ONEOK, Inc. 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report, not a standalone fourth-quarter filing; Refined Products and Crude results include only September 25 through December 31, 2023, following the Magellan acquisition.
Business context
ONEOK is a diversified North American midstream infrastructure company operating more than 50,000 miles of pipelines and providing natural gas gathering and processing, NGL gathering and fractionation, natural gas transportation and storage, and refined-products and crude-oil transportation, storage and terminal services. More than 85% of 2023 consolidated earnings were fee-based.
On September 25, 2023, ONEOK completed its $14.1 billion acquisition of Magellan Midstream Partners, issuing approximately 135 million shares and paying $5.0 billion of cash consideration. ONEOK also assumed approximately $4.0 billion of Magellan debt at fair value.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenues | $17.677 billion | $22.387 billion | Down $4.710 billion |
| Operating income | $4.072 billion | $2.807 billion | Up $1.265 billion |
| Net income | $2.659 billion | $1.722 billion | Up $937 million |
| Diluted EPS | $5.48 | $3.84 | Up $1.64 |
| Adjusted EBITDA | $5.243 billion | $3.620 billion | Up $1.623 billion |
| Cash flow from operations | $4.421 billion | $2.906 billion | Up $1.515 billion |
| Capital expenditures | $1.595 billion | $1.202 billion | Up $393 million |
Operating margin was approximately 23.0%, compared with 12.5% in 2022. Net margin was approximately 15.0%, compared with 7.7%. Adjusted EBITDA margin was approximately 29.7%, compared with 16.2%; these comparisons were materially affected by the 2023 Medford insurance settlement and the Magellan acquisition.
Commodity sales declined primarily because of lower commodity prices, while services revenue increased from $1.411 billion to $2.063 billion. Changes in commodity prices and sales volumes generally affect commodity revenue and cost of sales concurrently, substantially offsetting each other.
Segment performance and operating trends
- Natural Gas Gathering and Processing: Adjusted EBITDA increased to $1.244 billion from $1.037 billion. Processed volumes rose to 2,995 BBtu/d from 2,612 BBtu/d, and utilization increased to 77% from 70%.
- Natural Gas Liquids: Adjusted EBITDA increased to $3.045 billion from $2.095 billion. Raw feed throughput increased to 1,359 MBbl/d from 1,237 MBbl/d. Results included a $779 million Medford settlement gain, partially offset by $146 million of third-party fractionation costs.
- Natural Gas Pipelines: Adjusted EBITDA increased to $559 million from $488 million. Transportation capacity contracted increased to 96% from 94%, and additional Oklahoma storage capacity was fully subscribed through 2027 and 90% subscribed through 2029.
- Refined Products and Crude: Adjusted EBITDA was $465 million for the post-acquisition period. Fourth-quarter 2023 volumes shipped averaged 1,547 MBbl/d for refined products and 808 MBbl/d for crude oil.
Cash flow, liquidity and capital structure
- Cash flow from operations was $4.421 billion. Cash used in investing was $6.404 billion, including $5.015 billion paid for the Magellan acquisition and $1.595 billion of capital expenditures.
- Cash from financing activities was $2.101 billion, primarily reflecting the $5.25 billion senior unsecured notes offering used to fund the Magellan transaction.
- Cash and cash equivalents were $338 million at December 31, 2023, compared with $220 million at year-end 2022. Working capital was negative $344 million, primarily because of current debt maturities.
- Total debt was $22.794 billion, including $21.667 billion of consolidated long-term debt including current maturities. The company reported a 3.6-to-1 consolidated indebtedness-to-adjusted-EBITDA ratio under its credit agreement.
- There were no borrowings under the $2.5 billion revolving credit agreement, which expires in 2027, and all debt covenants were satisfied. Long-term debt ratings were investment grade: Moody’s Baa2, S&P BBB and Fitch BBB, each with a stable outlook.
- ONEOK paid $3.82 per common share in 2023 dividends. In January 2024, the board increased the quarterly dividend to $0.99 per share and authorized a share repurchase program of up to $2.0 billion, with no repurchases completed as of February 20, 2024.
Material changes versus the prior comparable period
- The Magellan acquisition added the Refined Products and Crude segment, expanded the asset base and increased reported debt, equity, goodwill, intangible assets and depreciation.
- Operating income, net income, diluted EPS and adjusted EBITDA increased substantially, but the comparison benefited from the one-time Medford insurance gain and the partial-year inclusion of Magellan.
- Revenue declined despite higher earnings because commodity sales were lower, reflecting commodity price effects and the timing of commodity transactions.
- Interest expense increased to $866 million from $676 million due to acquisition-related debt, the August 2023 notes offering and bridge-facility commitment fees.
- Capital expenditures increased to $1.595 billion from $1.202 billion, primarily for NGL and pipeline expansion projects.
- Adjusted EBITDA methodology changed in 2023 to include adjusted EBITDA from unconsolidated affiliates; the company did not recast prior periods. Management states the change increased 2023 adjusted EBITDA by $62 million.
Guidance, outlook and unusual items
- ONEOK expects 2024 capital expenditures of $1.75 billion to $1.95 billion, excluding AFUDC and capitalized interest.
- The MB-6 fractionator, West Texas NGL pipeline loop and Elk Creek pipeline expansion are expected to enter service in the first quarter of 2025. The El Paso refined-products expansion was expected to be completed in early 2024.
- Management expects internally generated cash flows to fund operations, capital projects, dividends, debt reduction and the share repurchase program. It also expects 2024 operating cash flow to be affected by Medford-related costs because future business interruption proceeds will no longer be received.
- In February 2024, FERC approved the Saguaro Connector border-facility permit. A final investment decision for the related pipeline is expected by mid-2024; the filing does not provide a committed project cost.
- ONEOK has hedged approximately 60% of forecast 2024 equity volumes in Natural Gas Gathering and Processing. Commodity, location, basis and interest-rate exposures remain because hedging is not complete.
- Key risks include producer drilling declines, commodity-price volatility, weather and operational incidents, cybersecurity, construction and permitting delays, regulatory and environmental costs, interest rates, credit access, customer counterparty risk and integration of Magellan.
- The Medford fire investigation by the Chemical Safety and Hazard Investigation Board remained active. The company believes other legal proceedings and environmental matters are not reasonably expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
- ONEOK reported approximately 1.1 million metric tons of reductions toward its 2.2 million metric ton legacy-asset Scope 1 and Scope 2 emissions reduction target by 2030. Management did not expect current or pending methane regulations to have a material financial impact, but noted that future rules could increase costs.
Most important facts for investors to verify
- Separate recurring operating performance from the $779 million Medford insurance gain and related third-party fractionation costs.
- Assess the full-year economic contribution, synergies and integration progress of Magellan, since 2023 reported results include only approximately three months of its operations.
- Reconcile total debt, upcoming maturities and interest obligations with projected operating cash flow, planned capital spending, dividends and the $2.0 billion repurchase authorization.
- Review the company’s non-GAAP adjusted EBITDA methodology change and its $62 million effect on 2023 results.
- Monitor execution, costs and in-service dates for the MB-6, West Texas, Elk Creek and refined-products expansion projects.
- Evaluate exposure to commodity prices, producer activity, regulatory rate decisions, environmental liabilities, cybersecurity incidents and extreme weather.
- Confirm the final Magellan purchase-price allocation, including goodwill and intangible-asset valuations; the filing states that certain amounts remained subject to measurement-period refinement.