Q4 2023 Earnings Summary
- Strong Volume Growth Expected in the Rocky Mountain Region: ONEOK anticipates a 9% increase in processing volumes in the Rocky Mountain region in 2024, driven by continued producer activity and increased efficiency from longer 3-mile laterals, which also reduces required capital expenditures.
- Attractive Capital Projects Coming Online with High Returns: Three major projects are expected to come online in Q1 2025—the MB-6 fractionator, West Texas NGL pipeline expansion, and Elk Creek pipeline expansion—with strong return multiples, enhancing earnings growth prospects.
- Significant Shareholder Returns Through Dividends and Share Repurchases: ONEOK plans to initiate a $2 billion share repurchase program over the next four years, beginning in 2024, complementing a targeted annual dividend growth rate of 3-4%, and expects total shareholder returns to trend towards 75-85% of forecasted cash flow from operations after capital expenditures.
- Regulatory uncertainties pose risks to key projects: The Saguaro Connector Pipeline and associated LNG export volumes face uncertainties due to Department of Energy export approvals, particularly for Train 3 of the Mexico Pacific LNG project. The company acknowledges they don't know how this will play out, which could impact future growth.
- Lower NGL volume growth expected in 2024: ONEOK anticipates lower natural gas liquids (NGL) volume growth compared to processing volume growth due to expecting less incentivized ethane recovery in the Bakken region and the expiration of a low-margin, high-volume contract on the Overland Pass Pipeline.
- Higher third-party fractionation costs impacting earnings: Before the MB-6 fractionator comes online in the first quarter of 2025, ONEOK expects to incur significant third-party fractionation costs—approximately $30 million per quarter in 2024—which may weigh on earnings.
-
Synergies Upside
Q: What is driving the increased synergies to $400 million?
A: Management sees upside in synergies, now approximately $700 million, driven by integrating refined product, crude oil, and NGL systems across their networks. They have already realized significant cost savings in 2023, with full impact expected in 2024. -
Capital Returns
Q: How should we think about capital returns in 2025–26?
A: The company plans to initiate a share repurchase program in 2024, ramping up over the next four years while targeting a debt-to-EBITDA ratio of 3.5x. They expect to generate significant free cash flow, allowing for increased shareholder returns and funding high-return projects. -
CapEx Outlook
Q: Will growth CapEx decrease after 2024?
A: Growth CapEx is expected to decline post-2024 as major projects—MB-6, West Texas LPG expansion, and Bakken expansion—are completed. Future projects are anticipated to be smaller, funded by free cash flow, and focused on accelerating synergies in 2025–26. -
Saguaro Project Impact
Q: Will Saguaro FID affect CapEx plans?
A: If the Saguaro project reaches FID in mid-2024, it won't materially change 2024 CapEx, and 2025 CapEx is still expected to decrease from 2024 levels. The project aligns with their capital program and will take a couple of years to construct. -
Producer Efficiency
Q: Will longer laterals reduce required CapEx?
A: The increase in 3-mile laterals enhances production per well, reducing capital needed to maintain volumes. With 1.6 Bcf of throughput and 1.9 Bcf of processing capacity in the Bakken, they expect capital expenditures to decrease. -
Northern Border Capacity
Q: Are there limits on Bakken gas takeaway?
A: Management does not foresee restrictions on Bakken gas takeaway before 2026. The 400 million cubic feet per day of legacy Canadian volumes on Northern Border will continue, and growth will be accommodated by projects like Bison Express and WBI expansions. -
Project Returns
Q: What returns are expected from 2025 projects?
A: MB-6 will operate at high rates upon start-up, delivering strong returns. The West Texas expansion returns are improving with ongoing contracting, and the Elk Creek expansion requires minimal volume to achieve a return multiple well below 1 when fully utilized. -
LPG Export Opportunities
Q: Any updates on entering LPG export business?
A: The company continues to explore options, including leveraging Magellan assets or a greenfield site at Sabine Pass. While LPG exports could enhance integration, they are not essential, as current markets provide sufficient export capabilities. -
M&A Strategy
Q: How are you approaching consolidation opportunities?
A: The primary focus is integrating the Magellan acquisition to maximize shareholder value. The company remains disciplined and intentional in M&A, considering transactions that strengthen their competitive position. -
Refined Products Opportunities
Q: Are price swings creating new opportunities?
A: Price differentials between the Gulf Coast and Mid-Continent have created opportunities for longer-haul tariffs on their refined product systems. They've also utilized NGL pipelines to move refined products recently.
Research analysts covering ONEOK INC /NEW/.