Oneok Inc (OKE) — Q3 2017 Earnings Call Transcript

Thank you and welcome to ONEOK's third quarter earnings conference call. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision 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 this morning is Terry Spencer, President and CEO of ONEOK. Terry?

Thanks, Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued interest in investment in ONEOK. Joining me on today’s call are Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs, and Kevin Burdick, Executive Vice President and Chief Operating Officer. Before I hand the call over, I have a few brief opening remarks. I want to start by saying how much I appreciate the efforts of our employees who endured Hurricane Harvey. Employees at our Mont Belvieu area facility and countless others at our company worked tirelessly to keep our assets running safely in order to provide needed services to our customers. I am very proud of them. As expected, their dedication and commitment to this company continues to be nothing short of remarkable. I should also mention that the swift recovery of the Mont Belvieu infrastructure following Harvey would not have been possible without the hard work and cooperation of many of our industry peers, customers, service providers, and local governments. Many thanks to them. I also wanted to extend our thoughts and prayers to the victims, their families, and all affected by the senseless tragedy that occurred in New York City yesterday afternoon. The city and its people once again proved their courage and resolve as they cope with this tragic event. Moving on to our third quarter performance, building off our second quarter results. Third quarter performance was strong, benefiting from natural gas and natural gas liquids volume growth and higher transportation revenues in our natural gas pipeline segment. These results demonstrate that we are well on our way to achieving our 2017 guidance. As we stand today compared to a year ago, rig counts have increased in the states we serve by 70%, driven primarily by technological advances in drilling, which have made exploration more effective, more efficient, and production more prolific. We are seeing petrochemical facilities and ethane crackers coming online and expect two more to start up in the next several months. The industry has been anticipating these startups for several years, and now we are beginning to see real demand for ethane, which Kevin will discuss more in a moment. We're also hearing from customers about the next wave of petrochemical facilities to be designed and built on the Gulf Coast. I mention this because it's important to point out that the energy industry is once again proving its resiliency and adaptability to the marketplace. I believe ONEOK has played a big part in that by continuing to invest capital to aggregate supply and deliver it to the markets. We are well positioned to meet the needs of our customers today, and we are committed to continue investing in and around our assets to meet their needs into the future. With that, I will now turn the call over to Walt.

Thank you, Terry. ONEOK's third quarter adjusted EBITDA was $517 million compared with $462 million in the second quarter 2017. The 12% increase was primarily driven by natural gas and natural gas liquids volume growth. As noted in our earnings release, third quarter results included approximately $20 million in non-cash impairment charges related to non-strategic assets and equity investments in our G&P segment, which impacted third quarter earnings per share by $0.03. We estimate that without the disruption of Hurricane Harvey, the NGL segment's earnings would have been approximately $4.5 million higher for the quarter or $0.01 per share. Last week, we announced our quarterly dividend of 74.5 cents per share or $2.98 per share on an annualized basis, unchanged from the previous quarter when we increased the dividend by 21%. Dividend coverage was healthy at 1.3 times for the quarter. Management still expects to recommend annual dividend increases of approximately 9% to 11% beginning in 2018, with annual dividend coverage of 1.2 times or greater. Since June, we've announced nearly $0.5 billion in attractive, low multiple growth projects supported by commitments from anchor customers. In September and October, we issued 3.3 million shares through our ATM equity program resulting in net proceeds of $184 million. The proceeds of these issuances, along with cash generated in excess of dividends, support these recently announced high return projects as we prudently manage our balance sheet. We continue to see opportunities to make attractive investments supported by customer commitments. To the extent that we make additional future investments, the ATM will be one of the tools available to fund future growth. ONEOK's trailing 12 month GAAP debt-to-EBITDA improved again to 4.9 times at September 30. Our annualized third quarter GAAP debt-to-EBITDA run rate was 4.6 times. We continue to expect leverage to be around our target of 4 times or less by late 2018 or early 2019. We continue to proactively manage our balance sheet. We repaid $1 billion in outstanding debt in July and September combined and completed a $1.2 billion senior notes offering in July, essentially extending the term of the debt at very attractive rates. We are well positioned with ample liquidity to manage our debt maturities effectively and continue to finance growth investments. Regarding rates on West Texas LPG, in late September, the Administrative Law Judge provided its findings to the Railroad Commission of Texas, which the commissioners may accept, modify, or remand for further proceedings. There is no deadline for them to take action, but we anticipate the commissioners may consider the findings in any exceptions filed by the parties this December. Regardless of the outcome, we do not expect the Railroad Commission's decision to materially impact our financial results or our current and future negotiated rates on West Texas LPG. Our ability to secure new NGL supply from producers and processors remains strong, as noted by our recent announcement to expand into the heart of the Delaware Basin. In yesterday's earnings announcement, we maintained our 2017 guidance outlook, which was updated last quarter to reflect the completion of the ONEOK and ONEOK Partners merger transaction. We expect to announce 2018 guidance sometime after the first of the year. Please refer to our news release, investor presentation, and 10-Q filing for additional details on the quarter. I'll now turn the call over to Kevin for a closer look at each of our business segments.

Thank you, Walt. Starting with our natural gas liquids segments, third quarter adjusted EBITDA increased 8% compared with the second quarter 2017, including the impact from Hurricane Harvey, which lowered our EBITDA by approximately $4.5 million. We sustained significant damage to our facilities but experienced reduced volumes due to industry downtime and increased operating costs following the hurricane. We essentially realized no benefit from optimization directly related to the hurricane. As we look forward, we have seen wider spreads so far early in the fourth quarter. NGL volumes gathered averaged approximately 812,000 barrels per day, a 5,000 barrels per day increase compared with the second quarter 2017. Higher Mid-Continent volumes and higher volumes on our West Texas LPG pipeline drove the increase. Volume on Bakken NGL pipeline decreased slightly from the second quarter due primarily to planned maintenance activities at our Garden Creek and Grassland's natural gas processing plants in the Williston Basin and planned maintenance on the Overland Pass Pipeline. As we discussed previously, our Bakken NGL pipeline can run above its nameplate capacity of 135,000 barrels per day, and through October, volumes had returned to levels at or above what we experienced in the second quarter. We continue to monitor producer customer activity as well as the current utilization of Overland Pass Pipeline and are evaluating our options to provide additional capacity out of the region. Third quarter NGL volumes fractionated were down slightly compared with the second quarter 2017, primarily impacted by Hurricane Harvey. Volumes that were unable to be fractionated during the third quarter were stored and will be fractionated in either the fourth quarter of 2017 or first quarter 2018. Ethane rejection levels on our NGL systems remained relatively unchanged in the third quarter 2017, averaging more than 150,000 barrels per day, similar to second quarter levels. As multiple petrochemical facilities are expected to come online in the next few months, we continue to expect ethane recovery levels to fluctuate in the fourth quarter and into early 2018 as the startups occur. As we have moved into the fourth quarter, we have seen a significant increase in our gathered volumes. In October, we exceeded 900,000 barrels per day on numerous days. The increase is a combination of volume growth overall and additional ethane being recovered. For the natural gas gathering and processing segment, third quarter 2017 adjusted EBITDA increased 11% compared with the second quarter 2017, with the segment once again posting solid volume growth in the Williston Basin and STACK and SCOOP areas. In the Williston Basin, volumes processed established new highs with an average of more than 840 million cubic feet per day during the quarter. Despite planned maintenance at some of our processing facilities and the maintenance on the Overland Pass Pipeline, Mid-Continent volumes averaged more than 740 million cubic feet per day, an 8% increase compared with the second quarter 2017. Rigs remained steady across our acreage with approximately 30 rigs operating on dedicated acreage in the Williston Basin and approximately 15 rigs on dedicated acreage in the STACK and SCOOP areas combined. In the Williston Basin, we connected 130 wells during the third quarter for a total of 313 through the first nine months of the year, well on our way to completing our target of 400 in 2017. We now estimate the drilled but uncompleted wells on our dedicated acreage increased between 350 to 400, compared with 300 previously. We continue hearing of improved efficiencies across the basin, including indications between 10% and 15% productivity improvements in wells completed in 2017 compared with 2016. At current rig activity levels, and in addition to inventories in the basin, we expect continued volume growth into 2018. Growth in the Mid-Continent also continues well. We connected 35 wells in the Mid-Continent during the third quarter, and have connected 76 through the first nine months of the year, well on track to reach our target of 100 by the end of the year. The segment's average fee rate was $0.86 per MMBtu in the third quarter 2017 compared with $0.76 per MMBtu in the third quarter of 2016, a 13% increase primarily driven by increased volumes on contracts where we received higher fees. We still expect the segment's average fee rate to be approximately $0.85 for all of 2017. In the natural gas pipeline segment, adjusted EBITDA increased 8% in the third quarter 2017 and 13% through the first nine months of the year compared with the same periods in 2016. The segment continues to benefit from high fee-based earnings and increased transportation capacity contracted. We continue discussions with producers and markets to develop long-term natural gas takeaway solutions across our footprint, especially out of the Permian Basin, where we have a long-standing asset position with our West Texas Pipeline system and recently our joint venture Road Runner pipelines. As Walt discussed, we've announced nearly $0.5 billion of capital growth projects, with the most recent being the $200 million expansion of the West Texas LPG pipeline into the prolific Delaware Basin, one of the fastest growing plays in the U.S. The project is supported by long-term dedicated NGL production from two third-party natural gas processing plants, which we estimate will produce up to 40,000 barrels per day. The project is expected to be completed in the third quarter of 2018. Fees on this project are negotiated bundled rates at market-based transportation and fractionation rates. Because this is an extension and expansion of an existing pipeline asset, we expect EBITDA multiples to be in the four to six times range, better than our typical five to seven times. Additionally, the lateral is sized to allow for future growth beyond the initial two plants. We continue to discuss opportunities with numerous customers in the Delaware regarding potential contracts with more than ten new processing plants in the area. Terry, that concludes my remarks.

Thanks, Kevin. I have just a couple of closing comments regarding our future growth projects before we take your questions. Following the West Texas LPG expansion announcement, we are still developing our unannounced inventory of potential capital growth projects. We've updated that inventory, which is now between $2.5 billion and $3.5 billion compared with $1.5 billion to $2.5 billion previously. This inventory remains heavily focused on NGL infrastructure, which we anticipate could be announced between now and 2020. We are expanding our existing businesses and continuing to focus on deploying capital prudently at attractive returns and in ways that will create value for our customers and investors. Finally, I want to once again thank all of our employees for their continued hard work and their commitment to safe operations, our customers, and the communities we operate in. Operator, we are now ready for questions.

Hi, good morning, guys.

Good morning.

Just a couple of questions. Just to start off, I was wondering if you can talk about your CapEx funding strategy going forward. You tapped the ATM this past quarter, and I'm trying to understand is it more because you were during a blackout during the merger process and needed to get leverage in line post close and no longer expect to use it and use retained DCF, or alternatively, do you continue to plan using the ATM as a primary source of funding?

Fortunately, there was no relation to the period of time between the announcement of the merger and the closing of the merger. I think it's important to note that we've announced this $500 million or so of new growth projects since June, and we wanted to use the ATM to make sure that we funded those because they were in addition to the CapEx that we had previously been discussing. So it was more about getting ahead of the game and making sure that, as we look at forward growth projects, we maintain a very strong balance sheet.

Okay. And then secondly, the $500 million of identified CapEx for 2018, are there any other projects that you're very close to approving or moving forward with that could take the number materially in 2018, or is that kind of the run rate we should be thinking about?

Well, I think you should always consider that we have this base run rate of kind of routine growth, but we're continually working this backlog of new projects. And as contractual commitments and anchor customers come together, certainly we'll move forward and take those projects to our board. So we've got a number of projects that are in various stages of development. As those things mature, as we've always said, we will not only make those public once we get those approved, and our board will certainly disclose those.

Okay. And final question, you've had this forecast out there for dividend growth around the 10% range for several years going forward. How much capital do you need to be investing in to achieve that growth rate over the next couple of years? Is it a couple of hundred million, is it more? You're running at last, just kind of wondering what the cadence is to being able to achieve that growth rate, operating leverage versus needing to invest capital?

Sure, Shneur. This is Walt. The dividend growth rate that was previously announced was supported by base growth CapEx in line with the past couple of years. New projects will enhance these cash flows and will produce more free cash flow to reinvest in our business and maintain our strong balance sheet.

Great. Thank you very much, guys.

Thank you.

Good morning.

Good morning.

Terry, I just want to pick up on one of your last comments regarding the upsize in the kind of growth project evaluation last going up to $2.5 billion to $3.5 billion. I was wondering if you could provide a little bit more color on what specifically is driving that? What's changed? It sounds like this NGL pipeline is part of the driver there. But is there any more you can share as far as what basins or anything else in the market that evolved that you guys see as better opportunities now?

Well, so certainly, Jeremy, at a high level, what we're seeing is a strong core in NGL growth in the basins that we operate in, certainly in the Williston Basin we continue to grow. Their prospects, as Kevin mentioned on his call remarks, look great, and we continue to see strong development in STACK and SCOOP. And certainly, this recent announcement of West Texas is certainly an indicator of the opportunities in front of us there. So the bulk of the CapEx in this increased unannounced backlog is going to be in the NGL segment, and it will be in the form of pipeline loops, pumps, pipeline infrastructure, and potentially fractionation capacity. That could involve some storage as well possibly. So projects of that nature are primarily what they consist of. Kevin, do you have anything that you could add to that?

Just growth of our existing assets. Again, significant growth of existing assets.

That makes sense. Thanks. And then just another question on funding growth CapEx going forward, there's been an increased use of hybrid securities out there, and I am wondering how you think those stack up versus the ATM when you walk into, you know, minimize dilution for future growth?

Well, of course, we will look at every opportunity we have to fund the business going forward. We're pleased to be in a position with a very strong investment-grade balance sheet, and traditional capital access is something that we enjoy and it would probably be where we would lean more towards. But we'll say though that price of everything that's in the marketplace and evaluate whether it fits into our capital structure.

Got it. Thanks. And then just looking at the STACK and SCOOP, I just wondered if you could talk a little bit more about the dynamics there. It seems like STACK continues to have good opportunities moving forward. The Canadian value there and knock seems like it's still on the back burner at this point. I was wondering if you could share any more on what you see there?

Kevin can help you there?

Yeah, Terry. Again, we're excited about STACK and SCOOP. Our volume growth sequentially quarter-to-quarter just shows that and demonstrates some of the potential. On the G&P side, we do have the 200 million a day offload that we've got out there that's expected to be complete by the end of the year, so that's the first tranche of capacity. We've also got the Canadian Valley two expansion, which we've announced. Beyond that, our NGL segment with the footprint we've got in the STACK and the SCOOP, there's a lot of additional plants. I think they just came out yesterday and announced a new plant that would be under our contract with them. So, a lot of activity is going on in the STACK and the SCOOP. Producers have come out here and just in the last couple of calls I've seen, talked about moving to a complete development program which just drives the efficiency of the rigs up. And so there's a lot of opportunity for us, given our footprint in the STACK.

Thanks for that. And then just last on the Bakken. On the processing side there, I was just wondering if you could update us on the competitive dynamics you see in some of the NLPs moving forward, processing expansion such as Bear and others, and I was just wondering if you could give us your latest thoughts there.

You know, with the volumes that we have seen in the Williston, we probably, especially as we moved into the third quarter and got past some of this maintenance, we're probably - excuse me, we are into the fourth quarter and have gotten past some of the maintenance, we probably have 125 million a day of capacity left. So, with the rig activity we're seeing and the well performance that we're seeing, we could see additional processing capacity that we would need.

Okay. Great. Thanks for that. That's it for me.

Hey, good morning, guys. I was just wondering what you've been hearing from producer customers in the Williston heading into next year in terms of rig counts activity? You are targeting about 400 wells here and 30 rigs. It seems like that's about 27 days to complete a well which seems high. So do you expect the rig counts to taper off, and if nothing changes, is 400 a conservative number going forward, or how do you think about all that?

Hi, Eric, this is Kevin. I've got some thoughts, and Mike Fitzgibbons may have a couple of thoughts as well. But our conversations with the producer customers continue to be very positive. The rig counts have held, and we've seen some price strength here over the last few weeks. We see no indications that those rigs are going to back off. So yes, if you maintain this activity level at 30 rigs, the 400 would be light as we think about 2018. We're not ready to provide guidance yet; we will do that as we release our financial guidance. But clearly, you're right, the 2017 is high, and so we would expect the well connects to go off in 2018. Mike?

I agree with that. The only thing I will add is we've had a couple of producers announce they can achieve their volume growth target with fewer rigs because of the efficiency increases. So we may see a rig or two drop, but we're still seeing very productive wells and forecast of volume growth from those rigs.

Great. And just one quick follow-up. I'm curious as you look out at the - I think it's sort of asked in couple different angles, but you got the $485 million to $495 million of projects since June and $40 million that is finished in 2017. Sort of, I guess the rest is overwhelmingly in 2018. Do you expect your overall debt balance, your debt today is at quarter end was around $9.5 billion, do you expect that to drop materially at all, or do you think it hangs in there maybe drifts off a little as you have the EBITDA growth that sort of gets to the year leverage target?

Well, we're not going to give specific guidance for 2018, but I would say that we do expect to have significant EBITDA growth that will help those leverage statistics along in the most dramatic fashion.

Okay. So, $9.5 billion is net; do you see it materially dropping over the course of the next year or no?

I think given the level of our CapEx, we expect to see our deleveraging come more from the increase in EBITDA than a drop in that.

Good morning, everyone.

Good morning.

I was looking at the - I want to go back to 2017 guidance. The G&P segment specifically, the way how strong the gathering performed this year would imply decline in Q4, just to get to the high end of the guidance range there. It seems that you've been a little bit conservative but not raising guidance in my opinion. Is there any other assets that we should be thinking about, whether there be related to Harvey or maybe some of the ethane volumes that you had baked into your forecast that are going to be late end because of the outages in the Gulf Coast?

No, I mean specific to your question about G&P. Yeah, when you do that math to where you get to, the one dynamic that we always consider as we're thinking about the fourth quarter for gathering and processing is weather, especially when you look at the month of December. We do historically see a little bit of a pullback in our volumes. So we do factor that in. I don't think we see any lingering effects related to Harvey from our business. As we've talked about we've seen it transitioning a little bit. Overall, we talk about the volume growth we’ve seen in October in our NGL segment. Clearly, a decent chunk of that volume growth would be ethane which could signal that the ethane recovery story is starting a little bit. So, that's how I would frame up how we're thinking about guidance and still holding that firm.

Thanks for that. And then with respect to growth CapEx, I think the previous guidance was $500 million for the year. Thus far, we've paid, I think, $250 million, so should we expect a big chunk in Q4 here or is that going to extend over into 2018?

Yeah, we will - I mean, with the recent announcements, obviously we're getting hot and heavy into the construction on those projects that we've announced, so you would see that capital ramping up in Q4.

Good morning.

Good morning.

On the West Texas expansion project, could you elaborate a bit on the volume assumption on 4 to 6 times multiple expectation?

Sure. As we think about those the up to 40,000 barrels a day, it goes into service on the back half of 2018. We would expect that volume to ramp up maybe over a year to two, past in-service date.

Right, within two years, we should be at or above 40,000.

So the 4 to 6 times multiple is around 40,000 barrels a day volume?

Yes.

Okay. And then on those new barrels, what type of fractionation opportunities are there potential with those? Go to third parties?

Well, the 40,000 that we referenced in the press release, we do have a bundle of service with them. We will be fractionating those barrels. So it's a total package deal for us. The pipeline does give us the opportunities, we talk to more people to bring more volume on that and fractionate it as well at or below multiples that we will see on this project.

Okay. Just to summarize, the 4 to 6 times multiple expectation seems about 40,000 barrels a day of volumes including now fractionation fees?

Yes.

That's helpful. And then obviously have excess capacity, how do you view the competitive landscape in the Permian for NGL takeaway to increase the utilization of the expansion?

Brian, this is Sheridan. It's a very competitive landscape out there, but as we've said before, we have an existing pipeline that we can incrementally add capacity to, to dial into what the customer actually needs. We can do it much cheaper and faster than other brand new pipelines that are coming in there. So we see ourselves being very competitive. And with this new expansion in here, we can get into a position that we can compete even better for these Delaware barrels. We have been talking to multiple producers and processors out there in the short term before we announced this, and after we announced this, we've even had more come to us and want to get on this pipeline; we want to talk about this. So we're very excited about what this brings to us and very excited about seeing more expansions come out.

Okay. And for updates on the expansion, so obviously a lot of focus on your organic opportunities. As we moved into 2018, how do you see M&A playing overall in your growth?

Well, certainly in our thinking, we don't have any M&A factored in, but we're always going to be thinking about those opportunities. Certainly, we've got a strong currency to work with, so we're a financially sound company. But I can tell you that our focus will be heavily organic, and any M&A, whether it's a bolt-on asset or something broader from a strategic perspective, will certainly just be an opportunistic approach. So heavy organic will be the key strategy and focus for 2018.

Thank you, Terry.

Hey, good morning.

Hey, good morning, Michael.

Just one more question on West Texas, the new pipeline project. I think you mentioned you'll also be expanding the existing system. How much - if that's correct, how much are you also expanding that by?

Michael, we're expanding by an equal amount of 40,000.

Okay. So I guess since the extension line is 110, as you move above that 40,000 on the extension line, does that imply that you have to then probably further expand the mainline? I guess what is the capability to do that?

Michael, you're exactly right that you will have to continue to expand the mainline. That's when we get into we can expand and spend that capital on the mainline as we get the commitments on the lateral coming in there. So we don't have to spend it all upfront; we can incrementally add that capital in there. As I said, we expect those projects that we're working on now to expand the mainline to bring more volume in on the lateral will be in at or better than the 4 to 6 times that the original one is. We did put some upfront capital in there to put a bigger piece of pipe in the ground so that we are better able to compete in the Delaware.

Okay. And then my other question was just this on the cadence of dividend increases as you go out in time. Are you planning to do one dividend increase per year, or are you planning to do it every quarter? What's the thought there?

Well, Michael, obviously, the board will address that on a quarterly basis, but our expectation would be to be in line with the past practice and most likely look at the quarterly. The board will evaluate the facts and circumstances each quarter and then act accordingly.

Great. Thank you very much.

Thanks. What's left here, G&P strong margins in the quarter, can you just break that down a little bit on how much you might attribute to NGL prices and spreads versus fees?

Tom, this is Kevin. Yeah, again, we've converted so much of our throughput through the contract restructuring, we've moved so much of the commodity exposure to fees. It is primarily fee, and when you combine that with our hedge position for 2017, virtually all that is just volume growth with the fee increase.

Good. And then on the distribution, last question, not so much for 2018 but more for 2019. Is the philosophy around issuing equity to make a 10% or so distribution growth when you want to strengthen your balance sheet? Your capital spending is clearly very strong, and the industry itself seems to be moving more toward that mid-single-digit type being acceptable for the larger companies. Just wonder how you've traded off those kinds of dynamics?

Well, we are in a position today where for this particular quarter we cover the dividend by 1.3 times and we expect to have significant dividend coverage going forward, which will give us a lot of excess cash flow to put back into the business and reinvest in the business. As I said previously, the dividend growth that we had previously guided to was based on the run rate dividend and the run rate CapEx that we've been spending over the last couple of years. So as we have a lot of multiple projects, we just expect to have even more cash flow to invest in the business going forward.

All right. Thanks a lot and great quarter.

Thank you.

Hi, everyone. I just have a couple of operational questions. The Bakken G&P volumes were up, but the NGL pipeline volumes were down sequentially. What went on there? Was it just more ethane that was rejected versus last quarter?

Yes, Christine, that was primarily around ethane. It also relates to the maintenance activities that we saw at our assets and how we had to move gas around to continue processing as much as we could. We did end up projecting more ethane than we had the previous quarter. In addition to that, another dynamic that was going on during the same time is our deethanizer at state line really ramped up during that time period. So the NGLs produced actually went up, but yet the NGLs we were pushing down the pipeline went down a little bit.

So, if the NGL volumes were up but the pipeline volumes were down, where did the incremental NGLs go? Do you guys have storage up there?

No. It was - again, it was primarily ethane that was rejected due to a lot of maintenance and other activities that were going on. And then the ethane that's going through the deethanizer does end up in markets in Canada as well.

Okay. And then in your prepared remarks, you alluded to evaluating opportunities for providing additional takeaway out of the Bakken. Your 10-Q says that you're expecting to add capacity to the Bakken NGL line by the third quarter of next year. If you do that, don't you have to expand Overland Pass? I thought that was full, or if there are other alternatives?

Christine, this is Sheridan. Yes, we are looking at the total system, both Overland Pass and Bakken pipeline, to look at all alternatives to expand it. But you are correct, Overland Pass is full, so any expansion on the Bakken pipeline will have to take into account takeaway from the bottom end, and we're looking at all options. But all options will include expanding that system as we continue to see robust growth in the Williston.

And that would have to be looping, I'm assuming?

There are a lot of different options there; it could be looping of the existing system or completely building a new system.

I see, okay. And with natural gas production increasing out of the Bakken, is the incremental residue gas still going down the northern border, or do you guys have an idea of how much of the gas is going there?

Well, again, physically all the gas out of the basin is virtually all of it is ultimately ending up on Northern Border; that's what ends up in the Mid-Continent in the upper Midwest markets. So how it gets priced is really a separate question from an acre prospective. But all the gas and we're confident that with the growth projections we see out there, we will continue to be able to move all the residue out of the region on board.

Okay. Great. Thank you.

Good morning. I just wanted to verify, I think in your prepared remarks you said your NGL gathering volumes are up to 900,000 barrels a day in October, is that right?

That's correct.

That's a big pickup versus what you did in the third quarter. What's the driver there? Can you give us a breakdown of whether it's mostly mid-corner which is coming out?

Well, we're really seeing increases in all of our regions. We talked about the Bakken barrels being down and now we're back up to those levels before. Mid-Continent volumes are up as well. A chunk of that is going to be ethane. We have seen ethane recovery pick up during the month of October. We still think that will fluctuate a little bit when the startups come online. But again, we've seen some nice volume growth coming out of all areas.

And is it fair to say the margins on that additional will be in line with sort of your rules of thumb, $0.30 for NGL and $0.09 for ethane?

This is Sheridan. They will be close. Typically, we have a little bit of a breakdown for ethane, a little bit of an incentive, but it's going to be materially in the line of what we've given.

Remember, a lot of the ethane coming on is going to be value based barrels coming out in Mid-Continent which would be at a higher rate than the average rate that we have in our presentation because that has booked Conway and Bellevue and we talk about the Mid-Continent. So probably just slightly higher than that.

So, Sheridan, it's fair to say that in many of your contracts you have a structure slightly lower transportation and frac rate for ethane versus your propane plus?

That's exactly right. But we expect the Bellevue barrels to come out first which would be higher than the Conway price barrels.

Right. Okay. That makes a lot of sense, and it's really helpful. And then can you talk about the overall returns, I guess blended returns, both on the $500 million of growth CapEx you have announced since June, and as we think about that bigger chunk of $2.5 billion to $3.5 billion? What kind of EBITDA multiple should we think about for both of those buckets, please?

Well, I think you're going to see a lot of those projects in that unannounced backlog are going to be similar to the routine growth that we've seen historically. So you could see a good chunk of this coming in at 4 to 6 times, but I think broadly speaking overall some of the larger infrastructure projects that are in that mix are going to be in your 5 to 7 times that we've historically indicated. Does that help you?

Yeah, it's helpful. And then last one for me, just operating costs look like they're up a decent amount here in the third quarter sort of year-over-year. Is that all just sort of new assets, something like the rest of hurricane costs in there? What’s sort of a good new run rate on op costs or is there anything, any kind of one-time items in there?

Yeah, the op costs are really just more about our growth and dealing with that. Yes, there was a little bit in there for the hurricane, but again, every quarter typically we will see some one-time attributes. But I think that would probably be a decent run rate as we think about going forward.

All right. That's it for me. Thank you.

Thanks.

Good morning.

Good morning, Craig.

Well, as we - I mean, yes, Craig, you're right. We have seen an increase in spreads through the month of October. We do think there's some likelihood that those will maintain for two to three months here or beyond that. On the flip side, as our volumes do increase, that will reduce a little bit the amount of volume we can actually move on the pipes as we are physically flowing more volume on our assets. So there's a little bit of a give and take there, but yes, it's nice to have that tailwind of the stronger spreads. Sheridan?

Yeah, I definitely agree. And you are very right; there is more of this ethane, and we talked about more volume growth. We will consume more of the pipeline for fee-based business, and that will leave less capacity for optimization activities.

Understood. And with respect to the $200 million excess LPG expansion, I guess 116, that's OKE. I think three years ago, the guidance was given that you were hoping to achieve on the original acquisition, and follow-on this is including maybe $500 million of expected growth CapEx. You were expecting to achieve an all-in 6 to 8 times multiple by the end of the decade. It seems like maybe the growth CapEx figures are coming well under the $500 million you all envisioned years ago. Do you see that due to efficiency, but the EBITDA expectation would be untacked, or how do you see that multiple playing out over time?

Craig, I still think we will reach that by the end of the decade as we go through, especially as we look at all the projects and all the plans that we are looking at right now and how that drills down. But we knew it will take us some time when we bought the assets to get our strategy in place because a lot of the plants that are coming on were already committed when we first bought the assets. So, we knew we had to wait for the second wave of gas plants that were not committed. That is where we are right now, and we are finding that we can very effectively compete for these gas plants. So I still think we will reach that 6 to 8 times by the end of the decade.

Okay. And one last follow-on. I was under the impression that our original guidance did not incorporate any additional upside from associated fractionation. Does that continue to be the case, and does 4 to 6 times for the $200 million project include or exclude related fractionation?

We have to look at it; fractionation is - our fractionation system pulls from all across our assets, and then we see it growing the whole systems. So it all depends on when those fractionation capacity is needed. As we keep running like this, as Terry mentioned, we will probably end up having to build more fractionation capacity. We will see the Permian being able to help support that growth, and we will get market rates for that.

But does that feed into the original multiple expectation for the West Texas acquisition you originally made?

The original when we get that originally was more based on just pure carries and not the fractionation piece.

Okay, thank you.

Hey, good morning, Terry.

Hey, good morning, Chris.

Last thing asked and answered. I appreciate all the color, except two follow-ups I could, they're more sort of structure. I was just curious, you know, Bakken has done quite well this year. Obviously, the DAPL pipeline was sitting out there for a long term; it had a story history to get into service, but that is and we see a clear bit pricing at Permian. I was wondering about your conversations with producer counterparts out there, how much the pipeline actually being in place in the pricing dynamic, if that all is shaping decisions and how long they might - how they see that, I guess, evolving over time?

I mean, obviously, with DAPL, anytime we can provide more pipeline takeaway capacity for crude, it benefits the producers from a reliability perspective and also just a netback perspective. I mean, we typically hear their netbacks are maybe $2 or $3 better than they were before DAPL. So, that's just increased strength and helping their cash flow to fund more drilling.

Certainly, operational reliability has improved significantly.

Absolutely. I mean, you can look at some of the state and rail who is really shown a downward trend, so that clearly the pipe is more reliable than rail.

Okay, that's helpful. And then I guess switching gears probably for share and just this is a question for Michael Fitzgibbons. What is your expectation? Have you guys looked at what happens with ethylene, polyethylene markets when we bring on this much same cracking capacity in the window of time? I am kind of blind to what happens for their downstream, and so I am just wondering if you could help us think about the effects of that and maybe what your customers are saying and thinking about it and if there's an opportunity for you to stay on that into it?

What I would tell you is that what we look at, Chris, for that we hear from our customers on the polyethylene market, they think that these crackers are going to make ethylene, but you're already seeing these companies bring on ethylene to polyethylene units. So you're really talking about where the ethylene is going. In worldwide; with the low cost of feedstock, we have the United States, they all say the Gulf Coast crackers are much further to the left on the supply stack. If we would overbuild and the world cannot consume that much polyethylene, you will see more of the crackers and more east crackers being shut down, maybe some European crackers a long time before you see the Gulf Coast crackers shut down. So, that's why everybody is seeing the next wave of crackers being talked about on the Gulf Coast; because this is the most advantageous place today to build crackers due to the cost of feedstocks.

So the multiyear view then is, I guess if I were to paraphrase, it is something similar to what we've seen with other hydrocarbons where U.S. markets simply because of the advantage cost structure push out higher costs globally. And so we're basically going to make inroads via exports; that's the expectation?

That's right. You're exactly right.

And if I could, I don't know if you know the answer, but are there particular foreign markets we could pay attention to? Maybe get a sense of where that demand or where that supply competition is going to be most, I guess, severe?

Well, I think from a demand side, you're going to see the growth from China and India. We also see some from Latin America and maybe a little from Europe, but China and India are going to be the big movers on the demand side. Competition… You said on the competition for supply. I think it's a big—don't think it's going to affect that; it's the gas to oil ratio. If you see oil and gas on the BTU basis come back closer together and it will become more advantageous, you may see that; I think, where you would see on supply. We are seeing it depends on how you look at supply competition. Obviously, we are exploiting propane and ethane which are going to crackers that would compete against our polyethylene, against our polyethylene that is produced in the United States, but that still pulls hydrocarbons through our system and now the United States.

Right. And so I guess the next wave, I guess this is an interesting question for me, is that if we're seeing the next wave of ethylene crackers that are being talked about to be built domestically, it would seem like that communities are making a determination that the facility better exists here than to export the ethane to whatever foreign market there? Is that – I guess is that fair or is there something about the nature of all this that I don't understand?

I think it's a combination. You're seeing most of the people that want to export ethane for cracking or even propane for cracking are really in India and China, and I think they want to build their own facilities over there and get advantage of feedstock from the United States. The big - people that are building the next wave of crackers are the ones that built the first wave. They're going to be, obviously, already heard about the ExxonMobil Sabine cracker down in Corpus Christi that's been announced, and all the other people are also talking about when do they build their next cracker. All of them are saying it's probably going to be in the Gulf Coast.

Okay. Well, thank you everyone. Our quiet period for the fourth quarter starts when we close our books in early January and extends until earnings are released after the market closes in late February. Have a great rest of your day.