ONEOK, Inc. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. The filing also reports fourth-quarter 2020 results. ONEOK is a midstream energy company operating three segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. More than 90% of consolidated earnings were fee-based in 2020.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $8.542 billion | $10.164 billion | Down $1.622 billion |
| Operating income | $1.361 billion | $1.914 billion | Down $553.0 million |
| Net income | $612.8 million | $1.279 billion | Down $665.8 million |
| Diluted EPS | $1.42 | $3.07 | Down $1.65 |
| Adjusted EBITDA | $2.724 billion | $2.580 billion | Up $143.5 million |
| Distributable cash flow | $1.882 billion | $2.016 billion | Down $134.5 million |
| Cash flow from operations | $1.899 billion | $1.947 billion | Down $47.7 million |
| Capital expenditures | $2.195 billion | $3.848 billion | Down $1.653 billion |
| Dividends paid per share | $3.74 | $3.53 | Up 6% |
Revenue declined primarily because lower commodity prices and sales volumes reduced commodity sales; these effects were substantially offset in cost of sales and fuel. Services revenue increased to $1.287 billion from $1.248 billion. Adjusted EBITDA improved despite lower Natural Gas Gathering and Processing results because of stronger Natural Gas Liquids exchange-services performance and Natural Gas Pipelines results.
Reported earnings included $644.9 million of noncash impairment charges, comprising $607.2 million in operating impairment charges and $37.7 million related to equity investments. Depreciation and amortization increased to $578.7 million from $476.5 million. Interest expense increased to $712.9 million from $491.8 million.
Fourth-quarter 2020 results
| Metric | Q4 2020 | Q4 2019 |
|---|---|---|
| Revenue | $2.571 billion | $2.664 billion |
| Operating income | $538.7 million | $487.3 million |
| Net income | $308.0 million | $320.3 million |
| Diluted EPS | $0.69 | $0.77 |
Volumes and demand recovered during the second half of 2020 after significant producer curtailments in the second quarter. Third- and fourth-quarter results benefited from improved commodity prices and restored producer volumes.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $524.5 million at December 31, 2020, compared with $21.0 million at year-end 2019.
- Total debt was $14.4 billion; long-term debt, including current maturities, was $14.236 billion versus $12.487 billion in 2019.
- No borrowings were outstanding under the $2.5 billion revolving credit agreement, which expires in June 2024. The company was in compliance with its covenants, and its debt-to-adjusted-EBITDA ratio was 4.6 to 1.
- ONEOK issued $3.25 billion of senior unsecured notes in 2020, repaid the remaining $1.25 billion term loan, and repurchased $224.4 million principal amount of senior notes for $199.6 million, recognizing a $22.3 million gain.
- A June 2020 equity offering of 29.9 million shares generated $937.0 million of net proceeds. A $1.0 billion at-the-market equity program was established in July 2020; no shares had been sold under it as of the filing date.
- Investment-grade ratings remained stable: Moody’s Baa3, S&P BBB and Fitch BBB, each with a stable outlook.
Material changes versus the prior comparable period
- COVID-19, the crude oil price collapse and producer curtailments reduced gathering and processing volumes and lowered realized prices during 2020. Natural gas gathered declined to 2,553 BBtu/d from 2,753 BBtu/d; processed volumes declined to 2,364 BBtu/d from 2,555 BBtu/d.
- Natural Gas Gathering and Processing adjusted EBITDA declined to $650.0 million from $702.7 million, while Natural Gas Liquids adjusted EBITDA increased to $1.617 billion from $1.466 billion and Natural Gas Pipelines adjusted EBITDA increased to $437.4 million from $408.8 million.
- NGL raw feed throughput increased modestly to 1,084 MBbl/d from 1,079 MBbl/d, supported by Rocky Mountain and Permian volumes and improved ethane recovery economics.
- Natural gas pipeline capacity contracted was 96%, compared with 98% in 2019; the company described this segment as substantially protected by long-term firm fee-based contracts.
- Capital expenditures fell sharply as major projects were completed and additional projects were paused or suspended. Growth projects suspended or paused included Demicks Lake III, portions of the ONEOK West Texas NGL expansion, Arbuckle II expansion and other projects.
Outlook, risks and unusual items
- Management expected 2021 volumes and producer activity to improve as commodity prices stabilized, while acknowledging uncertainty regarding the duration and severity of COVID-19 and the pace of economic recovery.
- 2021 capital expenditures were projected at $525 million to $675 million, below 2020 levels, absent a need for additional infrastructure driven by producer activity.
- Management expected operating cash flows to continue funding dividends. The 2020 dividend coverage ratio was 1.17, down from 1.38 in 2019, and distributable cash flow exceeded dividends paid by $276.2 million.
- Key risks include commodity-price volatility, producer drilling and volume declines, COVID-19 or other economic disruption, high leverage and interest-rate exposure, refinancing and covenant risk, regulatory and FERC rate actions, environmental and greenhouse-gas requirements, pipeline integrity and operational incidents, cybersecurity, joint-venture distributions, and potential future impairment charges.
- The filing identifies the Dakota Access Pipeline easement litigation as a potential constraint on Williston Basin production growth, although management expected alternative transportation capacity and rail infrastructure to limit the impact.
- Management stated that probable and reasonably possible losses from disclosed litigation were not material, and no material environmental noncompliance risk was known based on currently available information.
Investor verification checklist
- Reconcile reported net income and EPS with the $644.9 million of noncash impairments and assess whether additional impairments could arise.
- Review debt maturities beginning in 2022, interest expense, leverage covenants and the company’s ability to sustain dividends while reducing debt.
- Verify the assumptions supporting the $525 million to $675 million 2021 capital-expenditure outlook and the timing of paused growth projects.
- Monitor producer drilling, gathering and processing volumes, NGL throughput, ethane recovery economics and commodity-price exposure.
- Assess the durability of Natural Gas Pipelines’ firm contracted capacity and distributions from unconsolidated affiliates.
- Review exposure to COVID-19, environmental and climate regulation, pipeline safety, DAPL-related litigation, cybersecurity and counterparty credit risk.