Energy Prospectus

Keith Kohl's Energy Investor newsletter recommends that invests hang on to OKS up to $58/unit. Below are Keith's remarks:

ONEOK is a partner company concerned with gathering, processing, storing, and
transporting natural gas throughout the U.S. The company’s 37,000-mile gas and
liquids pipeline system spans 17 states and into the Gulf of Mexico.
On the first of the month, ONEOK Inc. announced that it had agreed to buy the
remaining public shares of ONEOK Partners, combining the two companies into a
single entity.
The transaction will include transferring of each currently owned OKS share into
0.985 OKE shares, and is expected to be complete by the second quarter of this year.
ONEOK estimates that after the transaction goes through, the company will be able to
institute a 21% increase in its dividend, bringing it to $0.745 per share per quarter, or
$2.98/share per year. The merger will give ONEOK a dividend coverage of more than
1.2x.
Basically, what we as OKS investors will be seeing is higher dividends coming from an
even larger and financially stronger company than we already had.
I don’t know about you, but I’m pretty open to that kind of change.
ONEOK announced its financial guidance for the rest of the year as well.
For 2017, it expects pipeline transportation fees to be about 90% of revenues, up from
85% last year. The company estimates that net income will be between $575 million
and $755 million.
This is based on $45 oil and $3 natural gas, prices that have been surpassed already this
year and are likely to stay at least that high, if they don’t head higher!
Until the transaction goes through in the next few months, it’s business as usual with
this company—which has been good business so far this year.
We also managed to get one more quarterly dividend from our OKS shares as well; on
the 14th, unit holders as of January 30 will receive $0.79 per share.
ONEOK is rated a buy under $58.

My understanding is that the transfer of OKS shares into OKE shares is not a non-taxable like kind exchange. So a tax will be incurred at the time of transfer so if for example i had a 1000 shares of OKS with a cost basis of $35 (i.e. $35,000 investment) and at time of transfer my OKS shares were valued at $60 ($60,000), then i would be taxed on a profit of $25,000, while also acquiring 985 shares of OKS with a cost basis of a little over $60.91 per share (i.e. 60,000 divided by 985). Is that correct?

Is there any difference tax wise in selling the OKS shares now and utilizing the proceeds to purchase OKE shares, over simply waiting for the transfer to occur? It would seem to be a simpler way to proceed to sell now. I really have no idea of the consequences.

You should get a step up in basis for the amount of tax paid. Keep in mind that selling the MLP units or the taxable exchange will cause recapture of deferred gains as ordinary income.

OKS should have something on their website explaining this or just send the question to them. Go to their website an click on the Investors tab.

Taxes suck but the big gain sure is nice.

Thank you.