ONEOK, Inc. — Form 10-Q Summary
Business Context and Reporting Period
ONEOK 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 months ended March 31, 2021, compared with the three months ended March 31, 2020. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $3.195 billion | $2.137 billion | +$1.058 billion |
| Operating income (loss) | $664.7 million | $(83.5) million | +$748.2 million |
| Net income (loss) | $386.2 million | $(141.9) million | +$528.1 million |
| Net income available to common shareholders | $385.9 million | $(142.1) million | +$528.0 million |
| Diluted EPS | $0.86 | $(0.34) | +$1.20 |
| Adjusted EBITDA | $866.4 million | $700.8 million | +23.6% |
| Distributable cash flow | $661.9 million | $522.3 million | +26.7% |
| Operating cash flow | $533.3 million | $422.7 million | +$110.6 million |
| Capital expenditures | $176.7 million | $949.7 million | $(773.0) million |
Reported operating margin was approximately 20.8%, compared with negative 3.9% in Q1 2020. Net margin was approximately 12.1%, compared with negative 6.6% in the prior-year quarter. Adjusted EBITDA margin was approximately 27.1%.
- Segment adjusted EBITDA was $204.7 million for Natural Gas Gathering and Processing, $435.6 million for Natural Gas Liquids, and $226.2 million for Natural Gas Pipelines.
- Distributable cash flow exceeded dividends paid by $245.6 million; the dividend coverage ratio was 1.59x versus 1.35x in Q1 2020.
- Cash and cash equivalents were $402.4 million at March 31, 2021, down from $524.5 million at December 31, 2020.
- Total debt was $14.3 billion, including $543.8 million classified as current maturities. Long-term debt, excluding current maturities, was $13.6 billion.
- ONEOK had no borrowings under its $2.5 billion revolving credit facility and was in compliance with its covenants. The indebtedness-to-adjusted-EBITDA ratio was 4.6x.
- Working capital was negative $50.4 million, primarily because of current debt maturities.
- Cash flows used in financing activities were $484.7 million, principally reflecting $416.2 million of dividends and $56.5 million of long-term debt repayments.
Material Changes Versus the Prior Comparable Period
- Results improved substantially because Q1 2020 included $604.0 million of noncash operating impairment charges and $37.7 million of equity-investment impairment charges. No comparable impairment charges were recorded in Q1 2021.
- Revenue growth was primarily commodity-driven, particularly in the Natural Gas Liquids segment, while services revenue increased by $30.5 million.
- Natural Gas Pipelines adjusted EBITDA increased $113.7 million, primarily because the company sold 5.2 Bcf of natural gas held in storage at higher prices, compared with 1.2 Bcf sold in Q1 2020.
- Natural Gas Gathering and Processing adjusted EBITDA increased $45.1 million, primarily from improved realized prices under fee-with-POP contracts, partly offset by lower volumes.
- Natural Gas Liquids adjusted EBITDA increased $24.7 million. Higher Rocky Mountain volumes and optimization and marketing activity offset the negative effects of Winter Storm Uri, higher operating costs, and lower equity earnings from Overland Pass Pipeline.
- Capital expenditures fell sharply because several capital-growth projects were completed in 2020 or paused.
- Interest expense increased $44.9 million, primarily because of higher debt balances and lower capitalized interest.
- Operating cash flow increased despite working-capital uses, including higher accounts receivable and inventory balances.
Guidance, Outlook, Risks and Unusual Items
- Management expects earnings growth in 2021, supported by increasing volumes, available capacity, efficiency gains, flared-gas capture, and rising gas-to-oil ratios in the Williston Basin.
- Management expects approximately 90% of consolidated 2021 earnings to be fee-based. Natural Gas Pipelines capacity was more than 95% contracted under firm commitments.
- Total 2021 capital expenditures are expected to be $525 million to $675 million, excluding AFUDC and capitalized interest.
- The Bear Creek processing expansion is expected to be completed in the fourth quarter of 2021 at an approximate cost of $405 million. The Arbuckle II expansion was expected in the second quarter of 2021 at an approximate cost of $60 million. Several other NGL projects remained paused.
- Winter Storm Uri reduced February volumes in the gathering, processing, and NGL businesses but produced a net positive consolidated financial impact because higher demand and commodity prices benefited the company’s ability to serve customers and sell stored natural gas and NGLs.
- Management identified risks from COVID-19, severe weather, producer activity and volume declines, commodity prices, ethane rejection, regulatory and environmental requirements, pipeline integrity, cyberattacks, construction delays, counterparty credit, interest rates, leverage, and access to capital.
- Commodity and interest-rate derivatives are used for hedging rather than trading. At March 31, 2021, forward-starting interest-rate swaps had $1.1 billion of notional value.
- Legal proceedings and environmental matters were described as ordinary-course matters, with management not expecting reasonably possible losses or known compliance risks to be material. A FERC rate filing by Midwestern Gas Transmission remained under review, with no expected material impact.
- ONEOK repurchased $55.2 million of senior-note principal for $54.6 million during the quarter and maintained its $0.935-per-share quarterly common dividend.
Important Facts for Investors to Verify
- Reconcile adjusted EBITDA and distributable cash flow to GAAP results and assess the effect of excluding noncash items.
- Determine how the $543.8 million of current debt maturities will be refinanced or repaid and monitor leverage relative to the 5.0x covenant threshold applicable after the temporary acquisition adjustment period.
- Evaluate whether volume recovery after Winter Storm Uri and expected Williston Basin growth are sustained, particularly in the Gathering and Processing and NGL segments.
- Review the timing, remaining cost, contracting status, and potential restart of paused capital-growth projects.
- Monitor commodity-price exposure under fee-with-POP contracts, hedging coverage, basis risk, and the potential effect of future NGL, natural gas, and crude-oil price changes.
- Assess dividend sustainability against operating cash flow, distributable cash flow, capital expenditures, and debt-service requirements.
- Review environmental, pipeline-safety, cybersecurity, regulatory, FERC-rate, counterparty-credit, and litigation developments in subsequent filings.