ONEOK, Inc. Form 10-Q Summary
Business context and reporting period
ONEOK reported unaudited results for the three and nine months ended September 30, 2015. The company consolidates ONEOK Partners, L.P., in which it held a 41.2% aggregate ownership interest at quarter-end. Operations comprise Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. Former natural gas distribution and energy services operations are classified as discontinued operations following the ONE Gas separation and energy services wind-down.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $1.899 billion, down 39% | $5.832 billion, down 38% |
| Net margin | $538.1 million, approximately flat | $1.525 billion, down 1% |
| Operating income | $284.9 million, down 2% | $754.1 million, down 10% |
| Income from continuing operations | $164.7 million, up 44% | $411.6 million, down 12% |
| Net income attributable to ONEOK | $82.2 million, up 27% | $219.5 million, approximately flat |
| Diluted EPS | $0.39, including a $0.02 loss from discontinued operations | $1.04, including a $0.02 loss from discontinued operations |
| Cash flow from operating activities | Not separately reported | $695.1 million, down from $870.5 million |
| Capital expenditures | $300.9 million | $930.3 million, down 23% |
Services revenue increased 13% for the quarter and 11% year to date, partially offsetting lower commodity sales. Net margin was approximately 28% of revenue for the quarter and 26% year to date, based on reported consolidated figures. Depreciation and amortization increased 18% for the quarter and 22% year to date because of completed projects and acquisitions.
At September 30, 2015, cash and cash equivalents were $38.4 million, compared with $172.8 million at December 31, 2014. Consolidated current liabilities exceeded current assets by approximately $1.0 billion. Long-term debt, including current maturities, totaled approximately $8.4 billion on a book-value basis, compared with $7.2 billion at year-end 2014. Notes payable were $287.3 million, all attributable to ONEOK Partners commercial paper in the disclosed liquidity discussion.
ONEOK generated $695.1 million of operating cash flow, used $942.2 million in investing activities and generated $112.7 million from financing activities, resulting in a $134.4 million decrease in continuing-operations cash. Cash distributions and dividends paid totaled $380.5 million to ONEOK shareholders and $396.8 million to noncontrolling interests.
Material changes versus the prior comparable period
- Commodity sales declined sharply because of lower crude oil, natural gas and NGL prices and the absence of unusually strong weather-driven pricing and differentials in early 2014.
- Natural Gas Gathering and Processing operating income fell 49% in the quarter and 52% year to date, primarily because of lower realized commodity prices and operational issues, partly offset by higher fee rates, volume growth and improved contract mix.
- Natural Gas Liquids operating income increased 19% in the quarter and 8% year to date. Benefits from higher exchange-service and transportation margins, new volumes and the West Texas LPG acquisition offset narrower NGL differentials and weaker optimization margins.
- Natural Gas Pipelines operating income increased 4% in the quarter but declined 17% year to date, primarily reflecting lower storage, retained-fuel and park-and-loan activity compared with the unusually cold first quarter of 2014.
- Equity earnings from investments increased to $32.2 million in the quarter and $93.2 million year to date, compared with a loss of $52.3 million and earnings of $6.7 million, respectively, in the comparable periods. The improvement principally reflects the absence of the 2014 Bighorn Gas Gathering impairment charge and higher affiliate volumes.
- ONEOK issued $500 million of 7.5% senior notes due 2023 in August 2015 and used the net proceeds, together with cash on hand, to purchase $650 million of additional ONEOK Partners common units. ONEOK Partners also issued $800 million of senior notes and approximately $749 million of common units in 2015.
- ONEOK’s ownership interest in ONEOK Partners increased from 37.8% at December 31, 2014, to 41.2% at September 30, 2015.
- Capital spending declined from $1.204 billion to $930.3 million year to date as major projects were completed and certain projects were suspended or deferred.
Guidance, outlook, risks and unusual items
Management expected depressed crude oil, natural gas and NGL prices to continue through the remainder of 2015, with a modest recovery in 2016. Lower prices were expected to slow producer drilling and volume growth, although completed projects, additional Williston Basin capacity, contract renegotiations and a greater fee-based mix were expected to support fourth-quarter 2015 and 2016 results.
ONEOK Partners expected to substantially complete Williston Basin contract negotiations in 2015, with the full benefit of improved margins expected in 2016. Ethane rejection was expected to remain a significant headwind through 2017, although lower rejection in the Rocky Mountain region was expected to continue into 2016. The filing projected 2015 capital expenditures of approximately $1.155 billion for ONEOK Partners, excluding acquisitions, equity-method contributions and AFUDC.
Several processing and NGL infrastructure projects were suspended because of lower commodity prices and slower producer activity. Management stated that projects could resume as market conditions and customer needs improve. The Roadrunner Gas Transmission joint venture had an estimated total cost of $450 million to $500 million; ONEOK Partners contributed approximately $30 million through September 30, 2015 and expected to contribute approximately $65 million during 2016.
ONEOK Partners had $287.3 million of commercial paper outstanding, approximately $2.1 billion of available capacity under its $2.4 billion revolving credit facility and a 4.3-to-1 debt-to-adjusted-EBITDA ratio, remaining in compliance with covenants. ONEOK had approximately $298.9 million of available capacity under its $300 million facility, a 2.4-to-1 debt-to-EBITDA ratio and no borrowings under that facility. ONEOK Partners’ $650 million of 3.25% senior notes mature February 1, 2016, and management expected to refinance them.
Credit ratings weakened or outlooks became negative: ONEOK was rated Ba1 by Moody’s and BB+ by S&P, while ONEOK Partners was rated Baa2 by Moody’s and BBB by S&P, with negative outlooks. Further downgrades could increase borrowing costs, restrict commercial paper access or require additional collateral.
Material risks include commodity-price volatility, reduced producer drilling, volume declines, ethane rejection, project delays or cost overruns, access to capital markets, interest rates, counterparty credit, environmental and pipeline-safety regulation, and potential impairment charges. Gas Index Pricing Litigation was remanded for further proceedings after the U.S. Supreme Court affirmed the Ninth Circuit; the company could not estimate potential exposure and stated that future charges could be material. No goodwill impairment was identified in the July 1, 2015 quantitative assessment.
Most important facts for investors to verify
- Whether low commodity prices, ethane rejection and producer spending reductions continue to pressure Natural Gas Gathering and Processing results.
- Progress and economics of Williston Basin contract renegotiations and the expected 2016 margin benefit.
- ONEOK Partners’ ability to refinance the $650 million February 2016 maturity while maintaining investment-grade ratings and distribution levels.
- Operating cash flow relative to distributions, capital spending and debt-service requirements.
- Status, cost and completion timing of suspended projects, Roadrunner, WesTex and remaining growth projects.
- Potential exposure from Gas Index Pricing Litigation and environmental, pipeline-safety or emissions regulations.
- Changes in ONEOK’s ownership percentage, noncontrolling interests and reliance on distributions from ONEOK Partners.