ONEOK, Inc. 2016 Third-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. reported unaudited consolidated results for the three and nine months ended September 30, 2016. Its principal operations are conducted through ONEOK Partners, in which ONEOK owned a 41.2% interest and consolidated the partnership as its primary beneficiary. ONEOK Partners operates predominantly fee-based Natural Gas Gathering and Processing, Natural Gas Liquids and Natural Gas Pipelines businesses.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $2.358 billion | $1.899 billion | $6.266 billion | $5.832 billion |
| Operating income | $329.4 million | $284.9 million | $956.1 million | $754.1 million |
| Net income attributable to ONEOK | $92.1 million | $82.2 million | $261.5 million | $219.5 million |
| Diluted EPS | $0.43 | $0.39 | $1.23 | $1.04 |
| Adjusted EBITDA | $465.3 million | $405.9 million | $1.360 billion | $1.112 billion |
| Operating cash flow | Not separately provided | Not separately provided | $922.0 million | $695.1 million |
| Capital expenditures | $158.3 million | $300.9 million | $491.5 million | $930.3 million |
Q3 revenue increased 24%, operating income increased 16%, net income attributable to ONEOK increased 12%, diluted EPS increased 10% and adjusted EBITDA increased 15%. For the first nine months, revenue increased 7%, operating income increased 27%, attributable net income increased 19%, diluted EPS increased 18% and adjusted EBITDA increased 22%.
Operating margin was approximately 14.0% in Q3 2016 versus 15.0% in Q3 2015, but approximately 15.3% for the first nine months versus 12.9% in the prior-year period. The quarterly margin comparison was affected by higher commodity sales and related cost of sales, while the year-to-date improvement reflected stronger fee-based earnings and volume growth.
Cash provided by operating activities increased $226.9 million year over year. Investing cash use declined to $484.6 million from $942.1 million, primarily because of lower capital spending. Financing cash flow was an outflow of $297.4 million versus an inflow of $112.7 million, mainly because of debt repayment activity. Cash and cash equivalents increased to $237.4 million at September 30, 2016, from $97.6 million at December 31, 2015.
At September 30, 2016, total assets were $15.982 billion, total debt including current maturities was approximately $8.831 billion, and long-term debt excluding current maturities was $8.320 billion. ONEOK Partners had $694 million of commercial paper outstanding, no borrowings under its $2.4 billion revolving credit facility, approximately $1.7 billion of available capacity and $5.5 million of cash. ONEOK had $231.9 million of cash, no short-term debt and approximately $298.9 million of available capacity under its $300 million revolving facility.
ONEOK declared a quarterly dividend of $0.615 per share, and ONEOK Partners declared a third-quarter distribution of $0.79 per unit. Both were payable November 14, 2016, to holders of record on October 31, 2016.
Material changes versus the prior comparable period
- Natural Gas Gathering and Processing adjusted EBITDA rose 33% in Q3 and 45% year to date, supported by higher Williston Basin volumes, completed projects and contract restructuring. Average fee rates increased to $0.76 per MMBtu in Q3 and $0.73 year to date, compared with $0.43 and $0.39, respectively, in 2015.
- Natural Gas Liquids adjusted EBITDA increased 9% in Q3 and 19% year to date, driven by new plant connections, increased ethane recovery, higher exchange and storage activity and stronger equity earnings.
- Natural Gas Pipelines adjusted EBITDA increased 23% in Q3 and 11% year to date, primarily from higher contracted transportation capacity and storage-related earnings.
- Commodity prices remained lower, reducing realized NGL and residue natural gas prices and partially offsetting volume and fee gains. Q3 realized residue natural gas price declined to $2.84 per MMBtu from $3.62, while the year-to-date price declined to $2.76 from $3.64.
- Capital expenditures fell 47% year to date as major projects were completed, spending was aligned with customer needs and producer drilling and well-connect activity declined.
- ONEOK Partners drew the full $1.0 billion under a term loan in the first quarter, used partly to repay $650 million of senior notes. The $450 million of senior notes maturing October 1, 2016, were repaid in October with cash and short-term borrowings.
- ONEOK adopted ASU 2015-02 and continued consolidating ONEOK Partners under the variable-interest-entity model; the adoption had no financial statement impact.
Guidance, outlook, commentary and risks
Management expected approximately 85% of ONEOK Partners’ 2016 earnings to be fee-based, including approximately 90% for Natural Gas Liquids, more than 75% for Natural Gas Gathering and Processing and approximately 96% for Natural Gas Pipelines. Management expects continued demand for infrastructure serving the STACK, SCOOP, Williston Basin and Permian Basin regions, petrochemical facilities, NGL exporters, power generation and exports to Mexico.
Ethane rejection averaged more than 175 MBbl/d during the first nine months and is expected to fluctuate through 2016 and 2017. Management expects ethane recovery to improve as petrochemical and export capacity comes online, with a more favorable financial impact primarily in the second half of 2017. The lower commodity-price environment was expected to continue through 2016 and into 2017, potentially slowing producer activity and volume growth.
Bear Creek and Stateline de-ethanizers were completed in August and September 2016. Roadrunner Phase II and the WesTex expansion were completed in October 2016 ahead of schedule and below cost estimates. ONEOK Partners projected 2016 capital expenditures of approximately $570 million, excluding acquisitions, equity-method contributions and AFUDC.
Material risks include commodity-price volatility, ethane rejection, producer drilling and production declines, counterparty credit risk, interest-rate and refinancing risk, substantial leverage, access to capital markets, regulatory and environmental requirements, pipeline safety, project execution, litigation and potential collateral requirements following credit-rating changes. ONEOK Partners had investment-grade ratings of Baa2 from Moody’s and BBB from S&P, both with negative outlooks at the reporting date; Moody’s revised its outlook to stable in October 2016.
Suspended projects included the Bronco, Demicks Lake and Knox processing projects and certain NGL infrastructure. Management stated that prolonged weak commodity prices could further delay these projects and reduce future growth opportunities. Goodwill testing performed July 1, 2016, identified no impairment or reporting units at risk.
Environmental compliance and pipeline safety obligations could require penalties, remediation costs, operational restrictions or additional capital. Legal settlements related to several gas-index pricing cases were considered immaterial; the Sinclair litigation remained unresolved, although management expected any future charges to be immaterial.
Important facts for investors to verify
- Reconcile adjusted EBITDA to GAAP net income and assess the effect of increased fee-based contract structures versus commodity-price exposure.
- Monitor ONEOK Partners’ leverage, commercial paper balance, 2019 term-loan maturity and October 2016 refinancing of the $450 million notes.
- Verify continued access to the $1.7 billion of partnership revolver capacity and the $298.9 million of ONEOK revolver capacity.
- Track ethane rejection and recovery, NGL differentials, producer activity and volume trends in the Williston Basin, STACK, SCOOP and Permian Basin.
- Compare projected 2016 capital expenditures of $570 million with actual spending and the status of suspended projects.
- Assess whether the stated dividend and partnership distribution levels remain supported by operating cash flow after capital spending and debt service.
- Review credit-rating outlooks, interest-rate swap exposure and potential collateral requirements.
- Review environmental, regulatory and litigation developments, including the unresolved Sinclair matter and any pipeline-safety or permitting issues.