ONEOK, Inc. — Form 10-Q Summary
Business context and reporting period
ONEOK operates three primarily fee-based midstream segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. The filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Management expects approximately 90% of 2022 consolidated earnings to be fee-based.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenues | $6.0 billion | $3.4 billion | $11.4 billion | $6.6 billion |
| Operating income | $689.0 million | $611.5 million | $1.35 billion | $1.28 billion |
| Net income | $414.4 million | $342.1 million | $805.5 million | $728.3 million |
| Net income available to common shareholders | $414.1 million | $341.9 million | $805.0 million | $727.8 million |
| Diluted EPS | $0.92 | $0.77 | $1.80 | $1.63 |
| Adjusted EBITDA | $886.0 million | $801.5 million | $1.75 billion | $1.67 billion |
| Cash flow from operations | Not separately provided | Not separately provided | $1.25 billion | $1.08 billion |
| Capital expenditures | $302.3 million | $147.4 million | $559.3 million | $324.1 million |
Approximate consolidated margins for the second quarter were 11.5% operating margin, 6.9% net margin, and 14.8% adjusted EBITDA margin. For the six-month period, the corresponding margins were approximately 11.8%, 7.0%, and 15.3%, respectively.
At June 30, 2022, cash and cash equivalents were $135.8 million. Total debt was $13.9 billion, including $895.8 million of current maturities and $12.9 billion of long-term debt excluding current maturities. The company had no commercial paper outstanding and no borrowings under its $2.5 billion revolving credit facility. Working capital was negative $628.3 million, primarily because of current debt maturities.
Material changes versus the prior comparable period
- Second-quarter revenue increased $2.61 billion, primarily from higher commodity sales associated with higher natural gas and NGL prices; service revenue increased $31.7 million.
- Second-quarter operating income increased $77.5 million, and adjusted EBITDA increased $84.5 million. Natural Gas Liquids benefited from higher fee rates, volumes, and commodity price differentials; Natural Gas Gathering and Processing benefited from higher realized commodity prices after hedging; and Natural Gas Pipelines benefited from higher storage rates.
- Six-month operating income increased $75.2 million. Natural Gas Liquids adjusted EBITDA rose $129.1 million, while Natural Gas Pipelines adjusted EBITDA declined $81.4 million, mainly because the 2021 period benefited from Winter Storm Uri-related natural gas sales, interruptible transportation revenue, and park-and-loan revenue.
- Operating cash flow increased $171.6 million to $1.25 billion, while capital expenditures increased $235.2 million to $559.3 million, reflecting growth projects.
- Interest expense declined $27.7 million for the six-month period, primarily due to lower debt balances and higher capitalized interest. Equity earnings from investments increased $13.0 million.
- Natural Gas Liquids raw feed throughput increased to 1,266 MBbl/d in the second quarter from 1,209 MBbl/d. Ethane volumes under long-term contracts increased approximately 45 MBbl/d to 480 MBbl/d.
Guidance, outlook, risks, and unusual items
- Management expects 2022 capital expenditures, excluding AFUDC and capitalized interest, of $900 million to $1.05 billion.
- ONEOK expects cash flows from operations to sufficiently fund common dividends. The quarterly common dividend was maintained at $0.935 per share, or $3.74 annualized.
- Growth projects include the Demicks Lake III processing plant, expected to be completed in the first quarter of 2023, and the MB-5 fractionator, expected to be completed in the second quarter of 2023. The company is also expanding Oklahoma storage injection capability and expects completion in the second quarter of 2023.
- On July 9, 2022, a fire at the 210 MBbl/d Medford, Oklahoma, fractionation facility caused the facility to remain out of service for an extended period. ONEOK is using alternative integrated assets and third-party arrangements to continue providing services. Property damage and business interruption insurance has a combined per-occurrence limit of $2 billion, subject to policy terms, sublimits, deductibles, and a 45-day business interruption waiting period. The financial impact could not yet be reasonably estimated.
- In July 2022, ONEOK redeemed $895.8 million of senior notes due October 2022 using cash on hand and short-term borrowings. Short-term borrowings were $860 million as of July 31, 2022.
- The $2.5 billion credit facility was extended to June 2027. ONEOK reported a consolidated net indebtedness-to-adjusted-EBITDA ratio of 3.9 to 1 and compliance with all covenants at June 30, 2022. Credit ratings remained investment grade, with Moody’s outlook positive and S&P and Fitch outlooks stable.
- Risks include commodity-price and volumetric exposure, severe weather, operational outages, facility and pipeline safety, cybersecurity, environmental and climate regulation, inflation, interest rates, counterparty credit, insurance recovery and timing, leverage, and access to capital markets.
- FERC initiated a Section 5 review of Guardian Pipeline rates in April 2022. Management stated the outcome could reduce future rates but does not expect a material effect on results.
Most important facts for investors to verify
- Actual operating and financial effects of the Medford facility fire, including downtime, insurance recoveries, deductibles, business interruption losses, and timing of proceeds.
- Funding and refinancing of the July 2022 redemption and the resulting level and cost of short-term borrowings.
- Progress, costs, and completion schedules for the Demicks Lake III, MB-5, and Oklahoma storage projects.
- Sustainability of adjusted EBITDA growth after separating higher commodity prices and prior-year Winter Storm Uri effects from recurring fee-based performance.
- Compliance with leverage covenants, changes in investment-grade credit ratings, liquidity under the revolving facility, and future debt maturities.
- Outcome of the Guardian Pipeline rate review and any material environmental, regulatory, legal, or pipeline-safety developments.