ONEOK, Inc. 2020 Third-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. operates three primary midstream segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. This unaudited quarterly report covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Operations were affected by COVID-19, the crude-oil supply disruption involving Saudi Arabia and Russia, lower commodity prices, and producer curtailments. Management reported that production volumes improved in the third quarter as prices recovered from second-quarter lows.
Financial performance and key metrics
| Metric | Three months ended September 30 | Change | Nine months ended September 30 | Change |
|---|---|---|---|---|
| Total revenue | $2.174 billion | Down $88.9 million | $5.972 billion | Down $1.529 billion |
| Operating income | $550.4 million | Up $68.2 million | $822.7 million | Down $604.3 million |
| Net income | $312.3 million | Up $3.1 million | $304.8 million | Down $653.5 million |
| Net income available to common shareholders | $312.0 million | Up $3.2 million | $304.0 million | Down $653.5 million |
| Diluted EPS | $0.70 | Down $0.04 | $0.71 | Down $1.60 |
| Adjusted EBITDA | $747.0 million | Up $97.3 million | $1.982 billion | Up $62.1 million |
| Cash flow from operations | Not separately provided | — | $1.103 billion | Down $223.7 million |
| Capital expenditures | $380.0 million | Down $639.2 million | $1.924 billion | Down $815.3 million |
Third-quarter operating margin was approximately 25.3%, compared with 21.3% in the prior-year quarter. Net margin was approximately 14.4%, compared with 13.7%. For the nine-month period, operating margin was approximately 13.8%, compared with 19.0%, and net margin was approximately 5.1%, compared with 12.8%.
- Natural Gas Gathering and Processing adjusted EBITDA was $183.1 million in the third quarter and $431.5 million for the nine months, down $82.7 million for the nine-month comparison. Volumes and realized prices were pressured by curtailments and production declines.
- Natural Gas Liquids adjusted EBITDA was $451.2 million in the third quarter and $1.200 billion for the nine months, up $83.7 million and $107.9 million, respectively. Higher exchange-service volumes and lower transportation costs more than offset weaker optimization and marketing results.
- Natural Gas Pipelines adjusted EBITDA was $109.8 million in the third quarter and $332.2 million for the nine months, up $6.0 million and $21.2 million, respectively.
Liquidity, debt and capital structure
- Cash and cash equivalents were $447.1 million at September 30, 2020, compared with $21.0 million at December 31, 2019.
- Working capital was positive at $627.2 million. The company had no borrowings under its $2.5 billion revolving credit agreement and was in compliance with all covenants.
- Net indebtedness to adjusted EBITDA under the credit agreement was 4.6 to 1 at September 30, 2020. The applicable covenant was 5.0 to 1, subject to a temporary cash-netting provision.
- Long-term debt, including current maturities, was approximately $14.3 billion at September 30, 2020, compared with $12.5 billion at year-end 2019. Estimated fair value was $14.9 billion.
- ONEOK issued $1.75 billion of senior unsecured notes in March and $1.5 billion in May 2020. The May issuance funded repayment of the remaining $1.25 billion term loan, while March proceeds repaid commercial paper and other debt and funded capital expenditures.
- The company repurchased $202.3 million principal amount of senior notes during the nine months and recognized a $22.2 million gain on extinguishment of debt.
- ONEOK issued 29.9 million common shares in June 2020, generating net proceeds of $937.0 million. It also established a $1.0 billion at-the-market equity program; no shares had been sold under that program as of the report date.
- Common dividends paid during the first nine months totaled $1.189 billion. Cash dividends exceeded operating cash flow by $86.4 million, requiring use of other liquidity sources.
Material changes versus the prior comparable period
- Nine-month net income declined substantially because of $641.8 million of noncash impairment charges, including $604.0 million recorded in operating income and $37.7 million related to equity investments.
- Impairments included goodwill and long-lived assets in Natural Gas Gathering and Processing and inactive assets and an equity investment in Natural Gas Liquids.
- Interest expense increased $173.5 million for the nine months, partly because of new debt issuances and losses recognized on the settlement of interest-rate swaps.
- Operating costs declined $87.1 million for the nine months due primarily to lower discretionary, materials, contractor and employee-related costs.
- Capital expenditures declined 29.8% for the nine months as growth projects were completed, paused or suspended.
- Depreciation and amortization increased $75.4 million for the nine months as recently completed capital projects entered service.
- Natural Gas Liquids exchange-service earnings improved materially, while optimization and marketing earnings declined because of narrower location price differentials and lower optimization volumes.
Guidance, outlook, risks and unusual items
- Management expected improved third-quarter production volumes to continue through the remainder of 2020 and into 2021, subject to commodity prices and economic recovery.
- The company expected more than 90% of consolidated 2020 earnings to be fee-based, but Natural Gas Gathering and Processing and Natural Gas Liquids remain exposed to commodity prices, producer activity, volume reductions, ethane demand and operational disruptions.
- ONEOK reduced planned 2020 capital-growth expenditures by approximately $900 million and paused or suspended several projects, including Demicks Lake III and certain pipeline and fractionation expansions.
- Management expected remaining 2020 capital expenditures to be funded with cash on hand and believed liquidity was sufficient through cash, operating flows, the undrawn revolving facility and the available at-the-market equity program.
- COVID-19, commodity-price volatility, producer curtailments, potential pipeline capacity constraints, the litigation risk surrounding the Dakota Access Pipeline, and counterparty credit risk could adversely affect volumes, earnings, cash flow and liquidity.
- Environmental, pipeline-safety, permitting, regulatory and litigation matters could result in penalties, remediation costs, operating restrictions or additional capital requirements. The company stated that reasonably possible losses from existing litigation were not material.
- Credit ratings remained investment grade as of October 19, 2020: Moody’s Baa3 and S&P BBB, both with stable outlooks.
- At July 1, 2020, management concluded that the Natural Gas Liquids and Natural Gas Pipelines reporting units were not impaired; no goodwill remained in Natural Gas Gathering and Processing.
Most important facts for investors to verify
- Whether improved production and NGL volumes continued after the third quarter and supported management’s 2020-2021 outlook.
- The company’s ability to sustain quarterly dividends when annual cash dividends may exceed operating cash flow.
- Leverage trends, covenant headroom and refinancing requirements given approximately $14.3 billion of debt and higher interest expense.
- Whether paused or suspended growth projects are restarted, further delayed or impaired.
- Exposure to additional impairment charges if commodity prices, producer activity or asset valuations weaken.
- Potential effects of COVID-19, Dakota Access Pipeline litigation, regulatory actions, environmental obligations and counterparty defaults.
- Actual issuance activity under the $1.0 billion at-the-market equity program and the resulting dilution.