ONEOK, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2023. ONEOK operates fee-based midstream businesses in natural gas gathering and processing, natural gas liquids, natural gas pipelines, and, following the September 25, 2023 acquisition of Magellan Midstream Partners, refined products and crude.
- Magellan was acquired for total consideration of $14.1 billion, comprising approximately $5.1 billion of cash and approximately $9.0 billion of ONEOK common stock.
- Approximately 135 million ONEOK shares were issued, materially increasing the share count and paid-in capital.
- Magellan contributed $72 million of revenue and $29 million of net income from September 25 through September 30, 2023.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $4.189 billion | $5.914 billion | $12.442 billion | $17.355 billion |
| Operating income | $739 million | $700 million | $2.973 billion | $2.051 billion |
| Net income | $454 million | $432 million | $1.971 billion | $1.237 billion |
| Net income available to common shareholders | $453 million | $431 million | $1.970 billion | $1.236 billion |
| Diluted EPS | $0.99 | $0.96 | $4.36 | $2.76 |
| Adjusted EBITDA | $1.001 billion | $902 million | $3.689 billion | $2.652 billion |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $2.913 billion | $1.866 billion |
| Capital expenditures | $398 million | $327 million | $992 million | $886 million |
Q3 operating margin was approximately 17.6% versus 11.8% in the prior-year quarter; net margin was approximately 10.8% versus 7.3%. Nine-month operating margin was approximately 23.9% versus 11.8%, and net margin was approximately 15.8% versus 7.1%. Comparisons were significantly affected by the Medford insurance settlement and the Magellan transaction.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $284 million at September 30, 2023, compared with $220 million at December 31, 2022.
- Total assets were $43.939 billion, up from $24.379 billion, primarily because of the Magellan acquisition.
- Book value of consolidated debt, including current maturities, was approximately $22.0 billion, compared with $13.6 billion at year-end 2022. Long-term debt was $21.450 billion and current maturities were $500 million.
- ONEOK issued $5.25 billion of senior unsecured notes in August 2023, with net proceeds of approximately $5.2 billion used primarily to fund the cash consideration for Magellan.
- The $2.5 billion revolving credit facility expires in 2027. There were no borrowings outstanding at September 30, 2023, and ONEOK was in compliance with its covenants. The reported indebtedness-to-adjusted-EBITDA ratio was 3.7 to 1, against a temporary acquisition-period covenant of 5.5 to 1.
- Working capital was negative $110 million. Management stated that available operating cash flow, the revolving facility, debt markets and an unused $1.0 billion at-the-market equity program provide sufficient liquidity.
- Credit ratings were investment grade: Moody’s Baa2, S&P BBB and Fitch BBB, each with a stable outlook.
Material changes versus the prior comparable period
- Revenue declined 29% in Q3 and 28% for the nine-month period, primarily because of lower commodity sales prices, partly offset by higher service revenue and volumes.
- Net income increased 5% in Q3 and 59% for nine months. Diluted EPS increased 3% in Q3 and 58% for nine months.
- Adjusted EBITDA increased 11% in Q3 and 39% for nine months. Nine-month results include approximately $667 million of favorable adjusted EBITDA impact from the Medford incident.
- ONEOK recorded a $779 million operating gain in the first quarter from the Medford insurance settlement. Total insurance proceeds were $930 million, including $830 million received in 2023.
- Transaction costs related to Magellan were $123 million in Q3 and $133 million for nine months in operating expenses, with additional acquisition-related interest expense of $13 million and $21 million, respectively.
- Interest expense increased to $215 million in Q3 from $167 million and to $561 million for nine months from $510 million, primarily because of higher debt balances and acquisition-related financing costs.
- Segment adjusted EBITDA for Q3 was $614 million for Natural Gas Liquids, $322 million for Natural Gas Gathering and Processing, $125 million for Natural Gas Pipelines and $40 million for Refined Products and Crude.
- Natural gas processed volumes increased to 3,085 BBtu/d in Q3 from 2,743 BBtu/d. NGL raw feed throughput increased to 1,413 MBbl/d from 1,278 MBbl/d. Contracted natural gas transportation capacity was 96% utilized versus 92% in the prior-year quarter.
Guidance, outlook, management commentary and unusual items
- Management expects more than 85% of consolidated 2023 earnings to be fee-based. Approximately 70% of forecasted equity volumes in Natural Gas Gathering and Processing were hedged for the remainder of 2023.
- 2023 capital expenditure guidance is $1.475 billion to $1.675 billion, excluding the impact of the Magellan acquisition.
- Major projects include the $550 million MB-6 NGL fractionator and $520 million West Texas NGL pipeline expansion, both expected in service in the first quarter of 2025, and the $95 million Viking compression upgrade expected in the fourth quarter of 2023.
- Management expects cash from operations in the remainder of 2023 and in 2024 to be affected by Medford-related costs because future business-interruption proceeds will no longer be received.
- The preliminary purchase price allocation for Magellan includes $5.154 billion of goodwill and remains subject to adjustment during the measurement period.
- Acquired refined-products and crude inventory was marked up by approximately $50 million; management expects most of the related unfavorable earnings impact when the inventory is sold in the fourth quarter of 2023.
- The quarterly common dividend was $0.955 per share, or $3.82 annualized, a 2% increase from the comparable 2022 quarters. A further $0.955 dividend was declared for payment in November 2023.
- Key risks include integration of Magellan, leverage and interest rates, commodity prices and volumes, refinery and producer dependence, pipeline and environmental regulation, project execution, insurance coverage, cybersecurity, severe weather, and potential changes in energy demand associated with the lower-carbon transition.
- Management stated that known legal proceedings and environmental matters were not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Whether Magellan integration produces the expected commercial and cost synergies and whether the preliminary goodwill valuation changes materially.
- Post-acquisition leverage, debt maturities, interest expense and compliance with the revolving-credit leverage covenant as the temporary acquisition adjustment expires.
- The sustainability of earnings excluding the $779 million Medford settlement gain and other nonrecurring acquisition-related items.
- Execution, cost and timing of MB-6, the West Texas NGL expansion and other growth projects.
- Fourth-quarter effects from the $50 million acquired-inventory fair-value adjustment and the limited contribution from Magellan in the reported quarter.
- Future operating cash flow after the end of Medford business-interruption proceeds and its ability to fund dividends, capital expenditures and debt obligations.