ONEOK, Inc. 2021 Second-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK operates three primarily fee-based midstream segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. The filing covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods. Management expects approximately 90% of 2021 consolidated earnings to be fee-based.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $3.389 billion | $1.661 billion | $6.584 billion | $3.797 billion |
| Operating income | $611.5 million | $355.7 million | $1.276 billion | $272.3 million |
| Net income | $342.1 million | $134.3 million | $728.3 million | $(7.5) million |
| Net income available to common shareholders | $341.9 million | $134.0 million | $727.8 million | $(8.1) million |
| Diluted EPS | $0.77 | $0.32 | $1.63 | $(0.02) |
| Adjusted EBITDA | $801.5 million | $533.9 million | $1.668 billion | $1.235 billion |
| Distributable cash flow | $570.0 million | $300.5 million | $1.232 billion | $822.9 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.078 billion | $736.4 million |
| Capital expenditures | $147.4 million | $594.3 million | $324.1 million | $1.544 billion |
Calculated operating margin was approximately 18.0% in Q2 2021 versus 21.4% in Q2 2020, and approximately 19.4% for the first six months of 2021 versus 7.2% in the prior-year period. The Q2 2021 net margin was approximately 10.1% versus 8.1% in Q2 2020; the six-month net margin was approximately 11.1% versus negative 0.2% in 2020.
- Natural Gas Gathering and Processing adjusted EBITDA increased to $229.3 million in Q2 2021 from $88.7 million, primarily from higher volumes and improved fee-with-POP economics.
- Natural Gas Liquids adjusted EBITDA increased to $480.3 million from $337.6 million, driven by higher Rocky Mountain volumes, wider price differentials, and stronger optimization and marketing results.
- Natural Gas Pipelines adjusted EBITDA declined to $94.7 million from $109.8 million, primarily because Q2 2020 included a favorable $13.5 million contract settlement.
- Dividend coverage was 1.37x in Q2 2021 and 1.48x for the first six months, compared with 0.78x and 1.06x, respectively, in the prior-year periods.
Liquidity, debt, and capital resources
- Cash and cash equivalents were $374.4 million at June 30, 2021, compared with $524.5 million at December 31, 2020.
- ONEOK had no borrowings under its $2.5 billion revolving credit agreement, which expires in June 2024, and remained in compliance with its covenants. The indebtedness-to-adjusted-EBITDA ratio was 4.4x at June 30, 2021; the covenant decreases to 5.0x beginning in the third quarter of 2021.
- Total debt was $14.293 billion, including $536.1 million of current maturities. Book value of consolidated long-term debt, including current maturities, was approximately $14.2 billion; estimated fair value was $16.5 billion.
- Working capital was negative $159.0 million, primarily because of current debt maturities. Management does not expect the deficit to impair operations or cash flows.
- ONEOK repurchased $55.2 million principal amount of senior notes for $54.6 million in Q1 2021 and repaid the remaining $11.7 million of Guardian Pipeline notes in June 2021.
- Management expects 2021 capital expenditures of $525 million to $675 million, excluding AFUDC and capitalized interest. The Bear Creek expansion, with estimated cost of $405 million, is expected to be completed in Q4 2021; several other growth projects remain paused.
- The common dividend remained $0.935 per share per quarter, or $3.74 annualized. Cash dividends paid during the first six months were $832.5 million, while operating cash flow was $1.078 billion.
Material changes versus the prior comparable period
- Q2 revenue increased $1.728 billion, largely reflecting higher commodity sales from increased volumes and commodity prices; services revenue declined modestly.
- Q2 operating income rose $255.8 million, and six-month operating income rose $1.004 billion. The six-month comparison benefited substantially from the absence of $604.0 million of noncash impairment charges recorded in the first half of 2020.
- Six-month 2021 net income improved by $735.8 million, from a loss of $7.5 million to income of $728.3 million. The comparison also benefited from the absence of $37.7 million of equity-investment impairments recorded in 2020.
- Operating cash flow increased $341.6 million, while capital expenditures declined $1.220 billion because major projects had been completed or paused.
- Interest expense decreased by $34.0 million in Q2, primarily because the prior-year period included costs associated with the settlement of interest-rate swaps.
- Winter Storm Uri had a net positive impact on six-month 2021 results, primarily through Natural Gas Pipelines storage and transportation activities, although freeze-offs and outages negatively affected gathering, processing, and NGL volumes.
Guidance, outlook, commentary, and risks
- Management expects strong volumes through the remainder of 2021 because of higher producer activity and increasing ethane demand from the petrochemical industry.
- Natural gas transportation capacity was approximately 94% contracted with firm commitments for the first six months and approximately 93% contracted in Q2; management expects similarly high contracted levels through 2021.
- Management expects liquidity to remain sufficient based on operating cash flows, $374.4 million of cash, the undrawn credit facility, and no scheduled debt maturities until 2022.
- Key risks include commodity-price and basis volatility, production declines or curtailments, ethane rejection, weather events, operational outages, COVID-19 impacts, counterparty credit risk, interest rates, leverage and refinancing needs, regulatory and FERC actions, environmental and pipeline-safety requirements, construction delays and cost overruns, cybersecurity, and changes in demand for hydrocarbons.
- The company uses commodity and interest-rate derivatives for hedging rather than trading. At June 30, 2021, forward-starting interest-rate swaps had $1.1 billion of notional value, and a hypothetical 10% commodity-price movement would have changed the estimated fair value of commodity derivatives by approximately $147.6 million.
- Legal proceedings and environmental matters were described as normal-course matters with no material probable adverse effect expected based on currently known information. The Midwestern Gas Transmission rate filing remains under FERC review, with no material impact expected by management.
Investor verification priorities
- Verify the sustainability of earnings growth after adjusting for commodity prices, Winter Storm Uri effects, inventory timing, derivative results, and the absence of 2020 impairments.
- Reconcile adjusted EBITDA and distributable cash flow to GAAP results and assess the effect of working-capital movements on operating cash flow.
- Monitor the $536.1 million of current debt maturities, leverage covenant reduction to 5.0x, refinancing plans, and investment-grade credit ratings.
- Assess whether 2021 capital expenditures remain within the $525 million to $675 million guidance range and whether paused projects are restarted.
- Track producer activity, gathering and NGL throughput, ethane economics, contracted pipeline capacity, and the effect of commodity prices on fee-with-POP contracts.
- Review regulatory, environmental, pipeline-safety, cybersecurity, counterparty, and severe-weather exposures, including the pending FERC rate proceeding.
- Confirm future dividend funding and coverage if commodity prices, volumes, operating cash flow, or capital requirements weaken.