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

Hi, everyone. So we -- I think we knew that there would probably be some casualties from the travel delays. And so unfortunately, ONEOK had some travel issues today, but they will be joining us virtually. And I think it's all going to work out. We'll have Pierce Norton, President and CEO; Walt Hulse, EVP and CFO; and Sheridan Swords, EVP and CCO, joining us. And let's see if they come up on the screen. Oh my gosh. Hi guys. Can you hear me?

We can.

I can see you here, too. This is so much better than my office. Great. Well, thank you guys so much for joining us virtually today. I'm super excited about the ONEOK story.

Great. Thank you...

So yes, we can have a room of people that are kind of having lunch. And so we can kind of just jump right into some questions.

So I think just as an opening question, your portfolio has changed a lot over the last 3 years with some of the acquisitions that you've pursued. Can you talk about the original rationale for some of the major transactions? And do you feel like the W portfolio today in terms of asset mix is close to your ideal end state?

So Jean, I'll take that question. First of all, thank you for inviting us to your conference and allowing us to come and talk to you today and the others. I do apologize for our travel issues that sometimes things can't get off. I think it shows how innovative our industry is to be able to pivot and do something like this on the fly. So thank you. So your question, -- we -- back in 2021, we were visiting with the Board, and we believe that we had 5 key areas that we needed to address in the company. The first one being diversity and not only diversity in different basins, but diversity maybe in our business mix and to extend the value chain of the company. So that was the first criteria we were looking for. The second was a combination of things, which was the cash flow stability of whoever that we would buy, along with the capital intensity of that company. So could we find something that had good cash flow stability that could be sustained with very little capital applied to it going in the future. And then the third thing was what would the market position be of this company that we bought? Is it -- does it have a competitive advantage in the areas that they're in? And then the fourth one was scale. We wanted something that would be meaningful, that would be a growth platform that which is kind of project us kind of into that next level of market cap of our business. And then the last thing was synergies. And oftentimes, when you do a merger or acquisition, you're depending on synergies that somebody else would basically come through for you. We wanted synergies that we controlled. And so that was kind of the -- those 5 criteria for what we were looking for, and then we kind of put these different companies through that. And as you know, Magellan is the one that kind of bubbled up to the top. And that set us up to actually pivot and do some more gathering and processing. We did Medallion. We -- that interconnected with our long-haul pipes. So that's kind of the story behind how we got to where we are today, but it was very intentional. It wasn't just responding to somebody coming in and saying, well, we would sell this to year 1. It was intentional for us to go out and find these particular things that met those 5 criteria.

That makes sense. And I think if you're looking forward, are you pretty happy with where the mix is? Or would you say that, that criteria would still be kind of how you're evaluating potential future state?

I mean I will say that some of those things have dropped off. They're not quite as important. It's like we don't necessarily feel like that we need to be only looking for scale. So we actually revisit this criteria. Every time we do some sort of an M&A activity, we go back to the Board and say, which ones apply and which ones don't and which ones should we add. So we dropped a few, added a few. But I'd say, in general, we're very pleased. And we're in a position where we think we can expand and extend what the asset footprint that we have in all of our businesses.

Makes sense. Looking at where ONEOK has traded this year, what do you think the market is missing or underappreciating about the story?

Jean Ann, I'll take that. I think that realistically, we put 3 companies of size with a couple of other small add-ons to that. So a total of 5 companies together in about an 18-month window. And the last one just came into the fold here in February being EnLink. I don't think the market has seen a clear picture of how all of those companies together produce EBITDA going forward. So this year is kind of that test year as we bring EnLink into the fold and start to capture synergies there, continue to capture the synergies that we've had from Magellan, which have exceeded our expectations. And so delivering on the quarters like we did here just invest in the third quarter and showing the true earnings power of the company going forward, I think, is really just something that's a wait and see, see where we're going to go and looking for a catalyst. And I think that catalyst is really seeing us deliver on those earnings.

Yes. I think that makes sense. That's a great segue to my next question. You show a slide that there could be $700 million to $1.1 billion of synergies from the deals. Can you describe the major buckets of these synergies and how that number is trending versus your original expectation?

Sure. Well, I mean, right off the bat for both Magellan and EnLink, there were clearly kind of those G&A synergies that come pretty quickly. Some of them stage in over the course of the first year or so, depending on contract roll-off and things like that. In each case, that's probably $75 million to $100 million. So those have been done. They're in. Some of the examples of those would be insurance savings. We effectively rolled EnLink into our insurance program at 0 cost. They were paying tens of millions of dollars for the insurance that they had. And then your normal G&A. But the exciting ones are the commercial opportunities. And when we got into Magellan, we had an expectation of where we thought we could really deliver on synergies. Most of those came to fruition. But what's been exciting is the opportunities that have developed since then. I think as we got into Magellan, we realized that it had been starved for capital a little bit. And so with that happening, quite a few of the smaller projects just weren't bubbling up to senior management, and they weren't getting done. And so when we came in and took a fresh look at everything, there was this excitement that was developing within the legacy Magellan workforce, and they've showed up with all kinds of different projects that were incredibly high returns. So -- we like to use an example of one where we had to spend $10 million out in El Paso and got an $8 million annual return on it. So clearly, we'll do 80% projects all day long. As we came into Medallion, again, that was a business that was really set up to feed and fill our 2 long-haul crude pipes, and there have been some nice synergies there volumetrically being able to use our balance sheet to bring product on to the pipes that Medallion just wasn't in a position to do. And then as we bring on EnLink, and I would say we're still in the early stages of those, those are in line with our expectations. Some of those were clear contracts that had to roll off and those new volumes just roll right over on to our NGL system, particularly in the Permian because we pretty much already handled all of their NGLs in the Mid-Continent. But we had pretty significant overlap in the Mid-Continent in our G&P business. Significant synergies are just now starting to develop on that. And I think that what we've really seen and we didn't expect was more opportunities than we expected on the natural gas side of EnLink. There were things that we could do and that they weren't necessarily taking advantage of. And then clearly, the last is rolling their NGL assets, just specifically the fracs into our full network of fracs and being able to optimize across 3 different locations has seen a real nice benefit. When you look at back at the Magellan business, our blending opportunities have exceeded our expectations. Volumetrically, we're up very significantly, about 15% year-over-year. Unfortunately, the spreads have collapsed in that so that -- we're kind of net neutral there, but we're in a position that as those spreads come back that we will see a pretty meaningful uplift there. And those -- the ability to blend has really been extending out on the system, having product where it needed to be to blend. We've taken logistics costs out of the Magellan business where they were trucking blend stock out to various locations. We've been able to get it either on our NGL pipes or put it on the refined products pipes. And that's allowed us to reduce logistics around blending about $0.10 a gallon, which is pretty meaningful. And then it's allowed us with that lower cost to blend in more places further out onto the system. So we're excited about the opportunities. We continue to find new ones every day. And I think the best thing is that the vast majority, and I really mean the vast majority of them are within our control. They're not dependent. They're not supply push type of synergies. So as we are able to bring them on, they drop immediately to the bottom line. And in most cases, they're very small capital amounts.

That makes sense. And you would expect the $0.10 per gallon improvement to kind of roll in over 2026?

Yes, exactly. That was really -- some of it was around the Easton acquisition that we did that connected Mont Belvieu to the East Houston and Galena Park areas. A bunch of it is in the Mid-Continent, where we are connecting our Conway fracs into the refined products system in the Mid-Continent. That is just being completed here in the fourth quarter. The connections down at Easton were finished in the third quarter. So we're starting to see a little bit of Easton and all of it will be coming in here as we get into the -- into '26.

That's great. So kind of talking more about 2026, ONEOK's 2026 outlook has come down a little bit year-to-date. Can you kind of talk about how much of that is from commodity spreads coming in, so the butane blending that we're just talking about, for example, versus a lower production growth outlook?

Sure. The commodity, specifically around the butane blending and some of our other spread businesses, a couple of hundred million, $200 million or so of impact that we saw with lower spreads. Put that in the context of our overall company, it's around 2% of our EBITDA. So not a huge amount. It falls in that spray. We still are a volume times rate company. 90% of our business is fee-based. About 5% is differential, either location or timing and about 5% is commodity. So that was that portion. And then the balance is really as we've seen crude prices go from the mid-70s down, I think, today into the high 50s. We continue to see nice activity out of our producers, but they haven't been leaning in quite as much as they've been kind of taking their time a little bit. And I use the analogy, they were going 75 miles an hour. Now they're going 58. They're still going fast, but they're not going quite as fast as they were before. And we need to get a sense of where they're going to be in '26. They're going through that process right now. If crude stays right around here, I think we're going to see most of the producers not change up what they're doing at all. They're kind of making sure that it's not going to drop into the 50s or lower, lower 50s and where they might have a little bit of a backup. But that's the other component that we're just trying to get our hands around. When we do, we'll roll that out here in -- with our '26 guidance right around the first of the year, just after the first of the year type of thing.

That's super helpful. Kind of when are you targeting to reach your long-term debt-to-EBITDA target of 3.5x EBITDA? And how do you think about capital allocation after that?

You hit me right and left here. We got to get Sheridan to answer a question here...

We're going to get to operations...

All right. We're on target to head to that -- we said 3.6x in '26. I think it's important for us to put out there that the 3.5x target is a self-imposed target. Moody's wants us to be at 4x or below for Baa2 and S&P wants us at 3.75x. We still think 3.5x is the right place to run the business over the long term, and that's going to continue to be our target. But frankly, with the stock down here at these levels, we are thinking more about should we slow that down a little bit and maybe think about allocating some capital to shareholder return as well. So we're clearly getting through both of the agencies' targets headed towards our 3.5x. But I think we have a little more flexibility and are kind of thinking about that capital allocation.

Makes sense. Are you hearing from investors that they want more growth or more free cash flow? Or it just depends on which investor you're talking to?

I think it's all of the above. It definitely depends on the investors. But I think probably one of the keys to that is that they want to make sure that we aren't chasing growth and that we're using discipline to make sure that we continue to get the high-return projects that ONEOK has been known for in the past. And we are trying to be disciplined there and make sure that we do only pursue projects that are getting the return on invested capital that we're used to because we have the opportunity to return cash flow to shareholders as well. So we're trying to work that balance. We always want to grow the business and do it with good capital projects, but we are going to make sure that we're disciplined and not chase projects just to try to get growth at what are returns that wouldn't really be commensurate with the risk that you'd be taking.

Makes sense. Great. I think with that, Sheridan, maybe we'll move over to operations and commercial questions. In most basins that you operate in, you should have significant operating leverage. I think you have spare processing transport and frac capacity all over. So would you agree with that? And can you kind of speak to the advantages that, that could provide you going forward?

Yes, Jean. Yes, I would agree in a lot of areas, we have that operating leverage, and that was by design. When we had our big build-out and building the backbone of our business, we found through time that it's a lot easier to add just a little bit more steel, a little bit bigger piece of pipe when you're putting in the ground, very capital efficient to add quite a bit more capacity onto the system. So that's what we did. Really, if you put a couple more inches on a piece of pipe, you're really just buying a little bit more steel as you put it into the ground. So that has been our philosophy for a long period of time. So now where we sit, we have plenty of capacity coming out of the Bakken. We have plenty of capacity coming out of the Permian that we can grow into. And really, as we look forward, that means that we're not going to have to spend near the capital that you typically would see as we continue to grow volumes out of these areas. The frac is the same thing. With Medford coming on, we will have excess frac capacity. We don't have that today, but we will when Medford comes on, we'll have excess frac capacity that we will be able to grow into, especially as we see volumes coming on in the Permian. It's in one area, and we're alleviating that we don't have that operating leverage is our processing capacity in the Permian. But we have over 500 million a day of processing capacity coming online here through 2026 that will give us some more operating leverage in that area, so we can be able to be there when the producers need them and be able to fill the long-haul NGL pipes from there.

Makes sense. I was going to follow-up, I guess, on the Permian. I think one common investor concern is that there appears to be more than enough NGL capacity in the Permian. Can you kind of discuss your exposure? And would you feel that you need to backfill with more processing capacity like significantly more, either organically or inorganically to match that up?

Well, we're really going to look at as we grow our processing capacity out there, we want to first do it. We really like to do it organically. That's kind of the whole reason we bought the EnLink to be able to grow that asset. And you're already seeing we're having quite a bit of success as we -- as I mentioned before, we bring on this 500 million a day of processing capacity. But also in terms of the NGLs, we also will be -- have the benefit in '26 and '27 their EnLink had some contracts with other non-ONEOK NGL service providers. As those contracts come off, that volume will automatically come over to our system. The other thing is we built -- we built this additional operating leverage on our system. We still have great projects when we do it. So we don't need to fill our pipelines to have a great project. So we're not going to just chase volume and at lower and lower prices just to fill the system. We already have good projects, and this is just really making them actually substantially better as we put more volume to the system.

That makes sense. Is there any update on how the contracting for the LPG export terminal is coming along? And can you walk us through the competitive dynamics there?

Yes. I mean we are very pleased where that contracting is going, and I mentioned that in the call. It continues to progress at a level that we are very happy with right now. We have a lot of interest in from people wanting to sign up for capacity. And the big competitive advantage is really the location. We do have a superior location and the customers and the people we're talking to, they see that. They understand they value that closeness to the open water where you take a lot of the risk out of that from fog and demerge and some of those things. So we are very pleased where we are right now. It's going to be a very nice project.

Makes sense. Has the recent start-up of third-party ethane export terminals over the last quarter or 2, has that created pull-through for more ethane recovery in the basins that you're in? And do you expect that to continue?

Yes. I mean we saw it almost pretty immediately that the frac spread on ethane widened out when those facilities come online. And that really allowed us to -- in our discretionary ethane business out of the Bakken to get wider spreads and see a little bit more coming out of the Mid-Continent. And we do see some recovery out of there as well. We do some discretionary ethane coming out of the Mid-Continent as well. Obviously, the Permian has been in recovery and it's going to stay in recovery, especially now when we see that Waha prices are negative. It's obviously going to be the first one that comes out. But there was a definite move in the market when we saw these export terminals come online, and that's very good for us.

Was there actually like a lot of ethane that wasn't already being recovered in the Permian, I guess, that you think happened, I guess, after the Waha prices went negative that would have impacted how much was coming from Mid-Con and Bakken...

Well, no, I mean, I can really just speak to our system and what we see on that. We saw a pretty good ethane recovery coming across that system, what you would see for a full ethane recovery. Obviously, every plant, you got older plants and newer plants and as volume moves around, you can get a little bit more ethane here and there out of the Permian. But for the most part, it's been in full ethane recovery for a period of time. But as this new volume came on, it did kind of widen the spreads a little bit. We brought more volume out of the Bakken because of that, and we're able to bring a little bit more out of the Mid-Continent. We still, at times, see the Mid-Continent, as I've said before, being kind of in and out. It did give us an opportunity to bring some more with discretionary ethane as we went in there and worked with both our G&P and other third parties on coming to a number that they could bring some more volume.

Makes sense. I think another common question about the company is that you have had kind of a dominant position in the Bakken for really a long time. And next year, there will be a competing pipeline coming in. How do you view the sort of risk there, the amount of market share that you lose?

Well, I'd first start off as we talk about it, we talk about the market share up there on the NGL side is our G&P has 60% of the market share on the G&P side. So that volume is not at risk. That's always going to stay up. So now we start talking about what's left of the 40% that is not coming through our G&P assets. And -- most of that is all contracted very long term. And I'd say most of that, there is a contract that's coming off here in 2026. That is a Kinder Morgan plant that will go into DH. We know that we're going to lose about 20,000 barrels a day on that pipeline in the South. But also that pipeline, once it gets to Guernsey, it's going to go into another pipeline that we know that only has capacity of 20,000 barrels a day. So if they want to get any more than 20,000 barrels a day, more capital has to be spent, and they have to lay at least probably 200 miles through some very rough area to be on the front range up from a political standpoint to be able to get in there and to go forward. But we think we have a very competitive position out there, be able to dual lines, a lot of redundancy, a lot of resiliency in our system that we can make sure that the producer volume stays online, both from a gas and an NGL perspective. And that's really what the producers want. They want to make sure that their oil is going to flow.