ONEOK, Inc. Form 10-Q Summary
Business context and reporting period
ONEOK is a midstream energy company operating through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. The filing covers the three months ended March 31, 2023, compared with the same period in 2022. Results are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $4.521 billion | $5.445 billion | Down $924 million |
| Operating income | $1.497 billion | $662 million | Up $835 million |
| Net income | $1.049 billion | $391 million | Up $658 million |
| Diluted EPS | $2.34 | $0.87 | Up $1.47 |
| Adjusted EBITDA | $1.717 billion | $864 million | Up $853 million |
| Cash flow from operations | $1.221 billion | $463 million | Up $758 million |
| Capital expenditures | $289 million | $257 million | Up $32 million |
Operating margin was approximately 33.1%, compared with approximately 12.2% in the prior-year quarter; net margin was approximately 23.2%, compared with approximately 7.2%. These comparisons were substantially affected by the Medford insurance settlement.
Cash and cash equivalents were $680 million at March 31, 2023, versus $220 million at December 31, 2022. Working capital was positive at $387 million, driven primarily by Medford settlement proceeds. Cash flow exceeded dividends paid by $794 million during the quarter.
Total debt was $13.336 billion, including $500 million of current maturities and $12.728 billion of long-term debt excluding current maturities. ONEOK had no borrowings under its $2.5 billion revolving credit facility, reported a 2.8-to-1 indebtedness-to-adjusted-EBITDA ratio against a 5.0-to-1 covenant limit, and was in compliance with its covenants. Investment-grade ratings were maintained by Moody’s, S&P and Fitch.
The company paid a common dividend of $0.955 per share and declared the same quarterly dividend for May 2023 payment. Total cash dividends paid were $427 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower commodity sales, partly offset by higher services revenue. Commodity price and sales-volume changes generally affect both revenue and cost of sales and therefore have a largely offsetting impact.
- Operating income and adjusted EBITDA increased primarily because of a $779 million gain from the Medford insurance settlement, partially offset by $46 million of third-party fractionation costs.
- Natural Gas Gathering and Processing adjusted EBITDA increased $68 million to $283 million, supported by higher fee rates, realized prices and volumes. Processed natural gas volumes increased to 2,794 BBtu/d from 2,517 BBtu/d.
- Natural Gas Liquids adjusted EBITDA increased $753 million to $1.281 billion, primarily because of the Medford settlement and higher exchange-service activity. Raw feed throughput increased to 1,256 MBbl/d from 1,212 MBbl/d.
- Natural Gas Pipelines adjusted EBITDA increased $21 million to $145 million, primarily from higher storage rates and transportation services.
- Operating costs increased $32 million, primarily due to higher employee-related costs, outside services and property taxes.
- Cash used in financing activities increased to $808 million, including repayment of $425 million of senior notes in February 2023.
Guidance, outlook, risks and unusual items
Management expects approximately 90% of consolidated 2023 earnings to be fee-based. It has hedged approximately 70% of forecasted Natural Gas Gathering and Processing equity volumes for the remainder of 2023. The company expects 2023 capital expenditures of approximately $1.3 billion to $1.5 billion, excluding AFUDC and capitalized interest.
Growth projects include the completed 200 MMcf/d Demicks Lake III processing plant, the 125 MBbl/d MB-5 fractionator completed early in the second quarter, the approximately $550 million MB-6 fractionator targeted for first-quarter 2025 completion, and the approximately $95 million Viking compression project targeted for third-quarter 2023 completion. The company also expects to complete an Oklahoma storage injection expansion in the second quarter of 2023; the incremental 4 Bcf of capacity is substantially subscribed.
The Medford, Oklahoma, NGL fractionation facility was damaged by fire in July 2022. Total insurance payments were $930 million, including $830 million received in the first quarter of 2023. Management expects operating cash flow in the remainder of 2023 and 2024 to be affected by Medford-related costs for which business interruption proceeds will no longer be received. ONEOK plans to construct MB-6 instead of rebuilding the Medford fractionator at this time.
In April 2023, the company elected to redeem its $500 million, 7.5% senior notes due September 2023, with redemption expected in June 2023 using cash on hand. Key risks include commodity-price and volumetric exposure, ethane rejection, producer activity, operational outages, construction costs and delays, regulatory approvals, environmental and pipeline-safety requirements, cybersecurity, interest rates, leverage, credit ratings and access to capital markets.
Management stated that legal proceedings and currently known environmental and safety matters are not expected to have a material adverse effect. Disclosure controls and procedures were effective at March 31, 2023, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Adjust reported earnings and EBITDA for the nonrecurring $779 million Medford settlement gain and related $46 million third-party fractionation costs.
- Assess the cash-flow impact of losing future Medford business-interruption proceeds and the economics, timing and execution risk of the MB-6 replacement project.
- Verify the effect of the June 2023 $500 million debt redemption on cash balances, leverage and liquidity.
- Reconcile the company’s $1.3 billion to $1.5 billion 2023 capital-expenditure outlook with actual project spending and completion schedules.
- Monitor commodity prices, ethane economics, producer drilling activity and the approximately 70% hedge coverage for the remainder of 2023.
- Review the sustainability of fee-based earnings, segment volumes and contracted pipeline capacity, including the reported 96% transportation-capacity utilization.
- Evaluate exposure to regulatory, environmental, safety, cyber, weather, insurance and counterparty risks described in the filing.