ONEOK, Inc. 10-Q Summary
Business context and reporting period
ONEOK reported results for the three months ended March 31, 2024. Its four reportable segments are Natural Gas Gathering and Processing, Natural Gas Liquids, Natural Gas Pipelines, and Refined Products and Crude. The Refined Products and Crude segment reflects the Magellan Acquisition completed September 25, 2023, for total consideration of approximately $14.1 billion.
Management stated that system volumes were stable year over year despite winter weather. The company expects more than 85% of consolidated earnings to be fee-based in 2024.
Financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $4.781 billion | $4.521 billion | +$260 million |
| Operating income | $1.064 billion | $1.497 billion | -$433 million |
| Net income | $639 million | $1.049 billion | -$410 million |
| Diluted EPS | $1.09 | $2.34 | -$1.25 |
| Adjusted EBITDA | $1.441 billion | $1.733 billion | -$292 million |
| Cash flow from operations | $596 million | $1.221 billion | -$625 million |
| Capital expenditures | $512 million | $289 million | +$223 million |
Operating margin was approximately 22.3% in Q1 2024 versus 33.1% in Q1 2023. Net margin was approximately 13.4% versus 23.2%. These comparisons are affected substantially by the $779 million Medford insurance settlement gain recorded in Q1 2023.
At March 31, 2024, cash and cash equivalents were $65 million, compared with $338 million at December 31, 2023. Total assets were $44.390 billion and total equity was $16.445 billion.
Long-term debt, including current maturities, had a book value of $21.7 billion and an estimated fair value of $21.0 billion. Current maturities totaled $1.2 billion, consisting primarily of $484 million due in September 2024 and $750 million due in March 2025. Commercial paper outstanding was $320 million at a weighted-average rate of 5.50%.
ONEOK had no borrowings under its $2.5 billion revolving credit facility, which expires in 2027. Its consolidated indebtedness-to-adjusted-EBITDA ratio was 4.1 to 1, and it was in compliance with all covenants. The facility leverage covenant was temporarily increased to 5.5 to 1 through December 31, 2024, before returning to 5.0 to 1.
Working capital was negative $1.2 billion, primarily because of current debt maturities and short-term borrowings. Management stated that available liquidity, operating cash flow, the revolving facility, commercial paper access, debt markets, and a $1.0 billion at-the-market equity program are expected to provide sufficient resources.
Material changes versus the prior comparable period
- Revenue increased 5.8%, primarily from $488 million of higher services revenue associated largely with the expanded business following the Magellan Acquisition, partly offset by a $228 million decline in commodity sales.
- Operating income, net income, diluted EPS, and adjusted EBITDA declined primarily because Q1 2023 included the $779 million Medford insurance settlement gain.
- Operating costs increased $276 million and depreciation and amortization increased $92 million, reflecting the larger post-acquisition asset base and higher operating activity.
- Interest expense increased to $300 million from $166 million, primarily because of higher debt balances resulting from the Magellan Acquisition.
- The new Refined Products and Crude segment contributed $262 million of operating income and $381 million of adjusted EBITDA in Q1 2024.
- Natural Gas Gathering and Processing adjusted EBITDA increased $21 million to $306 million; Natural Gas Pipelines increased $7 million to $165 million; and Natural Gas Liquids decreased $695 million to $588 million, primarily because of the prior-year Medford gain.
- Operating cash flow decreased because of the absence of 2023 Medford insurance proceeds and unfavorable working-capital changes, including inventory and risk-management balances.
- Cash used in investing activities was $578 million versus cash provided of $47 million in the prior year, reflecting higher capital expenditures and the absence of Medford settlement proceeds.
Guidance, outlook, risks and unusual items
- Management expects 2024 capital expenditures, excluding AFUDC and capitalized interest, of $1.75 billion to $1.95 billion.
- Major projects include the $550 million MB-6 fractionator, the $520 million West Texas NGL pipeline expansion, and the $355 million Elk Creek pipeline expansion. Each is expected to be completed in the first quarter of 2025.
- The West Texas project is expected to increase Permian Basin NGL capacity to 740 MBbl/d, while the Elk Creek expansion is expected to increase Rocky Mountain capacity to 435 MBbl/d.
- In January 2024, the board authorized a $2.0 billion share repurchase program, generally targeted for use over four years. No shares had been repurchased through April 22, 2024.
- The quarterly common dividend was $0.99 per share, or $3.96 annualized, representing a 3.7% increase from the prior-year quarter. Management said operating cash flow exceeded dividends paid by $18 million in Q1.
- Ethane volumes under long-term contracts declined 15 MBbl/d to 415 MBbl/d, reflecting ethane recovery economics and winter weather. The company hedged approximately 65% of forecasted 2024 equity volumes in Natural Gas Gathering and Processing.
- The company settled all remaining claims in the Corpus Christi Terminal personal injury proceeding during Q1 2024. Accrued settlement amounts were offset by insurance receivables; the filing does not provide a clear net earnings impact.
- Key risks include commodity-price volatility, lower producer activity or volumes, operational incidents, insurance limitations and premiums, construction and supply-chain risks, regulatory and environmental requirements, cybersecurity, interest rates, leverage, credit ratings, joint-venture dependence, and integration risks related to Magellan.
- Long-term debt ratings were investment grade: Moody’s Baa2, S&P BBB, and Fitch BBB, each with a stable outlook.
Most important facts for investors to verify
- Whether the anticipated operating synergies and fee-based earnings contribution from the Magellan Acquisition are being realized.
- The company’s ability to refinance or repay the $1.2 billion of current long-term debt maturities and manage the $320 million commercial paper balance.
- Progress, costs, contracted volumes, and in-service dates for the MB-6, West Texas, and Elk Creek projects.
- Whether operating cash flow remains sufficient to fund capital expenditures, dividends, debt service, affiliate investments, and the planned share repurchases.
- The sustainability of Natural Gas Liquids results after the nonrecurring Medford settlement gain in the prior-year period.
- Changes in leverage, credit ratings, borrowing costs, and compliance with the revolving-credit-facility covenants.
- Potential exposure from environmental, safety, legal, insurance, regulatory, cybersecurity, and commodity-price risks.