ONEOK, Inc. (NYSE:OKE) Q3 2023 Earnings Call Transcript

ONEOK, Inc. (NYSE:OKE) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good day and welcome to the ONEOK Third Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Andrew Ziola, Vice President, Investor Relations. Please go ahead, sir.

Andrew Ziola: Thank you, Rocco and welcome to ONEOK’s third 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. [Operator Instructions] With that, I will turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce?

A bird’s eye view of a natural gas pipeline stretching across the landscape.

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; Sheridan Swords, Executive Vice President, Commercial liquids and Natural Gas Gathering and Processing, which includes our commercial responsibility for our NGL business, refined products and crude businesses. Also available to answer your questions are Chuck Kelley, Senior Vice President, Commercial of Natural Gas Pipelines; and Kevin Burdick, who has assumed the newly created position of Executive Vice President, Chief Enterprise Services Officer, with responsibilities for cybersecurity, information technology, enterprise optimization, innovation, and integration activities.

This position will be vital as we continue to integrate systems, technologies and workforces following the acquisition of Magellan. Kevin is uniquely qualified for his experience in integration processes, information technology, commercial and corporate operations to lead the company as we continue to identify, prioritize and realize the value of the synergies as one company. We completed the acquisition just over a month ago. And since then, we have been fully focused on integration activities, maintaining the reliable and responsible operations, our customers and stakeholders expect from us. And at the same time, exploring optimization and integrated opportunities by engaging the combined commercial, operational and engineering teams. What has become evident at this point, based on the number of commercial synergies and opportunities is the importance of prioritization, the value of combining our companies, the potential commercial synergies and the opportunities going forward are significant, more to come on this in the coming months.

But after September 25 and getting full access to both companies, I can say that the collaboration of our employees is already presenting additional possibilities. ONEOK’s increased scale, scope and diversified operations are already enabling us to create exceptional value for our stakeholders. We have added primarily fee-based earnings and expect a significant free cash flow through the new refined products and crude businesses and expected tax synergies, which combined with ONEOK’s legacy operations, is setting up a strong finish to 2023 and a solid foundation for 2024 performance. Yesterday, we announced third quarter 2023 earnings and increased our full year 2023 financial guidance on a pre-acquisition basis for the second time this year.

We also provided new consolidated guidance that includes the impact of the Magellan acquisition. Walt will provide more detail in our guidance a little bit later, which is underscored by our strong volumes across our systems and favorable market conditions continuing to drive confidence in our expectations. We saw double-digit growth in NGL and natural gas processing volumes in the third quarter and continue to see robust producer activity across our operations with North Dakota natural gas production reaching a new all-time high in August. The industry landscape is healthy, and now with a more diversified portfolio of assets, we are even better positioned to make the most of opportunities across our operations. So with that, I will turn the call over to Walt for the financial performance and a guidance update.

Walt Hulse: Thank you, Pierce. I’ll start with a brief overview of our third quarter financial performance. ONEOK’s third quarter 2023 net income totaled $454 million or $0.99 per share. Third quarter adjusted EBITDA totaled more than $1 billion, an 11% increase year-over-year. Adjusted EBITDA would have exceeded $1.1 billion for the third quarter 2023, excluding $123 million of transaction costs, $35 million of third-party fractionation costs and partial earnings from the Refined Products and Crude segment. Refined Products and Crude segment earnings totaled $40 million of adjusted EBITDA from the 6 days following the close of the Magellan acquisition, which includes a $9 million mark-to-market gain on commodity derivative positions settling in the fourth quarter 2023.

It is worth noting those 6 days of earnings aren’t necessarily an indicator of full third quarter segment earnings in part due to the uptick in our seasonal butane blending business. As of September 30, we had no borrowings outstanding under our $2.5 billion credit agreement and had more than $280 million of cash on hand. As we look ahead, we expect fourth quarter 2023 net debt to adjusted EBITDA, excluding transaction costs, to be approximately 3.7x on an annualized run-rate basis. Moving on to our increased guidance. On a pre-acquisition basis, we now expect 2023 net income midpoint of $2.61 billion and adjusted EBITDA midpoint of $4.8 billion, which is $125 million higher than our last guidance increase in August. These midpoints are specific to legacy ONEOK operations and exclude impacts from the Magellan acquisition in order to provide a more accurate comparison with our original 2023 guidance.

Since that original guidance announcement in February, we have increased our adjusted EBITDA midpoint by $225 million. Our higher guidance expectations are driven by volume strength across our operations, higher average fee rates, lower than expected third-party NGL fractionation costs and sustained strength in our natural gas pipeline segment. Moving on to our newly announced 2023 consolidated financial guidance, which includes impacts from the Magellan acquisition. We expect a consolidated net income midpoint of $2.6 billion and adjusted EBITDA midpoint of $5.1 billion. Consolidated guidance includes earnings from the Refined Products and Crude segment following the close of the acquisition on September 25 and also includes $175 million of transaction costs.

Earnings assumptions for the refined products and crude segment also include an approximately $40 million unfavorable earnings impact in 2023 related to commodity inventory balances being valued higher at the time of the acquisition than pre-acquisition value. As these inventories are sold, we will recognize a smaller margin than would have been recognized at the pre-acquisition value of the inventory. An additional $10 million unfavorable impact is expected in 2024 related to the same inventory valuation adjustment. The Refined Products and Crude segment is expected to perform in line with its previously increased expectations, which reflects solid segment fundamentals despite the impact of the inventory valuation. We continue to expect total capital expenditures, including growth and maintenance capital and excluding legacy Magellan CapEx of approximately $1.575 billion in 2023.

This includes assumptions for continued strong producer activity and initial activities related to the expansion of Elk Creek pipeline and fully looping the West Texas NGL pipeline. As we look ahead, our financial outlook remains strong. When we announced the acquisition in May, we expected total combined adjusted EBITDA to approach $6 billion in 2024, supported by stable and growing volumes across our operations. As we stand today, our confidence in that outlook has only increased further, and we believe there is a potential to exceed those expectations. I’ll now turn the call over to Sheridan for a commercial update.

Sheridan Swords: Thank you, Walt. Let’s start with our natural gas liquids segment. Third quarter 2023 NGL volumes increased 11% year-over-year with all regions where ONEOK operates seeing increases compared with the third quarter 2022. Compared with the second quarter of 2023 both Rocky Mountain and Mid-Continent NGL raw feed throughput increased 5%, driven by continued strong production activity in these basins, resulting in higher propane plus volumes and slightly higher ethane recovery levels. Rocky Mountain region volumes averaged more than 400,000 barrels per day in September. The continued growth in volume from the Rocky Mountain region provides momentum into 2024 and further supports why we have started initial long lead time activities for an Elk Creek pipeline expansion.

We continue to maintain our ethane recovery assumptions for the remainder of the year, with the Permian in near full recovery, the Mid-Continent in partial recovery and opportunity to incent recovery in the Williston. In the natural gas gathering and processing segment, third quarter processed volumes averaged more than 2.3 billion cubic feet per day, a 12% increase year-over-year. As Pierce mentioned, North Dakota gas volumes have reached record production levels of more than 3.3 billion cubic feet per day in August. Our Rocky Mountain region process volumes averaged more than 1.5 billion cubic feet per day during the third quarter and reached more than 1.6 Bcf per day in September. We’ve connected 450 wells in the region for the – through the first 9 months of the year compared with approximately 245 connections during the same period last year, a more than 80% increase.

We have also increased our well connect guidance for 2023 due to the strong pace of completions and now expect to connect 525 to 575 wells compared with our previous guidance of 475 to 525 wells. Currently, there are approximately 37 rigs and approximately 15 completion crews operating in the basin with 20 rigs and approximately half of the completion crews on our dedicated acreage, which remains more than enough activity to grow production. In the Mid-Continent region, third quarter process volumes increased 10% year-over-year and increased 3% compared with the second quarter of 2023. We continue to see producers focus on higher crude producing areas and currently have 3 rigs on our dedicated acreage in the region. We have connected 46 wells in the region through the first 9 months of the year compared with 40 in the same period last year.

We expect to be at the high end of our Mid-Continent well connect guidance of 45 to 55 wells in 2023. Moving on to the Refined Products and Crude segment, we only have 6 days of operation from this new segment in the third quarter due to the timing of the acquisition closing, but the segment continues to perform in line with expectations that were already increased earlier this year. Healthy business fundamentals continue to drive consistent performance, and we’re currently seeing strong seasonal butane blending margins. Looking ahead, we see a growing list of opportunities, which will continue to drive growth in this segment through synergies. The more time we spend with the assets and with the legacy Magellan employees, we’re seeing even more opportunities.

In the Natural Gas Pipelines segment, strong year-to-date results continue to benefit from demand from natural gas storage and transportation services. And we saw increased demand for interruptible services during the third quarter as extreme heat in Texas drove increased electric generation demand and pricing. We’re seeing opportunities for additional expansion in Oklahoma and Texas, with additional storage expansion in Oklahoma and Texas and demand for long-term storage capacity remaining strong. We continue to work toward FID in the Saguaro Connector pipeline and expect to receive the presidential permit before the end of the fourth quarter. There has been significant interest from producers in the Permian Basin relative to shipping gas west to the potential LNG export facility and reported support from multi-large, well-known customers anchoring the export project.

Pierce, this concludes my remarks.

Pierce Norton: Thank you, Sheridan and Walt, for adding color to what was a very strong quarter. With only 2 months much left in 2023, there’s still time for progress to be made and a lot to be excited about. Since closing, I’ve had the privilege of visiting many of our field and office locations, and we’ll continue to visit additional sites. I’m energized by the enthusiasm and the collaboration that I’ve already seen between both the legacy ONEOK employees and the Magellan employees. I can say with certainty that we have incredible teams in place. Thank you to all of our employees for what you are doing to continue our high level of service through safe and reliable operations. And thank you to our investors for your support and trust in our vision for the future of ONEOK. Our future is bright and the long-term value of bringing our companies together will play out in the years ahead. With that, operator, we are now ready for questions.

Operator: Thank you. [Operator Instructions] Today’s first question comes from Brian Reynolds with UBS. Please go ahead.

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Q&A Session

Brian Reynolds: Hi, good morning everyone. Maybe to start off on synergies, I know that you’ve only had 4 weeks into the pro forma ONEOK and thus larger growth CapEx projects will likely take some time to commercialize and talk about. So curious if you can just talk about some of the smaller low-hanging fruit synergies that you have seen over the last few weeks, particularly around just commercial discussions around batching, blending and bundling. Have you seen some initial commercial success and when can we see some realizations there? Thanks.

Pierce Norton: So I’ll start off and then I’m going to kick it over to Kevin on this. I am going to kind of start with part of your question is kind of what have you seen immediately with some of the kind of the smaller things. As you know, after closing, we do have immediate synergies that have been realized basically from day 1, which are board costs, credit facility renewals, cyber insurance, audit fees and then the executive organizational design that was put in place. So all of those kind of things added up to some immediate savings that will be annualized primarily in next year. I’m going to turn it over to Kevin to kind of talk a little bit more about the process, both on the small things and the large things.

Kevin Burdick: Yes, Brian, as we think about kind of how we went through the process and how we’re tracking, if you go back to really the announcement back in May, we immediately started kind of documenting all the synergy opportunities through the integration planning work we were doing. Once we got closed, then we had access to a lot more information, a lot more data. We continue to refine those estimates of existing opportunities, and we found new ones as well as the company has got to talk more closely. At this point, we’ve got around 250 different opportunities that we’ve identified. And now we’re going through and prioritizing those based on value, time to achieve, is there capital required, things like that, in many cases, like Pierce mentioned, some of it have been captured.

Several others are being worked right now as we speak. And then others still, we’ve got teams in place that are identifying, developing plans to go capture. I think the key is for each of these opportunities, we have owners identified that are held accountable for the results. And we’ve got tracking mechanisms in place that we’re tracking status, what’s been captured, how that relates to the forecast and our estimates as we go forward. So that’s kind of a general kind of overview of the process as it relates to some of the commercial synergies you asked about, yes, some of those may be a little longer lead time. But Sheridan and his team, have teams in place that are working these high-priority items that are – that have the opportunity to drive the most value.

And then I’ll just kind of close the question with all this will be factored in as we think about our guidance and go out with ‘24 guidance probably in February of next year. This will all be factored in and will be included in that guidance as we move forward.

Brian Reynolds: Great. Thanks. Appreciate all that. Maybe to pivot just towards the forward growth CapEx outlook relative to the initial S-4, it seems like ONEOK has pulled forward some CapEx related to West Texas LPG and Elk Creek expansion. And it seems like Saguaro is trending towards more of a JV type relationship, which could defer capital further. So perhaps could you just update us on kind of a forward CapEx outlook maybe for ‘24 and beyond? Just given some of these recent trends? And does it imply that ONEOK could be trading closer to a 10% free cash flow yield if CapEx trends lower? Thanks.

Walt Hulse: Well, Brian, we aren’t going to give you 2024 CapEx guidance today. I think that all of the material projects have been disclosed at this point. And as we look towards 2024 and the opportunities that we have, we see quite a bit of opportunity without any significant material capital projects that we’re ready to announce. So we think we’re set up very well for 2024, but we will give you the guidance in February to firm that number up.

Brian Reynolds: Great. Fair enough. I will leave it there. Have a great rest of your morning.

Operator: Thank you. And our next question today comes from Jeremy Tonet with JPMorgan. Please go ahead.

Jeremy Tonet: Hi, good morning.

Pierce Norton: Hi, Jeremy.

Jeremy Tonet: Just maybe one to pick up on the last question a little bit and fully appreciate not giving ‘24 guidance today, but just trying to get a state of affairs as it stands right now. And I think I wanted to be kind of clear, I guess, on the guidance. And if I’m looking at this the right way, if what’s implied for remainder of the year for fourth quarter, just over $1.4 billion, but then on a normalized basis, you back out most of that $50 million inventory adjustment and then there is a $40 million or so of transaction costs. So it seems like the run rate for the business might be close to $1.5 billion looking at 4Q. Now granted there is seasonality that can impact that at different points throughout the year, but then you also have $200 million of synergies from Magellan that should be realized and you have an increasing GOR and there is other projects set to come on over time in ‘24.

I’m just wondering, moving pieces wise, is that encapsulate what we should be thinking about? Is that a good base to work off of or any other color on these pieces would be helpful?

Walt Hulse: Well, Jeremy, I think you’ve done a good job of summarizing some of the moving parts there. And those – at this point, I would say, are all moving in a favorable direction. In my prepared remarks, I mentioned that on a run rate basis after you take out the merger expenses and the like, that we expect to be approximately at 3.7x debt to EBITDA in the fourth quarter, which is ahead of the expectations that we had when we announced the transaction. So that’s obviously showing that we’ve got favorable free cash flow materializing, and that’s going to give us even more flexibility as it relates to capital allocation as we go into 2024. And we will update you all on that as we get into the 2024 season.

Jeremy Tonet: Got it. That’s very helpful. And I guess I wouldn’t be a Wall Street analyst, if I wasn’t asking now that the ink is dry on the Magellan agreement, anything you can share on what you’re working on now going forward?

Pierce Norton: Well, Jeremy, this is Pierce. We do the same thing we’ve always done, which is we continue to look at different things out there. And like Walt said, with the capital allocation strategy that we have, it’s just a lot more flexible going forward post Magellan and especially with our debt-to-EBITDA metrics coming down quicker than what we expected. So it’s probably about as much color as I can get right now.

Jeremy Tonet: Got it. That’s helpful. I will leave it there, thanks.

Operator: Thank you. Our next question today comes from Michael Blum with Wells Fargo. Please go ahead.

Michael Blum: Thanks. Good morning, everyone. I wanted to ask on the West Texas NGL pipeline expansion. In the slide, you mentioned optionality to use the legacy system for NGLs refined products or crude. I’m wondering if you could just expand on that? Is there any way to get a sense of how you think that will kind of split over time?