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

And how long does it take to add the pumps?

We've talked about somewhere 12 to 18 months-ish, maybe a little bit longer than that. But that all depends on when you say go, right? Like I mentioned, we've already started taking steps to shorten that window with some low dollar type things to go there. So that would be the range. Probably if we talk or if we would come out and announce something, that would be a rough range that you're talking about there. And a lot of that is just kind of power driven, getting the utilities out to the new pump stations and so forth. Transitioning to the residue gas takeaway side, the majority of the gas goes in -- the residue gas goes into Northern Border, which ultimately makes its way down to the Chicago type market. That's a 2.5 Bcf a day pipeline. Currently, there's about probably 800 million cubic feet per day coming down -- or available coming from Canada, that what happens is gas coming in from the Bakken just displaces that gas coming from Canada. We think that can happen, and there's another 300 million to 400 million cubic feet per day of capacity that Bakken gas can displace on Northern Border. So that's one aspect. There is another 100 million cubic feet a day of capacity that we signed up for that goes kind of south on WBI into some other existing pipelines that makes its way down to the Cheyenne market. Northern Border has been talking about and are in the process of evaluating a project to expand their capacity by up to 400 million cubic feet a day that would ultimately reverse Bison and take gas down into a Cheyenne type market. That project is well underway. It hasn't reached FID yet, but hopefully, something will be coming here pretty quickly.

So is your guess that, that's the most likely next gas takeaway solution?

That one, again, from my perspective, my opinion, seems to make a lot of sense. And again, any time you can utilize existing pipelines that are already in the ground, and you can just do some piping and compressor stations and turn things around and flow a different direction, that's low-capital type, high-return-type projects. So that one seems to make sense. And then relatively recently, there's been a couple of new gas to power plants announced that reached up in North Dakota, which somewhere between 100 million and 200 million cubic feet a day of new demand. It's not pipeline demand, but it's new local demand that would be where residue would go. So all in all, I think the industry is doing a really nice job of staying ahead of where the capacity needs are given the growth that we see coming out of the Bakken.

So Jean Ann, I think it's important to note, those volumes of capacity are interesting, but you need to know the context of what they can deliver from a value standpoint. We've got 500 million a day of processing. Each 200 million a day plant generates between $100 million and $125 million of EBITDA. And each $200 million a day plant produces 25,000 barrels of C3+ on the NGL line. So each 25,000 barrels of C3+ is an additional $100 million. So we've got 170,000 of capacity once we expand it. That's close to $700 million of potential growth on the system before we fully utilize that, plus the $250 million on the processing. And you got to remember that we get all the NGLs, incremental NGLs, in the whole basin. We only have about 50% of the G&P ourselves. So there are other plants that are growing in the basin, and we'll get those NGLs to use on that capacity.

Makes sense. So just sort of high level directionally of how much runway we have left for different takeaways. You would say probably we would hit the oil and gas takeaway first with what's on the table now and then probably processing and then probably NGL and then probably crude, if ever.

That would be a good handicap. That's the way we think about it. Residue takeaway has been the first one that the industry has really jumped on hard. They know we've got -- there's been some responses with processing capacity. There's third-party processing capacity available as well that's probably similar to ours. So -- and then, yes, NGL and then crude's in great shape.

I think the most important thing, too, Jean Ann, is that the producing community supports these types of expansions because you're taking away the gas, which keeps the processing plants going, which keeps the liquids going, which keeps the well producing, which keeps the oil producing. And really, it's oil play. So the producers up there have been very, very supportive of these expansions and behind those.

Makes sense. Switching gears a bit. Everyone in midstream right now is very excited about gas storage recontracting. Rates are apparently going up a lot. Everyone's talking about it. Can you remind us how much gas storage you have and whether you are also seeing upward movement in rates? I don't usually think of it being a large part of your portfolio, but I think you do have some.

We absolutely do. We've got around a little over 50 Bcf of storage split mainly in Oklahoma, but we also have some in Texas as well around our intrastate assets in those states. Our financials, you've seen in our financials, we've done some recontracting. We've done some expansions at both of those facilities. In fact, the one in Oklahoma is right near to the point of coming online. We've been saying second quarter, we're in second quarter, and so we're just about there. But you've seen some of the recontracting already reflected in our strong results on the gas pipeline segment. So yes, we've seen that. We are also looking at additional expansion opportunities in both Oklahoma and Texas as well and evaluating different ways to both expand storage and are there some opportunities to bring other storage fields back in service. So it's definitely been a tailwind since Uri as we work with our customers to ensure that we've got the gas in the ground to meet some pretty crazy weather that can happen.

And that was actually my follow-up question is, from your discussions with customers, would you -- do you feel like this step-up in how people think about gas storage is a true difference, and it's like we need to make sure we have backup capacity? How much do you think is that? And how much is sort of this forward contango in the curve that will be maybe a one-off of how much people are willing to pay over the next year for storage?

I think from my experience and our discussions with our customers and our footprint, it has been a fundamental shift in the storage needed and both from a gas utility perspective, but also from an electric utility perspective as well, from a gas-fired generation. And seeing them step up for more firm service or more storage or things like that, again, it was another impact that we saw. It wasn't just the gas demand not just from the gas utilities, but also from the from the power gen facilities as well. We've seen a shift in how they think about their supply.

I definitely think it's Uri-related because the performance, especially of the ONEOK assets, is related to storage, really saved Oklahoma from any of the outages and those kind of things that were happening. Because typically, in February, Oklahoma is even a net exporter of natural gas to the tune of about 3 Bcf a day. During Winter Storm Uri, that went back to basically 0. And so you had all that went away. So now you really have lost your supply. It was the storage fields in Oklahoma that basically kept all the homes warm and the reason that you didn't have some of the same issues that was happening down in Texas. So I think people really woke up to the fact this has a lot of value. And I think Kevin's right. I think that the electric companies who really didn't have that storage before actually sees that as an insurance policy to add that to their portfolio going forward.

Good. Yes, as someone who had 2 pretty cold parents in Houston during Uri, thank God that people have responded to that. The Permian is short gas takeaway, which is causing ethane to be recovered there at very low prices. Once more gas takeaway starts there at the end of this year, do you forecast ethane recovery becoming economic in basins outside the Permian again?

We've been very consistent with kind of our assumptions that went into our guidance, and that's really played out because we kind of -- we saw some of those things coming. Short answer is, yes, we continue to believe -- we do believe Permian will remain in near full recovery even as it moves through the opportunities or the projects coming forth where you get more residue takeaway. But that doesn't change. We still believe we have seen and we continue to believe that the Mid-Continent will be in partial recovery. And with what's going up in the Bakken and Canada with gas prices there, that we will continue to have discretionary opportunities to incentivize ethane out of the Bakken. That's played out so far this year. Mid-Continent may have been a little more in rejection than we maybe originally thought, but that it continues to ebb and flow, just depending on what's going on with your local gas price or your regional gas price and what's going on with ethane price in Belvieu.

Makes sense. When does -- the Northern Border is the gas pipeline coming out of the Bakken. When does Northern Border BTU stack become an issue as the gas stream gets heavier?

Well, it's one of those things that I've said for a while, it's just math. As that Bakken gas continues to displace the dryer, the lower BTU content gas coming out of Canada, that's going to raise the BTU level of the blended stream that ultimately gets to downstream markets. A marker to use is if you rewind to pre-COVID gas production or gas captured was about the same level than it is today in the basin. And all of that gas was flowing in, and complete ethane rejection was flowing into Northern Border. And the BTU level was 11, 20-ish, right? And that's when it became -- there was concerns, and Northern Border put a proposed tariff to put a spec in place at around 1,100. FERC rejected that tariff and asked Northern Border to go back and work with shippers, work with the markets, work with supply sources to try to come up with a more economic solution than had been proposed. Well, about the same time COVID hit, volumes dropped off, and so the problem went away for a period of time. As gas production has grown back, we've been incentivized to recover ethane. So we've been making money by recovering ethane from the stream, which has kept the BTU level lower. If those economics change and we, all of a sudden, started rejecting all that ethane, the BTU content will go right back to the 11, 20. And there are some downstream consequences when you think about the utilities, the gas utilities, or the primary demand source that the gas gets to a certain BTU level, you start having issues inside the utility, and so they'll start pushing back. So Northern Border continues to work it. I think it's just a matter of time before there is something like that. But at the end of the day, the tariff will have to get put in place with a spec that will have to be approved by FERC before that happens. Now in the meantime, if you do have some spots where the gas gets too high and downstream markets refuse to buy the gas, we can always recover ethane as a means to lower the BTU content. If it's a physical limitation that we have to do that, then we would charge full rates rather than incentivized rates to recover that ethane.

Makes sense. And these ethane decisions, is this something that ONEOK is making day by day? My first job out of college was as a gas scheduler, a lowly gas scheduler for ExxonMobil. So I'm picturing some soon to be thriving current gas scheduler at ONEOK that's kind of deciding the ethane amount to take out every day. Or is it more of a month-to-month decision?

That depends. We evaluate it every day. We're looking at it. We've got people looking at what's going on in the gas markets and the ethane markets every day. Does that mean we're moving it up and down and turning levers every day? Probably not. But it's -- but we've done it on a weekly basis, monthly and to some extent, longer term. It all just depends on what the forward curve or the current right price and the forward curve looks like for gas in the region and ethane in Belvieu.

That's actually one of my favorite jobs to date. It's the -- it really -- there's no better way to learn. So -- that makes sense. Can you remind us of how FERC PPI indexation works on your assets?

So on the liquid side, on an annual basis, FERC puts out an adjustment factor that is based on a couple of things. One, it's based on an adjustment that FERC approved, which the current level, I believe, is negative 0.21% or something like that. But the bigger one then is the PPI adjustment. So I think when you do the math on that, it's around 13% this year. And that goes into effect on July 1. So to the extent you have a cost of service rate on your NGL or your liquids pipelines that you have the ability to apply that index, if you will, to your rates from that standpoint. But again, it's the pipeline's decision. They don't have to, but they absolutely have the right from a FERC perspective.

Makes sense. Take another quick break to look at the pigeon hole again. Okay. Right. That's a good one. Has the market reaction to the deal been a surprise to you? And what do investors not appreciate about the deal?

Well, I think we clearly didn't expect as much activity as we got in the first 2 days, and with stock trading 20 million shares the first day and 10 million shares the second day. Magellan traded 17 million shares, which was about 45 days of volume. So there clearly was more activity there than we thought. Stocks have settled down now. The market itself for the space has been under some pressure as we look at what's going to go on with OPEC this weekend and other things. So clearly, we had hoped for better. We knew -- we expected it to trade down. We didn't expect that initial pressure. And what we're seeing from the investors and really those investors that I mentioned that have been pretty active in our stock over time that are increasingly -- and we were meeting with a couple of them here at this conference that are coming back and getting back up to speed on the spaces definitely showing us that the activity level is going to come back. So we're pretty confident that it's just a short term.

I think once people really have thought through the quality of the earnings and how little capital it takes to maintain those and really thinks through, you're combining a company that has a tremendous amount of free cash flow, they'd kind of run up against their potential growth opportunities, but actually combining them with our assets actually gives them growth opportunities in the future as well as us as well. So you combine the free cash flow with the growth opportunities, and you quickly start to see that you don't necessarily have to go out and borrow more debt and issue equity. And so that earnings per share is going to really start to take off in the future. So I think once people really think through that, like I said, I think people thought we were going to do something differently. Although in my opinion, we've kind of left some bread crumbs along the way that kind of told what we might do. But I think it's -- it all goes back to us being really intentional and disciplined in what we do and the fact that capital allocation is very important to us. And so first priority is to reinvest. I will say, in our economics, we have not taken any benefit from reinvesting that cash flow into really high return projects. That really juices this deal in the long run. So -- but we haven't done that yet. So we'll get to that as we go through our planning process, both in the current annual process for 2024 and looking at our 5-year plan as well. But I think once people really grasp the benefits of these 2 companies together, our Board saw it, their Board saw it because there was a unanimous consent on voting for this deal. Our employees are very excited about this. Their employees are very excited about it. So between -- when you get your employee base excited about it, if they're in the business every single day and they see the benefits, you get something pretty special there.

Makes sense. Can you give us the latest on the Saguaro connector?

Sure. We keep working the process. The presidential permit process is well underway, and we did -- we'll keep working that. We work with the -- we're working with the LNG facility as they continue to contract and work towards their FID. There's been some discussion in the marketplace about nice PSAs. They've put in place with really strong, nice creditworthy counterparties, that's obviously a positive for us. But we continue to work and do those things to get to that FID. We continue to talk about mid-summer, probably on the other side of mid. But again, still love the project. We think it makes perfect industrial logic sense. By going West versus East, the shipping cost and the other logistical benefits you have by going from the Mexico coast to markets primarily in Asia makes a lot of sense. And so we feel good about it, and we'll keep working it.

You all have a house view on LPG prices. I've noticed over the last month, people have gotten, I'd call it, over the short or medium term, but nervous about LPG prices over the next couple of quarters, given where storage is at and the fact that perhaps Asia can't take more, I'm not sure, for the year or for the next 12 to 18 months. Do you have a view?

Well, I think, obviously -- well, two things are going on. LPGs are following crude. And so as crude has seen some weakness, you've seen some more weakness on the LPG side. Yes, there's been some discussions as supply grows, it's going to have to clear over the water because U.S. demand isn't growing to the extent. As we look internationally, exports have been very strong over the last several months, and I think that continues as you look forward. Longer term, cure for low prices is low prices. LPGs tend to find a way. If it gets to a certain low level, you'll see some switching happen in the U.S. that could chew off some -- or some inventories. So I think it just remains to be seen. We didn't have a lot of weather this year in some of the markets. And I think that caused a little bit of a shift in the inventory position, but it can change in a hurry.

Yes. On GOR in the Bakken, the last -- I know it often fluctuates a bit, but it hasn't risen as much. The last 6 to 12 months is kind of in the trend before that. Do you see any reasons for that? Or do you think it's just kind of part of the noise still?

Well, I think it's part of the noise and then part of its math is activity came back. Your -- you are the IPs you're getting depending on where the drilling occurs. There's been some movement of rigs. There's been some phenomenal wells drilled in Dunn County, which is a positive for us because that's why a lot of the rigs are remaining on our acreage. The GORs are slightly lower down there. But regardless, over time, the GOR still will trend up. So it's just a matter of kind of where that initial starting point is that could pull a basin average down that's why it could decrease month-over-month. But the general trend, we believe, will continue as it has over the last several years.

Okay. Let me check one more time here if people are able to ask their questions. Let's see. How do you prioritize mid-BBB rating at all 3 agencies versus shareholder returns?

Well, I think that the rating agencies have been incredibly supportive of this transaction. Moody's went as far to come out and actually say that they were moving the benchmarks that we had to achieve to maintain our rating. In the past, they had said to get -- looked at as an upgrade to a Baa1, we'd have to be at 3x or lower. They moved that to 3.5x. And they said that for us to maintain our Baa2, that we would -- historically, it had been at 4x and then moved that to 4.5x. So they've clearly seen the size of the company, the stability of the company giving us more flexibility. So I don't think that you're going to see a situation where the Baa2 rating is going to play into any kind of constraint on our return on capital. I think that our overlying thing is that we're going to continue to return capital along the lines of our earnings growth going forward so that we can maintain a sustainable growth profile for that capital return. And I don't think credit rating is going to play into that at all.

Magellan has historically had modest maintenance CapEx spend, as you mentioned. Are there growth opportunities on legacy Magellan refined products footprint?

So I guess the way I'd answer that is, yes, but it took the combination of the two to unlock those. You're going to be looking at maybe some different interconnects and some other things that -- it goes back to that first opportunity that we talked about is combining these two companies together, we do think that more volume is going to be moving that's going to be meeting market demands and what the customers are really wanting out of both systems.

Okay. ONEOK aggressively defended bondholders in 2020 to defend IG. Now ONEOK is buying Magellan. Are there any opportunities that you see to sell assets from the current portfolio?

Right now, the answer would probably be no, at least nothing that would be meaningful.

Great. Makes sense. Well, I think we're coming up at the end of time. If there's any closing remarks that you want to make about ONEOK or about the deal, feel free to use the time.

Well, #1, I just appreciate the chance and the opportunity to come up here and our management team to present at the conference. We do are really strongly behind this particular acquisition. We said all along that if we're going to do M&A, it's going to be intentional and disciplined. I think we've shown the intentionality because we did something probably a little bit different than what people thought. But I can tell you that there was a lot of thought went into this. A lot of things that we looked at as far as the key drivers to something that we would look at. And one of the questions you had asked around those, putting different companies together through those filters, Magellan kept -- keep rising to the top. And so we're extremely excited to move toward getting this thing closed and to bringing the value and the benefits to all of our stakeholders, our customers and our shareholders and our employees.

Great. Well, thank you all so much for joining our conference. And I know a lot of investors are really excited for their meetings with you.

All right. Thank you, Jean Ann.

Thank you.