ONEOK, Inc. 2022 Form 10-K Summary
Business context and reporting period
ONEOK is a U.S. midstream energy company operating three segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. Its assets gather, process, fractionate, transport, store and market natural gas and NGLs across the Rocky Mountain, Mid-Continent, Permian, Gulf Coast and Midwest regions.
The filing covers the fiscal year ended December 31, 2022. It is an annual Form 10-K, not a standalone fourth-quarter filing, although fourth-quarter operating impacts are discussed.
Approximately 90% of consolidated earnings were fee-based in 2022. The company had 447.2 million common shares outstanding at December 31, 2022, and 2,966 employees.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenues | $22.387 billion | $16.540 billion | +$5.847 billion |
| Operating income | $2.807 billion | $2.596 billion | +$211.1 million |
| Net income | $1.722 billion | $1.500 billion | +14.8% |
| Diluted EPS | $3.84 | $3.35 | +$0.49 |
| Adjusted EBITDA | $3.620 billion | $3.380 billion | +7.1% |
| Cash flow from operations | $2.906 billion | $2.546 billion | +$359.7 million |
| Capital expenditures | $1.202 billion | $696.9 million | +$505.2 million |
| Net property, plant and equipment | $19.953 billion | $19.320 billion | +$632.7 million |
Revenue growth was largely driven by higher commodity prices and volumes. Commodity sales increased to $20.975 billion from $15.180 billion, while services revenue increased to $1.411 billion from $1.360 billion. Because commodity sales and related costs generally move together, revenue growth is not directly indicative of margin expansion.
Operating income margin was approximately 12.5% in 2022 versus 15.7% in 2021, reflecting the substantial increase in commodity-related revenue and cost of sales. Net income margin was approximately 7.7% versus 9.1%. Adjusted EBITDA margin was approximately 16.2% versus 20.4%; these comparisons are affected by the company’s commodity sales mix and hedging activity.
Segment performance
| Segment adjusted EBITDA | 2022 | 2021 | Change |
|---|---|---|---|
| Natural Gas Gathering and Processing | $1.037 billion | $889.1 million | +$147.5 million |
| Natural Gas Liquids | $2.095 billion | $1.964 billion | +$131.6 million |
| Natural Gas Pipelines | $488.4 million | $527.8 million | -$39.4 million |
- Natural Gas Gathering and Processing benefited from higher producer activity, realized commodity prices net of hedging, higher average fee rates and increased volumes. Natural gas gathered increased to 2,852 BBtu/d from 2,736 BBtu/d, and processed volumes increased to 2,612 BBtu/d from 2,515 BBtu/d.
- Natural Gas Liquids benefited from higher volumes, fee rates, optimization and marketing results, and equity earnings from investments. Raw feed throughput increased to 1,237 MBbl/d from 1,198 MBbl/d.
- Natural Gas Pipelines declined primarily because 2021 benefited from unusual Winter Storm Uri gains. Excluding that comparison effect, transportation and storage activity improved, including higher storage services revenue.
Liquidity, debt and cash flow
- Cash and cash equivalents were $220.2 million at December 31, 2022, compared with $146.4 million at December 31, 2021.
- Working capital was negative $503.9 million, primarily because of current maturities of long-term debt. Management does not expect the deficit to impair operations or cash flows.
- Total debt was approximately $13.6 billion at year-end, including $925.0 million of current maturities. The company had no borrowings under its $2.5 billion revolving credit agreement and had $7.9 million of outstanding letters of credit.
- The revolving credit agreement matures in June 2027. The company reported a consolidated net indebtedness-to-adjusted-EBITDA ratio of 3.7 to 1, below the 5.0-to-1 covenant limit, and stated that it was in compliance with all debt covenants.
- In November 2022, ONEOK issued $750 million of 6.1% senior unsecured notes due 2032, receiving net proceeds of $742 million. Proceeds were used primarily to repay commercial paper.
- The company redeemed $895.8 million of 3.375% notes due October 2022. It also elected to redeem $425 million of 5.0% notes due September 2023, with payment expected from cash on hand.
- Cash flows from operations exceeded dividends paid by approximately $1.2 billion in 2022. Common dividends were $3.74 per share for 2022; the February 2023 quarterly dividend increased to $0.955 per share.
Credit ratings were investment grade: Moody’s Baa3 with a positive outlook, and S&P and Fitch BBB with stable outlooks.
Material changes versus the prior comparable period
- Earnings increased due primarily to higher commodity prices net of hedging, stronger producer activity, increased volumes and higher fee rates.
- Capital expenditures increased 72% to $1.202 billion, reflecting growth projects including Demicks Lake III, MB-5 and the Viking compression project.
- The Natural Gas Pipelines segment’s adjusted EBITDA decreased because 2021 included favorable Winter Storm Uri effects.
- Operating costs increased $82.7 million, primarily because of higher outside services, materials and supplies, property taxes and growth-related costs.
- Interest expense decreased $57.0 million, primarily because of increased capitalized interest and lower debt balances.
- The company recorded no impairment charges in 2022, compared with significant impairment charges in 2020.
Guidance, outlook, commentary and unusual items
- Management expects 2023 earnings to benefit from higher volumes, the completed 200 MMcf/d Demicks Lake III processing plant and the expected completion of the 125 MBbl/d MB-5 fractionator in the second quarter of 2023.
- ONEOK expects 2023 capital expenditures of $1.3 billion to $1.5 billion, excluding AFUDC and capitalized interest.
- MB-6, a new 125 MBbl/d NGL fractionator in Mont Belvieu, is expected to cost approximately $550 million and be completed in the first quarter of 2025. MB-5 is expected to cost approximately $750 million.
- The Viking compressor electrification project is expected to cost approximately $95 million and be completed in the third quarter of 2023.
- A July 2022 fire rendered the 210 MBbl/d Medford, Oklahoma, fractionator inoperable. No personnel were injured. ONEOK accrued $150.7 million of insurance recoveries in 2022, including $96.1 million of business interruption recoveries, $45.6 million of property losses and $9.0 million of response expenses.
- In January 2023, insurers agreed to pay $930 million to settle the Medford claims. The remaining $830 million was received in the first quarter of 2023. ONEOK applied $50.7 million to the year-end insurance receivable and recorded a $779.3 million operating gain. The filing warns that future operating cash flow in the remainder of 2023 and 2024 will no longer include business interruption proceeds for subsequent Medford-related costs and losses.
- Approximately 70% of forecasted 2023 equity volumes in Natural Gas Gathering and Processing were hedged. Commodity price, basis, volume, weather and ethane-rejection risks remain.
- Management expects inflationary effects to be substantially mitigated by contractual fee escalators and fuel-recovery mechanisms, but continues to identify elevated costs and interest rates as risks.
- ONEOK targets a 2.2 million metric ton reduction in combined Scope 1 and Scope 2 emissions by 2030 and reported approximately 0.5 million metric tons of reductions achieved to date.
Principal risks and contingencies
- Reduced drilling or production in connected basins could lower gathering, processing, fractionation and transportation volumes.
- Commodity-price volatility, ethane rejection, location differentials, weather disruptions and incomplete hedging could affect earnings and cash flow.
- Operational hazards, including fires, pipeline ruptures, equipment failures, severe weather and cybersecurity incidents, could cause outages, liabilities or uninsured losses.
- Regulatory developments involving FERC, PHMSA, EPA, methane emissions, pipeline integrity, environmental compliance and climate policy could increase costs or limit operations.
- High leverage, refinancing needs, interest-rate increases, credit-rating downgrades and restrictions under debt agreements could reduce financial flexibility.
- Construction costs, permitting delays, supply-chain constraints and insufficient future volumes could reduce returns on growth projects.
- Legal and environmental proceedings are described as arising in the ordinary course; management believes reasonably possible losses are not material.
Investor verification checklist
- Verify the effect of the $779.3 million Medford insurance gain on 2023 operating income, cash flow and comparability of future results.
- Reconcile reported revenue growth with commodity costs, hedging gains and losses, and fee-based earnings.
- Monitor completion, cost and commercial utilization of MB-5, MB-6, Demicks Lake III and the Viking electrification project.
- Review debt maturities, interest costs, leverage covenant compliance and the planned redemption of the $425 million notes.
- Assess whether producer activity, NGL demand, ethane economics and weather conditions support projected volume growth.
- Evaluate the sustainability of the dividend against operating cash flow, capital expenditures, debt service and the loss of future Medford business interruption proceeds.
- Review regulatory developments concerning methane charges, emissions standards, pipeline safety and FERC rate proceedings, including Guardian’s approved future rate reduction.