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

Good afternoon, everyone. My name is Theresa Chen, and I'm the Midstream and Refining analyst here at Barclays. It is my pleasure to introduce our next company, ONEOK. Joining me from ONEOK are President and CEO, Pierce Norton; CFO, Walter Hulse; Chief Commercial Officer, Sheridan Swords. Welcome, everyone.

Thank you.

So as ONEOK works to integrate all of its recently acquired assets, progress on the synergy targets and 2025 guidance remains a key focus amongst investors. I want to start there. Can you talk more about where ONEOK is currently tracking with respect to the goal of the $250 million in synergies in 2025? And have your expectations relative to the synergies changed at all since initially putting forth this guidance.

Well, no, our expectations haven't changed. I think, if anything, I think you got to put it into buckets. The one that we're furthest along on is our Magellan acquisition. If you think about it, Magellan, we bought in September of '23. So we had kind of the fourth quarter to get things set up and we hit the ground running and had all of '24 and now we're into '25. Most of those opportunities were opportunities that were completely within our control. So at this point in time, I think we're well ahead of our expectation as it relates to Magellan and really pleased with the opportunities that have presented themselves that we didn't know about and we're pursuing for further synergies. When you look at EnLink and Medallion, I'll break those apart too. Medallion, again, almost entirely within our control on the synergies. We are in a position where we can fill our 2 long-haul pipes. We can actively go out and gather that crude and use the Medallion system in a more aggressive way than it was being able to be used before. to fit in with our long-haul crude assets that we bought from Magellan. Then EnLink, we just have really been at it since February 1 when we closed that acquisition. And in that one, we're well on our pace on all of our corporate synergies. They're kind of falling right into line. Some of those big ones that come off are insurance, for example, those don't happen the day you close the transaction. They happen throughout the course of the year. In fact, we just found 4 different policies on September 1. So those are types of synergies that we will now pick up from this point going forward in perpetuity. The low-hanging fruit in and around EnLink is all happening right away. But things like contracts rolling off that are synergies, those just happen with time. But we're on pace, and we're fairly comfortable with the $250 million.

Well, the only thing that I'd add to that is that there wasn't a lot of capacity left in the processing side on EnLink. So some processing plants needed to get built. So you don't do those overnight. So they take sometimes a year or 2 years to build those. And so that's going to be -- that was another thing that we knew that the pace of the synergies in EnLink would be different than in Magellan just because of either the contracts terminating or the fact that we got to build things.

And I think you see us come out right away. We've already sanctioned another plant into the Delaware to get that capacity coming on as quick as we can. And then there, we have a plant coming along at the end of this year, the Shadowfax plant in the Midland that will give us capacity to be able to grow, as Pierce said, and we'll see those synergies continue to go forward. We did have capacity in the Mid-Continent, and we're now connecting our legacy ONEOK system and the legacy EnLink system together that we can now access the most efficient capacity in the Mid-Continent. So we can direct the gas to each one of the respective companies processing plants to make sure we get the most liquids out of each plant. And all those plants are connected into our NGL system.

I don't want to beat this question to death, Theresa. But in the Mid-Con, what's important there is that there was area dedications to the EnLink plants. And that dedication was far outside where the assets were located. So a lot of times when the producer went to drill a well, then they had the right to go out and get it, but it was too far to economically drill. What just so happens those acreage dedications overlap our assets, the old ONEOK assets. And so now instead of losing that particular package to somebody else, we are now able to pick it up because of the expansiveness of our footprint between the 2 systems of EnLink and ONEOK.

Perfect. And on this type of optimization opportunities to capture more volumes and market share, but as it relates to the interplay of NGLs and refined products, in particular, can you provide any data points to quantify those types of opportunities?

Well, if you think about on optimization between the NGL and the refined products system, one of the big things that came out right away and said that you can move NGLs on a refined product system and you can refine products on an NGL system. And that really came down to being able to reduce the cost of butane getting to the blending location. We blended over 50 locations across our refined products and asset base. And a lot of that is being trucked to those locations with us being able to put in -- be able to use the assets together to be able to move a lot of that volume off the truck onto pipelines and get it into further out into the system where we can blend more. Magellan's typical cost was $0.20 a gallon to move butane to the blending locations. As we finish the Easton integration, Easton connections, we finish connecting our Conway NGL hub into the Midwest refining pipelines that we have, and we continue some of our other blending projects. We'll move that $0.20 per gallon on the logistic cost down to $0.10 per gallon in 2026. So a substantial reduction in cost. And then we'll continue as we get into '26 as we bring on the Denver expansion, we'll be able to use that as well to be able to move butane from the Mid-Continent out to Denver to be able to blend there as well with that is now being trucked today. So we'll see a further savings into '26 into '27 as well. So we're seeing a great reduction in our logistics cost, which doesn't depend on a spread to be able to capture. That's just purely drops to the bottom line.

Got it. And how have customers responded to your ownership and operatorship of recently acquired refined products and crude assets over the past few quarters. What has surprised you in your commercial discussions?

I don't know if there's been a whole lot of surprises. I mean, ONEOK has always been a very customer-centered company that wants to make sure we take care of the customers. I think we have brought a little bit different kind of offering to the customers on the refined products side that they appreciate. We've also brought the willingness to spend capital -- more capital than we did before, and we've been able to work with our customers, especially like on the Denver expansion, where people were wanting that to be able to be done. We tried to see what the opportunity was, how big that could be, what the future could look like and working with those customers to get an acceptable project out to the Denver and a very attractive project out to the Denver Airport with a lot of expandable upside onto that. So the customers have been very willing to work with us, been very -- see that ONEOK is customer centered. And I think they've liked as we've seen, like what they've seen so far because they continue to sign up for more volume.

Very good. And I do want to touch on the Denver refined product infrastructure project in a bit. But with recently completed and soon to be completed projects entering into service, ONEOK is set up with significant amount of operating leverage going forward. Can you speak to the opportunities that this provides you and how you see these assets such as the Elk Creek and the West Texas NGL pipelines contributing to future earnings and commercial opportunities.

So to go back, when we did both the West Texas expansion and the Elk Creek expansion, we had contracts behind that, that gave us a very acceptable return on those projects. But we didn't have to fill the complete pipeline up to get to those returns. So we oversized to put a little bit of optionality in there that we could put more volume on there than what was needed for the project. So basically, you could think about that as we have free capacity. It's already been paid for, for certain contracts. So we sit there and go out there in the Permian, which is a very competitive area. When we compete, we can be very effective in competing for new volume coming on there that we can still continue to grow our bottom line. So our objective now is to go in and fill that capacity, both that we talked about on the West Texas pipeline and out of Elk Creek, but we also have the Medford fractionator coming up in 2026 that it's another one where it's a very low-cost fractionator. It's not completely full. We only needed to get a certain amount of volume into it contracted before for an acceptable return. We have FID-ed that when that comes up in late 2026, we'll be able to not only provide transportation out of the Permian, but also fractionation and be able to compete with anybody out there for that volume.

So the only thing I'd add to that, Theresa, is that when you make a decision on a pipeline, let's say you're going to build a 16-inch and you decide to do a 20 or 24, that extra cost to get that extra volume is very, very efficient because your right of way is going to cost the same, whether or not you put a 16 or 20 or 24. The ditch size is basically the same. So you're really digging the same level of ditch, the cost on that. So really, the only difference is the additional welding that you have on the pipe and then whatever the pipe cost is set between it. But it is very, very efficient to get extra capacity. The reason I'm saying that is because it doesn't take very much volume to really juice the returns on that extra capacity.

We like to say it's a lot easier to put -- to expand the pipeline by 2 inches before you put it in the ground and then after you put it in the ground.

Fair enough. And I'm seeing this playbook translate to my next question about the Denver expansion as well. There's some consistency here. So looking at this project coming into service next year, okay. So entering initial service mid-2026 at 30,000 barrels per day. Can you offer some more color on the strategic importance of this project. Sheridan, you touched on the butane piece earlier. Can you talk about the potential changes to PADD 2 and PADD 4 refined product movements. And how should we think about the time line to potentially scale the project towards its total hydraulic capacity of 250,000 barrels per day.

So first talking about the strategic side of it is that our refined product system is a demand pull system. So we want to be connected to growing demand anywhere across our system. And we're seeing growing demand in PADD 4 and in parts of PADD 5, not all parts of PADD 4, but definitely all parts of PADD 5. But definitely PADD 4, we're seeing growing demand in there and definitely, at the Denver Airport as they continue to expand that airport. So we wanted to make sure we had capacity into that area that we could service that demand that we can pull it from our refiners, not just in PADD 2, but also in PADD 3 to be able to pull that refinery as we go forward. As we go and look at just the structure out there, what's happened, we sized it that we could grow as that area grows. And also, we sized that if there was a structural change in PADD 4 and refining capacity, we would be able to supply the front range with enough refined products to meet their needs continue to go out. But even beyond that, we're even deeper into PADD 4. We're seeing premium markets continue to grow as more population grows out there as well and into PADD 5 on the eastern side of PADD 5 that this pipeline is set up very nicely. It's connected to all these other pipelines. As demand continues to grow, we'll be able to supply it out of the Mid-Continent and in the Gulf Coast.

And if there's ever any reason why the supply should be short out there in the Denver and the Front Range area, we're right there ready to add pumps on to this pipeline and fulfill that entire need.

It's 30,000 barrels a day, but it could easily -- with pumps, it could go over 200,000 barrels a day.

So standing ready to add pumps and with a potential long-haul tariff from those far-flung refining centers.

Right. And you said when could we see it grow. We'll see how -- what the market comes to it. It was -- as Pierce said, to make that pipe to grow it up to 16-inch or what we wanted was very small incremental capital to be able to do that. And when you look at the whole scope of the project, it gives us tremendous upside as things happen into the future. Same thing we did, we did the same thing with Elk Creek. We had a very -- we at the time, didn't think we needed a 20-inch pipeline, but we put a bigger pipeline in case we need it, and now we need it, and it's been very profitable.

Got it. So turning from the downstream side of things, let's go to the wellhead, okay. Producer activity has been an area of interest given the ebbs and flows of pricing out there. How are production and G&P volumes currently trending across your areas of service. And what are you hearing from your producer customers in terms of expectations for the remainder of this year and into next year?

Well, we're having the same dialogue we've always had with the producers we can going on. And as we think about '26, they're working through their budget processes at this time and it'll be later in the year when we get a little bit more insight of what they see into '26. Across our basins, we're continuing to grow. All basins are growing. Our volumes are growing up there. No doubt, growth is -- that rate of growth has slowed just a little bit as we kind of look across our system, but we still very much are growing our volumes, and we anticipate that to be into 2026 as well as like I said, we haven't got the official budgets and what they're going to do. Our producers are going to do in 2026, but everything they're telling us now, they continue to expect it to grow. Obviously, the Permian is going to be one that's going to probably have the highest growth as well. But we're seeing good growth out of the Mid-Continent over on the western side of the state. There's the Cherokee formation over there. We've got copper producers continue to be excited about that location. And then the Bakken is going to be the Bakken. It's going to be a steady growth. It's going to be a low single-digit growth, especially with -- kind of more -- we're calling for more flattish crude oil, and then we'll see a lot of the growth coming through the GORs.