ONEOK, Inc. (NYSE:OKE) Q4 2023 Earnings Call Transcript
ONEOK, Inc. (NYSE:OKE) Q4 2023 Earnings Call Transcript February 27, 2024
ONEOK, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the ONEOK Fourth Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Andrew Ziola, Vice President, Investor Relations. Please go ahead.
Andrew Ziola: Thank you, Drew and welcome to ONEOK’s fourth quarter and year end 2023 earnings call. We issued our earnings release and presentation after the markets closed yesterday and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK’s expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Just a reminder for Q&A, we ask that you limit yourself to one question and a follow-up in order to fit in as many of you as we can. With that, I will turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce?
Pierce Norton: Thanks, Andrew and good morning, everyone and thank you for joining us this morning. On today’s call is Walt Hulse, the Chief Financial Officer, Treasurer and Executive Vice President, Investor Relations and Corporate Development; and Sheridan Swords, who is our Executive Vice President, Commercial Liquids and Natural Gas Gathering and Processing. Also available to answer your questions are Chuck Kelley, our Senior Vice President, Natural Gas Pipelines and Kevin Burdick, who is the Executive Vice President of Chief Enterprise Services. Record volumes, strong financial performance and the closing of the Magellan acquisition solidified 2023 as a year of significant growth and transformation for ONEOK. Momentum from our operations in 2023 is setting the stage for additional growth in 2024.
With our earnings release yesterday, we reported double-digit NGL and natural gas processing volume growth year-over-year and continued fee-based earnings growth in all three of our legacy business segments. We also provided 2024 guidance along with some insight into 2025 and beyond, including an expectation for double-digit adjusted EBITDA growth in 2024. Walt will provide more detail on our guidance, which is underscored by solid business fundamentals, demand for the products that we deliver, and a full year of earnings contribution from our refined products and crude oil segments and the initial realization of acquisition-related synergies. Before I turn the call over to Walt, I want to share a few data points that help sum up the exceptional growth ONEOK has experienced in recent years.
While our business continues to transform and to look to the future, it’s still important to reflect on what has already been accomplished. I’ll share just a handful of highlights, but there are many more. First, 2023 marked ONEOK’s 10th consecutive year of adjusted EBITDA growth throughout various commodity cycles. Over the same time period, we have increased dividends paid to $3.82 per share from $1.48 per share, a more than 150% increase. And in January, the Board approved another increase. Our volumes out of the Rocky Mountain region have set numerous records. Over the last 5 years alone, NGL volumes from the region have grown at a more than 20% annual growth rate and natural gas processing volumes have grown at a 10% annual growth rate.
We have continued to expand our asset portfolio, increasing our extensive pipeline network to more than 50,000 miles from approximately 30,000 miles in 2013 and adding nearly 2 Bcf per day of natural gas processing capacity and 3 fractionators. And finally, through all of this growth, both internally and by acquisition, we’ve continued to prioritize safety and our sustainability and ESG-related performance, consistently ranking towards the top of our industry peer group, including a AAA rating from MSCI. We have achieved a great deal in recent years. And over the course of our company’s history and now with a more diversified portfolio of assets, we are even better positioned to make the most of future opportunities. With that, I’ll turn the call over to Walt.
Walt Hulse: Thank you, Pierce. Before I get to guidance, I’ll start with a brief overview of our fourth quarter and full year financial performance. ONEOK’s fourth quarter and full year 2023 net income totaled $688 million and $2.7 billion respectively. Adjusted EBITDA totaled more than $1.5 billion in the fourth quarter 2023 and more than $5.2 billion for the full year. While there were a number of unique items contributing to the significant year-over-year increase in results such as the Medford settlement and the Magellan acquisition, the strong performance from our legacy business segments continued. Even excluding these unique one-time items, ONEOK’s adjusted EBITDA would have increased more than 15% year-over-year.
As of December 31, we had no borrowings outstanding under our $2.5 billion credit facility and had more than $335 million of cash on hand. In 2023, ONEOK extinguished $1.3 billion of long-term debt, contributing to a fourth quarter 2023 run rate net debt-to-EBITDA ratio in line with our previously discussed target of 3.5x. In January, we increased our quarterly dividend 3.7% to $0.99 per share or $3.96 per share on an annualized basis. Going forward, ONEOK expects to target an annual dividend growth rate ranging between 3% to 4%. We also announced a $2 billion share repurchase authorization, which we target to largely use over the next 4 years. This program is complementary to the dividend growth rate when thinking about shareholder return in the future.
Over the next 4 years, ONEOK’s combination of dividends and share repurchases is expected to trend towards a target of approximately 75% to 85% of forecasted cash flow from operations after identified capital expenditures. Our commitment to maintaining our financial flexibility and taking advantage of attractive return, capital growth opportunities that complement our now larger and more diverse operating footprint continues to be the highest priority in our capital allocation strategy. This commitment will continue to create value for our investors and support ONEOK’s position as one of the midstream leaders of return on invested capital. Now moving on to 2024 guidance. We provided a net income midpoint of more than $2.8 billion, an EPS midpoint of $4.88 per diluted share and an adjusted EBITDA midpoint of $6.1 billion.
We also include in guidance related to the synergies we expect to realize over the next couple of years. This guidance reflects higher earnings from all business segments, excluding the Medford insurance settlement and a full year contribution of the refined products and crude segment. Sheridan will provide more detail on each of the operating segments in a moment. As for synergies, we’ve assumed a midpoint of $175 million of total realized annual cost and initial commercial synergies in 2024, followed by an additional $125 million in 2025. We expect additional synergies in 2026 and beyond as capital expenditure projects to connect our NGL to the refined products and crude businesses are completed. As it relates to capital expenditures, we’ve assumed a total of $1.85 billion, which includes growth and maintenance capital.
This guidance reflects the investment necessary to keep up with the expected levels of producer activity and attractive return growth projects, including the MB-6 Fractionator and expansions of our West Texas NGL and Elk Creek NGL pipelines, all expected to be completed in the first quarter of 2025. Once these projects are completed in early 2025, we expect to be on a trend of decreasing capital expenditures over the near to medium-term. Our expected 2024 capital guidance does not include the Saguaro Connector project or any other projects that have not yet reached financial investment decision. I’ll now turn the call over to Sheridan for a commercial update.
Sheridan Swords: Thank you, Walt. We saw strong year-over-year volume growth in 2023 with natural gas processing volumes up 14% and NGL volumes up 10% compared with 2022. Rocky Mountain region volumes were particularly strong with double-digit growth in both NGL and natural gas processing volumes year-over-year. Higher producer activity levels, increased well connects, and continued strong gas-to-oil ratios drove record fourth quarter volumes totaling nearly 400,000 barrels per day of NGLs and nearly 1.6 Bcf per day of processed volume. Mid-Continent process volume increased 15% year-over-year and Permian Basin NGL increased 19% year-over-year, both benefiting from solid producer activity throughout the year in those regions.
Well connects across our operations increased more than 50% compared with 2022. We continue to see the benefit of those connections throughout 2024 as volumes ramp. Our Natural Gas Pipeline segment significantly exceeded its 2023 financial guidance range on higher earnings from long-term storage services and higher rates from negotiated fee-based contracts. Our Refined Products and Crude segment adjusted EBITDA totaled more than $420 million in the segment’s first full quarter of operations since the acquisition of Magellan. This segment’s performance was driven by midyear tariff increases, longer haul refined product shipments and steady crude oil transportation volumes. Our optimization and marketing activities, which includes liquids blending also benefited from strong margins and volumes.
Turning to 2024. Key drivers for our higher 2024 guidance includes stable producer activity and continued production efficiency improvements, providing strong natural gas and NGL volumes across our systems. Solid refined products demand, continued strength in fee-based earnings and rates and our first full year of annualized synergies. In our Natural Gas Liquids segment, we expect higher year-over-year adjusted EBITDA and raw feed throughput volumes should be driven primarily by growth out of the Rocky Mountain region. Despite lower assumptions for incentivized ethane recovery in 2024 and a low margin contract expiration from Overland Pass pipeline in November of 2023, we still expect higher year-over-year NGL volumes. The expired contracts volume is being replaced with higher rate barrels ramping through 2024.
Healthy demand for ethane from the petrochemical industry and wide gas-to-oil ratios are setting up a positive backdrop for NGL markets in 2024. On our system, we’ve assumed high levels of ethane recovery continue in the Permian Basin in 2024 and partial recovery in the Mid-Continent. We also expect to see continued opportunities to incentivize ethane recovery in the Rocky Mountain region. As Walt mentioned, we’ve officially moving forward with the expanding the Elk Creek pipeline to 435,000 barrels per day, increasing our total NGL capacity out of the Rocky Mountain region to 575,000 barrels per day. This additional capacity will support future growth and increased ethane recovery. Moving on to the Natural Gas Gathering and Processing segment.
We expect volume growth in the Rocky Mountain and Mid-Continent regions driven by higher-than-anticipated well connections in 2023 and consistent producer activity levels expected in 2024. In the Rocky Mountain region, we expect processing volumes to grow 9% at the midpoint compared with 2023 and an average more than 1.6 Bcf per day in 2024. This outlook includes the impact from the weather we experienced so far this year, including well freeze-offs in mid-January when the wind chills dropped below negative 60 degrees. By the end of January, volumes had recovered to levels achieved prior to the extreme cold. Strong producer activity levels in 2023 and the continued trend of high gas-to-oil ratios drove several months of record North Dakota natural gas production with the latest record of 3.52 Bcf per day set in December.
Producer activity has carried over into 2024. Even through the winter months, as we enter March, there are 36 rigs in the Williston Basin with 20 on our dedicated acreage. Through detailed planning sessions with our customers, we expect additional rigs to return as we move into spring. Additionally, we continue to see a trend at producers drilling longer laterals in the basin, 3 miles in length or more as opposed to the historical 2-mile laterals. These longer laterals continue to drive improved production efficiencies and result in fewer well connections needed to grow gathered volumes. As detailed in our earnings presentation, we expect 3-mile laterals to account for approximately 30% of the wells drilled on our acreage in 2024 compared with only 7% 2 years ago.
In the Mid-Continent region, we are currently seeing approximately 45 rigs in Oklahoma with 6 operating on our acreage. We expect processing volumes to grow approximately 3% at our guidance midpoint compared with 2023 and average approximately 770 million cubic feet per day in 2024. Rig activity across the basin will continue to drive additional NGLs to our system. In the Natural Gas Pipelines segment, we continue to expect strong demand for natural gas storage and transportation services in 2024. At the end of 2023, more than 75% of our natural gas storage capacity was contracted under long-term agreements, and our pipeline transportation capacity was nearly 96% contracted. We expect similar levels in 2024. From a natural gas storage perspective, we continue to focus on expansion projects.
We are currently working on a project to reactivate 3 Bcf of previously idled storage in Texas and are further expanding our injection capabilities in Oklahoma. In February 2024, the FERC approved the Saguaro Connector Pipelines presidential permit, and we expect the final investment decision on the pipeline by midyear 2024. Moving on to the Refined Products and Crude segment. We continue to expect healthy business fundamentals and the segment’s more than 85% fee-based earnings to drive consistent performance. We’ll see the full year effect of higher refined products tariff rates, driven by the midyear 2023 increase of 11.5%. And we expect additional mid-single-digit increases in July 2024. We also expect an increase in refined products volumes, including a benefit from the completion of our expansion to El Paso.
Additional benefits are expected from higher volumes and margins related to liquids blending in 2024, driven by favorable market conditions and synergy-related opportunities. Walt discussed commercial synergies earlier, which we expect primarily to show up in our Refined Products and Crude segment’s earnings. Pierce that concludes my remarks.
Pierce Norton: Thank you, Sheridan and Walt. I started this call by saying that 2023 was a year of significant growth and transformation. None of this would have been possible without our dedicated employees, with many of those employees actually listening to this call today. So I want to make sure that I thank them publicly for all that they did in 2023. With us now 5 months post closing of the acquisition, our employees have continued to focus on our integration efforts and prioritize the reliable operations of our assets in the high quality of service expected at ONEOK. Everything we have accomplished this past year means nothing if we don’t do it safely and responsibly. From an environmental perspective, we’ve made significant progress toward our greenhouse gas emissions reduction target, achieving reductions that equate to approximately 50% of our total 2030 reduction target.
And from a safety perspective, we brought together two companies with leading safety cultures and performance. And combined, we will continue to focus on the safety and health of our employees in the communities that we operate. We’ve created an operational platform that provides increased scale, scope and diversification. It’s a platform which is already providing opportunities and enabling us to generate exceptional value for our stakeholders. Looking ahead, ONEOK is well positioned in 2024 for another year of significant growth and opportunity. With that, operator, we’re now ready for questions.
Operator: [Operator Instructions] The first question comes from Brian Reynolds with UBS. Please go ahead.
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