ONEOK, Inc. (OKE) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining the second day of the Barclays CEO Energy-Power conference. My name is Christine Cho, and I am the lead midstream Analyst here at Barclays. Next up, we have ONEOK, one of the leading integrated NGL value chain players with basin exposure in the Rockies, Mid-Con and Permian. We're going to do a fireside chat today with what looks like the Dream team. We've got Pierce Norton, President and CEO; Walt Hulse, CFO; and Kevin Burdick, COO. How are you guys?

We're great, Christine.

So I have a list of questions that I'm going to go through. But maybe to kick it off, Pierce, you've been back at ONEOK for 2 months now. Would be curious to know what have you been focused on so far? And what have you learned by being away from midstream for several years?

So first of all, Christine, glad to join you today with the team here. What I've been focused on since I've been back is actually just listening to the employees and trying to reconnect with a lot of people that I've known in the past and try to get to know some of those who are new to ONEOK since I exited back in 2014. Our main focus has really been to kind of revisit our mission, vision and our values because I think that sets the tone for everything that we do in the future. Getting our vision right is very important. And I think going into the future, you -- things will be a little bit different in the next several decades in the energy business than it was in my previous 40 years. So I think getting that right is very important. And I've really been encouraged by the engagement of our employees and their participation in this. And in particular, this particular leadership team. So your second question is, what have I learned in the distribution business, now that I'm back in the midstream business. I have a whole different appreciation for how important the midstream section is to the distribution business. This particular company just did heroic things for us at ONE Gas as far as delivering gas during winter storm Uri. And we didn't really lose any customers to speak of through one of the most difficult coal periods that this part of the country has seen in over 125 years. I also learned that the distribution business is a B2C business. And the C stands for customer, and that is very important to the whole industry because I've learned that those customers are voters and that politicians do listen to our customers who are their voters. So that's probably the main things that I've learned since I've been away.

And I guess, just to continue on, as you guys think about energy transition or I think you guys like to call it energy transformation. What sort of opportunities makes the most sense for you? And how would you say your experience running a gas utility plays into the vision here?

Well, a little bit of history behind why we call it transformation as to the transition. The way we look at it is, transition means that you're leaving one thing and going to something totally different. And in this particular case, we believe that the assets that are in the ground, there's over 2.6 million miles of pipelines in the United States, actually as many pipelines as there is miles of roads in the United States. And those assets will play a major role in lowering the carbon in the future. I think there's going to be continued opportunities for natural gas pipeline companies to serve electric generation that will likely, at least for the next couple of decades, be looking at gas-fired generation instead of coal. So that's going to lower the emissions. I think because we're going to end up with so much gas-fired generation in the United States, that's going to give us an opportunity to focus on carbon sequestration or carbon capture that's either going to come in the form of addressing the carbon before it gets to the electric generator or afterwards, in the affluent that comes out of them. That's a skill set that plays into our wheelhouse because that's what we do. We have storage, we have pipe as far as the carbon sequestration goes. And then also, as it relates to renewable natural gas, the capture of the methane that comes off other industries like the waste industry, wastewater treatment plants, landfills, dairy farms, or agriculture facilities. There's only 6% of the CO2 comes from those things that I just talked about here in the United States, but there are so many points that it's going to provide many, many opportunities to connect to those. In the beginning, I think our role in that is going to be to learn and to probably let the people spend the money that benefits the most out of that, and we'll use that -- use our assets to capture those, and therefore, will become very relevant in a lower carbon future.

Well, I look forward to hearing about those opportunities as they arise?

Well, we look forward to delivering on them, too.

So maybe if we can kind of go through the existing business, Kevin, maybe a question for you. Volumes out of the Bakken, I think, the last I heard were a little above 300,000 barrels per day on the pipe, which is about the capacity of Elk Creek. I realize you have some capacity on the Bakken NGL line, but I've always thought of that as a bridge asset since you don't collect the full T&F with volumes having to go down OPPL, which isn't fully owned by you guys. So with the expectation for growing volumes out of Basin, the increasing GORs that you guys have talked about, the potential for increased ethane extraction, when should we think it makes sense to increase this pipeline to the full 400,000 barrels per day?

So Christine, I think that will depend on what that ramp in volume looks like, right? As we talk to our customers and they go through kind of their final planning for '22 and beyond, we have seen activity levels pick up. As we've talked about, we're seeing more completions, like we've talked about. And we've seen rigs tick up a little bit. So I think that trend continues as the DUC inventory gets worked down, obviously, we believe with Bear Creek II, when that plant gets completed in early in the fourth quarter of this year, that provides more capacity for an area that we know producers have a lot of DUCs behind and want to move some rigs back because of the quality of the rock down there. So we do anticipate volumes growing out of the Bakken. So then it just becomes math, right? We'll look at -- we do have 140,000 barrels a day of available capacity on the Bakken NGL line. We've got 300,000 barrels a day currently on Elk Creek. So we've got a lot of headroom of an operating leverage to play with to understand, okay, then it just becomes economics of where we think volumes are going. The beauty is, like you said, you can use the asset as a bridge and then wait until we're sure and spend the capital to it, it's not a lot of capital to go ahead and expand it up to some point between $300 and $400 or go ahead and take it all the way to $400. Ethane also plays into that as well to understand what ethane we may or may not need to recover out of the Bakken.

And what would be the lead time that you would need for expanding the asset? And what are we looking at ballpark for -- I'm guessing it's pump stations, but maybe to go to full like 100,000 barrels per day, like what is the incremental capital that, that would require?

The time frame you'd need is probably in the 9- to 12-month type range. Again, just depending on when you call it start or go, there are things we can do, excuse me -- there are things we can do in advance of that to obviously prepare for that to shorten that window. Capital cost, we've said -- you're talking tens of millions of dollars, not hundreds of millions of dollars. So that's the way I would frame that up. And it may depend on how we choose to walk into it or go all the way to $400.

Okay. Well, that sounds like that would be money very well spent. Okay. And then I guess we just touched upon ethane rejection, but ethane rejection in the Bakken, obviously, it's been pretty topical. And the 25,000 barrels per day equating to $100 million is an attention grabbing statement. However, when we think about the issues surrounding Northern Border pipe, how does one think about the different vintage and capabilities of the processing plants that feed into these pipes. For example, some of the older processing plants, as I understand it, may not be able to efficiently take out the ethane versus other plants that are newer, cryo plants and can take it up more efficiently. So like when I think about this, does this mean only the newer plants are going to be the ones that have to take it out and commit to T&F agreement when that time comes, how do I think about what's the most equitable solution for all of the parties that are involved?

Well, that's part of -- that's exactly kind of what Northern Border and the various processors and producers and the shippers are all working through right now as they look at potential tariff changes related to the Btu content. You're right, there are some plants in the Bakken that may not be able to get down to a certain level of Btu from a residue perspective, but they can pull some ethane out. There's been discussions about can you -- can there be joint deals across processors to pull the ethane out. The people need to spend some capital to add some refrigeration or whatever may be needed to pull the ethane out. At the end of the day, it really just comes down to a math problem though. I mean Bakken gas production is just about where it was at its peak before COVID hit. And it's still ticking up. Like you mentioned, the rising gas-to-oil ratios, the additional activity levels, the forecasts are going to show gas production is going to go up. So at some point, as that high Btu Bakken gas continues to displace gas coming from Canada, the Btu content is going to continue to up. And at some point, the pipe and the downstream shippers are going to have to do something to pull that Btu content back down.

So I actually want to come back to sort of those points. But before I do, when we think about ethane recovery in the Bakken, what are the most appropriate natural gas pricing points that we should be comparing it to. If we're rejecting it into the natural gas stream, like what hubs are most relevant? And how should we compare that to Mont Belvieu prices, a? And how should we think about at what level above Mont Belvieu prices, does it make sense to incentivize extraction because I'm assuming it's not going to be the full T&F of $0.28 that you guys disclosed for Bakken?

Right. And we -- I mean, I'll start at the end kind of work backwards. We talked on our last call that fee rate for the T&F rate out of the Bakken ticked down a little bit in the second quarter from the first quarter. And that was because we were incenting some ethane recovery out of the Bakken. So clearly, that shows that it's not the full T&F rate. As far as natural gas and how that's sold up there, there's a couple of different ways. One is people may have transportation on Northern Border. So they're actually the shippers. So they're selling downstream at Ventura, so -- or a Chicago market. So that would be 1 kind of market to look at. But a lot of the incremental gas, if -- so if you have gas above what you may have transport capacity on Northern Border, is really you're selling it at the plant tailgate. And so you're getting a price that's typically going to be more aligned with an AECO price versus a Ventura or Chicago price. So that's where we point people to for that kind of discretionary ethane recovery, it's probably going to be looking at an AECO-based price to compare to a Mont Belvieu ethane price. So that's the spread that we're typically looking at when we make the decision, are we going to recover ethane. Are we going to incent ethane or not? And then it's just a matter of what that is, and we're not going to get into what that actual rate is. But what's going on is the NGL group can say, well, we can keep the G&P group or the process or whole, if not, make a little more money and still recover the ethane. So that's the analysis we're going through on a daily, weekly, monthly basis and how we think about pulling the ethane, incenting the ethane to be recovered.

And appreciate that you can't talk about at what rate it makes sense to incentivize, but what sort of needs to -- what are the scenarios that you see where you can collect the full $0.28 out of the Bakken for ethane?

Well, you could get really short ethane. That's 1 thing. And just economics would drive the ethane prices up to say -- and a lot of it's going to depend on what happens with natural gas, right? I mean, current market, natural gas has spiked like crazy, and you had the hurricane, which knocked some petchem capacity offline. So it did squeeze that processing spread quite a bit just right now of where we're at. But you look forward, you've got quite a bit of additional ethane demand getting ready to hit the system. Exports continue to be very strong. You've got a cracker coming up here sometime in the fourth quarter. And you got another big cracker coming up sometime late this year, first quarter of next year. So you're adding a lot of ethane demand in a market where just gross production isn't growing at the same clip. So clearly, that would seem to signal some price strength for ethane relative to natural gas. So that's one scenario. The other scenario is if we do get into a situation on Northern Border, that we -- the pipes, the Btu content as Bakken gas displaces Canadian gas continues to rise and you've got to recover some ethane in order to meet specs, which we anticipate will be coming later this year or into early in '22 that you've got to recover some ethane to meet those specifications or to meet downstream market requirements on Northern Border.

So I wanted to go back to kind of the comments that you talked about with like the increasing gas-to-oil ratio. And I think in your slides, you guys have noted that you can add 1.3 Bcf a day of gas production even if actually, if crude production doesn't actually grow just from the increasing GOR. So what are the other alternatives to gas takeaway other than Northern Border? And if we do -- you kind of mentioned, if we do displace and push out additional Canadian gas on Northern Border, doesn't that actually put pressure on AECO and therefore, impact the ethane frac spread in the Bakken? Because you did say that is sort of the price point, the spread that we look at.

Yes, that absolutely could happen. It all depends on how much gas production continues to come out of Canada and where that gas flows as well. If you remember, pre-COVID, we were actually -- we and several other midstream companies, we're evaluating a variety of options for additional gas takeaway out of the Bakken. Some of those conversations have started back up, especially as producers in the region have started looking at growth plans and have communicated those. Northern Border has talked about an expansion. There may be some expansions there. There's been discussions going back pre-COVID to gas reversing a couple of pipes in the ground and gas flowing down to Cheyenne markets. There's a couple of different ways and a couple of different assets you might be able to use to reverse to get gas back into Cheyenne markets. So some of those conversations have absolutely started back up, and we will definitely be participating in those because of the -- because of our market share and our strength in the region. So as those volumes continue to grow, we get commitments in place, then we'd be announcing something.

Okay. And then maybe last sort of question on the asset. You guys kind of changed disclosures to go by like raw feed and things like that. So it's become a little more opaque. But on the fractionation side, I'd be curious to know how much slack capacity you guys have for propane plus? It would seem that we could be approaching a point where you would need a new facility. So could you just remind us how much lead time you would need to construct MB-5? How much CapEx is left?

Yes. So the first question, we're in decent shape right now from a C3+ frac capacity standpoint. As volumes have ticked up, we start tuning up a little bit more of that capacity. If you remember, NV5 was started and was well underway. Walt likes to say, if you drive by the facility, it almost looks like it's done because the towers and vessels are all stood up and connected. So we -- it's probably halfway complete, just order of magnitude. So that's the nice thing, both -- yes, we've spent quite a bit of the capital. So there's not a lot of incremental capital that we need to be spent. And also the time frame, you're probably looking at a year, give or take 2 or 3 months on either side. Again, just depending on kind of how we approach it and so forth. But when we put that project on hold, our team did a really nice job of getting it to a point where we could start it quickly and be ready to go. And so we'll continue to look at our volumes, but as Bakken volumes continue to grow as those gas-to-oil ratios tick up, we're seeing nice growth out of the Permian as well. So that would be probably the next logical project if we do need some more capacity that we would finish off.

And I think you guys have previously mentioned that you could do a short-term frac deal. So I'm assuming that you could lease some capacity from a competitor. It sounds like short-term frac rates are pretty cheap. Would this be what you would want to do until you have sufficient volumes to actually fill that new facility pretty immediately rather than bringing a new plant on and then having pretty low utilization on it in the beginning?

Yes. That's obviously economics and evaluations that Sheridan and his team are going through any time we talk about building capacity. We'll take a look at what are the alternatives we have and what are the economics of those. And so this will be no different. Yes, there appears to be frac capacity available in the marketplace. But at the same time, if our volumes are growing, we've got to understand our others growing as well. And you don't want to get the situation where all of a sudden, if you remember, I can't remember if it was '18 I think when all of a sudden, we got -- the market got ridiculously tight frac capacity and things went the other way. So we'll factor all that in, like we always do before we make a final investment decision and -- to restart in NV5.

Yes. I guess I forget how quickly things can change. So Walt, maybe to close out the conversation. ONEOK is on track to be [indiscernible] 4x on the leverage front next year. How should we think about capital allocation with respect to the dividend increase stock buyback, and/or additional investments outside what we already know, and the standard well connect?

Christine, we've put out that we wanted to get through 4x as kind of a guidepost to the progress we wanted to make and that, that would be one of our first achievements. And thankfully, things have been right on track, maybe a little bit ahead of schedule. So we think we have visibility to getting to that goal. But we've also said that aspirationally, we'd like to head down towards that 3.5x. I think clearly, after we kind of achieve that or as we get into achieving that 4x benchmark that we'll start to broaden our view of things that we could be doing and factor in opportunities and new investments in lower carbon opportunities and the like. But we're going to use discipline, and we're not going to give up what we've been very committed to and providing good returns on the investment that we make. We'll look at other opportunities such as share buybacks and the like. We're not going to define any particular avenue at this point in time. I think that we believe that there will be opportunities going forward to find good investments. We don't think that we're going to see any very large investments, like another Elk Creek or another Arbuckle II come down the pike anytime soon. So to the extent that we see opportunities to grow off of our existing capital base. There'll be ones that we think we can do through free cash flow, most likely. So we're pleased to be in a point where now we're starting to have this conversation, and we're not just talking about when will you get to 4x. But what I'd say is we're going to be open-minded, and look at what drives the most shareholder value, but we are going to be disciplined and make sure that investments that we make in the business achieve the kind of returns that we've come to expect from those types of investments.

Well, I look forward to hearing about the different kinds of projects that you guys can do going forward. I'd like to thank you all for your time and also thank everyone for tuning in on this fireside chat. I hope everyone has a great day.

Thank you, Christine.

Thank you, Christine.