ONEOK Partners, L.P. ONEOK Partners, L.P. (NYSE:OKS) Applied Portfolio Management. Investment Thesis. Segments Breakdown 5/5/2015

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1 ONEOK Partners, L.P. (NYSE:OKS) ONEOK Partners, L.P. Applied Portfolio Management Publicly traded partnership formed in 1993 o Headquarters: Tulsa, Oklahoma A leading transporter of natural gas and natural gas liquids (NGLs) in the Mid-Continent area to market centers in the U.S. Owns a 50% equity interest in a major transporter of natural gas imported from Canada to the U.S. Owns a 50% equity interest to construct a pipeline to transport natural gas from Texas to Mexico Investment Thesis Segments Breakdown Macro 2015 Outlook o Sector rotation Quality dividend stocks with low beta Financial dashboard o EBIT and NOPAT are increasing at a faster rate than revenue o High dividend growth rate of 9.1% OKS is one of the largest independent service provider in mid continent o 60% stake in Williston Basin 50% equity interest in transport pipelines, Canada to US, US to MX Margins o two third of the margins are fixed fee based gas storage and transportation services OKS Cushion in recent drop in oil and gas prices Growth Projects Underway and entering 2015 Given the strong growth potential and large dividend yield, we believe that OKS will be a great addition to student portfolio. 1

2 Drilling economical with WTI as low as $45. Largest Independent Operator, serving 60% of the 5 million acres. Approx. half of producers rigs are drilling on OKS area. One of the top 5 reserves with over 2 dozen oil & gas wells. Well positioned to supply gas to MX. Drilling economical with WTI as low as $47. Assets Overview Well Positioned for Shale Gas Plays OKS - Dividend & Yield Historical Performance 2

3 Predominantly Fee Based Margins Earnings & Margins Consideration 2015 guidance revised down from $2.6 B to $2.3 B Portion of margins from fees are expected to increase in 2015 NGP: More than 2,000 contracts on books Pipelines: 92% of transportation capacity contracted, 76% of storage capacity contracted Avg contract length is about 7 years Debt Quality BBB & Baa2 (Stable) Liquidity & Debt Consideration 3

4 Profitability, CAPEX & EVA Capital Growth Projects Purpose of Capital Growth Projects The first-ever NGL pipeline to transport NGLs out of the Williston Basin 24% of North Dakota s natural gas production is flared North Dakota Industrial Commission (NDIC) policy targets: Reduce flaring to 15% by 1Q2016 and 5% 10% by the 4Q2020 The Environmental Protection Agency s CO2 limits for power plants are likely to accelerate the decline of coal for electricity generation Increased demand for natural gas-fired electric generation Approximately 35 existing coal-fired, electric power generation plants within 20 miles of OKS natural gas pipelines Growth in export demand to Mexico and in LNG NOTE: Projects are predominantly fee based, and are announced after commitments from producers/processors/end-users are secured NGP NGL NGP/NGL Volume Growth 4

5 Gas Production and Imports Outlook Gas Consumption Outlook Gas Storage Capacity Outlook Electricity Fuel Sources Outlook 5

6 Gas Prices Outlook Henry Hub Gas Price Outlook Hedging Hedging Activities Commodity Price Risk Only commodities and differentials are hedged About 1/3 of revenues come from commodities and differentials This table sets forth OKS Natural Gas Gathering and Processing segment s hedging information for the period indicated: 6

7 Income Statement Forecasts Balance Sheet Forecasts Balance Sheet Forecasts WACC 7

8 Financial Analysis & Valuation Dividend Discount Valuation Model Note: If we leave the beta unchanged and forecast no dividend growth, the Intrinsic Value comes to $84.76, with a required return of 3.6%. Estimated Target Vs Current Price SIF Snapshot 8

9 Right Stock for the Portfolio Because... Questions? Key Metrics o Reasonable P/E o Low Beta DDM: Dividend yield of 7.5% o Strong commitment to increasing dividends Expected Growth Well positioned to take advantage of expansion in use of natural gas (especially Mexico) A great dividend play during late expansion cycle Increasing projected dividend yield in future Recommended Entry Price: $40 Recommendation: BUY New Competition Huge investment required Highly regulated sector Difficult industry to start up Threat level: Low-Medium Supplier Power Contracted through producers Has a monopoly in their market Threat level: High Competitive Rivalry Texas deal to move Natural gas Maintains monopoly in Natural Gas industry Threat level: Medium Substitute Products Substitutes are available, but NGL will lead Other energy sources will take years before it is as affordable Threat level: Low Buyer Power B2B model Has lot of options Monopoly in their geographic locations Threat level: Medium Strength Pipelines are the cheapest method of Transportation High domestic availability of Gas Tax advantage for MLP Recurring revenue business Opportunity Low price helps increase demand for natural gas Expanding natural gas demand Weakness Low geographic diversification Heavily regulated on what they can charge on fees Threat MLP regulations may change, which would result in loss of tax advantages Volatile commodity prices Porter s Five Forces Analysis SWOT Analysis 9

10 Industry - Midstream Gas Sector Contract Mix by Margins NGP NGL Socially Responsible Tax advantages of MLP Does not extract oil and gas using fracking techniques Provides cheapest and safest way to transport gas to consumers Helps environment by reducing the amount of gas flaring Helps electric generation companies to reduce CO2 emission and follow EPA rules Helps economy by creating more than 2200 jobs MLP MLPs do not pay corporate taxes on profits Owners of a partnership are taxed only once Gains are considered as ROC Capital gain taxes are deferred until the unitholder sells the units Corporation C-Corps pay corporate taxes on the profits Shareholders in a corporation face double taxation Gains are considered as profits Profits are taxed in the year the distribution is made in form of dividends 10

11 Short Term Energy Outlook Hedging Estimates a $0.01 per-gallon change in the composite price of NGLs would change 12-month forward net margin by approximately $3.0 million; a $1.00 per-barrel change in the price of crude oil would change 12- month forward net margin by approximately $1.6 million; and a $0.10 per-mmbtu change in the price of residue natural gas would change 12-month forward net margin by approximately $5.2 million. Map of Pipeline Projects Major Pipelines -Keystone XL Pipeline -Pipeline would carry about 830,000 barrels of tar sands crude each day. -Energy East Pipeline -Pipeline would carry about 1.1 Million barrels of tar sands crude each day (More than Keystone XL) -Alberta Clipper Expansion Pipeline -Already in the process of increasing the capacity of the existing Alberta Clipper pipeline from 450,000 to 570,000 barrels per day -Currently seeking to increase the pipeline s capacity to 880,00 barrels per day (More than the capacity of Keystone XL) 11

12 Company Comparison - DDM Company Comparison - DCF KMI MMP OKS Relative Valuation & Industry Comparison Base price = $41 Current annual dividend = $3.07 Projected Future Dividend Yields Comparison with Industry Peers 12