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ONEOK INC /NEW/ (OKE)·Q4 2016 Earnings Summary

Executive Summary

  • Q4 2016 was solid operationally despite December headwinds: revenue rose to $2.65B and diluted EPS was $0.43 (vs. $1.93B and $0.12 in Q4 2015), while adjusted EBITDA improved to $469M; severe weather and increased ethane rejection reduced Q4 by ~$15M .
  • Strength remained broad: G&P fee rate rose to $0.84/MMBtu and segment EBITDA grew 30% YoY; Pipelines EBITDA rose 22% YoY; NGLs EBITDA dipped YoY on lower optimization spreads and West Texas LPG rate pressure .
  • 2017 guidance (issued Feb 1) calls for Adjusted EBITDA of $1.87–$2.13B and NGLs gathered of 800–900 kbpd; OKE expects no cash income taxes through at least 2021 and a 21% dividend increase to $0.745/quarter post-OKS acquisition close (9–11% annual growth through 2021) .
  • Catalysts: announced acquisition of remaining OKS units (immediately accretive DCF, 21% dividend step-up), rising STACK/SCOOP and Permian activity, and expected ethane recovery timing (2017 back-half ramp) .

What Went Well and What Went Wrong

  • What Went Well

    • Fee-based durability and mix shift: 2016 adjusted EBITDA rose 17% YoY driven by higher fee-based earnings across all segments; G&P fee rate averaged $0.76 for 2016 vs $0.44 in 2015 (Q4 reached $0.84) .
    • Volume trends and project execution: Full-year natural gas processed +12% and NGLs fractionated +6% YoY; multiple projects (Roadrunner phase 2, WesTex expansion) fully subscribed under firm commitments .
    • Strategic repositioning: Proposed acquisition of OKS boosts dividend by 21% and eliminates IDRs, with rating agencies placing OKE on review for investment grade post-close; CFO targets leverage ~4x in 18–24 months, primarily via EBITDA growth .

  • What Went Wrong

    • Weather and ethane rejection: December storms and higher ethane rejection reduced Q4 by ~$15M; optimization spreads narrowed vs Q3, pressuring NGL marketing .
    • NGL segment YoY softness in Q4: NGL adjusted EBITDA fell to $253.6M (from $279.3M) on lower short-term contracted volumes, West Texas LPG rate pressure, and narrower product differentials .
    • West Texas LPG rate case and Permian fees: Rate case pending; average transport fee on West Texas system remains low versus Mid-Con all-in bundles, with expansion likely requiring higher contracted volumes and some looping/pumps .

Financial Results

  • Consolidated results vs prior periods and YoY
MetricQ4 2015Q2 2016Q3 2016Q4 2016
Revenue ($USD Billions)$1.93 $2.13 $2.36 $2.65
Diluted EPS ($)$0.12 $0.40 $0.43 $0.43
Operating Income ($USD Millions)$242.0 $315.3 $329.4 $329.6
Adjusted EBITDA ($USD Millions)$448.4 $452.7 $465.3 $469.0
Operating Margin (%)12.5% (calc from )14.8% (calc from )14.0% (calc from )12.4% (calc from )
  • Segment adjusted EBITDA
Segment Adj. EBITDA ($USD Millions)Q4 2015Q2 2016Q3 2016Q4 2016
Natural Gas Liquids$279.3 $276.6 $279.3 $253.6
Gathering & Processing$97.3 $110.3 $109.8 $126.6
Natural Gas Pipelines$73.9 $68.5 $80.3 $89.9
  • KPIs
KPIQ2 2016Q3 2016Q4 2016
NGLs Fractionated (MBbl/d)608 606 579
NGLs Transported – Gathering Lines (MBbl/d)809 775 744
Nat Gas Processed (BBtu/d) – G&P1,882 1,829 1,869
Avg G&P Fee Rate ($/MMBtu)$0.76 $0.76 $0.84
Pipeline Capacity Contracted (MDth/d)6,193 6,300 6,659
  • Estimate comparison (consensus)
MetricQ4 2016 ActualQ4 2016 Consensus
Revenue ($USD Billions)$2.65 N/A (S&P Global consensus unavailable at time of request)
Diluted EPS ($)$0.43 N/A (S&P Global consensus unavailable at time of request)

Note: We attempted to retrieve S&P Global consensus; data was unavailable due to request limits at time of analysis.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EBITDA (Consolidated)FY 2017—$1.87B–$2.13B New
Distributable Cash FlowFY 2017—$1.245B–$1.505B New
NGLs GatheredFY 2017—800–900 kbpd New
NGLs FractionatedFY 2017—575–635 kbpd New
NGL Segment Adj. EBITDAFY 2017—$1.11B–$1.31B New
G&P Segment Adj. EBITDAFY 2017—$445M–$485M New
Pipelines Segment Adj. EBITDAFY 2017—$320M–$340M New
Fee-based Earnings MixFY 2017~85% (2016)~90% (2017) Raised mix target
Cash Income TaxesThrough 2021—None expected New
Dividend/Share (quarterly)First div post-close$0.615 (Q4’16) $0.745 (21% increase) Raised
Ethane Recovery ContributionFY 2017—+$40–$60M adj. EBITDA New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3 2016)Current Period (Q4 2016)Trend
Ethane recovery timing/impactExpected significant recovery starting 2017; intermittent recovery in 2016 aided NGL volumes 2017 uplift of $40–$60M adj. EBITDA; cumulative ~$200M as crackers ramp 2017–2019 Improving visibility; back-half weighted
STACK/SCOOP & Permian activityAnticipated ramp; Bear Creek online; Roadrunner/WesTex completed and fully subscribed 10–12 rigs rising to 17–20 by year-end on OKE acreage; strong growth into H2’17 Accelerating
Weather/supply chainNo notable mention in Q2/Q3 beyond normal opsSevere December weather cut Q4 by ~$15M; volumes rebounded in Feb Temporary headwind
Marketing/optimization spreadsWider spreads aided optimization in Q2Spreads narrowed in Q4 vs Q3; widening again in early Q1’17 Near-term rebound
West Texas LPG ratesNot highlightedAdmin law judge hearing set; transport-only fees low; potential expansion with pumps/looping Proceeding; fee uplift needed
Leverage/ratingsLeverage improving; OKS outlook to “stable” in Q3 Post-merger path to ~4x in 18–24 months without equity issuance; review for upgrade Improving

Management Commentary

  • Strategic positioning: “ONEOK and ONEOK Partners reported strong 2016 financial performance… adjusted EBITDA increased nearly 18%… despite increased ethane rejection and severe weather in December” .
  • Growth drivers: “We expect year-over-year adjusted EBITDA growth in 2017 to be weighted towards the back half… routine high return capex to fill available capacity… sets the stage for significant adjusted EBITDA growth into 2018 and beyond” .
  • Merger economics: “We anticipate closing… acquisition of the remaining 60% of ONEOK Partners… immediately accretive and then double-digit accretive to ONEOK’s DCF 2018–2021, providing for a 21% initial dividend increase followed by 9%–11% annual growth” .
  • NGL outlook: “At least three world-scale petrochemical facilities are slated to begin operations in the second half of 2017… 2017 guidance expects increased ethane recovery to provide $40–$60 million of adjusted EBITDA growth” .

Q&A Highlights

  • Permian/West Texas: Weather and ethane rejection contributed to lower Q4 volumes; two new Permian plant connections in 2017 should lift volumes; West Texas LPG rate case hearing scheduled, with potential expansion via pumps/looping .
  • NGL volume ramp: NGL gathers expected to cross 800 kbpd by Q2; recovery and plant ramps imply second-half bias toward upper end of 800–900 kbpd guidance .
  • Leverage path: CFO reiterated path to ~4x leverage in 18–24 months without needing equity, assuming EBITDA growth; equity optional for larger projects .
  • Marketing spreads: Optimization spreads narrowed in Q4 vs Q3 but widened again in early Q1 (propane $0.08–$0.10/gal; butane ~$0.12/gal), supporting Q1 optimization .
  • SCOOP/STACK takeaway and frac capacity: 200–210 miles 36” pipeline concept estimated at $750–$900M; frac additions likely around 2019 if commitments warrant; de-ethanizer capacity sufficient for ethane uplift .

Estimates Context

  • We were unable to retrieve S&P Global consensus estimates at the time of analysis. As such, we present actual results only and note that weather-related impacts (~$15M) and narrowed marketing spreads likely weighed slightly on Q4 relative to intra-quarter expectations, while management’s 2017 back-half weighted outlook may prompt upward revisions to H2 segment volumes and ethane-related EBITDA contribution .

Key Takeaways for Investors

  • Fee-based resilience: 2016 performance validates the fee shift (G&P fee rate, pipeline firm demand), buffering commodity exposure; 2017 fee mix ~90% targeted .
  • Near-term headwinds abating: Weather and ethane rejection hit December, but February volumes rebounded and Q1 optimization spreads improved, setting a healthier entry into H2 volume ramp .
  • Back-half 2017 setup: Six new plants connecting in 2017, rising rig counts on dedicated acreage, and ethane recoveries should tilt growth to H2 and into 2018 .
  • Dividend growth and credit trajectory: Merger-driven 21% dividend step-up and 9–11% CAGR through 2021 with ≥1.2x coverage; leverage trending to ~4x without equity if project slate remains moderate .
  • Project optionality: Potential SCOOP/STACK takeaway and West Texas LPG expansion provide upside if contracted; frac capacity likely needed by 2019 if volumes materialize .
  • Segment watch: Monitor NGL segment for rate case resolution and marketing spreads; G&P fee rates should normalize to ~$0.80 in 2017 on mix, after Q4 spike from IP-heavy volumes .

Appendix: Additional Q4/FY Highlights

  • Q4/FY consolidated: Q4 adjusted EBITDA $469.0M; FY adjusted EBITDA $1.83B; FY dividend coverage 1.31x .
  • Dividends/Distributions: OKE declared Q4 dividend $0.615/sh; OKS declared Q4 distribution $0.79/unit .
  • Weather quantified: Estimated ~$15M reduction in Q4 from weather/ethane rejection; volumes rebounded significantly in February .