Oneok Inc (OKE) — Q1 2023 Earnings Call Transcript

Thank you, Chad. And welcome to ONEOK’s first quarter 2023 earnings call. We issued our earnings release and presentation after the markets closed yesterday and those materials are on our website. After our prepared remarks, management will be available to take your questions. 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 forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Just a reminder for Q&A, we ask that you limit yourself to one question and one quick follow-up in order to fit in as many of you as we can. With that, I’ll turn the call over to Pierce Norton, President and Chief Executive Officer. Thank you.

Thanks, Andrew. Good morning, everyone, and thank you for joining us. On today’s call is Walt Hulse, our Chief Financial Officer and Executive Vice President, Investor Relations and Corporate Development; and Kevin Burdick, the Executive Vice President and Chief Commercial Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas Liquids and Natural Gas Gathering and Processing; and Chuck Kelley, Senior Vice President, Natural Gas Pipelines. Yesterday, we announced first quarter 2023 earnings and affirmed our full year 2023 financial guidance. Strong first quarter results were supported by continued earnings growth in each of our businesses, with higher Natural Gas Processed and Natural Gas Liquids volumes, providing a solid start to the year. Producer activity continues to drive new volume to our assets and recent conversations with customers point to additional activity through the remainder of the year. Crude prices well above breakeven economics in the Basins where we operate and continued strong demand for U.S. energy support, a constructive outlook for 2023. We provide midstream services to some of the largest, most well-capitalized producers in the U.S., helping contribute to our history of earnings stability and growth despite commodity prices. We continue to evaluate infrastructure and the needs of these customers so that we can provide added capacity or services aligned with their growth. The successful completion of our Demicks Lake III natural gas processing plant and MB-5 fractionator projects provide additional system capacity and resiliency, and are examples of our continued focus on organic growth aligned with our customers’ needs. We remain financially well positioned with significant balance sheet strength and flexibility to support continued growth. Our capital allocation priorities remain consistent, with ONEOK’s unique ability to identify and execute on high return organic growth opportunities setting us apart. With that, I’ll turn the call over to Walt for a discussion of our financial performance.

Thank you, Pierce. ONEOK’s first quarter 2023 net income totaled $1.05 billion or $2.34 per share and adjusted EBITDA for the period totaled $1.72 billion. As we discussed on our last call, we booked the gain related to the Medford insurance settlement in the first quarter, resulting in a net increase in operating income and adjusted EBITDA of $733 million. This reflects the insurance settlement gain of $779 million, offset partially by $46 million of third-party fractionation costs incurred during the first quarter. We expect third-party fractionation costs to remain around this level with the potential to decrease through the remainder of the year as our MB-5 fractionator ramps up. Excluding the Medford impact, net income increased 24% year-over-year and adjusted EBITDA increased 14% over the same period, benefiting from increased NGL and natural gas processed volumes, higher average fee rates and higher natural gas storage rates. We ended the first quarter with a higher inventory of unfractionated NGLs primarily due to the timing of the MB-5 fractionator being placed in service and expect to recognize approximately $12 million over the second quarters and third quarters as that inventory is fractionated and sold. In April, Moody’s upgraded ONEOK’s credit rating to Baa2 from Baa3, recognizing our significant deleveraging, conservative financial policy and consistent strong operating and financial governance. Our net debt-to-EBITDA remains below our long-term target of 3.5 times and we had $680 million of cash and equivalents as of March 31st. Our cash balance is primarily made up of highly liquid government and treasury money market funds and deposits fully insured by the FDIC. We’ve reduced our total net debt by more than $1 billion compared with the first quarter of 2022. In February 2023, we redeemed $425 million of 5% notes due September 2023 and we recently announced a June redemption of $500 million of 7.5% notes due September 2023, both with cash on hand. As Pierce mentioned, we affirmed our financial guidance expectations in yesterday’s earnings release. With our strong first quarter performance and positive outlook for the remainder of the year, our confidence remains high in achieving our financial guidance. I’ll now turn the call over to Kevin for a commercial update.

Thank you, Walt. Let’s start with our Natural Gas Liquids segment. First quarter 2023 NGL volumes increased both year-over-year and compared with the fourth quarter of 2022, with higher producer activity levels driving increased C3+ or propane plus volumes on our system. Permian Basin volumes saw the largest increase up 17% compared with the first quarter of 2022 and 14% compared with the fourth quarter of 2022. We continue to have success contracting additional volumes in the Basin and connected one new third-party natural gas processing plant during the first quarter. Permian producer activity remains strong and we continue to consider incremental expansions on our West Texas NGL system to accommodate increasing volumes. Volumes in the Rocky Mountain region increased during the first quarter compared with the same period last year and decreased slightly compared with the fourth quarter 2022. The decrease was driven entirely by reduced ethane recovery as our propane plus volumes increased sequentially. We expect volumes to continue to grow in the spring and summer months. In the Mid-Continent region, consistent producer activity in the STACK and SCOOP continues to drive NGL volumes on our system. Raw feed throughput volumes increased compared with the fourth quarter 2022, driven primarily by higher ethane recovery. Regarding the macro ethane environment, we expect domestic petrochemical utilization rates to continue to improve as we move through 2023. With lower sustained natural gas pricing and lower ethane inventory levels driving improved ethane economics and volumes across our system. Through the remainder of the year, we continue to expect that the Permian Basin will stay at high levels of ethane recovery, the Mid-Continent will be in partial recovery and that we will have opportunities for incentivized recovery in the Rocky Mountain region. In April, we completed our 125,000 barrel per day MB-5 fractionator in Mont Belvieu. With MB-5 now fully operational, our system-wide fractionation capacity is nearly 900,000 barrels per day. The added capacity will be used to accommodate volume growth and reduce third-party fractionation needs. We remain on track to complete our MB-6 fractionator in the first quarter of 2025. In the Natural Gas Gathering and Processing segment, first quarter processed volumes averaged more than 2.1 billion cubic feet per day, an 11% increase compared with the first quarter of 2022. In the Rocky Mountain region, processed volumes averaged nearly 1.4 billion cubic feet per day during the first quarter and have recently reached more than 1.5 Bcf per day. We connected nearly 150 wells in the region during the quarter, compared with approximately 90 connections in the first quarter of 2022, a more than 60% increase. Well connections in the region are currently on pace to exceed our guidance midpoint of $500 million for the year. There are currently approximately 40 rigs and 23 completion crews operating in the Basin with 20 rigs and approximately half of the completion crews on our dedicated acreage. We continue to expect additional rigs entering the region as we exit winter. In the Mid-Continent region, first quarter processed volumes averaged more than 750 million cubic feet per day, a 27% increase year-over-year. We connected 11 wells in the region during the first quarter, compared with six in the first quarter 2022 and are on track to be within our guidance of 45 to 55 connections. There are currently more than 50 rigs and 11 completion crews operating in the region, with 10 rigs on our dedicated acreage. Despite weakness in natural gas prices, we continue to see strong activity in the higher crude and NGL rich producing areas of the region, where producers are focusing their drilling. In the Natural Gas Pipeline segment, strong first quarter results continue to benefit from firm transportation services and the demand for natural gas storage. We are on track to complete an expansion of our natural gas storage capabilities in Oklahoma in the second quarter, allowing us to utilize and subscribe an additional 4 billion cubic feet of our existing storage capacity. We have subscribed 100% of this incremental capacity through 2027 and 90% through 2029. We continue to evaluate the Saguaro Connector Pipeline, a potential intrastate pipeline project that would provide natural gas transportation to the U.S. and Mexico border for ultimate delivery to an export facility on the West Coast of Mexico. There continue to be positive developments related to the potential LNG export project and we still expect to make a final investment decision on the ONEOK pipeline in mid-2023. Pierce, that concludes my remarks.

Thank you, Walt and Kevin. As you both have highlighted, ONEOK is well positioned for another year of strong financial and operational performance. We continue to execute on high return organic growth projects and remain intentional and disciplined in looking for additional opportunities to add value for our business and our stakeholders. Demand for our products and services remains robust and we’re continually looking for opportunities to enhance the vital services we provide for our customers. Our employees take pride in our position as a leading midstream operator, maintaining our focus on operational reliability, safety, and environmental responsibility. As part of our core values, a focus on safety and environmental performance is at the core of our business and we’re proud of the cultures we’ve built around these key areas. 2023 is not only a year of continued financial progress, but also a year to continue our commitment to responsible operations, emissions reduction projects, and our continued pursuit of a zero incident culture. With that, Operator, we’re now ready for questions.

Hi. Good morning, everyone. Maybe to start off on the third-party frac fees. The original guidance stipulates roughly $0.25 billion in costs for all of 2023, but 1Q trended better than expected, and now with MB-5 up and running, kind of curious if you can give us an updated view on how we should see third-party frac fees trending going forward and into next year? Thanks.

So, Brian, as we said in the remarks, we expect that $46 million level to be viewed as kind of a run rate going forward with the potential for us to do better as we bring up MB-5 throughout the balance of the year.

Great. Thanks. As a follow-up, I would like to know about the Bakken activity levels, which have had a strong start this year, aided by favorable weather in the first quarter. Since ONEOK has completed about a third of its Rockies well connections in the first quarter, should we anticipate a slowdown in activity from producers, or can we expect similar activity levels going forward? Thanks.

Yeah, Brian, it’s Kevin. I think we see similar activity levels, if not a little bit stronger. In the fourth quarter, we were a bit behind on our connections, which we attributed to some timing issues that pushed some of those into the first quarter. However, the activity levels with 20 to 20-plus rigs on our acreage appear to be consistent, if not increasing, going forward. I don’t anticipate a slowdown in activity. That’s why we believe we’ll be ahead of the midpoint of our guidance for well connections.

Great. Appreciate it. I will leave it there. Thanks.

Hi. Good morning.

Good morning, Jeremy.

Good morning, Jeremy.

I just want to dial into the Bakken a little bit more, if I could. That was helpful with the 1.5 Bcf per day volume number that you provided there, but just wondering on the NGL side itself. I think we saw the Bakken NGLs tick down a little bit quarter-over-quarter, but the rates went up a little bit quarter-over-quarter. Just wondering, I guess, where you see that now? How you think about NGL volumes trending in kind of like the ethane extraction economics at this point?

So, Jeremy, this is Sheridan. What I want to convey is that, as mentioned earlier, the drop in volume from one quarter to the next was due to less ethane incentivized in the first quarter compared to the fourth quarter. In fact, our C3+ volume on the NGL system increased from one quarter to the next. We still observe strong growth potential as we move through 2023. With the current low gas prices and ethane being favored as the feedstock in petrochemicals, we believe there will be ample opportunities to incentivize ethane from the Bakken moving forward.

Got it. That’s helpful. Thanks. And just wanted to kind of pivot with the insurance proceeds, obviously, a lot of capacity on the balance sheet and thinking about where that could be deployed going forward between growth or buybacks or what have you. And just any updated thoughts, I guess, as far as incremental West Texas LPG looping or other extensions of the value chain such as LPG export facility in the Houston Ship Channel.

Well, I’ll start out with the first part of it and kick it over to the other guys for the West Texas part of. Jeremy, you’re absolutely right. Our balance sheet is in stellar shape at this point and it does give us quite a bit of flexibility. Our priorities haven’t changed at all. Our first priority is to find very high return projects that we can grow our business. Our debt reduction has kind of achieved the goals that we were looking for, and that does create our flexibility for further dividend increases and potentially even stock buybacks over time. But that is our list of priorities, and as I said, high return growth projects that they’re at the top of the list and that’s a good segue into West Texas LPG.

Yes, Jeremy, it’s Kevin. As we mentioned, the Permian volumes have been strong for us and we’ve experienced significant growth there. We are actively assessing our capacity needs and will manage them by looping West Texas LPG. We will ensure we are prepared and won’t be short on capacity.

Got it. That’s helpful. Thank you.

Thanks. Good morning, everyone. I wanted to ask on the Saguaro Pipeline project around contracting. What percent of the pipeline do you need to be contracted to move forward and what’s sort of an average length of contract that you’re looking for?

Well, Michael, it’s Kevin. As we think about Saguaro, we’ll look at that project from an integrated perspective. I mean you’ve got the contracts with the LNG facility, the potential pipeline in Mexico and our potential pipeline. So all those are related. At the end of the day, the offtakers are the ones that will be looking for the transportation out of Waha. So that’s the way we’re thinking about that. Not ready to talk about any contract terms or rates or anything like that yet. Still early in the process. But we are taking the steps forward and continue to move it forward. So, hopefully, we’ll be in a position to announce something midyear.

Okay. Great. So just maybe a follow-up on that, since midyear is fast approaching here. If you do go forward with the project, would that result in some increase in 2023 CapEx and then just, generally, when would be CapEx for the project be spent?

That will all depend on when we announce something. However, we are not ready to discuss any specific capital that might be involved, as we are still uncertain about when the final investment decision will be made.

Hey, good morning, everyone. Kevin, I appreciate your insights on the Permian. You're experiencing production growth there, and you're also adding a new third-party plant. You mentioned contracting additional volumes as well. Could you elaborate on that environment? Are these medium- or long-term agreements? What does that landscape look like, and how might it have impacted the first quarter?

Well, I think, a lot of the volumes that we’ve seen on our system are growing volumes on contracts that may have been put in place several years ago, back when even pre-COVID. But we also have seen opportunities to go contract new volumes. And Sheridan, do you want to talk about some of the things we’ve seen there?

Volume is increasing significantly in the Permian Basin. We have established many relationships with producers and processors, which has allowed us to secure a substantial share of the rising volume. We have been successful in contracting new volume, primarily through our existing plants or the potential for new plants as we explore opportunities. We believe we have a strong position in this competitive area and are experiencing positive results.

Appreciate it, Sheridan. And then maybe just the obligatory high level question. Obviously, strong results in the first quarter. Just thinking about the full year outlook, some of the conditions necessary to hit the high end versus what might need to happen to see the low end occur?

Hey, Tristan. This is Pierce. I think you all have picked up on the fact that, we’re coming out of the first quarter with some really, really strong tailwinds and that actually is a very positive move for us, a lot of times during the first quarter we’re trying to explain kind of the different trajectories that we have, but we really, really like the trajectory that we’re on now and we’ve affirmed our guidance range and stay tuned for the quarters to come.

Appreciate it. Thank you, guys.

Hi. Thank you for taking my questions. Within the G&P segment, can you talk about the fee escalation that I think kind of just wholly steps up in the second quarter now that we’re a month and change through it, how that’s trending now and how that gets to your guidance within the fee range?

Theresa, it’s Kevin. On the fee rate, again, that’s going to move around on a couple of factors. One is just various contract mix as new volume comes on the system every quarter and then the others is the contract escalators that kick in. So we’ve said, historically, and previously that in G&P segment, that typically occurs in the spring. So you’re just seeing just the minor moves like that or just contract mix moving around from quarter-to-quarter.

Okay. And then in terms of the third-party frac fee, so I understand that you have downsized from the $46 million per quarter as you utilize some of the space on MB-5. But as some of your competitors are also bringing on additional frac capacity second half of this year and into next year, would you expect that the spot fee will also weaken to some extent. So is there further downside even in addition to you being able to use MB-5?

I believe there is significant potential as we consider 2024. Much of our activity in 2023 has been contracted at a fixed rate. However, as we approach 2024, if there is a need for more capacity in 2023, we are certainly observing that spot frac rates are considerably lower than they were six months ago, and we expect this trend to persist into 2024. Therefore, we might experience some further fluctuations in either direction in regard to lower third-party frac fees.

Thank you.

Thanks, Operator. Hi, guys. First question actually one for about Elk Creek. Curious, you talked about keeping pace with customer needs and I acknowledge this question is probably a bit on the early side. But just given the well connect outlook, potential breathing recovery, GOR is increasing over the next year or so. When is it sort of time to start thinking about not expansion? How are you guys thinking about some of the capital needs and timing that will go into that?

I think I'll provide a brief overview and then pass it to Kevin. We've previously mentioned that we won't fall behind on capacity. In response to your question about when to start planning, we're already considering it. I'll let Kevin elaborate further.

We are encouraged by the recent strength and the levels of activity we observed last year, particularly with the producers and the rigs in operation. As we enter Q1, and based on what we are seeing from the producers, we are actively taking steps to ensure we have the necessary capacity when required.

Great. That’s helpful color. Second question kind of outside the quarter as well, but over the last two years or so, even before that we’ve sort of seen you lean more in some more utility-like businesses, new storage expansions, now the potential Saguaro Pipeline, more take-or-pay style. Is that part of kind of a larger plan to introduce even more earnings stability into the platform and how should we think about maybe other avenues where you can continue to grow there?

Well, the short answer to that is yes. This is Pierce. But those things are really driven by customer demands as well, but we definitely are looking for those opportunities. That’s part of the intentionality of the diversification into those more stable earnings type areas in our footprint. So the short answer is yes.

Understood. Appreciate the color, guys. Thank you.

Hi. Good morning. I have another question about the Saguaro Connector. My understanding is that pipelines in Mexico have faced significant delays and challenges. How can ONEOK and investors be assured that if you build another pipeline to the border, the subsequent phases will be completed on schedule?

Okay. Jean, this is Kevin. I think the way I would answer that is, as we approach a decision to move forward or not, we are considering the entire situation with the pipeline. It's fair to say that we will take the necessary steps from our contractual standpoint to minimize that risk as much as we can.

Okay. That makes sense. Thank you for taking my questions.

Good morning, all. Thanks for the time. My first question is just on the contract structure. I’m just wondering maybe in the type of valid commodity tapered now, could you remind me, I don’t think it’s changed much, but I just want to make sure I’ve got this. What percent of this year’s earnings you expect to be fee based and I’m just wondering, do you all have availability. I don’t know any of these contracts to potentially walk them up the remainder of the year?

We mentioned that we are 90% fee-based and 10% exposed to commodities. When considering the G&P business with our POP contracts, which involve some direct commodity exposure, we are well hedged for 2023. This further minimizes our commodity exposure. From an earnings perspective, the percentage of direct commodity exposure is quite small.

Perfect. Okay. My second question is about the Rocky Mountain Nat Gas G&P. I noticed a nice increase last quarter in the total there. Could you remind me how we should expect the cadence for the rest of the year? I see that the guidance for the year is at the lower end, but there’s still a good range. I'm curious about the anticipated increases we should expect.

In the first quarter, we were at the lower end, but recently we reached 1.5 Bcf. We believe there’s a ramp-up occurring, and one of the positive factors mentioned by Pierce is our current position in terms of Bakken or Rockies volume, which looks very promising.

Great to hear. Thank you all.

Hi. Good morning. Thanks for taking my question. A lot has been answered. So I wanted to go a little bit beyond the quarter and with the Medford proceeds and what seems to be a strong 2023, it seems like your leverage levels are trending well below kind of the 3.5 times target. So when you think about that a little bit longer term, do you plan to stay lower like some of your peers or are you thinking more about dividend increases, repurchases or possible acquisitions and just in terms of how you plan to think about the mix?

Sure. Neel, this is Walt. If we exclude the gain from the Medford settlement, we’re around 3.4 times. So, yes, we’re above 3.5 times, but we’re not significantly below it at this time. We are not worried about that trend decreasing. If we don’t have investment opportunities, it likely would trend lower in the short term. However, we are still looking at attractive opportunities. We’ve discussed the increases we’re seeing in various basins and the expansion plans we may need for some of the pipelines. These projects tend to offer very high returns, which is where we prefer to focus first. Additionally, we have flexibility for other capital returns now that we’ve achieved these goals.

Got it. For my second question, I understand you’ve experienced a lot of stability with your rigs, but crude has fallen below $70 twice this year. How do you foresee producer activity given that many public companies have set their budgets around $70 if this situation continues over the intermediate to long term?

Well, Neel, this is Kevin. I haven't had much time to talk to our customers recently, but you're right, the rigs have been quite consistent. As prices moved through $50 and $55, rigs really started coming back to the Bakken. That's when we noticed this consistency. When prices surged to $110, the rigs didn't necessarily increase, but as prices dropped, they remained active. We feel very optimistic because production costs are still well above breakeven, and producers are generating significant cash flow even at current price levels. This gives me a lot of confidence that we will continue to see this consistency even in the current environment.

I want to add that I've had the chance to meet with leaders from various exploration and production companies, and they have a long-term perspective. They're not just focused on today's prices; although prices have dropped recently, they believe in the future trends of crude oil. Until they drill the rigs and start producing wells, they can't take advantage of any existing prices. Therefore, they maintain a long-term outlook and consider a wide range of possible prices. They remain steady and don't react emotionally to fluctuations.

Okay. Great. I appreciate the color.

Good morning, everyone, and thank you for the clarity on the call. I wanted to start by discussing Bakken. There has been some discussion in the exploration and production community regarding well productivity. Could you share any updates on how many wells you believe are needed each year to maintain your gas volumes? Previously, you mentioned needing close to 400 wells per year. Has that figure changed based on recent results, and I’ve also noticed that the gas-to-oil ratio seems to have decreased recently?

This is Kevin. There were a few questions raised. One concerns well productivity, and we have not observed any decline in that area. There has been some movement toward different regions due to strong prices, which has led to minor changes in the gas-to-oil ratio, but nothing alarming that suggests wells are becoming less productive. In fact, as producers continue to drill in the same regions, technological advancements have yielded strong results. Therefore, we currently have no concerns regarding well productivity or the gas-to-oil ratios.

Okay. And then my follow-up was on your Natural Gas Pipeline segment. It seems like a pretty strong Q1 and even if the remainder of the year turns out to be similar to last year. I think you would exceed that guidance. So I was just curious if there are any one-time items in Q1, which helped the gas pipelines?

Sunil, this is Chuck. No. Q1 was a solid quarter for us in all regards. Our storage revenues were higher. Obviously, we had some gas sales that we were able to pick up in the quarter like we typically do first quarter. So there wasn’t a single outlier that generated debt performance. So balance of the year, we expect to be at or above our midpoint and looking forward to see what opportunities come about this summer.

Got it. Thanks for that.

Hi. Just a quick follow-up on Saguaro. It looks like the proposed 48-inch diameter would offer plenty of capacity over and above the proposed LNG exports in that. So can you speak to how you scope that project and what opportunities you might be tracking downstream apart from LNG?

Colton, this is Kevin. We are currently assessing the situation regarding the potential export facility in Mexico and the necessary developments for border crossing. That's our focus at this time. We are not ready to discuss other opportunities just yet. However, there are potential plans for the LNG facility that may include additional trains, and we are looking at the pipeline and what they require.

Understood. Thank you.

Good morning. Just a couple of quick ones. So the Permian NGL unit rates were shown at about $0.06 versus over $0.06 in the fourth quarter. Wondering if there’s any detail or trending there? And could you remind us roughly on the increments that you can increase Elk Creek with additional pumping and what kind of CapEx that would incrementally run?

I’ll address the last question first and then let Sheridan discuss the fee rates. Regarding the Elk Creek expansion, as Pierce mentioned, we are adding pumps along the pipeline. That’s the main scope of the project. We haven’t specified the costs yet, but we are making sure we won’t run short of capacity and are taking the necessary steps to advance this.

Craig. This is Sheridan here.

Thank you. Sorry. I am sorry. Could you quickly just elaborate how quickly or soon that can be done. It’s pretty efficient stuff, right? So can you do it well under a year once the decision is made or how quickly can you roll that out?

We are still working through the details. We are taking steps to understand what it would involve, including collaborating with power companies and pump providers. Those are the actions we are undertaking to figure out the timeline. However, it's important to note that this is not the same as constructing a brand new pipeline from start to finish.

Hi. This is Pierce.

All right. Thank you.

The only thing I’d add to that is, the thing to remember on that as it relates to capital is, these are very high return projects. So whatever the number is, when we announced today that we’re going to do this, just be assured that it’s a very high return project.

Yeah. Craig, this is Sheridan. I mean we always see a little bit of escalation or changing up and down in our fee rates. It all depends on where the volume is coming from. And one of the biggest thing that drives that is if we’re getting a little bit more volume from a transport-only contract versus the TNF contract or is that mix is a little bit, it’s going to play with that rate just slightly and you’re just seeing just a little bit of a slight change. I mean it’s just noise. It’s really immaterial. It’s just kind of contract mix.

Got it. So no trend going on there, just bouncing around.

No trends. There’s no trends going on.

Thanks.

Well, thank you all for joining us today. Our quiet period for the second quarter starts when we close our books in July and extends until we release earnings in early August. We’ll provide details for that conference call at a later date. Thank you all and have a good day.