ONEOK, Inc. 2021 Third-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK is a midstream energy company operating three reportable segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the same periods in 2020.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenues | $4.536 billion | $2.174 billion | $11.120 billion | $5.972 billion |
| Operating income | $667.9 million | $550.4 million | $1.944 billion | $822.7 million |
| Net income | $392.0 million | $312.3 million | $1.120 billion | $304.8 million |
| Diluted EPS | $0.88 | $0.70 | $2.50 | $0.71 |
| Adjusted EBITDA | $865.2 million | $747.0 million | $2.533 billion | $1.982 billion |
| Cash flow from operations | Not separately provided | Not separately provided | $1.491 billion | $1.103 billion |
| Capital expenditures | $166.2 million | $380.0 million | $490.3 million | $1.924 billion |
Q3 operating margin was approximately 14.7%, compared with approximately 25.3% in the prior-year quarter, primarily because commodity sales and cost of sales increased substantially with higher commodity prices. Net margin was approximately 8.6%, compared with approximately 14.4% in Q3 2020.
- Q3 revenue increased $2.362 billion, while operating income increased $117.5 million and net income increased $79.7 million.
- Nine-month revenue increased $5.148 billion; net income increased $815.5 million, benefiting significantly from the absence of $604.0 million of prior-year impairment charges.
- Q3 segment adjusted EBITDA was $229.7 million for Natural Gas Gathering and Processing, $532.2 million for Natural Gas Liquids, and $102.7 million for Natural Gas Pipelines.
- At September 30, 2021, cash and cash equivalents were $224.3 million, compared with $524.5 million at December 31, 2020. Working capital was negative $136.0 million, primarily because of current debt maturities.
- Total debt was $14.293 billion, including $536.1 million classified as current maturities. Long-term debt, net of current maturities and issuance adjustments, was $13.640 billion.
- ONEOK had no commercial paper outstanding and no borrowings under its $2.5 billion revolving credit facility. Its debt-to-adjusted-EBITDA covenant ratio was 4.3 to 1 versus a maximum of 5.0 to 1.
- Cash dividends paid during the first nine months were $1.250 billion. The quarterly common dividend remained $0.935 per share, or $3.74 annualized.
Material changes versus the prior comparable period
- Higher producer activity, rising gas-to-oil ratios, increased ethane production, higher commodity prices and stronger NGL volumes drove improved results.
- Natural Gas Gathering and Processing adjusted EBITDA increased $46.6 million in Q3 and $232.1 million for nine months, primarily from higher volumes and improved fee-with-percent-of-proceeds economics.
- Natural Gas Liquids adjusted EBITDA increased $81.0 million in Q3 and $248.3 million for nine months, driven by higher volumes, wider commodity price differentials and optimization and marketing activity.
- Natural Gas Pipelines adjusted EBITDA decreased $7.1 million in Q3 because of lower equity earnings from Northern Border Pipeline and higher operating costs, but increased $91.4 million for nine months due primarily to higher-priced natural gas sales from inventory during the first quarter.
- Operating costs increased $60.2 million in Q3 and $134.4 million for nine months, reflecting higher employee-related costs, property taxes, materials, supplies and outside services.
- Capital spending declined substantially as major growth projects had been completed and certain projects were paused.
- Prior-year results included $641.8 million of impairment charges in cash flow reconciliation, including significant charges in the Gathering and Processing and Natural Gas Liquids segments, and a $37.7 million impairment of equity investments.
- Winter Storm Uri produced a net positive financial impact overall, primarily through the Natural Gas Pipelines segment, although it reduced volumes and increased costs in portions of the Gathering and Processing and Natural Gas Liquids segments.
Guidance, outlook, commentary and risks
- Management expects approximately 90% of consolidated 2021 earnings to be fee-based. Pipeline transportation capacity was approximately 94% contracted, with nearly all capacity supported by long-term firm contracts.
- Management expects volumes to remain strong through the remainder of 2021 and into 2022, supported by producer activity, Rocky Mountain production, higher gas-to-oil ratios and ethane demand from the petrochemical industry.
- Expected 2021 capital expenditures were $525 million to $675 million, excluding AFUDC and capitalized interest.
- ONEOK expects operating cash flows to continue funding its dividends and states that available liquidity is sufficient for operations, capital expenditures and dividends.
- On November 1, 2021, after quarter-end, ONEOK redeemed $536.1 million of senior notes due February 2022 using cash on hand and short-term borrowings. It reported $150 million of short-term borrowings outstanding at October 31, 2021.
- Growth projects involving the MB-5 fractionator, West Texas LPG pipeline and Mid-Continent fractionation expansions were paused, and the filing states that original completion dates are not expected to be met.
- Key risks include commodity-price and volumetric exposure, producer activity and supply availability, severe weather, COVID-19, interest rates, leverage and refinancing, counterparty credit, regulatory and FERC proceedings, environmental and pipeline-safety requirements, cybersecurity threats, construction costs and the transition to a lower-carbon economy.
- ONEOK announced a target to reduce combined Scope 1 and Scope 2 greenhouse-gas emissions by 30%, or approximately 2.2 million metric tons, by 2030 from 2019 levels.
- Management reported no material expected adverse impact from disclosed legal proceedings, environmental matters or a pending FERC rate filing based on currently known information.
Most important facts for investors to verify
- Whether the earnings improvement remains durable after adjusting for higher commodity prices, Winter Storm Uri effects and the absence of 2020 impairment charges.
- The timing, funding and economic returns of paused growth projects and the final 2021 capital-spending level.
- Debt refinancing and liquidity following the November 2021 redemption of $536.1 million of senior notes.
- Progress toward maintaining investment-grade credit ratings and the 5.0-to-1 revolving-credit covenant limit.
- Actual contracted pipeline capacity, producer volumes, ethane recovery and exposure under fee-with-POP contracts.
- Potential cash collateral requirements and earnings volatility from commodity derivatives and counterparty exposure.
- Regulatory, environmental, cybersecurity and pipeline-safety developments, including the FERC rate proceeding and compliance with 2021 TSA security directives.