ONEOK, Inc. 2018 First-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. reported unaudited consolidated results for the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company operates three primary segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. Management expects approximately 90% of 2018 consolidated earnings to be fee-based, although volumes, commodity prices and operating conditions remain relevant.
The comparison is affected by the June 30, 2017 acquisition of the publicly held interests in ONEOK Partners. ONEOK now owns 100% of ONEOK Partners, and the prior-year period included significant net income attributable to noncontrolling interests.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $3.102 billion | $2.750 billion | 13% |
| Operating income | $419.7 million | $317.1 million | 32% |
| Net income | $266.0 million | $186.2 million | 43% |
| Net income attributable to ONEOK | $264.5 million | $87.4 million | 203% |
| Net income available to common shareholders | $264.2 million | $87.4 million | 203% |
| Diluted EPS | $0.64 | $0.41 | 56% |
| Adjusted EBITDA | $570.3 million | $459.6 million | 24% |
| Cash flow from operations | $495.3 million | $269.1 million | 84% |
| Capital expenditures | $264.5 million | $112.7 million | 135% |
Commodity sales increased 27% to $2.820 billion, while reported services revenue declined 47% to $282.1 million. The services-revenue decline primarily reflects the January 1, 2018 adoption of Topic 606, which moved approximately $352.6 million of contractual fees into a reduction of cost of sales and fuel. Management stated that the change had no material effect on operating income, net income or adjusted EBITDA.
Operating margin was approximately 13.5% in Q1 2018 versus 11.5% in Q1 2017. Net margin was approximately 8.6% versus 6.8%. Adjusted EBITDA margin was approximately 18.4% versus 16.7%.
Segment adjusted EBITDA was $130.6 million for Natural Gas Gathering and Processing, $342.1 million for Natural Gas Liquids, and $93.6 million for Natural Gas Pipelines. Growth was attributed primarily to higher volumes in the Williston Basin, STACK and SCOOP areas, the Mid-Continent, and the Permian Basin; wider NGL location differentials; and the sale of previously held NGL inventory.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $495.3 million. Investing cash use was $255.6 million, principally from capital expenditures, and financing cash use was $259.4 million.
- Cash declined to $17.5 million from $37.2 million at December 31, 2017.
- Working capital was negative $0.8 billion, primarily because of current maturities of long-term debt. Management stated that the deficit is not expected to adversely affect operations or cash flows.
- Total debt was approximately $8.1 billion at March 31, 2018, compared with $9.2 billion at December 31, 2017. Long-term debt, including current maturities, had a book value of approximately $8.0 billion and estimated fair value of $8.7 billion.
- ONEOK had no commercial paper outstanding at quarter-end and no borrowings under its $2.5 billion revolving credit facility. The debt-to-adjusted-EBITDA covenant ratio was 3.7 to 1 versus a 5.5 to 1 limit for the period, and the company was in compliance with all covenants.
- In January 2018, the company repaid the remaining $500 million term loan balance. It expects to repay ONEOK Partners’ $425 million of senior notes due September 2018 using cash and short-term borrowings.
- ONEOK issued 21.9 million common shares in January 2018, generating net proceeds of $1.2 billion, used for capital expenditures, general corporate purposes and debt repayment.
Material changes versus the prior comparable period
- The ONEOK Partners merger materially changed the ownership and earnings presentation, including the reduction in prior-period noncontrolling interests.
- Natural gas gathered increased to 2,460 BBtu/d from 1,985 BBtu/d, and natural gas processed increased to 2,285 BBtu/d from 1,863 BBtu/d.
- NGLs transported on gathering lines increased to 855 MBbl/d from 764 MBbl/d, while NGLs fractionated increased to 693 MBbl/d from 574 MBbl/d.
- Natural gas transportation capacity contracted was 6,779 MDth/d versus 6,757 MDth/d, with capacity subscribed at 97% in both periods.
- Capital expenditures increased substantially due to announced growth projects. Operating costs also increased because of employee-related costs, materials, outside services and maintenance timing.
- The common dividend paid increased to $0.77 per share from $0.615 per share, a 25% increase. A $0.795 per-share dividend was declared in April 2018.
- Adoption of Topic 606 produced a $1.7 million increase to beginning retained earnings and changed revenue classification. Adoption of ASU 2018-02 reclassified $38.1 million of stranded tax effects from accumulated other comprehensive loss to retained earnings.
Guidance, outlook, management commentary and risks
- Management expects 2018 growth capital expenditures of $2.0 billion to $2.3 billion and maintenance capital expenditures of $140 million to $180 million, excluding AFUDC and capitalized interest.
- Since June 2017, the company had announced approximately $4.2 billion of capital-growth projects, including processing expansions and NGL pipelines, fractionation and storage projects. Major projects are scheduled through 2020 and are supported primarily by long-term contracts, minimum volume commitments and acreage dedications.
- Management expects natural gas and NGL volumes to continue increasing in 2018 as producer activity and drilling efficiency improve. Ethane volumes increased approximately 50 MBbl/d year over year; ethane rejection averaged more than 140 MBbl/d in the quarter and is expected to decline to approximately 70 MBbl/d by year-end 2018.
- The company expects operating cash flows to fund operations, capital expenditures and dividends, and expects no significant cash income taxes through 2021. Management stated that expected equity financing needs have been satisfied through the remainder of 2018 and well into 2019.
- Approximately 85% to 95% of 2018 dividend payments are expected to represent a return of capital.
- Key risks include commodity-price and volumetric exposure, producer drilling declines, ethane rejection, weather and operational outages, construction cost and schedule risk, interest rates, leverage and credit ratings, counterparty performance, environmental and pipeline-safety requirements, and FERC actions affecting tariffs.
- Northern Border Pipeline’s FERC-approved settlement will reduce rates 12.5% by January 2020 compared with prior rates; management does not expect a material effect. FERC also initiated a Section 5 review of Midwestern Gas Transmission rates, which could result in a future rate reduction.
- Environmental compliance, spills, permitting, litigation and regulatory changes could result in penalties, remediation costs, operating restrictions or additional capital expenditures. Management believes currently known legal and environmental matters are not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether volume growth and the predominantly fee-based earnings profile continue to offset commodity-price, ethane-rejection and producer-activity risks.
- Progress, final costs, contracting and in-service dates for the approximately $4.2 billion of announced growth projects.
- Funding for the $2.0 billion to $2.3 billion 2018 growth-capital program, upcoming debt maturities and dividend obligations.
- Future leverage, credit ratings, covenant headroom and access to commercial paper and revolving-credit liquidity.
- The effect of Topic 606 revenue classification on comparisons with prior periods and on reported revenue mix.
- Outcomes of FERC proceedings, including the Midwestern Gas Transmission rate review and potential tariff effects from the Tax Cuts and Jobs Act.
- Management’s expectation that no significant cash income taxes will be paid through 2021 and that 85% to 95% of 2018 dividends will be return of capital.