ONEOK, Inc. 2018 Second-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. reported unaudited results for the three and six months ended June 30, 2018. The company operates three reportable segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. Results include the consolidated operations following the June 30, 2017 acquisition of the publicly held interests in ONEOK Partners.
Management stated that approximately 90% of expected 2018 consolidated earnings would be fee-based. Volume growth was driven primarily by increased producer activity in the Williston, Permian, STACK and SCOOP regions, while wider NGL location differentials supported optimization and marketing earnings.
Financial performance and key metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenues | $2.961 billion | $2.726 billion | $6.063 billion | $5.475 billion |
| Operating income | $448.4 million | $319.5 million | $868.1 million | $636.6 million |
| Net income | $282.2 million | $176.0 million | $548.2 million | $362.2 million |
| Net income attributable to ONEOK | $281.0 million | $71.7 million | $545.6 million | $159.1 million |
| Diluted EPS | $0.68 | $0.33 | $1.32 | $0.74 |
| Adjusted EBITDA | $601.8 million | $462.3 million | $1.172 billion | $921.9 million |
| Capital expenditures | $350.9 million | $82.5 million | $615.4 million | $195.2 million |
Second-quarter revenue increased 9%, operating income increased 40%, net income increased 60%, and adjusted EBITDA increased 30% versus the prior-year quarter. Six-month revenue increased 11%, operating income increased 36%, net income increased 51%, and adjusted EBITDA increased 27%.
- Second-quarter operating margin was approximately 15.1%, compared with 11.7% in the prior-year quarter; six-month operating margin was approximately 14.3%, compared with 11.6%.
- Second-quarter net margin was approximately 9.5%, compared with 6.5%; six-month net margin was approximately 9.0%, compared with 6.6%.
- Natural Gas Gathering and Processing adjusted EBITDA increased 30% in the quarter and 28% year to date, primarily from volume growth and higher realized NGL and condensate prices.
- Natural Gas Liquids adjusted EBITDA increased 29% in the quarter and 26% year to date, benefiting from wider location price differentials, inventory sales and increased exchange-service volumes.
- Natural Gas Pipelines adjusted EBITDA increased 6% in the quarter and 9% year to date, primarily from higher interruptible transportation and storage activity.
Cash flow, liquidity and debt
- Cash provided by operating activities was $1.003 billion for the first six months of 2018, compared with $642.9 million in the prior-year period.
- Cash used in investing activities was $601.4 million, primarily reflecting increased growth capital expenditures.
- Cash used in financing activities was $423.5 million, including $643.5 million of dividends, $503.8 million of long-term debt repayments and $458.7 million of net short-term borrowing repayments, partially offset by $1.187 billion of common-stock issuance proceeds.
- Cash and cash equivalents declined to $15.3 million at June 30, 2018, from $37.2 million at December 31, 2017.
- Book debt, including current maturities and short-term borrowings, was approximately $8.236 billion at June 30, 2018, compared with $9.199 billion at year-end 2017. Long-term debt, excluding current maturities, was $7.091 billion.
- The $2.5 billion revolving credit facility was extended to June 2023. ONEOK had no borrowings under the facility, approximately $2.3 billion of available capacity, a debt-to-adjusted-EBITDA covenant ratio of 3.5 to 1, and was in compliance with its covenants.
- Working capital deficits were $1.1 billion at June 30, 2018, and $0.9 billion at December 31, 2017. Management attributed the deficit primarily to current debt maturities and stated that it did not expect an adverse effect on operations or cash flows.
Material changes versus the prior comparable period
- The June 30, 2017 ONEOK Partners merger materially affects comparability. The 2017 period included earnings attributable to public ONEOK Partners unitholders, including $104.3 million of noncontrolling-interest income in the second quarter and $203.1 million in the first six months.
- ONEOK issued 21.9 million common shares in January 2018 for net proceeds of approximately $1.2 billion. Average basic shares increased to 411.9 million in the second quarter from 211.8 million in the prior-year quarter.
- Capital expenditures increased substantially because of growth projects, particularly in the Natural Gas Liquids segment.
- Operating results benefited from the absence of 2017 merger-related costs of $22.8 million in the quarter and $29.5 million year to date.
- Topic 606 revenue recognition was adopted January 1, 2018. The principal effect was a reclassification of certain contractual fees from services revenue to a reduction of cost of sales and fuel; management said the impact on operating income, net income and adjusted EBITDA was not material.
- The company adopted ASU 2018-02 and reclassified $38.1 million of stranded tax effects from accumulated other comprehensive loss to retained earnings.
Guidance, outlook, commentary and risks
- Management expects 2018 growth capital expenditures of $2.0 billion to $2.3 billion and maintenance capital expenditures of $160 million to $180 million, excluding AFUDC and capitalized interest.
- Announced growth projects totaled approximately $4.3 billion since June 2017, including NGL pipelines, fractionation, processing and natural gas pipeline expansions. Several major projects are expected to enter service from the third quarter of 2018 through the first quarter of 2020.
- Ethane volumes increased to 370 MBbl/d in the second quarter from 310 MBbl/d in the prior-year quarter, while ethane rejection averaged more than 140 MBbl/d because of system constraints. Rejection levels are expected to fluctuate until additional infrastructure is completed.
- On July 31, 2018, after the reporting date, ONEOK acquired the remaining 20% interest in West Texas LPG Pipeline for $195 million.
- In July 2018, the company issued $1.25 billion of senior unsecured notes, generating approximately $1.23 billion of net proceeds. Management indicated that proceeds could fund capital expenditures or repay debt, including the planned repayment of $425 million of notes due in September 2018.
- Management expects cash flows from operations to fund dividends in 2018 and declared a third-quarter common dividend of $0.825 per share. It expects 85% to 95% of 2018 dividend payments to be treated as return of capital.
- Key risks include commodity-price and volumetric exposure, ethane rejection, construction cost and schedule execution, access to capital, leverage and credit ratings, counterparty performance, environmental and pipeline-safety requirements, regulatory rate actions, weather, operational outages and litigation.
- The Sinclair gas-index pricing litigation was remanded to the district court after an August 1, 2018 appellate decision. Management expected any ultimate charges to be immaterial. The company also disclosed a FERC rate review involving Midwestern Gas Transmission and stated that it did not expect a material effect.
Most important facts for investors to verify
- Reconcile year-over-year earnings and per-share results for the ONEOK Partners merger, share issuance and changes in noncontrolling interests.
- Track execution, final costs and in-service dates for the approximately $4.3 billion announced growth program.
- Assess whether operating cash flow can continue to fund capital expenditures, dividends and debt maturities while cash balances remain low.
- Monitor leverage, credit ratings, commercial-paper access and compliance with the revolving-credit agreement.
- Evaluate the sustainability of NGL optimization gains and the effect of changing Conway-to-Mont Belvieu differentials, ethane rejection and inventory timing.
- Review subsequent events, including the July 2018 debt issuance, the West Texas LPG acquisition and the planned September 2018 debt repayment.
- Verify the outcomes of FERC proceedings, environmental and pipeline-safety matters, and the Sinclair litigation.