ONEOK, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. ONEOK operates natural gas gathering and processing, natural gas liquids and natural gas pipeline businesses. The 2017 comparison is affected by the June 30, 2017 acquisition of the remaining publicly held ONEOK Partners units.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $3.394 billion | $2.906 billion | $9.456 billion | $8.382 billion |
| Operating income | $495.5 million | $354.6 million | $1.364 billion | $991.2 million |
| Net income | $313.9 million | $166.5 million | $862.1 million | $528.7 million |
| Net income available to common shareholders | $313.0 million | $165.5 million | $858.0 million | $324.3 million |
| Diluted EPS | $0.75 | $0.43 | $2.07 | $1.20 |
| Adjusted EBITDA | $650.2 million | $517.2 million | $1.822 billion | $1.439 billion |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $1.516 billion | $936.0 million |
| Capital expenditures | $694.3 million | $135.2 million | $1.310 billion | $330.4 million |
Margins: Q3 operating margin was approximately 14.6%, net margin approximately 9.2% and adjusted EBITDA margin approximately 19.2%. Nine-month operating margin was approximately 14.4%, net margin approximately 9.1% and adjusted EBITDA margin approximately 19.3%.
- Q3 revenue increased 17%, operating income increased 40%, net income increased 89% and adjusted EBITDA increased 26% year over year.
- Nine-month revenue increased 13%, operating income increased 38%, net income increased 63% and adjusted EBITDA increased 27% year over year.
- Growth was driven by higher volumes in the Williston Basin and STACK and SCOOP areas, wider NGL location differentials, higher NGL optimization and marketing earnings, and increased demand for NGL infrastructure.
- Natural Gas Liquids segment adjusted EBITDA increased 36% in the quarter and 29% year to date; Natural Gas Gathering and Processing increased 12% and 22%, respectively; Natural Gas Pipelines increased 3% and 7%.
Cash flow, debt and liquidity
- Operating cash flow of $1.516 billion exceeded cash dividends paid of $983.1 million by $533.4 million during the first nine months.
- Investing cash outflows were $1.485 billion, including $1.310 billion of capital expenditures and the $195 million acquisition of the remaining 20% interest in West Texas LPG Pipeline. ONEOK now owns that system fully.
- Cash and cash equivalents were $84.5 million at September 30, 2018, compared with $37.2 million at December 31, 2017. Working capital remained negative at $642.3 million.
- Total debt was $9.023 billion, including $8.326 billion of long-term debt, $507.7 million of current maturities and $120.0 million of commercial paper. Estimated fair value of consolidated long-term debt was approximately $9.3 billion.
- ONEOK issued $1.25 billion of senior unsecured notes in July 2018 and received approximately $1.23 billion of net proceeds. It repaid $425 million of notes in August and had repaid the remaining $500 million term-loan balance in January.
- The $2.5 billion revolving credit facility was extended to June 2023. At September 30, no borrowings were outstanding, approximately $2.4 billion of capacity remained, the debt-to-adjusted-EBITDA covenant ratio was 3.5 to 1 versus a permitted 5.5 to 1, and all covenants were satisfied.
- Moody’s and S&P rated long-term debt Baa3 and BBB, respectively, both with stable outlooks.
Material changes and unusual items
- Capital spending rose substantially because of major growth projects, including NGL pipelines, fractionators, processing plants and natural gas pipeline expansions.
- ONEOK issued 21.9 million common shares in January 2018 for approximately $1.2 billion of net proceeds. No shares were sold under the at-the-market program during the first nine months.
- Topic 606 revenue recognition was adopted January 1, 2018. It primarily reclassified certain contractual fees from services revenue to a reduction of cost of sales and fuel; management stated that the effect on operating income, net income and adjusted EBITDA was not material.
- 2017 results included $16.0 million of long-lived asset impairment, $4.3 million of equity-investment impairment and $29.5 million of merger-related operating costs. No comparable impairment charges were recorded in 2018.
- Common dividends declared were $2.390 per share for the first nine months, compared with $1.975 in the prior-year period. A $0.855 per-share dividend was declared for payment in November 2018.
Outlook, management commentary and risks
- Management expects approximately 90% of consolidated earnings to be fee-based in 2018. Volume growth is expected to continue across the company’s basin footprint, supported by producer activity, improved completion techniques and NGL demand from petrochemical and export facilities.
- Approximately $6.0 billion of growth projects had been announced since June 2017. Expected 2018 capital expenditures were $2.0 billion to $2.3 billion for growth and $170 million to $180 million for maintenance, excluding AFUDC and capitalized interest.
- Management expects 2018 dividend payments to be 75% to 85% return of capital and expects operating cash flow to fund dividends. Additional equity financing, if needed, was expected to be considered in the latter part of 2019 and generally limited to the existing at-the-market program.
- Major projects targeted completion from late 2018 through 2021, including Demicks Lake processing plants, Elk Creek and Arbuckle II pipelines, West Texas LPG expansions, and MB-4 and MB-5 fractionators. Completion timing, costs, permitting and construction execution remain risks.
- Commodity exposure remains concentrated in NGLs, condensate and natural gas retained under certain POP contracts. ONEOK uses derivatives and physical contracts for hedging; approximately 74% to 89% of selected 2018 and 2019 forecast equity volumes were hedged.
- Key risks include commodity prices and differentials, producer volumes and drilling activity, construction delays or cost overruns, interest rates, access to capital, leverage and ratings, counterparty performance, environmental and pipeline-safety regulation, regulatory tariff changes, weather, litigation and facility integrity.
- The Sinclair gas-index pricing litigation was remanded to the District Court after an August 2018 appellate reversal. Management expected any ultimate charges to be immaterial.
- Management stated that environmental, FERC and other ordinary-course legal matters were not expected to have a material adverse effect, although outcomes cannot be assured.
Investor verification points
- Reconcile year-over-year earnings and segment trends for the impact of the 2017 ONEOK Partners merger and the 2018 Topic 606 presentation change.
- Evaluate whether expected growth-project completion dates and the $2.0 billion to $2.3 billion 2018 growth-capital range remain achievable.
- Monitor leverage, debt maturities, credit ratings, commercial-paper access and compliance with the 5.5-to-1 revolving-credit covenant.
- Assess NGL price differentials, optimization earnings, commodity hedges and the timing of earnings recognition on increased unfractionated NGL inventory.
- Review dividend coverage and the projected 75% to 85% return-of-capital component.
- Track permitting, environmental and pipeline-safety developments, FERC tariff actions, the Sinclair litigation and counterparty-credit exposure.