ONEOK, Inc. 2016 First-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK reported unaudited consolidated results for the three months ended March 31, 2016, compared with the same period in 2015. The company consolidates ONEOK Partners, in which it held a 41.2% ownership interest, because it determined that ONEOK Partners is a variable-interest entity and that ONEOK is the primary beneficiary. ONEOK Partners operates Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines businesses.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1.774 billion | $1.805 billion | Down 2% |
| Services revenue | $490.9 million | $369.6 million | Up 33% |
| Commodity sales | $1.284 billion | $1.436 billion | Down 11% |
| Operating income | $311.4 million | $196.5 million | Up 59% |
| Net income | $175.0 million | $95.7 million | Up 83% |
| Net income attributable to ONEOK | $83.4 million | $60.8 million | Up 37% |
| Diluted EPS | $0.40 | $0.29 | Up $0.11 |
| Adjusted EBITDA | $441.6 million | $320.4 million | Up 38% |
| Cash flow from operations | $229.5 million | $39.3 million | Up $190.2 million |
| Capital expenditures | $196.4 million | $343.8 million | Down 43% |
Consolidated operating margin improved to approximately 17.6% from 10.9%. Consolidated net margin increased to approximately 9.9% from 5.3%; net income attributable to ONEOK represented approximately 4.7% of revenue versus 3.4% in the prior-year quarter. Adjusted EBITDA margin was approximately 24.9%, compared with 17.7%.
At March 31, 2016, cash and cash equivalents were $137.2 million, including $127.3 million held by ONEOK and approximately $9.9 million held by ONEOK Partners. Consolidated long-term debt, including current maturities and before certain unamortized adjustments, was approximately $8.8 billion. ONEOK Partners had $444.6 million of commercial paper outstanding, approximately $1.9 billion of available revolving-credit capacity, and no borrowings under its $2.4 billion credit agreement. ONEOK had no borrowings under its $300 million credit agreement and approximately $298.9 million available.
ONEOK Partners declared a $0.79 per-unit distribution for the quarter. ONEOK declared a $0.615 per-share quarterly dividend, or $2.46 annualized. Dividends and distributions paid during the quarter were $129.2 million and $138.0 million, respectively.
Material changes versus the prior comparable period
- Results benefited from higher natural-gas gathered and processed volumes and higher NGL volumes following completion of Williston Basin projects, including the Lonesome Creek plant and compression facilities.
- Restructured Natural Gas Gathering and Processing contracts increased the average fee rate to $0.68 per MMBtu from $0.35, materially increasing the fee-based component of earnings.
- Natural Gas Gathering and Processing adjusted EBITDA increased 65% to $100.0 million; Natural Gas Liquids adjusted EBITDA increased 40% to $270.2 million; and Natural Gas Pipelines adjusted EBITDA increased 5% to $74.3 million.
- Lower commodity prices pressured realized prices: average WTI was approximately $34 per barrel versus $50, NYMEX natural gas was approximately $2.00 per MMBtu versus $2.80, and Conway propane was $0.35 per gallon versus $0.49.
- Lower commodity prices reduced commodity sales, but the associated effect was largely offset in cost of sales. Higher service revenue, increased volumes, contract restructuring, and cost reductions more than offset commodity-price pressure.
- Interest expense increased 22% to $118.2 million, primarily because of 2015 debt issuances, higher short-term borrowing rates, lower capitalized interest, and the August 2015 ONEOK debt issuance.
- ONEOK Partners drew the full $1.0 billion available under a new term loan. Proceeds were used to repay $650 million of senior notes that matured in February 2016, reduce commercial paper borrowings, and fund general partnership purposes.
- Capital spending declined substantially as projects were placed in service, spending was aligned with customer needs, and producer drilling and completion activity slowed.
Guidance, outlook, risks and unusual items
- Management projected approximately $600 million of 2016 capital expenditures, 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 purposes.
- Management expects Gathering and Processing earnings to be more than 75% fee-based and consolidated ONEOK Partners earnings to be approximately 85% fee-based in 2016. It expects continued volume growth from Williston Basin projects and new plant connections, although Mid-Continent volumes may decline because some producer completions were delayed.
- Several growth projects were suspended because of lower commodity prices and reduced producer activity. Projects still in progress included Stateline de-ethanizers, Bear Creek facilities, Bear Creek NGL infrastructure, the Phase II Bakken NGL Pipeline expansion, the WesTex expansion, and Roadrunner Phase II.
- Management expects ethane rejection to decline as petrochemical and export demand increases, with stronger ethane demand anticipated as projects come online in early 2017. Excess NGL supply and narrow Conway-to-Mont Belvieu price differentials were expected to persist until demand improves.
- ONEOK Partners expects to repay its $450 million of 6.15% senior notes due October 1, 2016, using cash on hand and short-term borrowings. It expected liquidity to be adequate through 2016 and well into 2017, but access to capital markets and financing costs remain sensitive to commodity prices and credit ratings.
- ONEOK Partners’ debt-to-adjusted-EBITDA ratio was 4.2 to 1, below its 5.0-to-1 covenant limit; ONEOK’s indebtedness-to-EBITDA ratio was 2.2 to 1, below its 4.0-to-1 limit. Both entities were in compliance with their covenants.
- Credit ratings were Ba1 with a stable outlook for ONEOK and Baa2 with a negative outlook for ONEOK Partners at March 31, 2016. A downgrade could increase borrowing costs, require additional collateral, or reduce access to commercial paper markets.
- ONEOK reached an agreement in principle to settle several gas-index pricing lawsuits. The expected settlement payment was described as immaterial and is expected to be funded with cash on hand; the agreement did not cover the Sinclair or Reorganized FLI cases.
- Future cash payments related to released transportation and storage contracts from the former energy-services business were estimated at approximately $31 million, including $13 million in the remainder of 2016.
- Principal risks include prolonged low commodity prices, lower producer drilling and volumes, ethane rejection, customer or counterparty credit problems, high leverage, interest-rate increases, capital-market access, regulatory and environmental requirements, pipeline safety, construction delays, litigation, and weather or operational disruptions.
Important facts for investors to verify
- Reconcile the significant increase in adjusted EBITDA and operating income to the underlying volume growth, fee-rate increases, contract restructuring, cost reductions, and commodity-price impacts.
- Assess ONEOK Partners’ ability to refinance or repay the $450 million October 2016 maturity while maintaining distributions and funding projected capital expenditures.
- Monitor leverage, credit ratings, commercial paper availability, and the effect of potential downgrades on borrowing costs and collateral requirements.
- Evaluate whether the expected shift toward fee-based earnings sufficiently offsets exposure to commodity prices, producer activity, ethane rejection, and NGL market differentials.
- Verify the timing, costs, and customer commitments supporting projects still under construction, particularly Bear Creek, Stateline, Roadrunner Phase II, and WesTex.
- Review cash-flow coverage because ONEOK Partners’ distributions exceeded operating cash flow in both first-quarter periods and required use of debt, distributions from equity-method investments, and other liquidity sources.