ONEOK, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
ONEOK operates three primarily fee-based midstream segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. The filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Management expects approximately 85% of 2019 consolidated earnings to be fee-based.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $2.780 billion | $3.102 billion | Down 10% |
| Operating income | $468.7 million | $419.7 million | Up 12% |
| Net income | $337.2 million | $266.0 million | Up 27% |
| Net income available to common shareholders | $336.9 million | $264.2 million | Up 28% |
| Diluted EPS | $0.81 | $0.64 | Up $0.17 |
| Adjusted EBITDA | $637.5 million | $570.3 million | Up 12% |
| Cash flow from operations | $353.6 million | $495.3 million | Down $141.7 million |
| Capital expenditures | $889.7 million | $264.5 million | Up $625.2 million |
Operating margin increased to approximately 16.9% from 13.5%, while net margin increased to approximately 12.1% from 8.6%. Revenue declined primarily because of lower commodity sales, with the decrease largely offset by lower cost of sales and fuel. Services revenue increased 9% to $307.0 million.
- Natural Gas Gathering and Processing adjusted EBITDA was $152.2 million, up 17%; gathered volumes increased to 2,636 BBtu/d from 2,460 BBtu/d.
- Natural Gas Liquids adjusted EBITDA was $377.6 million, up 10%; raw feed throughput increased to 1,028 MBbl/d from 949 MBbl/d.
- Natural Gas Pipelines adjusted EBITDA was $106.6 million, up 14%; contracted transportation capacity increased to 7,480 MDth/d from 6,779 MDth/d, with 99% subscribed.
Liquidity, debt and cash flow
- Cash and cash equivalents were $27.8 million at March 31, 2019, compared with $12.0 million at December 31, 2018.
- Total debt, including current maturities, was $10.3 billion at March 31, 2019, compared with $9.4 billion at year-end 2018. Long-term debt was $10.0 billion, excluding current maturities.
- ONEOK issued $1.25 billion of senior unsecured notes in March 2019 and received net proceeds of approximately $1.23 billion. It also had $750 million outstanding under its $1.5 billion term loan.
- The $2.5 billion revolving credit facility had no borrowings outstanding. The company reported a debt-to-adjusted-EBITDA covenant ratio of 3.6 to 1 versus a maximum of 5.5 to 1 at March 31, 2019, and was in compliance with its debt covenants.
- Operating cash flow covered approximately 40% of capital expenditures. Cash dividends paid were $354.2 million, slightly exceeding operating cash flow; management funded an immaterial portion of dividends from other short-term liquidity sources.
- Working capital was negative $346.9 million, primarily because of current debt maturities. Management stated that the deficit was not expected to adversely affect operations or cash flows.
Material changes versus the prior comparable period
- Operating income benefited from $69.2 million of volume growth, $26.5 million of higher NGL optimization and marketing earnings, and $15.7 million of higher transportation services revenue.
- These benefits were partially offset by $30.5 million of higher operating costs, $21.7 million of higher rail transportation and third-party fractionation costs, and $10.0 million of additional depreciation.
- Capital spending increased substantially as the company accelerated announced growth projects. First-quarter 2019 growth capital spending was concentrated in NGL pipelines, fractionation capacity, processing plants and related infrastructure.
- Comprehensive income declined to $255.9 million from $318.0 million because of an $81.3 million after-tax loss in other comprehensive income, primarily from derivative valuation changes, compared with a $51.9 million gain in the prior year.
- ONEOK adopted the new lease standard on January 1, 2019, recording approximately $17.5 million of operating lease assets and $17.4 million of operating lease liabilities. The overall accounting impact was immaterial.
Guidance, outlook, commentary and risks
- Management expects 2019 growth capital expenditures of $2.5 billion to $3.7 billion and maintenance capital expenditures of $160 million to $200 million, excluding AFUDC and capitalized interest.
- Management expects continued volume growth across the Williston, Permian, STACK and SCOOP regions and expects wider-than-historical NGL location differentials until additional pipeline and fractionation infrastructure is completed.
- Major projects include Demicks Lake I and II, Elk Creek, Arbuckle II, West Texas LPG expansions, MB-4 and MB-5 fractionators, and related gathering and storage infrastructure. Several projects are scheduled for completion between late 2019 and 2021.
- Management expects to draw the remaining $750 million available under the term loan in May 2019.
- Commodity prices remain volatile. Although operations are primarily fee-based, the company remains exposed to commodity prices, volume declines, ethane rejection, basis differentials and optimization results. Hedging covered substantial portions of forecast 2019 and 2020 natural gas, NGL and condensate volumes.
- Key risks include high capital intensity and leverage, interest-rate increases, credit-rating downgrades, access to capital markets, construction delays or cost overruns, permitting and regulatory requirements, pipeline integrity and environmental liabilities, customer and counterparty credit risk, weather, commodity-price changes and litigation.
- The Gas Index Pricing Litigation was remanded to the Wyoming District Court in February 2019. Management expects any future charges from the ultimate resolution to be immaterial.
Most important facts for investors to verify
- Whether volume growth and new projects generate the expected contracted cash flows and returns as projects enter service.
- Actual 2019 growth and maintenance capital spending versus the stated ranges and the resulting funding needs.
- Debt growth, term-loan draws, refinancing requirements and compliance with leverage covenants.
- Sustainability of the first-quarter increase in NGL optimization and marketing earnings, including the effect of location differentials and inventory sales.
- Operating cash flow coverage of capital expenditures and dividends as project spending remains elevated.
- Progress, costs and completion timing for Elk Creek, Arbuckle II, Demicks Lake, West Texas LPG and MB-4/MB-5 projects.
- Exposure to commodity prices, ethane rejection, production declines, counterparty credit, environmental matters and regulatory or legal developments.