ONEOK, Inc. 10-Q Summary — First Quarter 2020
Business context and reporting period
ONEOK reported results for the three months ended March 31, 2020. The company operates through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. Results were affected by the COVID-19 pandemic, the resulting economic slowdown, and the crude oil supply dispute involving Saudi Arabia and Russia, which caused sharp declines in crude oil, NGL and natural gas prices.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenues | $2.137 billion | $2.780 billion |
| Operating income (loss) | $(83.5) million | $468.7 million |
| Net income (loss) | $(141.9) million | $337.2 million |
| Net income (loss) available to common shareholders | $(142.1) million | $336.9 million |
| Diluted EPS | $(0.34) | $0.81 |
| Adjusted EBITDA | $700.8 million | $637.5 million |
| Cash flow from operations | $422.7 million | $353.6 million |
| Capital expenditures | $949.7 million | $889.7 million |
Revenue declined 23.1% year over year, primarily because of lower commodity sales and prices. The reported operating margin was approximately negative 3.9%, compared with approximately 16.9% in the prior-year quarter; the comparison was heavily affected by $604.0 million of operating impairment charges. Net margin was approximately negative 6.6%, compared with approximately 12.1%.
- Segment adjusted EBITDA increased to $683.1 million from $636.5 million, led by higher volumes and exchange-service revenue in the Natural Gas Liquids segment and higher Williston Basin volumes.
- Adjusted EBITDA increased to $700.8 million, despite the GAAP net loss, primarily because impairment charges were noncash.
- Cash provided by operations exceeded common and preferred dividends paid by approximately $36.1 million.
- Cash and cash equivalents were $531.6 million at March 31, 2020, compared with $21.0 million at December 31, 2019.
- Working capital surplus was $396.9 million at March 31, 2020.
Debt and liquidity
- Long-term debt, including current maturities, was approximately $14.2 billion at March 31, 2020, compared with $12.5 billion at year-end 2019.
- ONEOK issued $1.75 billion of senior unsecured notes in March 2020 and received net proceeds of approximately $1.73 billion. Proceeds were used partly to repay commercial paper and for general corporate purposes.
- The company repurchased $67.0 million of senior notes for $50.5 million and recognized a $15.8 million gain on debt extinguishment.
- No borrowings were outstanding under the $2.5 billion revolving credit agreement. The debt-to-adjusted-EBITDA covenant ratio was 4.5 to 1, below the 5.0 to 1 maximum, and the company was in compliance with its covenants.
- Credit ratings remained investment grade as of April 20, 2020: Moody’s Baa3 with a positive outlook and S&P BBB with a stable outlook.
- The quarterly common dividend was $0.935 per share, or $3.74 annualized, representing a 9% increase from the prior-year quarter. A $0.935 dividend was declared for payment in May 2020.
Material changes versus the prior comparable period
- Commodity sales fell $664.4 million, while services revenue increased $21.1 million.
- Operating income decreased $552.2 million, primarily because of $604.0 million of noncash impairments and $18.2 million of higher depreciation and amortization.
- Net income decreased $479.1 million. The loss included $641.8 million of total noncash impairment charges, consisting of $604.0 million in operating impairments and $37.7 million related to equity investments.
- Natural Gas Gathering and Processing adjusted EBITDA increased $7.4 million to $159.6 million. Gathered and processed volumes increased, but the average fee rate declined to $0.85 per MMBtu from $0.91.
- Natural Gas Liquids adjusted EBITDA increased $33.3 million to $410.9 million, driven by higher exchange-service revenue and lower operating costs, partly offset by weaker optimization and marketing results.
- Natural Gas Pipelines adjusted EBITDA increased $5.9 million to $112.5 million, supported by higher contracted transportation capacity and rates.
- Operating cash flow increased $69.1 million, while investing cash outflows increased $100.0 million because of higher capital expenditures. Financing cash inflows increased $525.7 million, mainly because of the March debt issuance.
Guidance, outlook, risks and unusual items
- Management reduced planned 2020 capital-growth expenditures by approximately $900 million, suspended or paused several projects, and expected capital expenditures to decline during the remainder of 2020 and into 2021.
- Updated 2020 capital guidance was $1.4 billion to $1.8 billion of growth capital and $130 million to $170 million of maintenance capital, excluding AFUDC and capitalized interest.
- Management expected lower drilling, completion activity, volumes and cash flows during 2020 because of weak commodity prices, while noting mitigation from fee-based contracts, long-term acreage dedications, fully contracted Permian positions, flared-gas capture opportunities and nearly fully subscribed pipeline capacity.
- Management expected approximately 90% of consolidated 2020 earnings to be fee-based, but the company remained exposed to commodity prices, producer activity, volumes, ethane rejection and counterparty credit risk.
- The company recorded $153.4 million of goodwill impairment, $380.5 million of long-lived asset impairments, and $70.2 million of impairments on certain inactive NGL assets. Equity investment impairments totaled $37.7 million.
- COVID-19, crude oil price volatility, reduced demand, storage constraints, potential production limits, lower producer activity, regulatory developments and access to capital markets were identified as significant risks.
- Environmental, pipeline safety, regulatory and ordinary-course litigation matters remained ongoing. Management stated that reasonably possible losses were not material based on currently known information.
Important facts for investors to verify
- Whether the 2020 capital-spending reductions and project pauses are sufficient to preserve liquidity while maintaining contracted growth opportunities.
- Actual producer drilling activity, gathering and processing volumes, NGL throughput, ethane rejection and the effect on fee rates and cash flows.
- Debt-to-EBITDA trends, covenant headroom, refinancing needs and continued access to investment-grade debt and commercial-paper markets.
- Whether additional goodwill, long-lived asset or equity-investment impairments are required if commodity prices and market valuations remain depressed.
- The sustainability of the $0.935 quarterly common dividend if operating cash flow declines or capital requirements increase.
- Potential counterparty defaults, margin or collateral requirements, environmental liabilities, regulatory changes and COVID-19-related operational disruptions.