ONEOK, Inc. 2022 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
ONEOK, Inc. is a midstream energy company operating three reportable segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. The unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Management states that approximately 90% of expected 2022 consolidated earnings are fee-based.
Financial and Operating Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $5.445 billion | $3.195 billion | +$2.250 billion |
| Operating income | $662.5 million | $664.7 million | -$2.2 million |
| Net income | $391.2 million | $386.2 million | +$5.0 million |
| Net income available to common shareholders | $390.9 million | $385.9 million | +$5.0 million |
| Diluted EPS | $0.87 | $0.86 | +$0.01 |
| Adjusted EBITDA | $863.9 million | $866.4 million | -$2.6 million |
| Cash flow from operations | $462.2 million | $533.3 million | -$71.1 million |
| Capital expenditures | $257.0 million | $176.7 million | +$80.3 million |
Revenue growth was driven primarily by higher commodity prices and volumes; the associated commodity costs rose substantially, limiting the effect on operating income. Operating income margin was approximately 12.2% in 2022 versus 20.8% in 2021, while net income margin was approximately 7.2% versus 12.1%. The filing does not present a consolidated gross margin measure.
- Natural Gas Gathering and Processing adjusted EBITDA increased to $214.7 million from $204.7 million, supported by higher volumes.
- Natural Gas Liquids adjusted EBITDA increased to $527.6 million from $435.6 million, reflecting higher fees, volumes, commodity differentials and recovery from Winter Storm Uri impacts in the prior-year quarter.
- Natural Gas Pipelines adjusted EBITDA declined to $123.5 million from $226.2 million, primarily because Q1 2021 benefited from Winter Storm Uri-related natural gas sales, interruptible transportation revenue and park-and-loan revenue.
- Natural gas gathered increased to 2,736 BBtu/d from 2,589 BBtu/d, and processed volumes increased to 2,517 BBtu/d from 2,380 BBtu/d.
- NGL raw feed throughput increased to 1,212 MBbl/d from 1,036 MBbl/d.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $14.6 million at March 31, 2022, compared with $146.4 million at December 31, 2021.
- Total debt was $13.835 billion, including $78.0 million of commercial paper. Long-term debt, net of current maturities and adjustments, was $12.750 billion.
- The $2.5 billion revolving credit facility expires in June 2024. There were no borrowings under the facility, and ONEOK was in compliance with all covenants. The indebtedness-to-adjusted-EBITDA ratio was 4.0-to-1; the applicable first-quarter covenant was 5.5-to-1.
- Working capital was negative $841.3 million, primarily because of $895.8 million of current long-term debt maturities. Management does not expect this deficit to adversely affect operations or cash flows.
- Operating cash flow exceeded dividends paid by $44.8 million during the quarter. Dividends paid were $417.4 million, including a common dividend of $0.935 per share and preferred dividends of $0.3 million.
- Cash used in investing activities was $243.7 million, principally for capital expenditures. Cash used in financing activities was $350.3 million.
- Credit ratings remained investment grade: Moody’s Baa3 with a positive outlook, S&P BBB with a stable outlook, and Fitch BBB with a stable outlook.
Material Changes Versus the Prior Comparable Period
- Commodity sales increased 80%, to $5.105 billion, while services revenue declined 5%, to $339.4 million.
- Cost of sales and fuel increased 106%, to $4.366 billion, broadly offsetting the commodity-revenue increase.
- Interest expense declined $13.5 million, primarily because of lower debt balances and higher capitalized interest.
- Operating cash flow declined because of larger working-capital uses, including accounts receivable timing and increased cash collateral associated with risk-management positions.
- Capital spending increased 45%, primarily for growth projects, including the Demicks Lake III processing plant and MB-5 fractionator.
- Segment adjusted EBITDA was essentially flat overall, as higher Natural Gas Liquids and Gathering and Processing results were offset by the decline in Natural Gas Pipelines.
- Cash collateral posted with counterparties increased to $275.7 million at March 31, 2022, from $157.0 million at year-end 2021.
Guidance, Outlook, Commentary and Risks
- ONEOK expects 2022 capital expenditures, excluding AFUDC and capitalized interest, of $900 million to $1.050 billion.
- Demicks Lake III, a 200 MMcf/d processing plant, is expected to be completed in the first quarter of 2023. The 125 MBbl/d MB-5 fractionator is expected to be completed in the second quarter of 2023.
- In April 2022, the company completed a 1.1 Bcf expansion of Texas natural gas storage capacity. Oklahoma storage injection-capability expansion is expected to be completed in the second quarter of 2023 and would allow utilization and subscription of an additional 4 Bcf of existing capacity.
- ONEOK hedged significant portions of its Natural Gas Gathering and Processing commodity exposure for the remainder of 2022 and 2023. Commodity and interest-rate derivatives can produce significant fair-value changes and require collateral or margin funding.
- In April 2022, FERC initiated a Section 5 rate review of Guardian Pipeline. Management cannot predict the outcome but does not expect a material impact on results.
- Key risks include commodity-price and basis volatility, producer drilling and volume declines, ethane rejection, weather and operational disruptions, inflation and supply-chain constraints, regulatory and environmental requirements, pipeline integrity, cybersecurity, climate-transition risks, counterparty credit, interest rates, refinancing needs and access to capital.
- Management states that known legal proceedings and environmental matters are not expected to have a material adverse effect, but outcomes cannot be predicted with certainty.
Important Facts for Investors to Verify
- Whether operating cash flow remains sufficient to fund the dividend, elevated growth capital spending and upcoming debt maturities.
- The refinancing plan for the $895.8 million of long-term debt maturing in October 2022 and the effect of higher interest rates on future borrowing costs.
- Progress, costs and completion timing for Demicks Lake III, MB-5 and the Oklahoma storage expansion.
- The effect of commodity prices, hedging settlements, collateral requirements and derivative fair-value changes on cash flow and earnings.
- The outcome of the Guardian Pipeline FERC rate review and any other regulatory, environmental or pipeline-safety actions.
- Whether volume growth and fee-based earnings offset exposure to producer activity, NGL price differentials and ethane economics.
- The sustainability of investment-grade credit ratings and compliance with the $2.5 billion credit facility covenant as debt and capital requirements change.