ONEOK, Inc. 2019 Form 10-K Summary
Business context and reporting period
ONEOK is a U.S. midstream energy company providing natural gas gathering and processing, NGL gathering, fractionation, transportation, storage and marketing, and natural gas pipeline services. The filing covers the fiscal year ended December 31, 2019; fourth-quarter figures are included in the annual filing. Approximately 90% of consolidated earnings were fee-based in 2019.
- Reportable segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines.
- Key operating footprint: Williston, Powder River, DJ, Permian, STACK and SCOOP basins, with connections to Conway, Kansas, and Mont Belvieu, Texas.
- 2019 volume growth was driven primarily by completed capital projects, new well connections and improved producer productivity.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $10.164 billion | $12.593 billion | (19.3%) |
| Operating income | $1.914 billion | $1.835 billion | +4.3% |
| Net income | $1.279 billion | $1.155 billion | +10.7% |
| Diluted EPS | $3.07 | $2.78 | +10.4% |
| Adjusted EBITDA | $2.580 billion | $2.448 billion | +5.4% |
| Cash flow from operations | $1.947 billion | $2.187 billion | (11.0%) |
| Capital expenditures | $3.848 billion | $2.142 billion | +79.7% |
| Total assets | $21.812 billion | $18.232 billion | +19.6% |
| Total debt | $12.814 billion | $9.451 billion | +35.6% |
Approximate consolidated margins were 18.8% for operating income, 12.6% for net income and 25.4% for adjusted EBITDA. The filing does not present a consolidated gross margin that is economically meaningful because commodity sales and corresponding cost of sales fluctuate together.
- 2019 dividends paid were $3.53 per common share, up 9% from $3.245 in 2018. Cash flow from operations exceeded common dividends paid by $489.2 million.
- Year-end cash was $21 million, commercial paper outstanding was $220 million, and no borrowings were outstanding under the $2.5 billion revolving credit facility.
- Working capital was negative $550 million, compared with negative $709.8 million at December 31, 2018.
- Debt-to-adjusted-EBITDA under the credit agreement was 4.1x, versus a 5.0x covenant limit. Investment-grade ratings were Moody’s Baa3/Prime-3 with a positive outlook and S&P BBB/A-2 with a stable outlook.
Fourth-quarter 2019 results
| Metric | Q4 2019 | Q4 2018 | Change |
|---|---|---|---|
| Revenue | $2.664 billion | $3.137 billion | (15.1%) |
| Operating income | $487.3 million | $471.9 million | +3.3% |
| Net income | $320.3 million | $292.9 million | +9.3% |
| Diluted EPS | $0.77 | $0.70 | +10.0% |
Material changes versus the prior comparable period
- Revenue declined primarily because of lower commodity prices and sales values; the decrease was substantially offset by lower cost of sales and fuel.
- Operating income increased due to higher volumes and fee-based earnings in all three segments, partially offset by higher operating costs and depreciation.
- Natural Gas Gathering and Processing adjusted EBITDA increased to $702.7 million from $631.6 million, supported by higher Williston Basin and STACK/SCOOP volumes.
- Natural Gas Liquids adjusted EBITDA increased modestly to $1.466 billion from $1.441 billion. Higher exchange-service volumes and fee rates were partly offset by lower optimization and marketing earnings.
- Natural Gas Pipelines adjusted EBITDA increased to $408.8 million from $366.3 million, primarily from higher contracted transportation services.
- The Conway-to-Mont Belvieu ethane differential averaged $0.07 per gallon in 2019 versus $0.15 in 2018, reducing optimization and marketing earnings.
- Capital spending increased substantially as ONEOK advanced its NGL and natural gas growth projects, while operating cash flow declined because of working-capital and risk-management movements.
Guidance, outlook, risks and unusual items
- Management projected 2020 capital expenditures of $2.45 billion to $2.95 billion, including $2.25 billion to $2.73 billion of growth capital and $200 million to $220 million of maintenance capital.
- Management expects 2020 capital spending to decline from 2019 levels and expects higher operating cash flow to help reduce leverage and fund capital projects.
- Management expected narrower NGL location price differentials in 2020. Mid-Continent natural gas volumes were expected to decline modestly, while Rocky Mountain and Permian volumes were expected to grow.
- Major projects included Demicks Lake II, Bear Creek and Demicks Lake III processing capacity; Elk Creek and Arbuckle II NGL pipelines; West Texas LPG expansions; and MB-4 and MB-5 fractionators. Several projects were completed in late 2019 or early 2020, with additional projects scheduled through 2021.
- ONEOK issued $3.25 billion of senior unsecured notes in 2019 and ended the year with $1.25 billion drawn under its $1.5 billion term loan, which matures in November 2021.
- No material legal losses were identified. A remaining gas-index pricing litigation case was settled in September 2019 for an immaterial amount.
- Key risks include producer drilling declines, commodity-price and NGL differential volatility, excess capacity, project cost or schedule overruns, high leverage and refinancing needs, interest-rate exposure, regulatory and FERC rate actions, environmental and greenhouse-gas requirements, pipeline integrity, severe weather, cybersecurity and counterparty credit risk.
- The 2019 goodwill review resulted in no impairment charge. The filing also reports no material environmental effect on earnings or cash flows during 2019.
- The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective. The critical audit matter involved valuation of Level 3 commodity derivatives.
Most important facts for an investor to verify
- Whether operating cash flow can consistently fund dividends, maintenance capital and a meaningful portion of growth capital while leverage remains elevated.
- The timing, final cost and contracted volumes associated with the remaining 2020-2021 growth projects.
- Producer drilling activity, basin production growth and utilization of ONEOK’s gathering, processing, NGL and pipeline assets.
- The sensitivity of earnings to NGL location differentials, ethane rejection, commodity prices and basis risk despite the predominantly fee-based business model.
- Refinancing plans for the $1.25 billion term loan due in 2021 and other debt maturities, including the impact of interest rates and credit ratings.
- Future regulatory, environmental, pipeline-safety and greenhouse-gas compliance costs, as well as potential impacts from FERC or state rate proceedings.