10-Q: ONEOK Reports Q1 2024 Results, Impacted by Medford Settlement and Weather

ONEOK's first quarter 2024 results were impacted by the absence of a prior year insurance settlement gain and weather, despite stable volumes and the inclusion of the Refined Products and Crude segment.

Summary

• ONEOK's first quarter 2024 net income was $639 million, or $1.09 per diluted share, compared to $1,049 million, or $2.34 per diluted share, in the same period of 2023.
• The decrease in net income was primarily due to the absence of a $779 million insurance settlement gain related to the Medford incident in 2023, and higher interest expenses.
• Total revenues increased to $4.781 billion from $4.521 billion year-over-year, driven by the inclusion of the Refined Products and Crude segment from the Magellan acquisition.
• Adjusted EBITDA was $1.441 billion, down from $1.733 billion in the first quarter of 2023.
• Capital expenditures increased to $512 million from $289 million year-over-year, primarily due to ongoing projects like the MB-6 fractionator and NGL pipeline expansions.
• The company experienced stable volumes across its system despite the impact of winter weather.
• ONEOK's operations are now more than 85% fee-based, reducing exposure to direct commodity price volatility.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to decreased earnings and increased capital expenditures, offset by positive developments like the completion of the El Paso pipeline expansion and the share repurchase program. The absence of the Medford settlement gain and the impact of weather are significant factors.

Positives

• Total revenues increased year-over-year due to the inclusion of the Refined Products and Crude segment.
• The company's operations are now more than 85% fee-based, reducing exposure to commodity price volatility.
• ONEOK completed the expansion of its Refined Products pipeline to El Paso, Texas, connecting more supply to growing markets.
• The company experienced stable volumes across its system despite the impact of winter weather.
• ONEOK has a $2.0 billion share repurchase program authorized by the board.

Negatives

• Net income and diluted EPS decreased significantly year-over-year due to the absence of a prior year insurance settlement gain and higher interest expenses.
• Adjusted EBITDA decreased year-over-year.
• Capital expenditures increased significantly year-over-year.
• NGL volumes decreased due to lower ethane recovery and the impact of winter weather.

Risks

• The company is exposed to commodity price risk, particularly in its Natural Gas Gathering and Processing segment.
• The company is subject to operational hazards and unforeseen interruptions at its facilities.
• The company's credit ratings could be affected by leverage, liquidity, and potential transactions.
• The company is exposed to the credit risk of its customers and counterparties.
• The company is subject to regulatory risks and potential penalties.
• The company is exposed to risks associated with climate change and increased attention to ESG issues.

Future Outlook

ONEOK expects its consolidated earnings to be more than 85% fee-based in 2024. The company anticipates completing several key capital projects in the first quarter of 2025, including the MB-6 fractionator and expansions of the West Texas NGL and Elk Creek pipelines. The company also expects to utilize its share repurchase program over the next four years.

Management Comments

• Management noted stable volumes across the system despite weather impacts.
• Management highlighted the strategic diversification of the asset base following the Magellan Acquisition.
• Management emphasized the company's focus on fee-based operations to reduce commodity price volatility.
• Management stated that the company expects to fund its operations, capital expenditures, dividends, and debt maturities with its cash inflows.

Industry Context

The report reflects the ongoing trends in the midstream energy sector, including the focus on fee-based revenue models to mitigate commodity price volatility. The Magellan acquisition is a significant move towards diversification and integration of assets, aligning with industry consolidation trends. The expansion projects indicate a focus on increasing capacity to meet growing demand in key shale basins.

Comparison to Industry Standards

• ONEOK's adjusted EBITDA of $1.441 billion is lower than the previous year, which included a significant one-time gain, but is in line with expectations for a large midstream company.
• The company's focus on fee-based revenue is a common strategy among midstream companies to reduce exposure to commodity price fluctuations, similar to companies like Enterprise Products Partners and Kinder Morgan.
• The capital expenditure increase to $512 million is significant, reflecting the company's investment in growth projects, which is typical for companies expanding their infrastructure, similar to projects undertaken by Williams Companies and Energy Transfer.
• The company's debt-to-EBITDA ratio of 4.1 to 1 is within the range of other investment-grade midstream companies, but the increase in debt due to the Magellan acquisition is a factor to monitor.
• The company's share repurchase program is a common practice among mature midstream companies to return value to shareholders, similar to programs implemented by MPLX and Plains All American Pipeline.

Legal Proceedings

• The company reached a settlement with all remaining claimants in the Corpus Christi Terminal personal injury proceeding.

Stakeholder Impact

• Shareholders will see a decrease in earnings per share compared to the prior year.
• Shareholders will benefit from the share repurchase program.
• Customers will benefit from increased capacity and connectivity in the company's pipeline systems.
• Employees will be impacted by the company's ongoing operations and capital projects.
• Creditors will be impacted by the company's debt levels and credit ratings.

Next Steps

• The company will continue to execute its capital projects, including the MB-6 fractionator and pipeline expansions.
• The company will continue to monitor ethane economics and adjust operations accordingly.
• The company will continue to evaluate opportunities for growth and expansion.
• The company will continue to execute its share repurchase program.
• The company will pay a quarterly common stock dividend of 99 cents per share on May 15, 2024.

Key Dates

Keywords

ONEOK, Natural Gas, NGL, Refined Products, Crude Oil, Midstream, Pipelines, EBITDA, Capital Expenditures, Magellan Acquisition