ONEOK, Inc. (NYSE:OKE) Q4 2022 Earnings Call Transcript

ONEOK, Inc. (NYSE:OKE) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Hello, and welcome to the ONEOK Fourth Quarter 2022 Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Mr. Andrew Ziola. Please go ahead.

Andrew Ziola: Thank you, MJ, and welcome, everyone, to ONEOK’s Fourth Quarter and Year-end 2022 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. . With that, I’ll turn the call over to Pierce Norton, President and Chief Executive Officer. Pearce?

Pierce Norton: Thanks, Andrew, and good morning, everyone, and thank you for joining us this morning. On today’s call is Walter Hulse, our Chief Financial Officer and Executive Vice President, Investor Relations and Corporate Development, and Kevin Burdick, 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 strong fourth quarter and full year ’22 performance. We met our 2022 financial guidance expectations despite weather-related events and a significant operational incident. We also achieved our ninth consecutive year of adjusted EBITDA growth in 2022.

Through the efforts of our workforce and the resiliency of our assets, we have provided exceptional value for our stakeholders and have positioned ONEOK to continue delivering growth in 2023. I believe the term resiliency is a great description descriptor of 2022 and will continue to be a focus of our operations going forward. Our people, assets and earnings continue to prove their resiliency flexibility and stability. With yesterday’s earnings announcement, we also provided 2023 financial and volume guidance expectations. Higher natural gas processing and NGL volumes and strong fee-based earnings are expected to contribute to higher earnings in 2023 as we continue to focus on both growing our core business and innovating for future opportunities.

There are key differentiators of ONEOK’s business that have proven critical to our past success and offer us confidence in the future. These differentiators provide stability, resiliency and unique opportunities for growth. First, our solid and growing base business, which features strategically positioned assets in some of the most productive U.S. shale basins connected with some of the largest and most well-capitalized producers in the U.S. who provide stable and growing supply to our systems. Our margins in our core businesses are approximately 90% fee-based with minimum direct commodity price exposure because of our proactive hedging strategy; second, our strong balance sheet and investment-grade credit ratings, which provides significant financial flexibility.

We’ve reduced our leverage to below 3.5x and significant — a significant milestone for us. We provided investors with more than 25 years of dividend stability and growth not cutting our dividend during the COVID challenge years and recently announced a dividend increase. Third, our proven track record of intentional and disciplined growth. We continue to benefit from significant operating leverage across our systems, enabling us to continue focusing on lower capital, high-return projects and investments to support producer growth across our operations. Our strong return on invested capital is a source of pride for ONEOK and is a key metric for evaluating our management’s team performance annually. Our nearly 15% ROIC in 2022 highlights the scrutiny that we place on investments, the efficiency of our capital and the high quality of our projects earnings, and this disciplined growth also approaches and will continue.

Finally, the continued demand of the energy products and services that we provide, which are vital to our national security and the quality of life, in which we believe will play an important role in a transforming energy future. U.S. natural gas and natural gas liquids remain abundant and reliable. The products that we move will continue to provide much needed energy domestically and globally. We enter 2023 from a position of strength driven by a year of solid financial and operational performance. And as you can see, there are many reasons why we are confident and optimistic about ONEOK’s future. With that, I’ll turn the call over to Walt for a discussion of our financial performance.

Walter Hulse: Thank you, Pierce. As we detailed in yesterday’s press release, we expect continued growth in our businesses in 2023 after achieving our 2022 financial guidance even with some challenging events. ONEOK’s fourth quarter and full year 2022 net income totaled $485 million and $1.72 billion, respectively, representing increases of 28% for the fourth quarter and 15% for the full year compared with the same period in 2021. Adjusted EBITDA also increased year-over-year, totaling $967 million in the fourth quarter 2022 and $3.62 billion for the full year. Our strong financial performance was driven by increased producer activity, higher realized commodity prices, higher average fee rates and higher natural gas storage and transportation services.

In January, we increased our quarterly dividend to $0.95 per share or $3.82 per share on an annualized basis, marking a return to dividend growth following 3 years of dividend stability. In November 2022, we completed a $750 million senior notes offering due in 2032, generating net proceeds of $742 million, which was primarily used to repay short-term debt. And just yesterday, we redeemed $425 million of 5% senior notes due September 23 with cash on hand. Our year-end net debt-to-EBITDA on an annualized run rate basis was 3.46x, in line with our previously discussed aspirational target of 3.5x or less. As it relates to Medford, we reached an agreement with our insurers in early January to settle all claims related to the incident for total insurance payments of $930 million, which included $100 million that was paid in 2022.

We received the remaining $830 million in the first quarter of 2023, and applied approximately $50 million to an outstanding 2022 insurance receivable. We provided a table in our earnings release showing the line-by-line details. The remaining $780 million will be recorded as a gain in our operating income in the first quarter of 2023. As Pierce mentioned, with yesterday’s earnings announcement, we provided 2023 financial guidance, including a net income midpoint of $2.41 billion and an EPS midpoint of $5.36 per share diluted share. We also provided and adjusted EBITDA midpoint of $4.575 billion. Our guidance includes the net effect of the onetime insurance settlement gain of $780 million and future method related costs, primarily third-party fractionation, which we estimate will total $240 million in 2023.

We expect Medford related costs to be significantly lower in 2024 due to our ability to fully utilize the MB-5 fractionator to substantially reduce third-party fractionation costs compared with 2023. By taking the full settlement of $780 million, less the $240 million of expected third-party costs in 2023, you get a total approximately $540 million related to the settlement that has been assumed in our $4.575 billion adjusted EBITDA guidance midpoint for 2023. Excluding the effect of the settlement and the third-party costs of $540 million, this still amounts to more than $4 billion, double-digit earnings growth which we referenced on our last earnings call. We also expect double-digit earnings growth at the midpoint for both natural gas liquids and natural gas gathering and processing segments driven by higher volume expectations across our operations.

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Kevin will provide more detail on each of the operating segments in a moment. Our 2023 guidance assumes producer activity associated with WTI crude oil prices in the range of what we are currently seeing in the market. We expect total capital expenditures of $1.38 billion, which includes growth in maintenance capital. This midpoint reflects the investments necessary to keep up with expected increase in producer activity, the completion of MD5 early in the second quarter of 2023 and also more than $300 million related to MD6 this year. Excluding the MD6 expenditures, our total CapEx would have been lower than 2022. Our 2023 CapEx guidance does not include the Saro Connector pipeline or any other projects that have not reached a final investment decision.

Our routine growth capital accounts for higher number of well connects and our higher return projects such as natural gas storage expansions, pump stations and compression expansions to meet customer needs. Finally, as it relates to the 15% alternative minimum tax associated with the inflation Reduction Act, we expect the AMT to have an impact on our cash taxes beginning with the 2024 tax year. You can find details in our 10 -K when it is filed later today. I will now turn the call over to Kevin for a commercial update.

Kevin Burdick: Thank you, Walt. We saw strong full year natural gas gathering and NGL volumes on our system in 2022 despite several weather events during the year, providing continued growth in our primarily fee-based earnings. NGL volumes were particularly strong in the Rocky Mountain region, increasing 12% year-over-year due to higher activity levels and increased opportunities to recover ethane from the region. Well connects across our operations increased 24% compared with 2021, and we saw a solid return of activity in the Mid-Continent driving a significant increase in well connections in the region and higher natural gas processing volumes on our system. We’ll continue to see the benefits of this activity throughout 2023 as volumes ramp.

Our Natural Gas Pipelines segment exceeded its 2022 financial guidance range on higher earnings from long-term storage services and higher rates from renegotiated contracts customers continue to see the value in our storage assets, and we continue to evaluate opportunities to expand these services. Turning to 2023. A Key drivers for our higher 2023 guidance includes stable producer activity, providing higher natural gas and NGL volumes across our systems, continued strength in fee-based earnings and rates and higher expected realized commodity prices due to hedges placed at higher price levels compared with 2022. At the midpoints, our 2023 volume guidance would result in a 7% increase in total NGL volumes and an 11% increase in total natural gas processing volumes compared with 2022.

In the natural gas liquids segment, we expect volume growth to be driven by strong producer levels, a producer activity across our operations, a continuing the momentum we saw from producers in 2022. Higher average fee rates will also contribute to the segment’s earnings as contract escalators continue to be realized throughout the year. NGL market dynamics point toward a continued improvement in global demand with China reopening and with lower natural gas prices, resulting in an attractive environment for U.S. pet chems. We expect this current market to drive increased activity from the U.S. petrochemical industry relative to global pet chems while the U.S. position being with the U.S. position being one of the lowest on the global cost curve.

On our system, we expect the Permian Basin to stay in high ethane recovery in 2023 and for the Mid-Continent to be in partial recovery as natural gas prices fluctuate seasonally. We also expect to continue to see opportunities to incentivize ethane recovery in the Rocky Mountain region this year. We are on track to complete our 125,000 barrel per day MB-5 fractionator in Mont Belvieu early in the second quarter of 2023. And we recently announced MB-6 which we expect to be complete in the first quarter of 2025. Moving on to the natural gas gathering and processing segment. We expect volume growth again this year in both the Rocky Mountain and Mid-Continent regions, driven by producer activity levels, resulting in more well connections than in 2022.

In the Rocky Mountain region, we expect processed volumes to grow 11% at the midpoint compared with 2022 and averaged nearly 1.5 billion cubic feet per day in 2023. Already this year, despite winter weather, we’ve reached a process volumes as high as 1.46 billion cubic feet per day in February, a new record for the segment. We completed construction on the 200 million cubic feet per day Demicks Lake III processing plant this month, providing our customers with needed capacity as well as operational redundancy. Activity levels in the Williston Basin remains strong, particularly considering we are just entering March. There are currently more than 40 rigs and 22 completion crews operating in the basin compared with just over 30 rigs and 13 completion crews at this time last year.

Producers remain committed to the region, and we anticipate a few more rigs will return as we move into spring. At our guidance midpoint, we expect to connect 500 wells in the region this year a nearly 40% increase compared with 2022. We’ve already connected nearly 90 wells through February and have remained steady at more than 20 rigs operating on our dedicated acreage. Additionally, there remains a large inventory of around 500 DUCs basin-wide with approximately half on our acreage. Keep in mind that in the Bakken, producer economics are driven by crude oil and customers — our customers are some of the largest and most well capitalized in the country. This means recent fluctuations in commodity prices and specifically lower natural gas prices have not had an impact on producer activity levels on our acreage.

We also expect gas-to-oil ratios to remain strong and continue to trend higher in the future, which can drive volume on our systems even without increased producer activity. In the Mid-Continent region, we continue to see positive activity with approximately 10 rigs currently operating on our acreage and more than 50 across the region. We expect process volumes to grow 12% at our guidance midpoint compared with 2022 and average more than 700 million cubic feet per day in 2023. Rig activity across the basin will also continue to drive additional NGLs to our system. In the natural gas pipeline segment, we continue to expect strong demand for natural gas storage and transportation services in 2023. At the end of 2022, nearly 80% of our natural gas storage capacity was contracted under long-term agreements, and our pipeline transportation capacity was nearly 95% contracted.

We expect similar levels in 2023. Work continues on a project that will expand our storage capabilities in Oklahoma by 4 billion cubic feet and we are currently evaluating reactivating previously idled storage facilities in Oklahoma and Texas. Construction also continues on our Viking pipeline compression electrification project. The Oklahoma storage expansion and Viking project are both slated for completion this year. Additionally, in late December 2022, a ONEOK subsidiary filed a presidential permit application with the FERC to construct and operate new international border crossing facilities at the U.S. and Mexico border. The proposed border facilities would connect upstream with a potential ONEOK intrastate natural gas pipeline called the Swaro Connector pipeline and with a new pipeline under development in Mexico for ultimate delivery to an export facility on the West Coast of Mexico.

Since the announcement, there have been several positive developments related to the potential LNG export project. And a final investment decision on the ONEOK pipeline is expected in mid-2023. Pearce, that concludes my remarks.

Pierce Norton: Thank you, Kevin, and thank you, Walt. We covered a lot today, and we have many reasons to feel confident in our 2023 guidance and our expectations for more growth this year. Everything that we’ve talked about today, from our 2022 performance to our future expectations and key differentiators for growth are all underscored by our commitment and focus on safety and environmental performance. Our company and our industry aren’t immune to incidents, but I’m proud of how we have responded when challenges do occur and how we continue working to improve our performance going forward, focusing on safety and the health of our employees and the communities near where we operate. From our environmental perspective, we’ve made significant progress toward our greenhouse gas emissions reduction target, achieving reductions that equate to approximately 20% of our total 2030 reduction target.

Our employees’ dedication to meeting customers’ needs while operating our assets in a safe, reliable and environmentally responsible manner continues to drive our strong operational growth and financial performance year after year, and we’re set up well for continued growth in 2023. With that, operator, we are now ready for questions.

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Q&A Session

Operator: . Today’s first question is from Brian Reynolds with UBS.

Brian Reynolds: Maybe to start off on the guidance. Last year, we had a couple of weather events and a material amount of frac capacity come offline, but guidance was still achieved. While some activity seems to have gotten pushed to 23% from ’22, the ’25 guide yearly seems similar to 2022 original base guidance. So perhaps could you just talk about the puts and takes this year from last year and whether this is a base guide out performance or if we saw some volumes for G&P and NGLs get moved into ’23.

Kevin Burdick: Brian, yes, this is Kevin. I think probably the big thing is just like you mentioned the volume that was off-line and really the delays we saw when the volume came offline primarily in April, when we had the severe just kind of historic weather events in North Dakota, that just delayed not only getting volume back online, which hurt our ’22. But it delayed some of the well connects as we into push back into ’23. So that’s why we feel really good about our ’23 guide. Yes, we’ve got a significant step-up in well connects. But when you look at the wells. We’ve already connected to date, which historically is some of our lower months from a well connect perspective. and you look at the momentum we kind of built as we exited ’22, we feel really good about where we’re at volumetrically in both G&P and NGL out of the Bakken.

Brian Reynolds: Great. And as a follow-up just on capital allocation. It seems like we should have pretty stable CapEx in the next few years with the MB-6 build-out. And just given the already announced dividend raise and leverage targets and payout ratios met at this point, how should we think about use of excess cash going forward?

Pierce Norton: Brian, this is a good question to kind of clear up and really focus on what our key strategies are for capital allocation. The first one is that we want to invest in high-return organic projects that are adjacent to our existing footprint. The second thing is that we want to maintain and grow a — what we refer to as a sustainable dividend. And what we mean by that is we want to keep that dividend growth somewhere below our EPS growth percentage and then also focus on our payout ratio, which I would say that approximately 85% are lower. So we were above 100%. We’ve got it down below 100% in our 2023 guidance. And number three, we want to keep our strong investment-grade credit ratings with a target of that 3.5x debt-to-EBITDA.

And assuming that we’ve achieved all of those kind of capital allocation key strategies, if we do have excess cash or whatever, we could consider share buybacks. But that’s kind of laying it out as to what our priorities are from a capital allocation standpoint.

Operator: The next question is from Spiro Dounis with Citi.

Spiro Dounis: First question, I wanted to touch on the third-party frac fees. You guys highlighted Mont Belvieu 5, frac 5 coming online and really sort of benefiting 2024 from the third-party frac 3 perspective. But I guess just given the fact it does come on or it sounds like it could come on early and second quarter, is there any ability to leverage that frac as well in 2023? And to the extent you’ve considered any of that in the ’23 guidance?