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

Okay. Good afternoon, and welcome, everyone. My name is Theresa Chen. I'm the midstream and refining analyst here at Barclays. It is my pleasure to introduce our next company, ONEOK. From ONEOK, we have Pierce Norton, CEO; Sheridan Swords, EV of Commercial; and Walt Hulse, CFO. Welcome, everyone.

Thank you, Theresa. Excited to be here.

We're happy to have you, especially after so many announcements as of recent. But maybe starting with your most recent announcement, nearly a week after the news of the EnLink and Medallion midstream interest from GIP acquisition. Can you tell us about the growth and margin generation opportunities that these assets bring to ONEOK that maybe you otherwise would not have had?

So Theresa, you mentioned the fact that we've done a few acquisitions here basically in the last year. I'd start off by saying they're a little bit different. So our Magellan acquisition was really define -- we define synergies a little bit differently than we do with the last acquisition we did with EnLink and Medallion. And so in the Magellan deal, we define synergies as those particular projects that neither company could have done by themselves, something that needed to be brought together to actually exercise those synergies. This one, because it's in businesses that we're currently in, which is gathering and processing and the crude oil piece of this, we're able to find synergies in a different way. In a different way is what can these 2 companies do more of together than they could not have done otherwise apart. And so that's the reason that we talked about feeding and filling our assets when we got on the last analyst call. And so that's really what this is about. It's about taking 2 sets of assets and being able to do more with them. The ONEOK assets probably brings more to the table with the EnLink assets and the Medallion assets because of the long-haul capability we have and the connectivity we have downstream. And so that really defines the synergies. I'll let Sheridan and Walt kind of talk a little more specific about the synergies of the sale.

Yes, Pierce, I would say, when you think about bringing value to EnLink, how ONEOK does that, we're going to -- we make EnLink and Medallion more competitive, so they can go out there and compete for volume and bring in more to the supply -- supplying our long-haul pipes. And as you think about it with EnLink and the NGLs we had set on the West Texas pipeline that we don't need gathering process and to be able to acquire liquids or supply our pipelines. But what the EnLink and Medallion allow us to do that at a much higher margin, a much better margin to bring those in as we further integrate. So we think about it is we are going to make them more competitive so they can go out and compete or we can go out and compete for more liquids on the G&P side, and then definitely more crude oil with Medallion going into our long-haul pipes into the Houston area where we have more touch points with a premier crude distribution system on the Houston ship channel.

And if you look online at our investor deck that we used with the conference call last week, you'll see in the very first slide is a map of our businesses from the Mid-Continent down to the Gulf Coast. We put 4 pink boxes around the EnLink businesses. And Medallion fits right into that Permian business that is down there in the left-hand corner. And what you really see when you look at that map is that EnLink had 4 disparate businesses that weren't connected and integrated. But when you lay the ONEOK map on top of it, all of those are connected. So they were able to take their assets and bring them into the integrated value chain and get those extra margin dollars from touching those molecules in more ways. So we're very excited about the strategic asset fit between the asset.

Very good. Now I want to get to the synergy targets, the 250 base case and the 450 plus upside case. So how did you come to these targets to begin with? And understanding that the nature of the synergies are inherently different than the Magellan acquisition synergies, but do you have a breakdown in mind, a categorization of sorts for these synergies as well?

Well, let me talk about the process first as to how it is that we do these particular type of analysis. Any time we do an acquisition, we bring some teams together, and we actually asked them one question, what is it that we can do now more of in this case than we could do separately. And so they identify specific projects. That ends up being kind of your ultimate case or what we would call kind of the art of the possible. And then we start to whittle that down by assuming differences on volumes. We assume differences on rates and just the probabilities that some might it. So just to give you a -- for example. There may be some sort of an operational synergy that we look at and say, we got a 100% chance of doing that. You may look at some of the commercial synergies and say we got a 75% chance of that or 50% or 30% or 40%. And then we risk weight all those, and that's the way we get to kind of that -- the 400 number and then the 250 number. So it's a risk-weighted analysis. It's the same thing that we did in the Magellan acquisition. We did the same thing here. But it's a lot about volume and, like we said, adding more volume into those systems and adding more volume into our systems. And having a better control, better competition for not only the new well connect and the new wells that are being drilled, but also those that may be coming off of some contract with somebody else. We feel like we've got a better competitive advantage to attract those volumes to our system.

The only thing I'd add to that is in true ONEOK fashion, we are fairly conservative on doing that. So we're very comfortable with the range that we've put out there. And we're hoping, as we were with Magellan, we'll see the same kind of success as we get our teams in there working on it and being able to talk to the other company's teams and be innovative that we grow these synergies beyond what we stated.

And when we've talked here a lot about volume growth synergies and opportunities, there are some opportunities. Clearly, there are cost synergies that will come out. But beyond that, there are some synergies. Just for example, EnLink has right around 200,000 barrels a day of frac capacity. Sheridan is going to be able to utilize that in a much more efficient fashion. We already supply Louisiana fracs with supply out of the Mid-Continent. So we'll be able to optimize that. EnLink had a small frac out in North Texas, and we'll be able to use that frac to then supply our refined products business for the blending business in the Dallas-Fort Worth area where we're up into Southern Oklahoma where they didn't have the opportunity to do that because they weren't in the refined products business. So the fact that we have the fully integrated value chain just opens up opportunities that EnLink and the Medallion didn't have as a stand-alone company.

Makes sense. And in addition to some of the complementary aspects of the existing footprints between these businesses, the EnLink assets also give you dry gas infrastructure importantly, an entry into LNG feed gas in Louisiana as well as natural gas storage opportunities. So how do you see these assets complementing the rest of your business? And are there obvious opportunities of expansion opportunity -- expansion projects within this footprint?

So the first thing that I would say about an intrastate business, it's the concept that that's kind of the last mile that gets you to the end-use customer. And in this particular case, a lot of industrial load, there's ammonia plants, they're on the system down there. There's more ammonia plants that are being permitted. You've got some potential hydrogen plants that are coming on down there. You've got also your LNG. And then not to mention, the natural gas utility business that's already connected down there. This system is really unique in the fact that back when I first started in the industry, back in the '80s, 25% of all the natural gas in the United States was actually coming out of the Gulf Coast area. So a lot of the gas would come onshore and then be distributed. But because of the volume, these pipes are very large. Some of them are 30- and 36-inch pipes, which is a little different than when you go into other parts of the nation, especially up in like Oklahoma and Texas, where we operate intrastate assets that are much smaller in diameter, but it's because of the way it used to be built and used to be designed. So -- but that last mile concept is really important because that last mile is used in a really expensive model. And so those are already connected to a lot of the loads that are already down there. And so we're really excited about what we can potentially do down there, especially with expanding the storage part because I think that's a very critical thing. As we go through the different varying extremities of the weather events that we have, you're going to see a lot more swings in the amount of energy that you're going to need. And the more and more wind and solar that you put on, you got more intermittent power that's coming on. And I didn't even mention electric generation, but that's usually loads that are really supply of these intrastate assets. So much different than interstate, and we really, really like the intrastate businesses. They're really, really good business as they're really steady for us in Oklahoma and Texas. And I think they'll be the same way down in Louisiana, provide some -- maybe some -- even some more growth opportunities.

Great. With these transactions announced, how has it changed, if it has, your capital allocation use and strategy?

My short answer is it's not, so I'll let Walt explain on that.

As Pierce said, we aren't changing anything as we sit here today. But clearly, this is a very strong free cash flow accretive transaction, both of them together. So we will have more cash available. We're taking on some debt here to acquire both entities. The rating agencies couldn't have been more supportive in their discussions as we announce the transaction. They're looking at the increased scale and diversity of cash flow. So we'll use that cash flow to return to our 3.5x target. But we can do that, we can construct what we have on the drawing board today and still stay to our dividend growth that we've said and still execute on the stock buyback that we've put in. If everything goes according to plan, we've only allocated 75% to 85% of legacy 1.0 cash flow in that capital allocation plan. So clearly, we'll have a little bit more CapEx as we look at more businesses. But with that excess free cash flow over the coming years, we're hopeful that we'll even be able to enhance the capital allocation strategy.

One thing we'd like to -- that we really see though, Theresa, is our #1 core priority is to reinvest in really high-return projects. And the more assets you have, you may not even know what they are today, but they will usually spawn other good opportunities to invest capital and get really, really good returns with the concentration we have all over the United States now.

And this focus is reflected in your current results without the contribution of these recently announced acquisitions. And from a base business perspective, with the progress that you've already made in 2024 and the momentum behind you, can you just remind us at this point, what are the puts and takes that would get you towards the high versus the low end of your annual guidance?

Well, I would say that, a, we're already halfway through 2024. And I think we've pretty much taken the low end off the table. So we're very confident in our midpoint and maybe even higher than that. The thing that can move the business around primarily happens at the end of the year is whether or not you have some really extreme cold fronts or cold weather, maybe in December and what that might do to your volumes. Last year, we had a very mild December. And we actually went into January with a lot of momentum because we had way higher volumes than what we had anticipated. The weather events in 2024 kind of came at the first part of this year. And so you just have to kind of see what the weather is going to do. But we're not anticipating anything material.

Great. And then staying on the existing business, would you be able to give an update on the progress with the Magellan synergies to date? And as you integrate these assets, have there been any surprises along the way?

The surprises have been good surprises, and I'll let Sheridan kind of answer more directly to that question.

Yes, that's right. In 2020, we've come out and said in 2024, we're going to capture $175 million of synergies. And we are very, very pleased where we're at this time. We're progressing that forward. And then we said we'd come out with $125 million and another $125 million in 2025. And obviously, we've accelerated some of the 2026 synergies into 2025 with the Easton acquisition that we said there. So we feel very good that we're going to be at or above what we've come out. And I think as we said before, the surprises that we've had is really is as we've gotten the 2 teams together and really let our people be innovative and really think about how they can make money together and collaboration, and they have really come up with some very unique ideas, some very good ideas that we've been able to execute on. And I think that's really, really what is pushing us above what our synergy targets were. And then we're really looking forward to doing that with the EnLink and Medallion acquisitions as well that we know pretty confident with the synergies we've stated. But when we get people together and people that really understand the nuts and bolts of this business, what's going on, and they start looking at things, it's going to be pretty exciting to see that happen.

And then on the recent acquisition of Easton Energy, how does this help you capture further value in the U.S. Gulf Coast between your NGL and refined product asset basis?

Well, if you just take a step back and look at the NGL and refined products business, especially down in the Gulf Coast, you have a big hub of NGLs at our Mont Belvieu facility. That's the bottom end of our whole NGL assets that hold a lot of them in the value chain. And then over on the refined products system, they have a premier distribution storage, terminaling business on that side of it. So it's very early on we knew that to be able to capture our synergies, we need to be able to tie these 2 together. Magellan already is not only for themselves using NGLs for blending and refined products, but offer their MVP in Galena Park or their marine terminals, they have customers with big needs for NGLs. So we need to connect these 2 together. And we knew there's going to be 2 ways to do that. We could either build a new system, which is kind of our #1 as we went into this, or we could try to buy a system that was out there. We knew Easton was out there. The -- we have -- even before Magellan, that was an asset that we had on our radar that when its time came and it was going to come up for sale, we wanted to take a hard push at it. But as we saw the opportunity with Magellan, we knew we had to act quickly because either we're going to start building a pipe or put the Easton in. And the Easton gives us a couple of different things. One thing is it's a lot faster. Most of the pipes are already in ground, and we have to disconnect it to our system. And it's actually cheaper because it comes with existing business. And that existing business is primarily coming from NGLs already coming from our Mont Belvieu business going to other marine terminals. In fact, we've been able to grow that business today. In a very short period of time, we have increased the throughput on the Easton system by over 50%, and we haven't even made a connection to any of the Magellan assets. So we're sure as that continues to go forward. But we think here in a very short period of time, into the mid-'25 and late '25, we'll have the connections into our Magellan systems that we would once again be able to offer a bundling service to a lot of our storage and terminaling customers by being able to supply them NGLs that they're now getting from other locations as well as be able to supply other terminals on the Houston ship channel through Easton by being and tied it into our NGL infrastructure. So we're pretty excited about how the Easton is going to fit in. So we actually think it's much better than what we ever imagined.

The only thing I'd add to that, Theresa, is that in summary, with the amount that we paid for it, we had a really good return. You already heard that we've been able to put a considerable amount more volume, and there was a lot of capacity left on the system. So when we fill that up and when we get all the connections made, we will fill that up because that's in our control. And then the third thing is it gives us connectivity at scale, which is really important to getting the synergies that we had planned on having in the refined products and the crude oil business.

Got it. Now I'm deeply curious as to who you're taking all those volumes from, but that will be for another day. Turning to the GMP side of things. So within this segment, what are you seeing in terms of producer activity in the Rocky Mountain region as well as the Mid-Con? And for the Bakken, in particular, the region's production outlook remains a topic of fierce debate that you've defended over and over again. And I would like for you to do that one more time. What can you tell us about your long-term view of Bakken inventories, producer efficiencies? And any other drivers that can be impactful to your volumes in the region?

Well, Theresa, right now, I'd say, if you start up in the Bakken, there's 37 rigs running right now up there, they're just more than enough to grow the volume that's in the Bakken. And we continue to see our producer customers be innovative on their drilling techniques. We've talked a lot about 3-mile laterals, how they can be much more efficient on that. They're getting different completion techniques up there. And a lot of our conversations with them and they talk about how the core is expanding, and they can continue to drop, to push down breakeven costs of what they could drill and produce up there as well. So in all our conversations with them we're having, we are very confident there's decades of inventory left up in that area, especially across the span of the system that we have going forward. If you move down into the Mid-Continent, we've said for a long period of time that the Mid-Continent is going to be kind of flat. We have seen a lot of resurgence on the west side of the Mid-Continent and a lot of activity over there, and this is definitely an area that we have assets in and so does EnLink that the 2 of us together, working together is going to be very beneficial on that western side of the state. But also in the main part of the state, the stack, we're seeing a lot of activity, a lot of growth in there that we think now more of the Mid-Continent is going to have a low single-digit growth going forward that we hadn't seen before. And then we also think about the Mid-Continent is having a little bit of an option value around natural gas prices. So if natural gas prices rise, you'll see more drilling rigs come into more the gassier area of the Mid-Continent. Now we're more in the oilier area. We'll see more in the gas kind of heavy condensate area of the states. So if that happens, you'll really see volumes take off. So somewhere, we think that the Bakken has got a lot of growth left into it. I think we've had to defend ourselves time and time again. I think most of the time, we've been right on that. And then in the Mid-Continent, we are seeing -- we're getting a little more excited about what's coming out and the potential growth that we have in the Mid-Continent that before that, we're seeing it more as just steady.

One of the ways we defend ourselves up there, Theresa, is our service that we provide. It's a very customer-focused service because of the connectivity that we have in multiple plants up there, which is what we call a super system. So if we have a plant that needs to go down for a turnaround, which they all do, because there is maintenance to be done on those plants, it's seamless to the producer. They don't know that the plant is down, the volume still moves because we can move it around to different areas. So that's very important. Actually, one of the sales pitches we have from a commercial standpoint is we actually go to the individual producers and quantify what 1% of downtime in our system accounts for them on a crude oil price, and it is significant because 90%, 95% of all the economics in those wells up there come off the crude oil, not the natural gas and not the natural gas liquids. So it's very important to keep that run time and the reliability up. And we think that is our competitive advantage up here. Somebody may try to undercut us on rates, but the value is in what is it that we bring to them in moving their crude.

Got it. So with this ample and visible backlog of projects and growth ahead of you, and then taking into account the new acquisitions, and I imagine it might cost some money to realize all those commercial synergies. Longer term, with the assets that you have currently and then you're about to acquire, what do you think is a reasonable run rate for annual CapEx on a go-forward basis?

Sure. Well, without giving formal guidance for 2025, I think if we just kind of look at where we sit today, we've got MB-6 wrapping up. We've got the expansion of Elk Creek wrapping up, and we have the West Texas NGL system wrapping up. 2 out of the 3 of those will be done here in the fourth quarter and the other one in the -- early in the first quarter. So we've got what are the largest projects kind of rolling off. Since those were -- we said those were in their tail end stage, we've announced 2 new transactions, our Medford rebuild and then our pipeline -- our refined products pipeline out to Denver. Net-net between the 3 that are rolling off and the 2 that are going on, we would still see a reduction in our CapEx, if you just look at the base business. Clearly, there are going to be some more opportunities. I would say that the synergy expenditures or CapEx associated with synergy in the EnLink and Medallion, the way these assets sit on top of each other, the way they're ready to be connected, capital is not really the driver for those very short connections to get the Medallion system plugged into our long-haul pipes, for example. So we see more opportunities on the expand and extend type of strategy that we have. So I think if you look at CapEx over the next several years where we are today to slightly lower, you'll be fine. But if you think about that in the context of free cash flow, as you look out a few years, we see free cash flow going out to that $5 billion a year range. So as a percentage of free cash flow, our CapEx will be coming down but probably stay in and around this range to slightly lower in the next few years.

Understood. So we started at the beginning of this discussion with the progress on the acquisitions and just the sheer number of transformative transactions you've announced with last week's included. At this point, you've extended one of scale and scope across multiple commodity value chains and multiple basins. So from here, how do you view your positioning within the competitive landscape versus similarly large and diversified midstream peers?

So as I listened to you ask that question, I think you may have answered it when you say we have considerable scope and scale. Three years ago, we sat down as a management team and said, okay, what do we do -- what do we need to do on the M&A front to best enhance our shareholder value. And we came up with basically 9 key areas that we wanted to focus on. One of them was scope and scale. Then there's others there. Well, once we did Magellan, we went back and revisited those. And in between time, we're talking to our Board every single Board meeting about what is it that we need to add, what do we need to subtract, those kind of things as we do these acquisitions. So you've really kind of answered your question is when you take the expand and extend model and you get back into the gathering and process and what goes into our liquids lines, which goes into our gas lines, which goes in the fraction areas, which goes through connectivity in different locations, over to refined products in our crude oil business and now being gathering in the crude oil business. Then we feel very, very confident in the future that we're going to be highly competitive and very successful.

Very good. Well, thank you all so much for your participation and all the color.

Thank you, Theresa.