ONEOK, Inc. 2020 Second-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK is a midstream energy company operating through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. This unaudited report covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Results were affected by the COVID-19 pandemic, the crude-oil supply shock, lower commodity prices, producer curtailments, and reduced drilling activity. The company stated that more than 90% of expected 2020 consolidated earnings would be fee-based.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Total revenue | $1.661 billion | $2.458 billion | $3.797 billion | $5.238 billion |
| Operating income | $355.7 million | $476.1 million | $272.3 million | $944.9 million |
| Net income (loss) | $134.3 million | $312.0 million | $(7.5) million | $649.2 million |
| Net income (loss) available to common shareholders | $134.0 million | $311.7 million | $(8.1) million | $648.6 million |
| Diluted EPS | $0.32 | $0.75 | $(0.02) | $1.56 |
| Adjusted EBITDA | $533.9 million | $632.4 million | $1.235 billion | $1.270 billion |
| Cash flow from operating activities | Not separately provided | Not separately provided | $736.4 million | $968.0 million |
| Capital expenditures | $594.3 million | $830.5 million | $1.544 billion | $1.720 billion |
Approximate consolidated operating margins were 21.4% in the second quarter of 2020 versus 19.4% in the prior-year quarter, and 7.2% for the first six months of 2020 versus 18.0% in the prior-year period. The six-month comparison was heavily affected by $641.8 million of noncash impairment charges.
Financial position, debt and liquidity
- Cash and cash equivalents were $945.7 million at June 30, 2020, compared with $21.0 million at December 31, 2019.
- Working capital was positive at approximately $906.8 million.
- Long-term debt, including current maturities, was approximately $14.3 billion, compared with $12.5 billion at year-end 2019. Estimated fair value was approximately $15.0 billion.
- ONEOK had no borrowings under its $2.5 billion revolving credit agreement and reported a net indebtedness-to-adjusted-EBITDA ratio of 4.5 to 1, within the amended 5.0-to-1 covenant limit.
- Financing activities provided $1.743 billion during the first six months, including $3.245 billion of long-term debt issuance and $954.4 million from common-stock issuance, partly offset by debt repayments and $774.0 million of dividends.
- In March and May 2020, ONEOK issued an aggregate $3.25 billion of senior unsecured notes. Proceeds were used for debt repayment, capital expenditures, and general corporate purposes.
- In June 2020, the company issued 29.9 million common shares at $32.00 per share, generating net proceeds of approximately $937.0 million.
- Cash dividends paid exceeded operating cash flow by $37.5 million for the six-month period, requiring use of other liquidity sources.
Material changes versus the prior comparable period
- Second-quarter revenue declined $796.9 million, or approximately 32%, primarily because of lower commodity sales. Service revenue increased $6.3 million.
- Six-month revenue declined $1.440 billion, or approximately 28%, while service revenue increased $27.5 million.
- Second-quarter net income declined $177.7 million, and six-month net income declined $656.7 million.
- Six-month adjusted EBITDA decreased $35.2 million, or approximately 3%, despite the significant decline in reported net income.
- Natural Gas Gathering and Processing second-quarter adjusted EBITDA decreased $97.9 million to $88.7 million, reflecting lower volumes, lower realized prices, and reduced fee rates.
- Natural Gas Liquids second-quarter adjusted EBITDA decreased $9.2 million to $337.6 million; six-month adjusted EBITDA increased $24.2 million to $748.6 million.
- Natural Gas Pipelines adjusted EBITDA increased $9.3 million in the quarter and $15.2 million for the six-month period, supported by higher firm transportation revenue and a $13.5 million contract settlement.
- Gathered and processed natural gas volumes, NGL sales volumes, and average fee rates declined from the prior-year periods. Natural gas pipelines remained substantially supported by long-term firm contracts.
- Capital expenditures decreased $236.2 million in the quarter and $176.2 million for the six-month period as growth projects were completed, paused, or suspended.
Impairments, outlook and risks
- During the first quarter, ONEOK recorded $641.8 million of noncash impairment charges: $153.4 million for goodwill, $380.5 million for long-lived assets in Natural Gas Gathering and Processing, $70.2 million for inactive Natural Gas Liquids assets, and $37.7 million for equity investments.
- Management expected continued improvement in the second half of 2020 compared with the second quarter as economies reopened, commodity prices improved, and production curtailments eased. July 2020 production volumes had increased from second-quarter lows.
- Second-half 2020 capital expenditures were expected to range from approximately $300 million to $400 million. Planned 2020 capital-growth spending had been reduced by approximately $900 million.
- Several projects were paused or suspended, including Demicks Lake III, portions of the Elk Creek expansion, Arbuckle II expansion, MB-5 fractionator, and additional West Texas LPG and Mid-Continent projects.
- Management stated that liquidity should remain sufficient through 2020 based on operating cash flow, cash on hand, the $2.5 billion credit facility, and access to $1.0 billion under its at-the-market equity program.
- Key risks include prolonged or renewed COVID-19 disruption, low commodity prices, producer curtailments, reduced drilling, volumetric and POP-contract exposure, ethane demand and production volatility, counterparty credit risk, high leverage, interest rates, environmental and pipeline-safety regulation, litigation involving the Dakota Access Pipeline, construction delays, and potential future impairments.
- ONEOK maintained investment-grade ratings as of July 20, 2020: Moody’s Baa3 and S&P BBB, both with stable outlooks.
- The company reported that disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether production volumes, fee rates, and commodity prices actually recover as projected in the second half of 2020.
- Whether operating cash flow is sufficient to cover dividends, interest, maintenance capital, and remaining growth expenditures without additional financing.
- The sustainability of the dividend given that first-half dividends exceeded operating cash flow.
- Debt leverage, covenant headroom, refinancing needs, and sensitivity to higher interest rates or credit-rating downgrades.
- Whether the $641.8 million of impairments represents the full deterioration in affected assets or whether further impairments could occur.
- The effect of COVID-19, producer curtailments, ethane rejection, DAPL litigation, and other regulatory matters on future throughput and contracted volumes.
- The timing, cost, and eventual restart or cancellation of paused capital-growth projects.