ONEOK, Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
ONEOK operates primarily fee-based midstream energy businesses through three segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Management expected approximately 85% of 2019 consolidated earnings to be fee-based, although gathering, processing and NGL activities remain exposed to volume and commodity-price risks.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $2.458 billion | $2.961 billion | $5.238 billion | $6.063 billion |
| Operating income | $476.1 million | $448.4 million | $944.9 million | $868.1 million |
| Net income | $312.0 million | $282.2 million | $649.2 million | $548.2 million |
| Net income available to common shareholders | $311.7 million | $280.8 million | $648.6 million | $545.0 million |
| Diluted EPS | $0.75 | $0.68 | $1.56 | $1.32 |
| Adjusted EBITDA | $632.4 million | $601.8 million | $1.270 billion | $1.172 billion |
| Cash flow from operations | Not separately provided | Not separately provided | $968.0 million | $1.003 billion |
| Capital expenditures | $830.5 million | $350.9 million | $1.720 billion | $615.4 million |
Q2 operating margin was approximately 19.4%, compared with 15.1% in the prior-year quarter. Six-month operating margin was approximately 18.0%, compared with 14.3%. Net margin was approximately 12.7% in Q2 2019 versus 9.5% in Q2 2018, and approximately 12.4% for the first six months versus 9.0% in the prior-year period.
- Segment adjusted EBITDA for Q2 was $186.6 million in Natural Gas Gathering and Processing, $346.8 million in Natural Gas Liquids, and $100.5 million in Natural Gas Pipelines.
- Six-month segment adjusted EBITDA was $338.9 million, $724.4 million and $207.2 million, respectively.
- At June 30, 2019, cash and cash equivalents were $273.4 million, compared with $12.0 million at December 31, 2018.
- Total debt, including current maturities, was $11.1 billion at June 30, 2019, compared with $9.5 billion at year-end 2018. The estimated fair value of debt was $12.1 billion.
- ONEOK had no borrowings outstanding under its $2.5 billion revolving credit facility and had approximately $2.5 billion of borrowing capacity. The debt-to-adjusted-EBITDA covenant ratio was 3.8x versus a 5.0x maximum.
- Working capital remained negative at $336.2 million, primarily because of current debt maturities.
- Common dividends paid were $0.86 per share in February and $0.865 per share in May. A $0.89 per-share dividend was declared for payment in August 2019.
Material changes versus the prior comparable period
- Revenue decreased 17% in Q2 and 14% for the first six months, primarily because of lower commodity sales. Services revenue increased 9% in both periods.
- Operating income increased 6% in Q2 and 9% for the first six months. Net income increased 11% and 18%, respectively, while adjusted EBITDA increased 5% and 8%.
- Results benefited from volume growth in the Rocky Mountain region, STACK and SCOOP areas, and the Permian Basin; higher fee rates; and increased transportation services from completed expansion projects.
- Natural Gas Gathering and Processing adjusted EBITDA increased 12% in Q2 and 14% year to date, supported by higher volumes.
- Natural Gas Liquids adjusted EBITDA declined 2% in Q2 but increased 4% year to date. Narrower NGL location price differentials, higher rail and third-party fractionation costs, and higher operating costs offset volume and fee-rate growth.
- Natural Gas Pipelines adjusted EBITDA increased 18% in Q2 and 16% year to date, primarily from higher contracted transportation services.
- Capital expenditures nearly tripled year to date, reflecting accelerated spending on growth projects.
- Cash flow from operations declined $35.0 million, while investing cash outflows increased by approximately $1.031 billion. Financing cash flow was positive $925.5 million, primarily from $1.25 billion of senior-note issuance and the remaining $950 million draw on the term loan.
Guidance, outlook, commentary and unusual items
- Management projected 2019 growth capital expenditures of $2.5 billion to $3.7 billion and maintenance capital expenditures of $160 million to $200 million, excluding AFUDC and capitalized interest.
- Management expected operating cash flow, available credit and capital-market access to fund operations, capital projects, debt obligations and dividends, although future projects and dividend increases are expected to increase cash outflows.
- Announced projects include the Demicks Lake processing plants, Bear Creek expansion, Elk Creek and Arbuckle II NGL pipelines, West Texas LPG expansions, and MB-4 and MB-5 fractionators. Most projects are supported by long-term contracts, acreage dedications or minimum-volume commitments.
- ONEOK completed the southern section of the Elk Creek pipeline in July 2019. Management expected Elk Creek to reach 100 MBbl/d in the first quarter of 2020.
- NGL location price differentials narrowed during the first half of 2019 and were expected to remain volatile. Ethane deliveries increased to 400 MBbl/d in Q2 2019 from 365 MBbl/d in Q2 2018.
- In March 2019, ONEOK issued $1.25 billion of senior unsecured notes. The proceeds were used for general corporate purposes, including debt repayment and capital expenditures. The $1.5 billion term loan was fully drawn by June 30, 2019.
- ONEOK adopted the new lease standard in 2019, recording approximately $17.5 million of operating lease right-of-use assets and $17.4 million of lease liabilities; the overall impact was immaterial.
- The Sinclair gas-index pricing litigation was scheduled for trial beginning October 15, 2019. Management expected any ultimate charges to be immaterial. Management also stated that other legal and environmental matters were not expected to have a material adverse effect based on currently known information.
- Key risks include commodity prices and basis differentials, production declines or reduced drilling, ethane rejection, project cost and schedule overruns, regulatory and environmental requirements, pipeline integrity, interest rates, credit ratings, counterparty performance and access to capital markets.
Important facts investors should verify
- Whether growth projects are completed on schedule and within the stated aggregate capital-cost ranges.
- Whether projected volume growth and long-term contract commitments support the planned expansion of NGL and natural gas infrastructure.
- Debt-to-adjusted-EBITDA, interest costs, credit ratings and compliance with the revolving-credit and term-loan covenants.
- Operating cash flow relative to capital expenditures, dividends and debt maturities as the capital program continues.
- The effect of NGL location-price differentials, commodity prices, ethane rejection and optimization margins on Natural Gas Liquids results.
- The outcome of the Sinclair litigation, the Viking Gas Transmission rate filing, and any material environmental, pipeline-safety or regulatory developments.
- The filing’s non-GAAP adjusted EBITDA reconciliations and comparability with similarly titled measures used by other companies.