ONEOK, Inc. 2016 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. ONEOK consolidates ONEOK Partners, a midstream master limited partnership in which it held a 41.2% ownership interest, including general and limited partner interests. ONEOK Partners operates Natural Gas Gathering and Processing, Natural Gas Liquids and Natural Gas Pipelines segments.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenues | $2.134 billion | $2.128 billion | $3.909 billion | $3.933 billion |
| Operating income | $315.3 million | $272.7 million | $626.7 million | $469.2 million |
| Net income | $179.9 million | $150.9 million | $354.8 million | $246.6 million |
| Net income attributable to ONEOK | $85.9 million | $76.5 million | $169.4 million | $137.3 million |
| Diluted EPS | $0.40 | $0.36 | $0.80 | $0.65 |
| Adjusted EBITDA | $452.7 million | $385.7 million | $894.3 million | $706.1 million |
| Operating cash flow | Not separately reported | Not separately reported | $531.6 million | $333.9 million |
| Capital expenditures | $136.8 million | $285.6 million | $333.3 million | $629.4 million |
Six-month operating margin was approximately 16.0%, compared with 11.9% in 2015. Six-month net margin was approximately 9.1%, compared with 6.3% in 2015. Adjusted EBITDA increased 27% year over year for the six-month period, while total revenue declined 1% as lower commodity sales were largely offset by higher service revenue.
- Commodity sales declined 8% to $2.917 billion for the first six months, while service revenue increased 28% to $991.8 million.
- Operating income increased 34% for the first six months, primarily from higher gathered and NGL volumes, new plant connections and higher fee rates from restructured gathering contracts.
- Interest expense increased 19% to $237.2 million for the first six months, reflecting the 2016 term loan, prior debt issuances, higher short-term borrowing costs and lower capitalized interest.
- Cash provided by operating activities increased $197.7 million year over year. Investing cash outflows declined to $298.5 million from $655.8 million, mainly because of lower capital spending.
- Financing activities used $149.6 million, compared with $374.9 million provided in 2015, principally because ONEOK Partners repaid $650 million of senior notes that matured in February 2016.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $180.9 million at June 30, 2016, compared with $97.6 million at December 31, 2015. Management separately reported $177.1 million of cash at ONEOK and $3.7 million at ONEOK Partners.
- Consolidated long-term debt, including current maturities, was $8.8 billion at June 30, 2016, compared with $8.5 billion at year-end. Current maturities increased to $460.7 million, including ONEOK Partners’ $450 million of 6.15% senior notes due October 2016.
- ONEOK Partners drew the full $1.0 billion term loan in the first quarter, used partly to refinance the $650 million notes that matured in February. The term loan matures in January 2019.
- ONEOK had approximately $298.9 million available under its $300 million revolving credit facility and no borrowings outstanding. ONEOK Partners had approximately $1.8 billion available under its $2.4 billion credit facility and $576 million of commercial paper outstanding.
- Debt-to-Consolidated EBITDA was 2.2-to-1 for ONEOK; ONEOK Partners’ debt-to-adjusted-EBITDA ratio was 4.2-to-1. Both were in compliance with their respective covenants.
- ONEOK Partners had a working-capital deficit of approximately $1.0 billion, driven primarily by growth-project funding and current debt maturities. Management stated that the deficit was not expected to adversely affect operations or cash flows.
- ONEOK declared a quarterly dividend of $0.615 per share, and ONEOK Partners declared a quarterly distribution of $0.79 per unit, each payable August 14, 2016.
Material changes versus the prior comparable period
- Natural Gas Gathering and Processing adjusted EBITDA increased 52% to $210.3 million for the first six months. Contract restructuring increased fee rates and volumes grew, particularly in the Williston Basin; lower NGL and natural gas prices partially offset the improvement.
- Natural Gas Liquids adjusted EBITDA increased 25% to $546.8 million. Results benefited from new plant connections, lower ethane rejection, higher exchange volumes and improved equity earnings.
- Natural Gas Pipelines adjusted EBITDA increased 5% to $142.9 million, supported by higher contracted firm transportation volumes and storage revenue.
- Natural gas gathered increased to 2,083 BBtu/d from 1,867 BBtu/d, processed volumes increased to 1,915 BBtu/d from 1,651 BBtu/d, and NGL sales increased to 742 MBbl/d from 643 MBbl/d for the first six months.
- Capital expenditures declined 47% to $333.3 million as major projects were completed, spending was reduced to align with customer needs and producer drilling activity slowed.
- Other comprehensive loss increased to $159.2 million at June 30, 2016, primarily reflecting unrealized losses on commodity and interest-rate hedges.
Guidance, outlook, risks and unusual items
- Management expected approximately 85% of ONEOK Partners’ 2016 consolidated earnings to be fee-based, including approximately 90% for Natural Gas Liquids, more than 75% for Natural Gas Gathering and Processing and approximately 96% for Natural Gas Pipelines.
- ONEOK Partners projected 2016 capital expenditures of approximately $600 million, excluding acquisitions, equity-method contributions and AFUDC: $345 million for Gathering and Processing, $125 million for Natural Gas Liquids, $110 million for Natural Gas Pipelines and $20 million for other projects.
- Management expected lower commodity prices to continue affecting realized prices and financial results. First-half averages were approximately $40 per barrel for WTI, $2.10 per MMBtu for NYMEX natural gas and $0.40 per gallon for Conway propane.
- Ethane rejection declined to approximately 150 MBbl/d in the second quarter from more than 175 MBbl/d on average during the second half of 2015 and first quarter of 2016. Management expected volatility to continue, with stronger ethane demand anticipated as petrochemical and export projects come online beginning in 2017.
- Roadrunner Phase I was completed in March 2016; Phase II was under construction and expected to be completed in the fourth quarter of 2016. ONEOK Partners expected to contribute approximately $45 million to Roadrunner during the remainder of 2016.
- Several processing and NGL infrastructure projects were suspended because of lower commodity prices and reduced producer activity. Prolonged weak prices could delay additional projects, reduce volumes, increase financing costs or pressure credit ratings.
- ONEOK Partners’ Moody’s and S&P ratings were Baa2 and BBB, respectively, both with negative outlooks. ONEOK’s ratings were Ba1 and BB+, with stable and negative outlooks, respectively.
- Commodity, interest-rate, counterparty, regulatory, environmental, pipeline-safety, construction and litigation risks remain material. ONEOK Partners had $70.1 million of interest-rate derivative liabilities at June 30, 2016.
- The company recorded a small loss from discontinued operations related to obligations from the wind-down of its former energy services business. Remaining cash payments for released transportation and storage capacity contracts were estimated at approximately $25 million.
- A court granted summary judgment for ONEOK in one gas-index pricing lawsuit, subject to a possible appeal. The company reached an agreement in principle to settle several other cases for an amount described as not material; the Sinclair matter remained outstanding.
Important facts for investors to verify
- Whether improved fee-based earnings and volumes offset continued commodity-price weakness and ethane-rejection volatility.
- The refinancing or repayment plan for ONEOK Partners’ $450 million senior notes due October 2016 and the January 2019 term loan.
- ONEOK Partners’ ability to maintain investment-grade ratings, covenant compliance and access to commercial paper and capital markets.
- Actual 2016 capital spending, completion timing for Roadrunner Phase II and other active projects, and the status of suspended projects.
- The sustainability of distributions, given that ONEOK Partners’ distributions exceeded operating cash flow in both the three- and six-month periods.
- Potential effects of prolonged low commodity prices, producer volume declines, counterparty stress, regulatory or environmental actions and pending litigation.