Is ONEOK Now a Buy?

This year has been a rough one up and down the energy patch, to the point that even higher income investments have had to worry. So why is it that Oppenheimer decided to upgrade ONEOK Inc. (NYSE: OKE) to Outperform on Wednesday?

For starters, the firm’s $27.00 price target does not sound that much higher than the $23.12 prior close, and it is far under the consensus analyst price target of $35.00 according to Thomson Reuters. Maybe that double-digit yield has something to do with it.

Oppenheimer said that ONEOK’s 2016 guidance should soothe nerves of investors. Management was shown to have impressed investors by releasing a solid 2016 outlook, expecting growth in EBITDA and distributable cash flows despite the weak energy environment.

ONEOK’s distribution coverage of over one-times and a manageable fourth quarter 2016 debt/EBITDA ratio of 4.2, Oppenheimer believes that ONEOK’s distribution appears sustainable in 2016. Oppenheimer also believes that the ONEOK Partners L.P. (NYSE: OKS) outfit will not require external equity issuance well into 2017.
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Bernard Colson and Hersh Shintre, Oppenheimer’s analysts on this upgrade, said of ONEOK and ONEOK Partners:

This outlook is corroborated by our analysis. Both OKS and OKE have rallied in response to this update. With this note, we upgrade OKE (the parent and GP) to Outperform and now prefer OKE to OKS, despite both being rated Outperform. We also lower our PT for OKS to $35 (from $40). OKE’s current yield is now in parity with OKS’s, a discrepancy that we believe should not persist unless you believe OKS will never grow its distribution again (which we do not).

ONEOK is projected to have a dividend of $2.44 for 2015, and Oppenheimer took its dividend expectations for 2015 to $2.46 per share from $2.51.

ONEOK Partners saw its target price taken down to $35 from $40 in this call, but all in all it was a positive for ONEOK.

ONEOK shares responded to this call with a 3.5% gain to $23.92 on Wednesday, though trading volume is light. It has a consensus analyst price target of $35.00 and a 52-week range of $18.84 to $51.53.