Disappointing trading results dragged Oneok Inc.’s quarterly earnings down 45%, to $35.2 million (31 cents/share) in 2Q2007, compared to $77.8 million (65 cents/share) in 2Q2006, but the company reaffirmed its earnings guidance for the year.

Oneok reaffirmed its previous 2007 earnings guidance, narrowing the range to $2.50-2.70 from $2.35-2.75. The company said the narrowed range reflects anticipated stronger performance in the Oneok Partners and distribution segments, as well as a recently completed share repurchase.

A.G. Edwards & Sons (AGE) vice president Michael C. Heim said Oneok management was able to favorably narrow the guidance, despite lower results, for several reasons:

Oneok’s operating income for 2Q2007 decreased to $135.7 million, compared with $154.5 million for 2Q2006. The decrease was due to the results in energy services segment, where lower storage and marketing margins, caused by reduced natural gas price volatility, led to an 81% decline in operating income, which fell from $53.5 million in 2Q2006 to $10.2 million in 2Q2007. This decrease was partially offset by the implementation of new rate schedules in Kansas and Texas, the company said. Year-to-date 2007 operating income increased to $464 million, compared with $423.6 million for the same period last year.

Last year Oneok sold its gas pipelines, gathering, processing, storage and gas liquids assets to Northern Border Partners, which then changed its name to Oneok Partners LP. The newly named general partner is owned by Oneok, which also owns 45.7% of the partnership (see Daily GPI, May 19, 2006). Among other assets, the partnership owns part of Northern Border Pipeline, Midwestern Gas Transmission, Viking Gas Transmission, Bear Paw Energy, Crestone Energy and Black Mesa Pipeline, a coal slurry system in Arizona and Nevada. Oneok Partners reported a 9% increase in operating income and a 288% increase in earnings per share in 2Q2007, reflecting a 35% increase in the average Conway-to-Mont Belvieu spread for ethane/propane mix.

“We continue to benefit from our ownership in Oneok Partners,” said Oneok CEO John W. Gibson. “The partnership’s assets are performing well, and we continue to see increased NGL [natural gas liquids] volumes and favorable market conditions in the natural gas liquids businesses.

In July, Oneok Partners agreed to acquire an interstate NGL and refined petroleum products pipeline system and related assets from a subsidiary of Kinder Morgan Energy Partners LP for approximately $300 million (see Daily GPI, July 5). The company expects to close the transaction in the third quarter. Financing will come from available cash and short-term credit facilities.

In March Oneok Partners said it wants to build a 440-mile NGL pipeline from southern Oklahoma through the Barnett Shale in North Texas to the Texas Gulf Coast. The proposed Arbuckle Pipeline, estimated to cost $260 million, could be completed by early 2009 if all the necessary permits are obtained. Also in March, Overland Pass Pipeline Co. LLC, a joint venture between Oneok Partners and Williams, announced plans to construct and operate a 150-mile pipeline lateral extension in the Piceance Basin to transport NGLs to Midcontinent markets (see Daily GPI, March 29).

Oneok shares fell 6.4% Thursday, from $50.01 to $48.52 on very heavy volume — more than 3.2 million shares were traded, compared to an average 790,257 shares traded — but AGE said the company’s outlook is hardly bleak. “The stock market has demonstrated a discomfort with volatile energy trading results and punishes the stock not only for the shortfall but also because energy trading volatility shows the need to apply a lower multiple to estimated earnings,” Heim said. “However, we are encouraged by [Oneok]’s strong operating statistics and believe favorable volumes and rising margins are more important than results for a single quarter.”

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