.

  52. Klaus,

    If we want to be critical and honest, I’ll be frank with you.

    It sounds like you don’t understand MLPs, this stock, or perhaps this industry in general. You look at the basic numbers and think every stock acts and reports the same. And that’s not true. You cannot use GAAP earnings when evaluating REITs and MLPs. Josh Peters, a well-respected analyst and author on investing actually released a video on this not long ago:

    http://www.morningstar.com/Cover/videoCenter.aspx?id=670742

    Being frank, I think you have a lot to learn. More reading, less talking. It would serve you well. I’d personally prefer not to spout off and ruin my reputation in front of wiser men. It would make me look like an idiot. But that’s just me.

    On the topic of reading more, since apparently you didn’t read the article, I wrote:

    “Lastly, net income isn’t really a good barometer for an MLP’s financial stability or growth due to substantial depreciation charges. So, like a REIT, EPS is not really accurate for valuing an MLP. When looking at MLPs, one would be wise to look at the distributable cash flow (DCF), which measures how much cash flow the partnership is generating, and the distributions themselves.”

    Read. It’s a great way to learn.

    Cheers!

  53. Mr. 1500,

    Indeed. I think there’s still some volatility ahead for energy, but the fear seems to be cranked up a little bit. Fine by me! 🙂

    The more fear I see, the greedier I get.

    Thanks for dropping by!

    Best regards.

  54. AJ,

    I’ve never looked at Spectra in-depth. But you have to love how the natural gas infrastructure plays are getting hammered with oil’s drop. In fact, they’re getting hit harder than the companies that rely on oil to fuel a big part of their earnings. Fine by me. 🙂

    Enjoy those dividends!

    Take care.

  55. BCS,

    Wow, gotta love that yield on HCLP. If you did the research and their business (and payout) is sustainable, that could be a great investment. It’s obviously a much less risky play at $30 than it was at $70, even though people don’t think of it that way.

    Best of luck! 🙂

    Cheers.

  56. wtd7576,

    OKE would be fine in an IRA. It pays qualified dividends, as it is set up as a C-Corp.

    OKS, however, is different as that’s the limited partner. It’s generally not advisable to install MLPs like OKS in an tax-advantaged retirement account.

    I hope that helps!

    Best wishes.

  57. Ken,

    Right. I’ve been discussing how I think some of the supermajors can still drop a bit from here. However, oil prices and their stocks won’t trade vis-à-vis like that over the long term. So I wouldn’t assume that just because oil drops 40% or whatever that all of these stocks must drop by a corresponding amount. And that’s because these businesses are more than just oil. Companies like CVX and XOM are integrated companies with both upstream and downstream operations. In addition, there are substantial gas and chemical businesses. What I try to do is look at recent oil prices over the last few years and look at how some of these companies fared in regards to EPS. COP and BP are impossible to compare because they’re totally different companies now than they were back then. But you can kind of gauge where CVX and XOM might go. They have less shares outstanding, which will cushion some of the blow there, but they are also spending more on E&P.

    I don’t forecast short-term moves in stocks, the market, or commodities. And thankfully, I don’t need to to be successful. But I wouldn’t be surprised at all to see XOM drop to $80 or below, for instance. I try not to anchor myself, but I purchased XOM not all that long ago at a similar price to where it’s at now, and oil was much higher (thus, less volatility). So I’m not really anxious to jump in. Then again, I might be a bit biased there because I’m filled up in energy and I feel pretty good about my stocks and the prices I paid.

    All in all, I think there will be continued volatility. I don’t think stocks like XOM or CVX are “steals” here, but I also think one would be wise to average in. Especially if the portfolio is either small or the energy exposure is light.

    I hope that helps!

    Best regards.

  58. Sam,

    I like both of them. I’m personally looking more at Exxon right now only because I have a smaller position in the company.

    If you really study up on oil and how some of these companies are judged, Exxon sports better metrics across the board. But they’ve made some errors, like paying too much for acquisitions (especially XTO).

    They have similar dividend growth rates. CVX has a higher yield. Exxon has the lengthier dividend growth record. I don’t really think you could come up with a clear winner there.

    CVX is a lot smaller, so the Law of Large Numbers would indicate it might grow faster over the next 10 years. Really impossible say, though.

    I was just looking through XOM’s numbers yesterday. Grew EPS at a 7%+ clip over the last 10 years. Low payout ratio, solid yield, great company. Been through it all. CVX, on the other hand, has also done very well. And they have some very exciting projects in Australia right now with Gorgon and Wheatstone.

    I don’t think you can really go wrong with either one, really. They’re both great companies and I’d prefer (and do) have exposure to both.

    I hope that helps.

    Best wishes!

  59. Vawt,

    Alternative energy is exciting. I think it’s still way too early to call any clear winners there, so that’s a bit too close to gambling for me. And there aren’t any established companies paying and growing dividends in the solar industry. At least, not that I’m aware of. But if you have any high-quality companies that I should look at, I’d be grateful for it. 🙂

    Thanks for dropping by.

    Cheers.

  60. Josh,

    The sky is falling! 🙂

    The pullback in some of the energy stocks is most welcome right now, especially when the broader market itself is still near all-time highs. I could imagine this drop pulling the rest of the market down at some point in time, so 2015 may, just may, be a lot of fun. 🙂

    CVX is a great company. I lack a big position in XOM right now, so I’m looking to average down into that company if/when it drops a bit more. Both great companies, though.

    Best wishes.

  61. Seraph,

    Haha. Oh, the trolls won’t get me down. I just may shut my feed to SA down at some point in time, though. I’ve just had a somewhat negative experience there, all in all. But I’ll continue doing my thing and blogging about it no matter what. 🙂

    Yeah, OKE (and MLPs in general) are up higher on the risk/reward scale than a company like CVX. I feel comfortable there, but only because I also have plenty of exposure to those low-risk (or what I perceive to be low-risk) stocks. But CVX and XOM are a great place to build out the energy side of your portfolio. OKE has killed a lot of them over the last 10 years, but past performance is certainly no guarantee of future returns.

    Glad we’re in the same boat there. It’s a great boat to be in!

    Keep up the great work.

    Best wishes.

  62. Tawcan,

    Thanks!

    Yeah, I think there are some good discounts here and there in energy. The natural gas infrastructure space has been particularly hard-hit, so I’m happy to get a great yield at a great value right now. I can’t see how I’ll be unhappy with this buy 10 years down the road. Even if OKE is only able to grow half as fast as they think they will, this should be a solid long-term investment. Pipelines aren’t going anywhere.

    Thanks for dropping by.

    Cheers!

  63. DM, do you think that OKE is the best “pure play” natural gas stock for dividend growth investors? What others would you also recommend?

  64. EWB,

    I like the bigger players in the midstream natural gas space. That naturally limits a lot of companies, but it also limits risk. A bigger company has the resources and wherewithal to sustain temporary setbacks, in my view. So I primarily like OKE, KMI, and WMB in this space. Kinder Morgan, however, has exposure to other commodities, but it’s a pipeline company like the others.

    There’s a lot of energy companies out there, though. I’m sure there’s some hidden gems that I’ll miss, but I’d rather stick with the tried and true. It’s not like any ol’ company can just go out and build 20,000 miles of pipeline.

    ONEOK is about as focused as you can get on natural gas, if that’s what you’re after.

    Best regards.

  65. I am just wondering why I hear all this love for KMI, etc. It doesn’t seem to be trading as a good deal and the payout ratio is very high.

    I am asking this as a general question having done my own analysis of the company in an admittedly very simplistic way. I am just trying to understand the logic.

  66. dzogen,

    I referenced a video to another reader earlier in the comment thread which goes into some of the real quick basics as far as why you should ignore GAAP earnings for REITs and MLPs. I reference it because it’s current and apt, and Josh Peters is fairly well known throughout the community:

    http://www.morningstar.com/Cover/videoCenter.aspx?id=670742

    That would be a good place to start. But there’s a lot of reading available out there on how MLPs work.

    I hope that helps. 🙂

    Best regards!

  67. I hate MLPs… taxes are a pain and years later when distributions have returned all principle you can will get taxed at 42%

  68. Finally stared a position in OKE at the closing yesterday along with PSX. Also started position in SE in the morning. I also added to CVX, XOM, EPD, BP and COP.

    Still have NOV, OXY, and HP on watch list for next week.

    Heavy on Energy sector right now but I am only 25% invested to my journey so there is lot of investing to do in future.

  69. You should consider Transocean(RIG) as a holding. The best driller out there. They have increased their dividend and have a good cash flow. Extremely cheap at around $17.00. A volatile stock but a solid company. The dividend is at about 16% at this price.

  70. Great to see you loading up on energy. I myself am likely becoming overweight with energy, but I don’t care! Energy is a great sector since we’re always going to need it, and these valuations are probably a once-in-a-lifetime opportunity. I started a year ago not really knowing much about value investing, so this is my chance to correct some of my own mistakes.

    I do have a couple of questions for you though:

    1) MLPs. Yes, I know you’ve posted the links to how they work more times than anyone can count, but I find them a bit hard to understand and I just want to see if I got the basics of what they do (whenever I buy a company, I often find myself looking at its PRODUCTS before its investments page, as I like to visualize what the company owns and sells so I know what I am owning. MLPs throw a wrench in that for me). From what I can tell, the GP doesn’t actually go out there and explore, produce, develop, or sell natural gas, right? The LP does all that; the LP is the actual oil/gas/whatever company. The GP just manages all its assets for a price that’s fixed to the LP’s cash distribution (sort of “skimming off the top” in a sense, the practice in question being called IDRs), giving them an incentive to increase the LP’s cash flow as higher distributions means higher compensation for them. Plus, they also own a percentage of the LP’s common units. Is that relatively close to being on the mark in terms of what MLPs do?

    2) Speaking of the GPs and LPs, I see you’ve chosen OKE over OKS. Any particular reason that you invest in the GP rather than the LP? DGI, in an entry from his blog a couple years ago, mentioned he sold OKE for OKS. Just curious on your thoughts on investing on OKE over OKS, GPs or LPs, or if it even matters.

    3) Not really related to this but do you recommend investing in royalty trusts for shorter time horizons (10 years or less) just to get the dividends to help fund investments in other companies such as Johnson & Johnson, Coca-Cola, or other dividend staples? I know that all royalty trusts are destined to go to zero, but if I know that a royalty trust has, say, a 20 year life ahead of it, that doesn’t mean I have to still be holding on 20 years from now while the workers scrape up the last drops of oil with a tablespoon. The yields are incredible despite the trusts’ destiny to bottom out over time, and while I hate to be a yield chaser, sometimes it is prudent to at least consider something with a high yield. I was curious on your take on the matter.

    Man, you should really be a fee-based consultant.

  71. nice buy jason, consumer stuff should benefit from this commodity drop – should see the impact of this once we start into 2015. I picked up some BBL down at $41, i am still expecting all the commodity/energy sector to keep dropping for a bit – especially energy but can’t time a bottom so slowly averaging in over the next 6 months. Next earnings cycle, expecting a reduction in guidance, probably cut in dividends, drop in eps etc and i think that will be an awesome place to load up for the next few years…

  72. One renewable energy dividend play i am in and i like is BEP-UN.TO – part of a bigger asset play of BAM. Both are excellent imo. I also like their infrastructure BPY-UN.TO. cheers T

  73. frankz,

    Right. The limited partner carries additional tax complications (and issue K-1s). I always invest in the general partner, like OKE and KMI. These pay qualified dividends as a corporation like any other dividend stock (PG, KO, etc.). Investing this way will make it easier once one is living off of their dividend income.

    Cheers!

  74. AJ,

    Nice. Laying it on thick over there. 🙂

    I’m almost positive we’ll see more volatility in energy, but being early on in the journey allows you to comfortably ride out that volatility and use it to your advantage by averaging into high-quality companies. I hope to continue doing the same. Most of those stocks (except BP and NOV) are trading above my cost basis, so I can be a bit patient here. But I would like to average down on NOV at some point here.

    Keep it up!

    Best wishes.

  75. Ed,

    Hmm, I don’t think RIG qualifies as a solid company or a solid stock. I don’t mind a stock that gives me an opportunity to build up a position at cheap prices, but a stock that performs as miserably as RIG is not for me. Factor in an intermittent dividend that isn’t regularly increasing and it’s completely off my radar. I feel bad for any RIG shareholders over the last five years. Been a very painful ride.

    SDRL’s yield was up there as well right before they cut their dividend. I wouldn’t be surprised to see RIG follow suit.

    I haven’t had time to dig very deep into RIG’s financials, but Morningstar shows them posting negative free cash flow and negative net income. And it looks like they carry more long-term debt than the entire market cap of the company. What makes you think the dividend is sustainable here, especially when RIG fairly routinely cuts their dividend?

    Cheers!

  76. Joey,

    Right. You’ve got the gist of the MLP structure there. However, not all MLPs have a GP. Depends on the partnership. But the GP serves as a type of management whose best interests lie in increasing the cash flow of the entire partnership.

    As far as OKE over OKS, I prefer the former because it should grow its dividend much faster over the long haul and should offer superior total returns. You’ll notice management typically has most of their money tied up in the GP (like Richard Kinder with KMI). In addition, they pay qualified dividends, which limits tax complications. But if you compare OKE and OKS over the last five years, you’ll see what I mean.

    I don’t really concern myself too much with what other investors are doing, but DGI actually admitted some time ago that he made a mistake pursuing OKS for OKE out of yield. I can’t find the exact post right now, but I’m almost certain he was going after yield. He just published an article the other day that states: “and I replaced ONEOK Partners (OKS) with ONEOK Inc (OKE).”

    I would never invest in a royalty trust like that. An asset with a finite time horizon and thus value isn’t really meant for long-term wealth creation. I suppose if I knew I were dying in five years and I just wanted as much income as possible now, that would be a different story. It would be interesting to see how an experiment would play out – someone takes the dividends from a royalty trust and invests that income into high-quality stocks. But royalty trusts, as I understand them, are wildly speculative as they don’t really own any assets. They just finance the operations which will eventually deplete themselves. Also, any changes with how they’re allowed to run as far as a tax perspective could cause disastrous results. Investors in Canadian royalty trusts were hit pretty hard when they had the rules changed. Just not for me. Doesn’t make them necessarily a bad investment if you really know what you’re doing there, however.

    I hope that helps! 🙂

    Best regards.

  77. Pingback: Long Term Mindset Portfolio – Purchase 023 - ONEOK | Long Term Mindset
  78. Good Job Dividend Mantra! another buy, makes you a step closer to your goal! I was unfortunate and could not invest this month and last month. Hope that January will serve me better. The outlook is good.. looking forward to a new job!
    Don’t think you can go wrong with Disney shares.. though i don’t really now oke good enough. Have to do some own research! seasonal greatings to your family!

  79. Congrats again on taking advantage of the energy dip. OKE is one of those companies that has always been on my radar but I never had enough capital to buy. It sounds like a solid purchase and now you’ve also got a huge margin of safety going forward. Well done!

  80. DDI,

    We can’t always purchase stocks every single month for years on end. Life can be a little complicated. But it sounds like you’re making the correct moves over there to put yourself in an even better situation. Congrats on the new job. 🙂

    Disney is a great company. The more I think about that investment, the more I want to increase it. So many stocks, so little capital. But I’m working on it!

    Thanks for dropping by.

    Best wishes.

  81. Spoonman,

    Just now spent a few minutes catching up on your journal over at ERE. Good stuff! Looks like you have a great budget worked out over there. Very nice. And I’m totally jealous of your rent. $685 in Portland? Awesome!

    That seems like a great city. I just don’t think I could do with the weather. I’m solar powered. 🙂

    I hear you on the gaming. I jump on the PS4 (a Christmas gift last year) and play at least a few times per week. I generally play just one game per year. The amount of entertainment out of $50 or $60 when you break it down per hour is out of this world. Sure blows a sporting event or something else out of the water.

    Keep enjoying the good life!

    Best regards.

  82. Conviction is important. So long as fundamentals haven’t deteriorated, an 8% pullback is an opportunity.

    The natural gas opportunity is going to be an interesting one and will play out over the next hundred years. Prices have been volatile over the past few years and it’s important to own best-of-breed operators so you don’t get nailed if prices drop again.

    Take Care!
    – Ryan from GRB

  83. GRB,

    Absolutely. If you have conviction in a company and the fundamentals are still solid, a pullback is nothing more than an opportunity to average down and buy more equity for the same amount of money. That means a higher yield right off the bat which also means more dividend income. That increased dividend income then just amplifies the effects of compounding over a long period of time. Good stuff! 🙂

    Thanks for dropping by.

    Cheers.

  84. Transocean sold three older rigs and formed a partnership with them. Their symbol is (RIGP)
    Transocean book value is $46.29 as of last quarter.
    The past two quarters their earnings have increased 40%.
    It is an 88 year old company headquartered in Switzerland
    It has contracts signed out until 2028. Has guaranteed cash flow of $5-$6 billion dollars a year.
    I have been investing and trading for 30+ years and this is a steal. oil will not stay at $59 forever. Carl Icahn invested in RIG in 2013 and was pushing for an increased dividend to $4.00
    This is a broken stock not a broken company.
    SDRL has bad management. They lied to their investors in August saying they would not cut the dividend. Transocean is top notch. I have owned them in the hey day of $200 oil and they will prosper.

  85. Jason, I’m on a buying binge of energy stocks 🙂 CVX, XOM, COP, RDS.B and BP due to valuations getting better and also good margin of safety. I’ll to take a closer look at OKE and thanks for bringing it up to my attention.

  86. PIM,

    I’m thinking about increasing my exposure to some of the supermajors at some point as well. But I’d like to see cheaper prices and I have a feeling we’ll see them. XOM is one company in particular that I don’t have as much exposure to as I’d like.

    Glad I could bring it to your attention. I don’t think OKE is a low-risk stock, but the risk-adjusted returns should be solid when you look at a yield and growth rate that high. We’ll see how it goes. 🙂

    Thanks for dropping by!

    Cheers.

  87. DM,

    On the news today about ARCP, I’m looking to sell this position so I can dollar cost avg into what I see as absolute bargains. BBL,PM,UL, or perhaps OKE. What are your thoughts as you’re a stock holder in ARCP. OkE,UL, Would be new positions what do you think?????

    Thanks,

  88. j-harr,

    Well, I can’t make that decision for you. However, I can only say that, for me, while the Schorsch announcement was expected and applauded, the departure of the CEO and COO was unexpected and makes me wonder what’s really going on over there.

    I like the idea of cleaning house, and the BOD may believe Kay was too connected to Schorsch. But the recent moves leaves me questioning whether I should hold. I may tax-loss sell these shares and wait for further clarity down the road. We’ll see.

    All of those replacements are probably going to be less volatile with less risk, but also provide less upside if everything turns out okay. Though, the commodity plays could continue to be very volatile in their own right.

    Best of luck with that decision. 🙂

    Cheers.

  89. DM,

    Thanks for the advice. I think ARCP isn’t what I bargained for. I can always come back in if I want to????

    Thanks again,

  90. Mantra,
    Where do you find the data to calculate DCF? I have looked in a few places including yahoo finance and market watch and haven’t found a good source yet!

    Ps new to DGI and attempting for FI by 40 like you! My wife is excited and on board and we enjoy reading your perspectives.

  91. Patrick,

    Glad to hear that! That’s awesome. It’s difficult sometimes to get a partner/spouse on board. That’s fantastic that she’s on the same page. 🙂

    I don’t use a DCF model to value shares. I use a DDM analysis. That said, you can find a number of DCF calculators around the internet if you prefer that method. I personally think the DDM model is fairly accurate for dividend growth stocks.

    Best of luck as you walk the path to financial independence!

    Cheers.

  92. Im sorry I should have been more clear!

    I also use a DDM analysis as well as a Graham Value calculation. However, in this article you discussed how REITs and MLPs are better analyzed using distributable cash flow. I am having a difficult time finding a source that lays out income, amortization, depreciation, etc to help with the inputs of that calculation. I tried to replicate the data you presented here for OKE because I am interested in the stock, but I had a difficult time coming up with the necessary data in this case.

    I will have to do some more research, but I guess I was fishing for a website or source that you use when valuing your MLPs and REITs.

    Again, thanks for the insight and taking the time to write back.

  93. Patrick,

    Ahh, I’m sorry. I was confused as to what you meant.

    Distributable cash flow isn’t something that any sites track, as far as I’m aware. That’s something you need to actually need to comb through financial statements to figure out. Some MLPs list DCF in their annual reports and 10-Ks, but most don’t. This post is going back a little bit for me, but I generally pull up all the financial statements to get the information I need. Analyst and investor presentations are also very helpful, as many MLPs lay out their cash flow in those presentations. I believe that’s where I got a lot of the information for OKE/OKS.

    Hope that helps!

    Best wishes.

  94. now it is sitting at 34$. Way below your purchase price. You keep mentioning that you will buy more when it drops 10-15%. Now it is way below that. Are you planning to add ? if not – why not ?

  95. I would be interested to know if you still think the dividend is safe given the continued plunge in price and earnings.

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