ONEOK, Inc. 2015 Second-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK reported results for the three and six months ended June 30, 2015. The company consolidates ONEOK Partners, in which it owned a 36.8% aggregate interest at quarter-end. Operations comprise Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. Former natural gas distribution and energy services businesses are presented as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenues | $2.128 billion | $3.067 billion | $3.933 billion | $6.230 billion |
| Net margin | $525.0 million | $495.5 million | $986.4 million | $1.006 billion |
| Operating income | $272.7 million | $251.3 million | $469.2 million | $545.4 million |
| Income from continuing operations | $151.0 million | $148.8 million | $246.9 million | $353.5 million |
| Net income attributable to ONEOK | $76.5 million | $61.6 million | $137.3 million | $155.1 million |
| Diluted EPS | $0.36 | $0.29 | $0.65 | $0.74 |
| Operating cash flow | Not separately provided | Not separately provided | $333.9 million | $536.3 million |
| Capital expenditures | $285.6 million | $392.7 million | $629.4 million | $822.2 million |
Q2 net margin was approximately 24.7% of revenue versus 16.2% in the prior-year quarter; six-month net margin was approximately 25.1% versus 16.1%. Q2 operating margin was approximately 12.8% versus 8.2%; six-month operating margin was approximately 11.9% versus 8.8%.
- Q2 revenue declined 31%, principally because of lower commodity prices; services revenue increased 15%. Net margin increased 6% and operating income increased 9%.
- Six-month revenue declined 37%, net margin declined 2%, and operating income declined 14%. Lower commodity prices and higher depreciation, operating costs and interest expense more than offset volume and fee-based growth.
- Natural Gas Liquids operating income increased 24% in Q2 and 2% for the six months, supported by higher exchange-service and transportation margins, the West Texas LPG acquisition and increased volumes.
- Natural Gas Gathering and Processing operating income declined 43% in Q2 and 54% for the six months as lower NGL, condensate and natural gas prices outweighed higher volumes and improved contract mix.
- Natural Gas Pipelines operating income increased 2% in Q2 but declined 25% for the six months, reflecting weaker storage, retained-fuel and park-and-loan activity.
- Cash and cash equivalents were $226.2 million at June 30, 2015, versus $172.8 million at December 31, 2014. Current assets were $1.264 billion against current liabilities of $2.607 billion.
- Consolidated long-term debt, including current maturities, had a book value of approximately $7.95 billion and an estimated fair value of $8.1 billion at quarter-end. Notes payable were $870.5 million, all associated with ONEOK Partners commercial paper.
- ONEOK had approximately $173.1 million of cash, $298.2 million of available capacity under its $300 million revolving facility, and no borrowings under that facility. ONEOK Partners had approximately $53.1 million of cash and $1.5 billion of available capacity under its $2.4 billion revolving facility.
Material changes versus the prior comparable period
- Commodity sales declined $992.8 million in Q2 and $2.364 billion for the six months, primarily due to substantially lower crude oil, natural gas and NGL prices compared with 2014.
- Services revenue increased $54.0 million in Q2 and $67.1 million for the six months due to higher volumes from completed growth projects and acquisitions.
- Depreciation and amortization increased 21% in Q2 and 24% for the six months because of completed capital projects and acquisitions.
- Interest expense increased 15% in Q2 and 8% for the six months due to higher short-term borrowings and rates, lower capitalized interest and the March 2015 ONEOK Partners debt issuance.
- Operating cash flow decreased $202.4 million for the six months, while investing cash use decreased $164.7 million because of lower capital spending and the absence of the prior-year acquisition.
- ONEOK Partners issued $800 million of senior notes in March 2015, receiving approximately $792.3 million of net proceeds. It also issued approximately 7.2 million common units for net proceeds of approximately $279.7 million during the six months.
- ONEOK Partners’ equity issuances reduced ONEOK’s aggregate ownership interest from 37.8% at year-end 2014 to 36.8% at June 30, 2015.
- ONEOK Partners declared a $0.79-per-unit quarterly distribution, while ONEOK declared a $0.605-per-share quarterly dividend. The annualized rates were $3.16 per unit and $2.42 per share, respectively.
Guidance, outlook, risks and unusual items
- Management expected depressed commodity prices to continue through the remainder of 2015, with a modest recovery in 2016. Lower prices were expected to slow producer drilling, supply growth, volumes and cash flows, particularly in Natural Gas Gathering and Processing.
- Ethane rejection was expected to remain significant through 2017 because available ethane supply exceeded petrochemical demand. Management expected integrated assets, minimum-volume commitments and contract changes to partially mitigate the impact.
- ONEOK Partners hedged approximately 72% of targeted second-half 2015 NGL equity volumes, 68% of condensate volumes and 88% of natural gas volumes. It hedged 18%, 45% and 69%, respectively, of targeted 2016 volumes.
- Several processing and infrastructure projects were suspended or reduced to align spending with customer needs and market conditions. ONEOK Partners’ projected 2015 capital expenditures, excluding acquisitions, equity-method contributions and AFUDC, were $1.227 billion.
- ONEOK Partners’ debt-to-adjusted-EBITDA ratio was 4.5-to-1 at June 30, 2015, within the temporarily permitted 5.5-to-1 threshold related to the West Texas LPG acquisition. Its $650 million of 3.25% senior notes mature February 1, 2016; management expected to refinance them.
- Gas Index Pricing Litigation was remanded for further proceedings after the U.S. Supreme Court affirmed the Ninth Circuit decision. The company could not reasonably estimate potential exposure, but stated that future charges could be material.
- Key operating risks include commodity-price volatility, producer drilling declines, ethane rejection, project delays or cost overruns, access to capital, credit-rating changes, counterparty performance, environmental and pipeline-safety regulation, and potential litigation or impairment charges.
- The company adopted the debt-issuance-cost presentation guidance early, recasting the December 31, 2014 balance sheet by reclassifying $42.8 million from other assets to long-term debt; management stated the impact was not material.
Important facts for investors to verify
- Whether lower commodity prices and producer capital reductions continue to pressure Gathering and Processing margins, volumes and operating cash flow.
- The refinancing plan and market access for the $650 million ONEOK Partners maturity due in February 2016.
- ONEOK Partners’ debt-to-EBITDA trajectory after the temporary acquisition-related covenant threshold expires.
- The timing, cost and commercial support for suspended growth projects, WesTex and the Roadrunner pipeline.
- The sustainability of distributions from ONEOK Partners and ONEOK’s ability to fund dividends from those distributions.
- Developments and potential financial exposure in the Gas Index Pricing Litigation, environmental matters and pipeline-safety requirements.
- The effect of further dilution from ONEOK Partners’ at-the-market equity program and the resulting change in ONEOK’s ownership interest.