ONEOK, Inc. 2019 Third-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. is a midstream energy company operating through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Management expected approximately 85% of 2019 consolidated earnings to be fee-based, although gathering, processing and NGL activities remain exposed to volumes, commodity prices and location differentials.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $2.263 billion | $3.394 billion | $7.501 billion | $9.456 billion |
| Operating income | $482.2 million | $495.5 million | $1.427 billion | $1.364 billion |
| Net income | $309.2 million | $313.9 million | $958.3 million | $862.1 million |
| Net income available to common shareholders | $308.9 million | $313.0 million | $957.5 million | $858.0 million |
| Diluted EPS | $0.74 | $0.75 | $2.31 | $2.07 |
| Adjusted EBITDA | $649.8 million | $650.2 million | $1.920 billion | $1.822 billion |
| Operating margin | 21.3% | 14.6% | 19.0% | 14.4% |
| Net margin | 13.7% | 9.2% | 12.8% | 9.1% |
Revenue declined primarily because of lower commodity sales, partly offset by higher services revenue. Operating income increased for the nine-month period despite lower commodity sales, supported by volume growth, higher fee rates and expanded transportation services. Q3 operating income and net income declined modestly because of lower NGL optimization and marketing earnings, higher operating costs and depreciation, and lower realized commodity prices.
Cash provided by operating activities was $1.327 billion for the first nine months of 2019, down from $1.516 billion in 2018. Capital expenditures increased to $2.739 billion from $1.310 billion, producing negative operating cash flow less capital expenditures of approximately $1.413 billion before financing. Dividends paid were $1.079 billion, and operating cash flow exceeded dividends by $247.5 million.
At September 30, 2019, cash and cash equivalents were $673.3 million, compared with $12.0 million at December 31, 2018. Working capital was a surplus of $400.4 million. Total debt was approximately $12.6 billion, including $1.25 billion outstanding under the term loan; long-term debt, net of current maturities, was $12.479 billion. The company had no commercial paper borrowings and $2.5 billion of available capacity under its revolving credit facility. Its debt-to-adjusted-EBITDA covenant ratio was 4.2 to 1 versus a 5.0 to 1 limit, and all covenants were satisfied.
Material changes versus the prior comparable period
- Q3 revenue decreased $1.131 billion, or approximately 33%, while nine-month revenue decreased $1.956 billion, or approximately 21%, primarily from lower commodity prices and related sales.
- Q3 net income decreased $4.7 million, while nine-month net income increased $96.2 million, or approximately 11%.
- Nine-month adjusted EBITDA increased $97.3 million, or approximately 5%. Natural Gas Gathering and Processing EBITDA increased $57.2 million and Natural Gas Pipelines EBITDA increased $41.9 million; Natural Gas Liquids EBITDA was essentially flat.
- Natural Gas Liquids Q3 adjusted EBITDA fell $31.5 million, primarily from lower optimization and marketing earnings, narrower location price differentials, higher operating costs and increased ethane rejection in the Mid-Continent.
- Natural Gas Gathering and Processing volumes increased: nine-month gathered volumes rose to 2,742 BBtu/d from 2,516 BBtu/d, processed volumes to 2,544 BBtu/d from 2,366 BBtu/d, and NGL sales to 223 MBbl/d from 195 MBbl/d.
- Capital expenditures more than doubled year over year because of major growth projects. Net property, plant and equipment increased to $17.363 billion from $14.767 billion at year-end 2018.
- Debt increased materially following $3.25 billion of senior note issuances in March and August 2019, partly offset by debt repayments and the redemption of $300 million of notes due 2020.
- The company adopted the new lease standard in 2019, recognizing approximately $17.5 million of operating lease assets and $17.4 million of lease liabilities; the financial statement impact was immaterial.
Guidance, outlook, risks and unusual items
- Management forecast 2019 growth capital expenditures of $3.5 billion to $3.7 billion and maintenance capital expenditures of $185 million to $205 million, excluding AFUDC and capitalized interest.
- Major projects included Demicks Lake I and II, Bear Creek expansion, Elk Creek, Arbuckle II, West Texas LPG expansions, MB-4 and MB-5 fractionators, and Mid-Continent fractionation expansions. Demicks Lake I entered service in October 2019; several other projects were scheduled for completion from late 2019 through 2021.
- Management expected continued volume growth in the Williston, Permian, STACK and SCOOP regions, but identified production declines, drilling activity, ethane rejection, infrastructure constraints, weather and operational outages as volumetric risks.
- NGL location price differentials remained narrow and volatile. The Conway-to-Mont Belvieu ethane differential averaged $0.08 per gallon in Q3 2019 versus $0.24 in Q3 2018. Management expected the differential to remain relatively narrow for the remainder of 2019.
- Commodity hedges covered 71% of forecast natural gas equity volumes and 66% of forecast NGL volumes for the fourth quarter of 2019; 2020 coverage was 81% for natural gas and 57% for NGLs.
- The company declared a quarterly common dividend of $0.915 per share payable November 14, 2019, following quarterly increases during 2019. Management expected operating cash flow to continue funding dividends, but future capital spending and dividend increases will require substantial financing.
- Investment-grade ratings as of October 21, 2019 were Moody’s Baa3 with a positive outlook and S&P BBB with a stable outlook. A downgrade could increase borrowing costs, restrict commercial paper access and require additional collateral for certain counterparties.
- The last remaining Gas Index Pricing Litigation case was settled in September 2019 for an immaterial amount. Management stated that other litigation and environmental matters were not expected to have a material adverse effect, although pipeline safety, environmental compliance, regulatory approvals and potential spills remain significant contingencies.
- A $2.7 million loss on extinguishment of debt was recognized in connection with the September 2019 redemption of the $300 million senior notes.
Most important facts for investors to verify
- Whether major growth projects are completed on schedule and within the stated cost estimates, particularly Elk Creek, Arbuckle II, MB-4, MB-5 and the Williston Basin projects.
- Whether volume growth and long-term contracts offset weaker NGL differentials, ethane rejection, commodity prices and optimization results.
- Capital-spending execution, free cash flow after growth capital, dividend coverage and future reliance on debt or equity financing.
- Debt-to-EBITDA, interest-rate exposure, credit ratings and compliance with the 5.0-to-1 revolving-credit covenant.
- Progress on regulatory approvals, FERC rate proceedings, environmental and pipeline-safety matters, and any new litigation or contingencies.
- The sustainability of the company’s fee-based earnings mix and the sensitivity of results to producer activity, production declines and counterparty credit quality.