ONEOK, Inc. 2022 Q3 Form 10-Q Summary
Business context and reporting period
ONEOK is a diversified midstream energy company operating through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. The filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company reported approximately 90% of 2022 consolidated earnings are expected to be fee-based.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $5.914 billion | $4.536 billion | $17.355 billion | $11.120 billion |
| Operating income | $699.2 million | $667.9 million | $2.051 billion | $1.944 billion |
| Net income | $431.8 million | $392.0 million | $1.237 billion | $1.120 billion |
| Net income available to common shareholders | $431.5 million | $391.7 million | $1.236 billion | $1.120 billion |
| Diluted EPS | $0.96 | $0.88 | $2.76 | $2.50 |
| Adjusted EBITDA | $902.4 million | $865.2 million | $2.652 billion | $2.533 billion |
| Cash flow from operations | Not separately provided | Not separately provided | $1.866 billion | $1.491 billion |
| Capital expenditures | $326.7 million | $166.2 million | $886.0 million | $490.3 million |
Q3 operating margin was approximately 11.8%, compared with 14.7% in the prior-year quarter; the decline primarily reflects the high commodity-sales pass-through component of revenue. Net margin was approximately 7.3%, compared with 8.6%. Nine-month net margin was approximately 7.1%, compared with 10.1%.
Liquidity, debt and capital structure
- September 30, 2022 cash and cash equivalents were $22.2 million, down from $146.4 million at December 31, 2021.
- Total debt was $13.882 billion, including $901.3 million of commercial paper and a $120 million Guardian Pipeline term loan. Long-term debt, excluding current maturities, was $11.951 billion.
- ONEOK redeemed $895.8 million of senior notes in July 2022 using cash on hand and short-term borrowings.
- The $2.5 billion revolving credit agreement was extended to June 2027. It had no outstanding borrowings at September 30, 2022; ONEOK reported a consolidated net indebtedness-to-adjusted-EBITDA ratio of 3.9 to 1 and compliance with all covenants.
- Working capital was negative $1.373 billion, primarily because of short-term borrowings and current debt maturities. Management stated that this deficit is not expected to adversely affect operations or cash flows.
- Cash used in financing activities was $1.126 billion, including $1.253 billion of dividends paid. Common dividends were maintained at $0.935 per share quarterly, or $3.74 annualized.
Material changes versus the prior comparable period
- Q3 revenue increased $1.377 billion, net income increased $39.8 million, diluted EPS increased $0.08, and adjusted EBITDA increased $37.2 million.
- Nine-month revenue increased $6.235 billion, net income increased $117.0 million, diluted EPS increased $0.26, and adjusted EBITDA increased $119.2 million.
- Natural Gas Gathering and Processing adjusted EBITDA increased $74.2 million in Q3 and $107.2 million for nine months, driven by higher realized commodity prices, higher fee rates and increased Rocky Mountain volumes.
- Natural Gas Liquids adjusted EBITDA decreased $47.4 million in Q3, primarily from lower optimization and marketing earnings, but increased $81.7 million for nine months due to higher exchange-service rates and volumes and the unfavorable comparison with Winter Storm Uri in 2021.
- Natural Gas Pipelines adjusted EBITDA increased $14.4 million in Q3 because of higher storage rates, but decreased $67.0 million for nine months because 2021 benefited from Winter Storm Uri-related sales and transportation activity.
- Capital expenditures increased $395.7 million for nine months, reflecting growth projects including Demicks Lake III, the MB-5 fractionator and Viking compression projects.
Guidance, outlook, commentary and unusual items
- Management expects approximately $1.2 billion of 2022 capital expenditures, excluding allowance for funds used during construction and capitalized interest.
- Demicks Lake III is expected to be completed in the first quarter of 2023, and the MB-5 fractionator in the second quarter of 2023.
- The Oklahoma storage expansion is expected to be completed in the second quarter of 2023; approximately 90% of the additional 4 Bcf capacity had been subscribed as of September 2022.
- The Medford, Oklahoma, 210 MBbl/d fractionation facility was damaged by fire on July 9, 2022, and is expected to remain out of service for an extended period. The company recorded a $6.7 million partial impairment charge and approximately $30 million of losses associated with the insurance waiting period. It also recorded $21.7 million of probable business-interruption insurance recoveries.
- Insurance coverage has a combined per-occurrence property damage and business-interruption limit of $2 billion, subject to policy terms, a $5 million property deductible and a 45-day business-interruption waiting period. Insurers agreed to a $100 million initial installment; approximately $45 million had been received by November 2, 2022.
- The company expects the Medford incident not to have a material effect on financial condition, results or cash flows, but the timing and ultimate amount of insurance proceeds remain uncertain.
- ONEOK hedged approximately 70% of forecasted Natural Gas Gathering and Processing equity volumes for the remainder of 2022 and 2023. Commodity prices, producer activity, ethane rejection, weather, operating outages and demand remain important earnings variables.
- Guardian Pipeline reached a settlement in principle in an FERC rate case that, if approved, would reduce future rates; management does not expect a material earnings impact.
- Investment-grade credit ratings were maintained: Moody’s Baa3 with positive outlook, and S&P BBB and Fitch BBB, both with stable outlooks.
Important facts for investors to verify
- Timing, amount and policy coverage of Medford property-damage and business-interruption insurance proceeds, including any additional impairment or unrecovered losses.
- Ability to fund the elevated capital program, dividends and upcoming debt maturities while commercial paper borrowings remain significant.
- Completion schedules, costs and subscription levels for Demicks Lake III, MB-5, storage expansion and Viking electrification projects.
- Exposure to NGL, natural gas and condensate prices, ethane economics, producer drilling activity and hedging effectiveness.
- Impact of the Guardian Pipeline FERC settlement and other regulatory, environmental, pipeline-safety and permitting developments.
- Changes in interest rates, credit ratings, counterparty collateral requirements and access to commercial paper or revolving-credit liquidity.