ONEOK, Inc. 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. The filing covers the quarter and six months ended June 30, 2023, with unaudited GAAP results compared with the corresponding 2022 periods.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total revenues | $3.732 billion | $5.996 billion | $(2.264) billion |
| Operating income | $737 million | $689 million | $48 million |
| Net income | $468 million | $414 million | $54 million |
| Diluted EPS | $1.04 | $0.92 | $0.12 |
| Adjusted EBITDA | $971 million | $886 million | $85 million |
| Capital expenditures | $305 million | $302 million | $3 million |
| Metric | Six months 2023 | Six months 2022 | Change |
|---|---|---|---|
| Total revenues | $8.253 billion | $11.441 billion | $(3.188) billion |
| Operating income | $2.234 billion | $1.351 billion | $883 million |
| Net income | $1.517 billion | $805 million | $712 million |
| Diluted EPS | $3.38 | $1.80 | $1.58 |
| Adjusted EBITDA | $2.688 billion | $1.750 billion | $938 million |
| Capital expenditures | $594 million | $559 million | $35 million |
Q2 operating margin was approximately 19.7%, compared with 11.5% in the prior-year quarter. Six-month operating margin was approximately 27.1%, compared with 11.8%. Net margin was approximately 12.5% for Q2 2023 versus 6.9% in Q2 2022, and approximately 18.4% for the first six months versus 7.0%. These comparisons were significantly affected by the 2023 Medford insurance settlement.
- Cash provided by operating activities was $1.993 billion for the first six months, compared with $1.250 billion in 2022.
- Cash used in investing activities was $353 million, including $594 million of capital expenditures and $328 million of Medford settlement proceeds classified as investing cash flow.
- Cash used in financing activities was $1.754 billion, including $855 million of dividends and $940 million of long-term debt repayments.
- Cash and cash equivalents declined to $106 million at June 30, 2023, from $220 million at December 31, 2022.
- Total debt was $12.846 billion at June 30, 2023, compared with $13.731 billion at year-end 2022. Reported long-term debt was $12.742 billion.
- ONEOK had no borrowings under its $2.5 billion revolving credit facility, a 2.8-to-1 indebtedness-to-adjusted-EBITDA ratio under the facility, and compliance with applicable covenants.
- Working capital was a surplus of $346 million at June 30, 2023. The company reported $1 billion of availability under its at-the-market equity program, with no shares sold as of the filing date.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower commodity prices and related commodity sales; services revenue increased by $16 million in Q2 and $41 million in the first half.
- Operating income and adjusted EBITDA increased as a result of higher volumes and fees in Natural Gas Gathering and Processing, stronger exchange services and volumes in Natural Gas Liquids, and higher transportation and storage activity in Natural Gas Pipelines.
- The Medford incident generated a $779 million insurance settlement gain in the first quarter. Including related third-party fractionation costs, the incident increased first-half operating income and adjusted EBITDA by $702 million. This nonrecurring item was the principal driver of the year-over-year first-half earnings increase.
- Operating costs increased $66 million in Q2 and $98 million in the first half, primarily from employee-related costs, outside services, property insurance and Merger Transaction costs.
- Natural gas processed volumes rose to 2,922 BBtu/d in Q2 from 2,506 BBtu/d, while the average fee rate increased to $1.20/MMBtu from $1.05/MMBtu.
- Natural Gas Liquids raw feed throughput increased to 1,399 MBbl/d from 1,266 MBbl/d in Q2.
- Natural Gas Pipelines transportation capacity contracted increased to 7,656 MDth/d from 7,257 MDth/d, with contracted capacity at 95% versus 92%.
- ONEOK redeemed $425 million of 5.0% notes in February and $500 million of 7.5% notes in June, using cash on hand.
Guidance, outlook, commentary, risks and unusual items
- Management expects approximately 90% of consolidated earnings to be fee-based in 2023 and has hedged approximately 70% of forecast Natural Gas Gathering and Processing equity volumes for the remainder of 2023.
- Expected 2023 capital expenditures are $1.475 billion to $1.675 billion, excluding the pending Magellan transaction.
- The company expects the Medford incident to reduce operating cash flow in the remainder of 2023 and in 2024 because it will no longer receive business-interruption proceeds for subsequently incurred costs.
- ONEOK announced an agreement to acquire Magellan in a cash-and-stock transaction. Magellan unitholders would receive 0.667 ONEOK shares and $25.00 in cash per common unit. Closing was expected in the third quarter of 2023, subject to shareholder approvals and customary conditions.
- ONEOK entered into a $5.25 billion unsecured 364-day bridge facility commitment to finance the cash portion of the acquisition, but expected to issue senior unsecured notes and terminate the commitment undrawn.
- Merger-related costs were $18 million for the quarter and first six months, including $9 million of bridge commitment fees and $9 million in operating and maintenance expense.
- The proposed MB-6 fractionator in Mont Belvieu, Texas, is expected to cost approximately $550 million and be completed in the first quarter of 2025. The MB-5 fractionator, costing approximately $750 million, was completed in April 2023.
- Management identifies exposure to commodity prices, producer activity and volumetric risk, severe weather, operational outages, regulatory and environmental requirements, cybersecurity, interest rates, insurance coverage, credit markets and the integration and financing risks of the Magellan acquisition.
- Legal proceedings and environmental matters are considered by management to have no material reasonably possible loss based on currently known information. The filing text does not provide a clear quantified aggregate exposure.
- The company’s investment-grade ratings as of July 31, 2023 were Moody’s Baa2, S&P BBB and Fitch BBB, all with stable outlooks.
Most important facts for investors to verify
- Separate recurring operating performance from the $779 million Medford insurance gain and related $702 million first-half adjusted EBITDA benefit.
- Confirm the timing, financing structure, required approvals, debt guarantees and leverage impact of the Magellan acquisition.
- Assess whether projected capital expenditures and the planned MB-6 project remain on schedule and within cost estimates.
- Monitor post-Medford operating costs, third-party fractionation expenses and the expected loss of future business-interruption proceeds.
- Review debt maturities, refinancing needs, interest-rate hedges, credit ratings and compliance with revolving-credit covenants.
- Evaluate volume trends, fee rates, contracted capacity and commodity-price hedging assumptions across the three operating segments.
- Confirm the sustainability of dividends in light of cash balances, debt financing and acquisition-related funding requirements.