ONEOK, Inc. (NYSE:OKE) Q1 2024 Earnings Call Transcript

ONEOK, Inc. (NYSE:OKE) Q1 2024 Earnings Call Transcript May 1, 2024

ONEOK, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the ONEOK First Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Andrew Ziola, Vice President of Investor Relations. Please go ahead.

Andrew Ziola: Thank you, Megan and welcome to ONEOK’s first quarter 2024 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. [Operator Instructions] With that, I’ll turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce?

Pierce Norton: Thanks, Andrew. Good morning, everyone, and thank you for joining us. On today’s call, is Walt Hulse, the Chief Financial Officer, Treasurer and Executive Vice President, Investor Relations and Corporate Development; and Sheridan Swords, Executive Vice President, Commercial Liquids and Natural Gas Gathering and Processing. Also available to answer your questions are Chuck Kelley, Senior Vice President of Natural Gas Pipelines; and Kevin Burdick, our Executive Vice President and Chief Enterprise Services Officer. Yesterday, we announced first quarter 2024 earnings and increased our full year 2024 financial guidance. Solid results during the first quarter were supported by higher year-over-year volumes in the Rocky Mountain region and contributions from the Refined Products and Crude segment.

The efforts of our employees were highlighted once again as we were able to effectively manage through the winter weather during the quarter. Heating degree days were actually higher than normal in January, but it was the temporary acute cold and excessive wind that caused a deviation from normal operations. Volumes have rebounded across our systems, and we are continuing to see volume trends higher, providing additional confidence in our expectations for the remainder of the year. Our increase to 2024 financial guidance was driven by two primary key factors: first, favorable industrial fundamentals across our systems, which is supply and demand that are contributing to volume growth and providing significant momentum for the remainder of 2024 and into 2025.

And second, the continued confidence in our ability to realize meaningful commercial and cost synergies. We remain focused on the integration efforts following the acquisition of Magellan last year our management team has spent the past several months meeting with employees and visiting assets across all of our operations. Our employees see the value of our combined businesses and are excited about the opportunities ahead. Through collaboration between business segments and the innovation of our employees, we are on pace to exceed our 2024 synergy goals, while most importantly, putting safety first. We also see growth across our systems from producer productivity, favorable commodity prices and continued demand for our products and services or as we previously mentioned favorable industrial fundamentals.

One potential significant source of future natural gas demand is expected to increase in power generation required to serve AI-driven data centers. ONEOK like other natural gas pipeline operators will play a role. We have already had conversations with several of our large electric power generation customers and power developers, who anticipate the need for additional natural gas transportation to address this future AI data center-related power demand. As the need for future power generation increases, domestic natural gas demand is projected to increase. This is going to affect the entire midstream value chain, and ONEOK is positioned to play a meaningful role. Today, we serve numerous natural gas-fired power plants across our system, and many of those customers are looking to expand, some related to AI and others to address general power demand.

We also continue to see supportive demand and fundamentals for the NGLs and refined products across our system. Ethane remains a highly preferred feedstock for the petrochemical facilities, NGL export strengths continue and a seasonal refined product demand for travel and agriculture is picking up. We remain focused on expanding and extending our systems in ways that align with our customers and the market’s needs. ONEOK now larger in scale will continue to support our efforts to help address domestic and international energy demand contribute to the energy security of our nation and maintain our critical role in the long-term energy transformation. With that, I’ll turn the call over to Walt.

Walt Hulse: Thank you, Pierce. As Pierce mentioned, we increased our 2024 financial guidance expectations. We increased our 2024 net income midpoint to $2.88 billion and increased our adjusted EBITDA midpoint by $75 million to $6.175 billion. This new guidance also brings up the low end of our original range, reflecting the strong fundamentals across our businesses. We remain confident in our synergy expectations. Our updated guidance still assumes we will meet or exceed our midpoint of 1.7 – sorry, $175 million in cost and commercial synergies in 2024. We continue to expect that additional annual synergies will meet or exceed $125 million in 2025. Additionally, our total 2024 capital expenditure guidance remains unchanged at $1.75 billion to $1.95 billion.

Now for a brief overview of our first quarter financial performance. ONEOK’s first quarter 2024 net income totaled $639 million or $1.09 per share, and adjusted EBITDA for the period totaled $1.44 billion. Results were driven primarily by higher NGL and natural gas processing volumes in the Rocky Mountain region increased transportation services in the natural gas pipeline segment and contributions from the refined products and crude segment. We saw higher consolidated operating costs in the quarter primarily related to the timing of planned maintenance turnarounds, higher property insurance premiums and operational growth. Of note, this was the first quarter the refined products and crude segment was allocated its full share of corporate costs.

Therefore, compared with the fourth quarter 2023, we saw an increase in operating costs for that segment and a decrease in operating costs for the other business segments as they received a lower allocation of corporate costs. As of March 31, we had no borrowings outstanding under our $2.5 billion credit agreement and our run rate net debt-to-EBITDA ratio was 3.8x. As it relates to capital allocation, we remain focused on delivering long-term value for our stakeholders through a balanced combination of high-return capital projects, dividend growth, debt reduction and share repurchases. As previously discussed, we continue to see share repurchases as an important part of our capital allocation strategy and remain committed to utilizing our $2 billion share repurchase program over the next 4 years.

We have significantly delevered our business in recent years, while still completing high-return capital growth projects and successfully closing a transformational acquisition. We are well positioned to continue returning value to Investors through a strategic and balanced capital allocation approach. I’ll now turn the call over to Sheridan for a commercial update.

Sheridan Swords: Thank you, Walt. Beginning with the Natural Gas Liquids segment. First quarter NGL volumes increased 12% in the Rocky Mountain region year-over-year, including the effect of the mid-January winter weather. Volumes fully recovered in February and have it continued to accelerate. April volumes averaged more than 400,000 barrels a day from the region, driven by record propane plus volumes on our system and modest ethane recovery levels. The Elk Creek pipeline expansion remains on track for an early first quarter 2025 completion increasing ONEOK’s total NGL capacity from the basin to 575,000 barrels per day, enabling continued volume growth and provided needed NGL takeaway capacity. Mid-Continent region NGL volumes reflect the effects of first quarter winter weather in a full quarter without the low-margin volumes from the contract expiring in November of 2023.

We expect to continue replacing the expired contracts volume with barrels at market-based rates ramping through 2024. Wide gas to crude ratios remain making ethane the most preferred feedstock of the petrochemical industry, and ethane exports remain highly utilized. These dynamics could provide tailwinds for ethane recovery throughout the remainder of the year. Our current guidance includes modest incentivized ethane recovery in the Rocky Mountain region. Moving on to the Refined Products and Crude segment. We continue to see healthy business fundamentals and consistent performance. First quarter refined product volumes increased compared to the first quarter of 2023. From a liquids blending perspective, volume and margins were in line with our expectations for the quarter.

With gasoline and diesel demand typically lower in the first quarter, we expect volumes to ramp in the coming months as we see a pull from agriculture activity and summer driving demand. Refined product volumes will also benefit from our pipeline expansion to El Paso, which is now fully complete. The majority of the 30,000 barrels per day expansion is contracted under firm long-term agreements. Moving on to the Natural Gas Gathering and Processing segment. Rocky Mountain region processing volumes increased 9% year-over-year, including the effect of winter weather during the quarter. By the end of January, volumes had recovered to levels achieved prior to the extreme cold. Since then, our process volumes have continued to increase, averaging nearly 1.6 Bcf per day in April.

There are currently 38 rigs in the Williston Basin with 20 on our dedicated acreage. We expect additional rigs to return as we are now into spring and for the trend of drilling longer laterals to continue. Stable rig activity and longer laterals coupled with continued strength in our gas-to-oil ratios and additional producer efficiencies provide a compelling backdrop for significant Rocky Mountain region volume growth in 2024. In the Mid-Continent region, we were currently seeing more than 40 rigs in Oklahoma with 6 operating on our acreage. With current gas prices we expect producers to continue concentrating activity in the oilier and NGL-rich areas in the region. In the Natural Gas Pipelines segment, we benefited from higher equity natural gas sales and increased firm and interruptible transportation in the first quarter.

Natural gas storage continues to be in high demand. Our current expansion projects, including reactivating 3 Bcf of previously idled storage in Texas and further expanding our injection capabilities in Oklahoma, enabling us to market an additional 4 Bcf of working capacity. The Texas project will be fully in service in the third quarter of 2024, and the Oklahoma expansion will be completed in the second quarter of 2025. Both projects have firm contracts extending beyond 2030. Pierce that concludes my remarks.

Pierce Norton: Thank you, Walt and Sheridan. As you have heard, strength across our businesses is indicating a solid 24% and already providing momentum into 2025. Before we take questions, I want to once again acknowledge our employees for your continued dedication and exceptional performance in the first quarter. Specifically, I’d like to recognize those of you who responded to the winter weather across our operations in January and our employees in Texas and Oklahoma, who were personally affected or helped, respond to the Texas Panhandle Smokehouse Creek fire in late February and early March. Our focus on reliable and responsible operations and on supporting our communities is particularly highlighted during the events like these.

I’m proud to work with individuals and teams who demonstrate a service mentality by being ready and willing to rise to the challenge. We’re looking forward to the rest of 2024 and beyond. And with that, operator, we are now ready for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Jeremy Tonet with JPMorgan. Please go ahead.

Jeremy Tonet: Hello, good morning.

Pierce Norton: Good morning, Jeremy.

Jeremy Tonet: Just want to start off with the guidance increase, if I could, I want to dig into the component pieces there. When you’re talking about volumes, it seemed like they rebounded in stronger. Just wondering, if you could break down where across the system that is, if that’s really the Bakken or other parts of the portfolio, you’re seeing better-than-expected strength. And at the same time, you talked about the synergy realization maybe being better than expected or more confidence. And just wondering, if you could dig in a little bit more detail on what the component drivers to that are as well?

Sheridan Swords: Jeremy, this is Sheridan Swords. The first thing we think about volume across our system is a lot of it is coming out of the Bakken. We’re seeing a strong volume as we come out of winter and with the rigs that we have running, we see that increasing strongly throughout the year. So that gives us a lot of confidence on our volume expectation drains and we’ll be more on the higher end of that. We also, in our refined product segment, we’re also seeing good volume into the El Paso market as our expansion was completed and came online. And for May, that – that expansion is already on allocation. So we feel that, that complete expansion and continue to see that go through the remainder of the year. So those are two areas where we’re really seeing volume increase.

As we think about synergies, synergies we’ve got in this company together and people working together, we are finding more and more synergies out there that we can execute on and we will continue to see that growth through the remainder of the year, which give us even more momentum as we move into the 2025 time line. The other thing that we have going on is in the first quarter, we also had two large planned turnarounds, one in the refined products segment at – refined products crude segment at our Corpus Christi terminal and the other one in our NGL segment at the NB1 fractionator. This was a onetime event that really pushed up our operating cost in the first quarter that we won’t see for the remainder of the year. So those are a lot of the things that give us confidence on raising our guidance.

Jeremy Tonet: Got it. That’s helpful there. Thank you. And then pivoting in your remarks, I think you touched on the potential for data centers to be a tailwind for the business over time. And just want to unpack that a little bit more. Do you see that as kind of a general thing that helps natural gas demand overall, or do you see the potential, I guess, for data centers materializing proximate to your footprint where in Oklahoma, West Texas, what have you, where there could be more, I guess, direct opportunities?

Pierce Norton: So Jeremy, this is Pierre. So I think it’s kind of all of the above. There’s – we – if you go back the last 20 years, electrical generation load between things that were added as far as devices that you have to charge versus the efficiencies that we got from LED pipes and those kind of things, pretty much offset one another. So it’s been really flat for the last 20 years. kind of for the first time in a couple of decades, we’re seeing a lot of momentum for needing more energy for these data centers. And a natural quick solution to that is natural gas. So we do see that, that’s going to increase natural demand here specifically over the next half decade here and be probably even more. When you look at it, it’s yet to be seen, which area is actually developed more, which means that you put a data center next to where electricity is already there, and they’ve got enough capacity to generate the load, or you switch over to putting a data center close to, say, a pipeline where you can literally generate the electricity from a natural gas-fired generation facility, this located right beside the AI data center.

So yet to be seen exactly how that comes. We’ve seen some interest in different areas of our system. And it’s something that we’re going to continue to focus on and to see just what the pace of that is going to be. But I think it’s kind of all of the above.

Jeremy Tonet: That’s helpful. Thanks. So on that last point, you’re in current conversations with potential customers that could be proximate to your assets, I just want to make sure I have that right.

Pierce Norton: Yes, we are. And whether or not it’s approximate to our assets or we serve quite a few utilities. So we’ve had a lot of calls from utilities as well. It’s yet to be seen exactly what kind of infrastructure is going to be needed in both cases.

Jeremy Tonet: Got it. Understood. Thank you very much.

Pierce Norton: Thank you.

Operator: Our next question comes from Spiro Dounis with Citi. Please go ahead.

Spiro Dounis: Thanks, operator. Good morning, team. I wanted to go back to the synergies quickly, if we could. Sheridan, it sounds like in some of your comments there, you’re saying you’re sort of finding even more as time goes by. And I was wondering if you could tie that back to your prior targets you talked about $400 million of with upside to $800 million. I think a lot of that was sort of probability weighted. So I’m curious, are you sort of getting closer to that $800 million number? If you could maybe just provide some examples of where you’ve been most surprised

Sheridan Swords: Yes. Sir, we are getting more confident in moving up the ladder as we see more opportunities come out there. And we’re kind of seeing it all across parts of our business. We’re seeing it from as how we optimize our storage, we’re seeing it how we are combining the two assets to make logistics savings better, we’re seeing it as we tie the systems together, how we can demand pull in gels in the refined products. So we’re seeing it across all aspects of our business that we’ve talked about.