ONEOK, Inc. (NYSE:OKE ) is a leading natural gas midstream operator in three critical segments. Its most profitable segment is its pipeline segment, while its NGL segment is the primary driver of its adjusted EBITDA. It also has a gathering and processing (G&P) segment that has underpinned its recovery.

OKE has also leveraged the recovery in the natural gas market, even though it's less susceptible to underlying prices. As a result, its long-term contracts provide robust visibility into its profitability, helping the company to maintain a high dividend payout ratio.

Notwithstanding, OKE is not immune to the coming recession or underlying volatility in the energy markets. Therefore, it's still important for investors to assess whether ONEOK can sustain its operating leverage through the cycle.

Our assessment suggests that the market has de-rated OKE since its April highs, anticipating a slowdown in utilization and commodity price decline. Therefore, we deduce that OKE's valuation seems pretty well-balanced now. It's also likely at a near-term bottom, so investors could see a short-term rally moving ahead.

However, we would like to see further digestion in its valuation, given the coming recession. Furthermore, while its dividend yield is attractive, its high payout ratio suggests that the company could find it more challenging to raise them much further through the cycle.

We rate OKE as a Hold for now, even though we expect a short-term rally to ensue.

OKE NTM EBITDA multiples valuation trend (koyfin)

OKE NTM EBITDA multiples valuation trend (koyfin)

OKE has struggled to regain its upward momentum since its highs in 2022, as its NTM EBITDA multiples were rejected at its 10Y mean. Therefore, we parsed that the market has likely de-rated OKE in anticipation of a slower profitability growth cadence moving ahead.

Furthermore, the recent pullback from its August highs sent OKE spiraling down from the one standard deviation zone under its 10Y mean. Therefore, we believe the market is attempting to model the appropriate earnings multiples for OKE against the coming recession.

We believe the market's adjustment could result in further downside volatility, sending OKE below the two standard deviation zones under its 10Y mean.

OKE NTM Dividend yield % valuation trend (koyfin)

OKE NTM Dividend yield % valuation trend (koyfin)

Furthermore, OKE's NTM dividend yields remain well below the levels observed in its significant market bottoms in 2016 and 2020. Hence, we postulate that OKE's dividend yields may not offer adequate valuation support to mitigate the worsening macro headwinds.

ONEOK Adjusted EPS and Dividend per share consensus estimates (S&P Cap IQ)

ONEOK Adjusted EPS and Dividend per share consensus estimates (S&P Cap IQ)

Moreover, ONEOK's high payout ratio could impede the company's ability to improve its dividends markedly through the cycle to underpin its valuation. Accordingly, we aren't convinced that the market has de-risked OKE's valuations sufficiently, even though it has already lost all its YTD gains (including dividends).

ONEOK Adjusted EBITDA change % consensus estimates (S&P Cap IQ)

ONEOK Adjusted EBITDA change % consensus estimates (S&P Cap IQ)

The consensus estimates (bullish) suggest that ONEOK's adjusted EBTIDA profitability should remain stable through the cycle. Therefore, it should assure investors that ONEOK's operating metrics should perform better than its less-hedged peers more exposed to the underlying energy prices volatility.

ONEOK Adjusted EBITDA margins % consensus estimates (S&P Cap IQ)

ONEOK Adjusted EBITDA margins % consensus estimates (S&P Cap IQ)

Accordingly, its adjusted EBITDA margins are expected to remain robust through FY23, providing tremendous visibility to its dividend payouts. Therefore, we assessed that the market would unlikely send OKE back to its March 2020 lows.

OKE price chart (weekly) (TradingView)

OKE price chart (weekly) (TradingView)

OKE has likely lost its medium-term bullish bias as the market rejected further buying upside from its August highs. Therefore, it's critical for OKE to stage a bullish reversal at the current levels.

We gleaned that OKE is re-testing its June bottom. Coupled with oversold momentum indicators, OKE could stage a short-term rally from here. However, we don't expect OKE to retake its near-term resistance with the coming recession and a relatively well-balanced valuation.

Therefore, we deduce that OKE's valuation needs to be further de-risked. Accordingly, a subsequent re-test of its intermediate support cannot be ruled out, which should proffer clues on its medium-term directional bias.

Hence, we encourage investors to stay on the sidelines for now and rate OKE as a Hold.

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This article was written by

I'm JR, the lead writer and founder of JR Research and Ultimate Growth Investing Marketplace service. Our team is committed to bringing more clarity to investors in their investment decisions.

Our marketplace service focuses on a price-action-based approach to growth and technology stocks, supported by fundamental analysis. In addition, our general SA site discusses stocks from various sectors and industries. 

Our discussion mainly focuses on a short- to medium-term thesis. While we hold stocks for the long-term, we also use appropriate opportunities to benefit from short- to medium-term swings, leveraging long (directionally bullish) or short (directionally bearish) set-ups. 

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.