Oneok Inc (OKE) — Q3 2016 Earnings Call Transcript

Thank you, and welcome to ONEOK and ONEOK Partners' third quarter 2016 earnings conference call. A reminder that statements made during this call that might include ONEOK or ONEOK Partners' expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provisions of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker is Terry Spencer, President and CEO of ONEOK and ONEOK Partners. Terry?

Thank you, T.D. Good morning and thank you for joining today. As always, we appreciate your continued interest and investment in ONEOK and ONEOK Partners. On this conference call is Walt Hulse, Executive Vice President of Strategic Planning and Corporate Affairs; Derek Reiners, Senior Vice President and Chief Financial Officer; and Senior Vice Presidents; Wes Christensen, Operations; Sheridan Swords, Natural Gas Liquids; Kevin Burdick, Natural Gas Gathering and Processing; and Phil May, Natural Gas Pipelines. In yesterday's earnings releases, we reiterated that ONEOK and ONEOK Partners expect to finish 2016 in line with financial guidance. In addition, we provided updated 2016 volume estimates for the gathering and processing and natural gas liquids segments in the third quarter earnings presentation. As I've discussed previously, our industry is experiencing one of many down cycles in my career, and it's been particularly challenging due to the duration of the low commodity price environment. While the cyclical nature of this industry continues, we are seeing more positive data points from our producer and end-user customers; industry fundamentals seem to be improving, and most importantly ONEOK Partners is well positioned to benefit from growth opportunities in 2017 and beyond. Our businesses have performed well in a tough environment and we remain disciplined and committed to making prudent operational, commercial and financial decisions. As I think about opportunities, I remain confident in our ability to serve our petrochemical customers as their ethane demand grows. We also continue to see producer activity ramping up in the STACK and SCOOP, which we expect will benefit all three of our business segments. And most importantly, the available capacity in our natural gas liquids and natural gas gathering and processing segments gives us room to grow without the need for large capital spending. Our more than $9 billion of investments over the last 10 years gives us the flexibility to grow with our producer and end-user customers without needing to spend significant capital. The efforts we have taken during this down cycle to better position ONEOK and ONEOK Partners will allow us to continue providing value to our stakeholders. Derek, that concludes my opening remarks.

Okay, thank you, Terry. Starting at the partnership, second quarter 2016 adjusted EBITDA increased 3% compared with the second quarter of 2016, and year-to-date adjusted EBITDA of approximately $1.4 billion represents a 23% increase compared with the same period last year, benefiting from recently completed capital growth projects across our system and sustained higher average fee rates in the natural gas gathering and processing segment. ONEOK Partners' distribution and coverage ratio was 1.11 times for both the third quarter and year-to-date 2016. In yesterday's earnings release, we also lowered the partnership's expected maintenance capital spend for 2016. About $10 million of this reduction relates primarily to the timing of an NGL relocation project, $5 million for information technology upgrades, $5 million from lower than expected vendor and contractor costs, with the balance being various smaller items. We continue deleveraging the partnership's already strong balance sheet as trailing 12 months GAAP debt to EBITDA improved again to 4.3 times at September 30. We continue to expect leverage of 4.2 times or less for the full year 2016. The partnership has ample liquidity and more than $1.7 billion of capacity on its $2.4 billion credit facility at September 30. In October, we repaid $450 million, 6.15% senior notes with the combination of cash on hand and short-term borrowings. We continue to have no debt or equity capital market needs until well into 2017. However, we will continue to assess the markets for opportunities to proactively manage our future debt maturities and liquidity at the partnership. The proactive steps we've taken to improve our leverage position and balance sheet are being recognized. In October, Moody's affirmed the partnership's investment-grade Baa2 credit rating and improved our outlook to stable from negative. Also, we expect these improvements will provide the partnership flexibility with excess coverage in the future. Options include repaying debt, funding capital expenditures, acquisitions, or increasing the distribution. On a standalone basis, ONEOK ended the third quarter with more than $230 million of cash and continues to expect to have approximately $250 million by year-end 2016, with an undrawn $300 million credit facility allowing us continued financial flexibility. ONEOK's third quarter dividend coverage was 1.3 times consistent with the second quarter. ONEOK's healthy coverage and liquidity provide flexibilities we transition into 2017. Leverage improvements, increased distribution coverage, and increased fee-based earnings at ONEOK Partners have decreased the potential need for ONEOK's support of the partnership. We will continue to be a supportive general partner to ONEOK Partners, to help maintain its investment-grade credit ratings, but also recognize that we have many potential options for the excess coverage at ONEOK. Those options include purchasing additional units in the partnership, repaying debt, repurchasing ONEOK shares, funding ONEOK Partners capital growth at the ONEOK level, acquisitions, and increasing dividends to shareholders. I'd like to reiterate, from a financial perspective, we're pleased with the progress we've made in 2016 at ONEOK and ONEOK Partners. Through the downturn, we've maintained our $0.615 per quarter dividend at ONEOK and $0.79 per quarter distribution at ONEOK Partners, while also improving coverage and reducing leverage through the proactive steps we've taken. And we continue looking for additional ways to increase shareholder value. Now, I'll turn the call back over to Terry.

Thank you, Derek. Let's take a closer look at each of our business segments. Let's start with our natural gas liquids segment and some updates to our outlook for the year. In the presentation we released with earnings, we updated our expected NGL volume estimates for 2016. We have seen lower volumes than expected with the lower margin gathered only barrels, particularly on our West Texas LPG system and in the Barnett Shale. However, we have also seen higher fractionated volumes, as gathered and fractionated barrels that earn higher fee rates have been strong on the Bakken NGL pipeline and the Mid-Continent region, and we've also fractionated more spot barrels during the year. We expect 2016 gathered volumes to average approximately 780,000 barrels per day, compared with our previous expected range of 800,000 to 870,000 barrels per day. And we expect volumes fractionated to average approximately 590,000 barrels per day, which is at the high end of our previous expected range. In the third quarter of 2016, we connected two additional third-party natural gas processing plants, one each in the Williston Basin and Mid-Continent. Including the connection of our Bear Creek natural gas processing plant in the Williston Basin, we've connected a total of six new plants to our NGL system in 2016. At full capacity, Bear Creek is expected to generate approximately 10,000 to 12,000 barrels per day of white grade takeaway, excluding Y-grade takeaway, excluding ethane. The expected ethane growth from the petrochemical industry remains a key opportunity for ONEOK Partners. As we said previously, approximately one third of the ethane currently being rejected in the U.S. is on our system. We continue to expect a meaningful impact from the ethane opportunity as new petrochemical plants come online, plus an increase in ethane exports during 2017. And we expect as much as $200 million annual EBITDA impact to the segment launching for ethane recovery. Recently we've been talking quite a bit about the STACK and SCOOP plays in Oklahoma and the rapidly developing growth opportunities they can provide to all of our business segments, but particularly our natural gas liquid segment, because of our position as a critical NGL takeaway provider in the area. We estimate that we're currently gathering approximately 150,000 to 200,000 barrels per day of NGLs from the STACK and SCOOP areas, which accounts for more than 20% of our expected 2016 gathered volumes and demonstrates our strong position in the growing STACK and SCOOP areas of the Mid-Continent where many producers are moving in, drilling rigs and seeing very positive results. Wells in the STACK play, in particular, are very NGL-rich with 6 gallons to 9 gallons of NGLs per Mcf in the natural gas stream. Moving on to the natural gas gathering and processing segment, we expect natural gas volumes gathered to average approximately 1.5 billion to 1.6 billion cubic feet per day in 2016, compared with previous estimates of 1.7 billion to 1.8 billion cubic feet per day. This whole driver of these changes, as we said previously, are delays to large multi-well drilling pads and steeper than anticipated declines in gathered-only volumes in the Mid-Continent. We expect natural gas volumes processed to average approximately 1.4 billion to 1.5 billion cubic feet per day in 2016, compared with previous estimates of 1.5 billion to 1.6 billion cubic feet per day. Our 2016 Williston Basin volume estimates remain unchanged and have benefited from a backlog of drilled but uncompleted wells, slowed natural gas capture, new plants placed in service, and continuing infrastructure build-up. While Mid-Continent volumes have been volatile this year, we continue to expect the segment to have higher natural gas processed volumes in the fourth quarter, compared with the third quarter 2016, as we've seen the completion of several wells in October and expect additional multi-well pad completions through the end of 2016 and into early 2017. We expect Mid-Continent processed volumes to reach nearly 690 million cubic feet per day in the fourth quarter. Specifically in the STACK, drilling economics remain viable based on recent conversations with our producers, and well results have been impressive. We've seen some wells on our acreage averaged 30-day peak initial production rates of 8 million to 10 million cubic feet per day. In the Williston Basin, we expect natural gas processed volumes to reach nearly 780 million cubic feet per day in the fourth quarter. This volume increase is driven by our recently completed Bear Creek plant and by increased well completions as producers work off some of their drilled but uncompleted well inventory. The segment's average fee rate remains $0.76 per MMBtu in the third quarter of 2016, unchanged from the second quarter 2016 and up $0.33 per MMBtu compared with the third quarter of 2015. Sustained higher fee rates have provided stable earnings for the segment, and we expect the fee rate to stabilize in this range with some fluctuation due to volume or contract mix changes. With the full benefit of our contract restructuring efforts being realized in 2016 and volume benefits from capital growth projects completed this year, we expect to finish 2016 in line with our financial guidance for the segment. In the natural gas pipeline segment, adjusted EBITDA for the third quarter 2016 increased 17%, compared with the second quarter 2016, driven by increased contracted capacity. In October, the segment completed its 260 million cubic feet per day WesTex Transmission pipeline expansion and the second phase of its joint venture Roadrunner Gas Transmission pipeline, which adds an additional 400 million cubic feet per day of capacity to the Roadrunner pipeline. Both projects were completed ahead of original schedules and below cost estimates and are fully subscribed under long-term fee-based commitments. We've been successful in our strategy to new markets such as Mexico closer to supply areas, such as West Texas and then Mid-Continent. Our recently completed Roadrunner and WesTex pipeline projects are examples of our ability to do this, and as the STACK and SCOOP continue to gain momentum, we're well positioned to provide needed residue takeaway options. We're currently connected to 34 natural gas processing plants in Oklahoma with a total combined capacity of approximately 1.8 billion cubic feet per day and have a broad footprint throughout the state, placing us in a strong position to offer transportation and storage services as producer activity picks up in the Mid-Continent. Related to this effort, yesterday we posted a binding open season soliciting interest in expanding segments of our intrastate natural gas pipeline in Oklahoma, ONEOK gas transmission, to drive additional residue takeaway from the STACK and SCOOP production areas. The expansion would provide increased capacity and delivery options and the pipelines in the Western Oklahoma serving markets in the upper Mid-West and Texas. We have secured a firm commitment from a customer to support expanding the pipeline to an incremental 100 million cubic feet per day, and in the open season, we will seek additional long-term firm commitments from shippers to support a broader expansion of the facility. With nearly 100% fee-based earnings in the segment and our portfolio of high quality and high connectivity assets, we'll continue to look for additional opportunities to grow this stable business. Acting as a solution provider to end-use markets has served us well and will continue to be a key segment strategy. To wrap up, I'd like to reiterate that we expect to finish 2016 in line with our financial guidance. We've seen better than expected results so far in our natural gas pipeline segment and on-target results in our gathering and processing segment. Our natural gas liquid segment remained slightly below our operating income and equity earnings guidance for the year. With line of sight into our expected earnings growth, strong balance sheets at ONEOK and ONEOK Partners, and continued healthy coverage, we expect to be in a position to increase dividend and distribution payments to stakeholders in the second half of 2017 if industry fundamentals continue to improve. Financially and operationally, we're in a strong position and we have the flexibility to take advantage of opportunities to create additional shareholder value. Thank you for your continued support of ONEOK and ONEOK Partners, and as always, thank you to our employees for your hard work and continued dedication to operating our assets safely and environmentally responsibly. Operator, we're now ready for questions.

Good morning. I just wanted to talk a little bit about OKE's tax situation going into 2017. What are you expecting for the cash tax rate if nothing changes and how are you thinking about managing coverage going forward if we have to assume that cash tax is significantly higher?

Eric, this is Derek. We will guide to cash taxes for 2017 when we roll out the rest of our guidance, maybe later this year or early next year. We do think about and we do forecast cash taxes as we think about distributions. Obviously, we've been running thicker coverage at OKE here in this period of some uncertainty, but as we look forward and think about the dividend growth, we'll consider the cash tax as a part of that announcement.

Okay, and if you were to consider doing a transaction at the OKE level, are there ways that you could basically structure a deal where you would be able to sort of take advantage of the OKE currency but then also shield some of the taxes, like if you were to buy a C-corp that had some deferred taxes, would you be able to use that to shield some of the OKE income or does it exclusively go to whatever you purchase and just how should we think about that?

Yeah, I think you're thinking about that right, Eric. Certainly, we have - look the two balance sheets have some flexibility in terms of structuring any sort of an acquisition. Stock-for-stock deals probably would not result in a step-up in the basis, but if we structure the transaction in some other ways such that the acquired entity is stepped-up for tax purposes, that would generate a fair amount of additional shield there.

Yeah, certainly, Eric, this is Terry. Yeah, we’re obviously highly focused on the tax liability in OKE and we’ll continue thinking about opportunities where we could acquire assets or businesses that could help shelter those taxes. So that’s an ongoing process and certainly as we prepare our 2017 forecasts, we’re in the middle of our 2017 planning process with our boards. As we come out of that process, we may be in a position to shed even more light on our thoughts. And I think broadly speaking, as we think about OKE coming to your earlier question, we’ve kept the thicker coverage in this very challenging environment, but I think as you think about coverage going forward at OKE over a much longer-term period, we’re going to gravitate more toward a 1.0 to 1.1 coverage range. So that’s kind of how we’re thinking about it from a longer-term perspective.

Okay. Thank you for taking my question. I’ll jump back in queue. Thank you.

Today, and maybe I just can follow up on the last question actually that you just had, which I think you answered based on the OKE level. I was wondering if you can talk about it at the OKS level. Can you share with us how management and the board is thinking about what’s an acceptable coverage ratio that you'd like to see at OKS before you would consider an increase? Some other management teams have talked about 115 being the new 105 or 120 being the new 105. Just wondering if you can sort of give us your thoughts with respect to that and how you're thinking about a higher retained DCF to fund growth CapEx going forward versus just maintaining the old 250 model?

Yeah, I think, Shneur, yeah, we’re thinking very similar to our peers carrying a bit thicker coverage. I think broadly speaking over the long term at OKS, coverage in the 101 to 102 range is kind of how we're thinking about it longer term.

Okay. And then -

If we can establish a sustainable coverage at that level, then certainly we've got to be thinking about distribution growth when we get to that point.

Right. Okay. So, 101 to 102 is kind of the new target range that we should be thinking about for OKS?

Yeah, that's correct.

Okay. And then in terms of all the detail that you gave on the SCOOP/STACK, I think it was on Slide 4, you sort of talked about the potential for this SCOOP/STACK mentioned very minimal capital for a 100,000 barrel increase on the NGL system. You also highlighted that you have some idle capacity that could come online. So I guess I really have two questions. One, given all the excitement by the producers, what is the timeframe that we would expect to see you FID that decision to spend $100 million in capital and bring that idle plant back? And then secondly, could we actually see the new builds of facilities as well to beyond the operating leverage that you just highlighted?

Well, Shneur, I think we’re seeing tremendous development in the STACK and SCOOP as we speak, and it's still early. Now, this 100,000 barrel a day potential is, as we've said in the past, a two to three-year phenomenon. Certainly, at the rate that we're seeing this development it could happen earlier. But a two to three-year timeframe I think is an appropriate way to think about it. And as we move into 2017 and we hear more about producers’ plans and as they finalize their budgets, we're going to get a better sense of the STACK and SCOOP and what it will mean to us from a timing standpoint. We’ll be in a position to refine that certainly as we move into the first quarter of 2017. Sheridan, do you have anything to add?

The only thing I would add is that we continue to get multiple calls from the processors out there trying to add more plants in the area, and as processors are talking to us, they continue to revise their volumes up. So, the chance of that moving forward in the two to three time frame is a great possibility.

Okay, great. Thank you very much, guys. I really appreciate the color.

You bet. Thank you.

Good morning, guys.

Good morning.

Good morning.

A follow-up on that point, lots of producers out this morning and last night chatting about SCOOP/STACK development, down in Marathon, you feel the whole nine yards, it seems like they're adding rigs and putting out wells that are well in excess of what they had previously planned. The 150,000 to 200,000 barrels you're talking about that you're pulling now from SCOOP/STACK, is that - I guess were the upside potential there without additional assets on your end? And then you've mentioned the 100,000 barrels a day and the minimal capital there. Is there, I guess, additional capacity within the system as it sits today for Q4, Q1, maybe Q2 just the short-term ramps, or do we need to see dollars for that direction to allow additional volumes at the system?

Yeah. So, you answered the question. We do have capacity available today for some of it. I think what we said, Sheridan, 40,000 barrels a day today. So, that's capacity that's existing naturally in the system that we don't have to expend any meaningful capital for that. There's the incremental 60,000 barrels a day that gets you to the 100,000, where we'd have to spend some capital, and I think that number was on the order of $100 million.

Yeah, to get to the whole 100,000, we need to spend about $100 million, and a bulk of that is going to be the incremental pumps on Sterling to get to the 60,000.

So, the gathering infrastructure that we have in the play is pretty extensive and it's been there a while and we're well positioned. It’s the downstream moving the barrels downstream to the market where, as Sheridan indicates, where that capital has been spent.

Okay. It’s helpful. And then on the net gas numbers pulling those down for the year, seem like the direction we're heading out to the Q2 results and kind of softness that is targeted for Q3. When we look at the exit rates, you mentioned the multi-pad well delays coming, I guess, coming into the fold. Is that the only benefit that we're getting that leads to those higher rates or do those higher rates also foreshadow activity increases on top of the delayed connections?

Yeah, this is Kevin. It's really both. I mean we are seeing there have been the delays that have really caused the lower volumes and the lower guidance. Those pads are coming online. We've seen some of that already completed in October. There are now some additional wells to come online through the rest of this year, and we've also got visibility into early 2017 to expect that ramp to continue on into the early parts of 2017 as well. So, with the producer activity and the ramp that we've seen in completions and also some visibility we have into rigs going forward, that's what gives us the confidence that that ramp will continue through Q4 and then into Q1.

Kevin, what type of magnitude of change do we see from Q4 into Q1 based on your visibility today? Just trying - I know it's too early to guide 2017, but just given those comments, how dramatic is that continued ramp from the current plan that you guys are aware of?

Well, it is a little too early to talk about some specific numbers into Q1, and part of the reason there is, as Terry talked in his remarks, the size of these wells are extremely large. So, pads or wells being completed and moving around a little bit can swing your numbers. But as we release our guidance for 2017, we’ll provide some more color on how that ramp occurs throughout the year.

Great. I appreciate that, Kevin.

Hi. So, I actually wanted to start off on some of the M&A comments or response that you gave to an earlier question. When you talked about cash being paid to sales taxes versus giving equity to a potential target, what's the leverage that you would be willing to go to at the parent in such a scenario?

Christine, this is Derek. I think it depends a bit on the nature of the acquisition and the assets or the businesses within that business. So, if you think about what we've been trying to do over time is move more towards fee-based businesses, certainly the pipelines business where we've got Road Runner now in service in the West Texas expansion. Those more highly fee-based businesses perhaps could carry a little bit more leverage than ones that are more volatile. So, I think it would depend a bit on that. What we've been targeting at the partnership for leverage is four times or less and we think we're going to be at 4.2 times or less by the end of this year. So, I don't think you would expect it to be dramatically higher than what we're thinking about today.

Okay.

Christine, I think ideally for us, the objective is not to get to four, but to get below four. And that's really - that's the long-term goal, stay below four.

At the LP?

That's right. That's at the LP.

Okay. And then moving over to the NGL segment, your Bakken G&P volumes were down sequentially over the last quarter, yet the volumes on the Bakken NGL pipe were up. It looked like there was some incremental ethane. But could you confirm that and talk about what's driving that?

The ethane is about, Christine. This is Sheridan. The ethane is about the same between the two quarters. We are seeing, as we saw, a little bit of ramp-up in our other volumes from the third-party plant that kind of makes up a little bit of the difference there.

Okay. So I think historically you guys have talked about like 25,000 barrels per day of ethane flowing down that pipe or what they're currently running at?

Well, actually about, I think what we said is 25,000 barrels a day is what ORM has extracted. What our plants have, we’re seeing above 30,000 barrels a day if you put all the plants in there.

So, that’s affiliated in -

Affiliated in 25,000 and you get above 30,000 with the non-affiliated plants.

Okay. And we should continue - that level continues going forward?

That's correct.

Okay. And then I might be kind of getting ahead of myself. But when we think - you talk about Sterling 3 expansion and it's clearly a really low cost 100,000 barrels per day. I mean, 60,000 that you can add for $100 million. But is that kind of the last of the low-hanging fruit? Because we do have a line of sight into all of those assets being fully utilized. So, beyond that, would it have to be looping if you were to add capacity and does the capital spend become meaningful if you want to add capacity beyond that?

Christine, if you want to add more raw fee capacity between the Mid-Continent and Gulf Coast, which would be expanding Sterling beyond the 60,000 or expanding our buckle, you would be talking about loops and it will be more meaningful.

Okay. Can you give us an idea of how much more meaningful?

Well, a lot depends on how much volume you want to put on there and which one we put it on, but I can't give you an idea without having run through the hydraulics and everything else and volume predictions.

What about if a new build? How much more expensive would that be versus the looping?

Well, the new build would be substantially more expensive. I mean if you're going to - and we think about putting pumps on, it's actually really low-hanging fruit, very cheap, as we just said. You get 60,000 barrels a day for less than $100 million. And if you're going to go put in a line, depending on what size of the line, you could be talking probably a little bit under $100 million, I mean a million dollars a mile to put that in. So looping is going to be much closer to putting pumps on than it will be to a completely new build.

Now, Christine, so the looping projects that we're talking about, we're not talking about necessarily a loop of the entire pipeline. These are - these are strategic loops between pump stations that we put depending upon the volumetric need in the most efficient place. So we're not talking about looping the entire pipeline. So, that capital - the capital expense a lot greater than just putting in pumps is not going to be the same as looping the entire pipeline.

Got it. Okay, great. Thank you for the color.

Good morning.

Good morning, Jeremy.

Sorry if I missed it. But did you guys touch on the number of docks on your acreage across your systems?

We have not touched on it, but I'll tell you the numbers about 375 or so in the Williston Basin on our dedicated acreage. Is that right, Kevin?

Yeah, that’s kind of where we're maybe - maybe slightly lower than that right now and that's where we do expect that number will start to trend down through the fourth quarter, and that's what, as we've talked about our Williston volumes and Terry in his remarks, when we think about the increased activity we're seeing, a lot of that is the completion of docks. So, we'll see that number trend down between now and the end of the year.

Thanks for that. And then there's been a good amount of conversation on M&A in general. I was just wondering if you could take a step back at a higher level on how you see the market right now as far as the bid/ask spread? There has been some consolidation. There have been some transactions recently in this space. How do you see ONEOK fitting into that? Any thoughts would be helpful.

Well, so, Jeremy, we continue to assess opportunities and the challenges continue to find opportunities and our potential targets that are willing to transact. The bid/ask spread is still wide. I think there will be more transactions, and certainly for us as we think about transactions, not just from an M&A perspective, but acquisitions strategically that make a lot of sense and those are good fit. Do they make sense within our footprint, do they bring in a volatile amount of commodity risk to us or do they perhaps bring a lot of fee-based, stable fee-based business to us? Those are all things that we think about, and certainly our bias is more toward fee-based and not as much commodity exposures as some of the midstream businesses have.

That's helpful. That's it for me. Thank you.

Yeah, thank you.

Yeah. Good morning everybody.

Good morning.

Thanks for taking my question. Just made the comment in the opening remarks on the potential raise in the distribution, if things continue to go well, perhaps in the second half of ‘17. I mean, is a logical move through there as you expect your leverage at OKS to drop under four times by the second half of next year?

Yeah, John, this is Derek. We do expect leverage to continue to ratchet down as we move through 2017. So, I would expect that we would be in that area.

Okay. And then, Derek, I presume you - before you contemplate recommending an increase of the distribution, you would really rather be below four times leverage, correct?

Well, sure, John, we would - I don't think we draw bright lines here and we're certainly looking forward even beyond ‘17 as we think about it. Going back to increasing the distribution. So if we've got a good line of sight, I don't know that we're going to draw a bright line. But as I mentioned, we continue to see that leverage ratchet down and you've really seen that quarter after quarter here. I don't expect that to change.

Okay, great. And then just following on Jeremy's question on the M&A front, obviously you want to have businesses that could potentially integrate where there is a footprint of fee-based. I mean, if there are - I mean are you looking at, say, any kind of step-out opportunities or something where you think you'd like to geographically be in areas where you aren’t currently? I mean just any thoughts around that potential appetite?

Most of the transactions, potential targets that we think about do have some overlap within our existing footprint, but do modestly reach into some other areas. I think that could make sense for us. Looking for something - a collection of assets stand-alone significantly outside our geographic footprint just because you can get it at a good value certainly doesn’t have much appeal to us. But yeah, modestly outside our footprint could make some sense.

Okay. All right, my other questions have been answered. Thank you so much.

Just one question really, just on the quarter, can you talk a little bit more about what's driving lower volumes on West Texas LPG? I would think just given the dynamics on the Permian that that might be at least steady to growing, and then does that have anything to do with the rate dispute that’s going on? Thanks.

Yeah, yeah, Michael. I think most of that on West Texas pipe is ethane, ethane rejection. I think that's the most of that impact. Sheridan, anything else?

That’s right.

Okay. Thank you very much.

You bet. Thank you, Michael.

Hey, guys. What’s the remaining flared gas capture opportunity in North Dakota look like? How much of a backlog do you think you have there?

This is Kevin. Yeah, we're still in that 70 million to 80 million a day range. We have brought on Bear Creek. We don't have the state reports of the flaring a couple of months in arrears, so we don't have that data yet to give the exact numbers, but I would absolutely - I mean we know the flaring has gone down as Bear Creek has ramped up. We've just, as recently as last weekend, kind of completed the last step of a gathering system expansion that put out some additional flares. So, I would expect that run rate - we’re expecting that run rate maybe to be in the 5% range kind of going forward if we think about our total production in the gas capture we expect going forward.

So, just to understand it correctly, 5% year-on-year versus 2016 total gathering up there?

I’m not sure. Apologies there.

What do you mean exactly by 5%?

Oh, okay, yeah. 5% of the production. So, if you go back to that theoretical chart that we put out there, we’re in that a little over 800 million a day of production on our acreage. So if you look at 5% of that, that would be 40 million to 50 million a day flared gas ongoing.

And when - as you look forward, when would you see that opportunity exhausted in terms of - at some point are you going to be capturing every new molecule that's produced or we're going to see a consistent backlog there as producers continue to bring on wells and flared gas?

Well, I don't think that it's ever going to go away completely. I mean there's always going to be some level of flared gas just due to ongoing. You're always tying in new infrastructure and new well connects; you're always going to have operational hiccups. So, there's always going to be some level of flaring, and that's what I think that 5% range that would be kind of an ongoing run rate.

Okay. That’s helpful. Thank you very much.

Hi, good morning.

Hey, Craig.

So, are you still confident speaking of M&A? Are you still confident about ultimately hitting that six to eight times EBITDA multiple all-in for the West Texas LPG pipeline?

Craig, this is Sheridan. Yeah, we're still confident. We’re still getting - we are out there actively engaged with a lot of potential new processing plants that are coming on. So we’re very excited about the volume growth that we see on the West Texas system. So, yeah, we’re very confident about getting the six to eight times by, I think what we said is 2020.

Okay. And any color on when - and when that rate dispute might be resolved? I mean, you're below market on your rates, aren’t you?

We are below market on the rates. I think the best thing we could say about is that we're going through the process. We're comfortable with our case. But it's up to the Texas Railroad Commission how the case progresses. So, we hope it’s resolved soon.

Did they give a timeline for that?

No. We have a procedural schedule that we're walking through.

Understood. And on the new STACK resolute gas pipeline opportunity, is it fair to say that that ought to be much better than the normal gas pipe EBITDA multiple and how large could it be?

Yeah, this is Phil. I think it would be probably a good multiple project. At this point, it’s just expansion. There may be opportunities to develop more capacity as the open season matures, which may mean that we need to put in some pipe. But, yeah, it's probably 200 million to 400 million a day. I would say it’s the sweet spot for us and it provides a lot of interconnectivity with the interstate pipelines out in West Texas. So, it seems to be a very popular discussion, because of the value associated with getting the molecules out there.

Phil, you probably looked from a multiple standpoint, probably on the low end of that typical five to seven times. Are you going to be on the low end of that multiple range?

Yes. Great, thank you.

That's great for a gas pipe.

Yeah, it is a great project.

And, look, there is some noise in the quarter; something is a little better than one would have expected. Gas pipes had a good quarter. You had some down, some of the more volatile margin staff with spreads. But you basically met street expectations and you're guiding to flattish to up fourth quarter NGL volumes and rising G&P volumes sequentially. Commodity pricing is much higher than the third quarter to date. ISO to normal butane spreads are up sequentially into the fourth quarter and you’ll get a fourth quarter contribution from the recently completed pipes. My question is if you think street expectations of just over $20 million higher sequential fourth quarter EBITDA might be light?

So, Craig, from a street expectations perspective, we’re going to hit our numbers. Okay. And so, I don’t know where that puts you in the fourth quarter relative to the street, but we feel highly confident in our ability to hit our financial guidance. And you're right, there is a lot of noise in the business, in the industry, and there are a lot of things that move up and down. I'm really glad we’re in a lot of basins and we've got a lot of levers to pull, and we’ve pulled some levers during the third quarter, and we continue to pull levers each and every quarter. So, we've got a lot of optionality, flexibility, and opportunity. We do have some upside in the fourth quarter in terms of NGL pricing and spreads and what have you. But you also do have heavy inventories in the industry that could weigh on it and some uncertainty in the export markets that could affect the industry near-term. All in all for us, it equates to a high degree of confidence in our ability to hit our numbers in terms of our guidance. Does that help - does that help you?

That does. And I apologize I got on a little late. I had trouble dialing in. Was there any comment about the third quarter Mid-Con spot NGL gathered and the NGL frack spot volumes?

Sheridan?

The spot volumes in the third quarter were minimal. We didn’t have all that spot lines in the third quarter, Craig.

Okay. Great. And lastly with M&A, is there any particular side of the business that you would emphasize or a geography like Permian where you already obviously made a move or maybe the Niobrara, any kind of color on where your wish list would be?

Craig, I think from the NGL perspective, as we look at, we want to have something that is complimentary to the assets that we already have, something that bolts on. I mean, obviously from a resource play, the Permian is a very good play with the West Texas pipeline. But in other areas, anything we can put into our system to be able to continue that integrated chain is what we're going to be looking at.

Okay. Thank you very much.

Thanks and good morning. Most of my questions have been hit. Just I had one quick clarifying question though. With respect to you guys, you have more visibility to distribution and dividend growth in 2017; do you have a sense of what that magnitude could be at OKS and OKE?

No, we're not going to provide that information. We're going to - we go through our planning process here for 2017 now, and to say we’re in the middle of that process now. When we issue guidance, maybe we'll provide a bit more specificity for you. We're not prepared to do that at this point.

And as you sort of evaluate fundamentals potentially changing, you said that this sort of growth was contingent on fundamentals remaining intact, right? What specifically are you monitoring in terms of making that decision?

Well, certainly just the overall industry climate commodity price environment, our producers are feeling how are they - how are they spending their capital, the petrochemical space, are they on schedule with their petrochemical plants, and just the general climate of the industry and, in particular, our business.

Okay. That's it for me. Thank you.

Yeah, thank you.

Thank you. Our quiet period for the fourth quarter starts when we close our books in early January and extends to when earnings are released after the market closes in late February. Thank you for joining us.