ONEOK Q2 2022 Earnings Results & Report

ONEOK EPS Results

• Actual EPS: $0.92
• Consensus EPS: $0.84
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: $0.77
• EPS Beat Rate: 6 of last 8 quarters

ONEOK Revenue Results

• Actual Revenue: $6.00 billion
• Expected Revenue: $5.18 billion
• Beat/Miss: Beat by +$812.92 million
• YoY Revenue Growth: +76.90%

ONEOK (NYSE:OKE) is a U.S. energy midstream company that gathers, processes, transports and stores natural gas and natural gas liquids (NGLs). Its services connect energy producers with processors, refineries, petrochemical facilities and other customers.

The company operates natural gas gathering and processing systems, NGL pipelines and fractionation facilities, as well as crude oil and refined products transportation assets. Its operations span regions including the Permian Basin, the Mid-Continent, the Rocky Mountain area and the Gulf Coast.

ONEOK traces its roots to Oklahoma Natural Gas Company, founded in 1906. Its acquisition of Magellan Midstream Partners in 2023 expanded its liquids transportation and storage businesses.

ONEOK Q2 2022 Earnings Call Transcript

Key Takeaways

• ONEOK reported 2Q 2022 net income of $414 million, up 21% year-over-year, with adjusted EBITDA of $886 million, up 11% yoy, and reaffirmed midpoints of 2022 guidance at $1.69 billion for net income and $3.62 billion for EBITDA.
• A fire at the Medford, OK fractionation facility on July 9 put it out of service for an extended period, though insurance coverage should mitigate any material financial impact, with timing of proceeds potentially affecting quarterly results.
• Total NGL raw feed throughput rose 5% yoy and 4% sequentially, driven by gains in the Rocky Mountain, Mid-Continent, and Permian regions, and the 125,000 bpd Mont Belvieu MB5 fractionator remains on track for early 2Q 2023 completion.
• Rocky Mountain natural gas gathering and processing volumes rebounded to about 1.4 Bcf/d in July following April weather disruptions, with ~375–425 well connections expected in 2022 and the basin’s DUC count down by ~200 year-to-date.
• The Natural Gas Pipelines segment saw full subscription of a 1.1 Bcf Texas storage expansion and 90% subscription for a 4 Bcf Oklahoma project, along with successful open seasons for Permian and upper Midwest pipeline capacity additions.

Presentation

[Operator]

Good day, and welcome to the Second Quarter 2022 ONEOK Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Ziola, Vice President, Investor Relations. Please go ahead, sir.

[Andrew Ziola, VP of Investor Relations at ONEOK]

Thank you, Nash, and welcome to ONEOK's Second Quarter 2022 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.

[Andrew Ziola, VP of Investor Relations at ONEOK]

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 one follow-up in order to fit in as many of you as we can. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce?

[Pierce Norton, President and CEO at ONEOK]

Thanks, Andrew. Good morning, everyone, and thank you for joining us today. We appreciate your interest and investment in our company. On today's call is Walt Hulse, Chief Financial Officer and Executive Vice President, Investor Relations and Corporate Development, and Kevin Burdick, Executive Vice President and Chief Commercial Officer. Also available to answer your questions are Sheridan Swords, our Senior Vice President of Natural Gas Liquids and Natural Gas Gathering and Processing, and Chuck Kelley, our Senior Vice President of Natural Gas Pipelines.

[Pierce Norton, President and CEO at ONEOK]

Yesterday, we announced strong second quarter 2022 earnings, provided an update on the Medford incident, and affirmed our 2022 financial guidance expectations. As we sit today, we still expect to achieve the midpoints of our 2022 net income and adjusted EBITDA guidance, which Walt will provide additional details shortly. Our second quarter financials were achieved despite unseasonable weather in the Rocky Mountain region during the quarter.

[Pierce Norton, President and CEO at ONEOK]

Two separate April weather events caused widespread outages and power, disrupting midstream and producer operations across the region. Our employees were well prepared and quickly responded to the challenge. They remained focused on the safe operation of our assets and the safety of the communities where we operate, and they worked with local agencies, customers, utility providers to resume normal operations as quickly as possible. Across our operations, we continue to see strength in producer activity, with commodity prices and demand supporting a strong second half of the year.

[Pierce Norton, President and CEO at ONEOK]

While it is still too early to provide our outlook for 2023, we are well-positioned across our integrated footprint to help transport and process essential natural gas and natural gas liquids. Before I turn the call over, I'd like to make and provide an update on the Medford, Oklahoma fractionation facility.

[Pierce Norton, President and CEO at ONEOK]

On Saturday, July the ninth, mid-afternoon, there was a fire at the facility. First and foremost, all of our personnel were safe and accounted for. The safety of our employees and communities is always the main concern and initial focus during a situation like this. I would like to thank the many employees, first responders, and local agencies who worked together to quickly respond to the incident. We cannot say enough about the cooperation and the coordination efforts of those teams who worked to put safety of our personnel and the surrounding community first.

[Pierce Norton, President and CEO at ONEOK]

We are cooperating with government agencies as we work to determine the cause of the incident but expect the facility to remain out of service for an extended period of time. In yesterday's earnings release, we provided details of our property and business interruption insurance coverage.

[Pierce Norton, President and CEO at ONEOK]

Because of this coverage, we do not currently anticipate that the incident will have a material effect on our financial condition, results of operations, or cash flows. However, the timing of insurance proceeds may impact financial results in a given quarter or year. From an operational perspective, we continue utilizing our system of integrated NGL pipeline, fractionation, and storage assets. We're also working with industry peers on additional fractionation and storage arrangements. I want to thank those companies for working with us to keep these essential products flowing since the incident.

[Pierce Norton, President and CEO at ONEOK]

Our industry has a long history of stepping up to help each other when disruptions happen, and this incident has once again proven that relationships and cooperation are critical to this industry's long-term success, and we want to thank them once again. With that, I will turn over the call to Walt for discussion on our second quarter financial performance.

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

Thank you, Pierce. ONEOK's second quarter 2022 net income totaled $414 million or $0.92 per share, a 21% increase compared with the second quarter of 2021, and a 6% increase compared with the prior quarter. Second quarter adjusted EBITDA was $886 million, an 11% increase year-over-year. Compared with the first quarter of 2022.

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

Our second quarter results were driven by increased NGL volumes across our operations and higher realized commodity prices, primarily benefiting our natural gas gathering and processing segment. Operating and cooperating costs increased in each of our business segments, which is typical for the second quarter, as improved weather allows for more routine maintenance projects to take place. As of 30 June 2022, our net debt to EBITDA on an annualized run rate basis was 3.8x, and we continue to view 3.5x or lower as our long-term aspirational leverage goal.

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

In June, we redeemed nearly $900 million of senior notes due in October 2022 with cash and short-term borrowings. We currently have no long-term debt maturities due until September of 2023. Yesterday, we reaffirmed our 2022 financial guidance expectations.

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

To expand on Pierce's comments earlier, as we sit today, we still expect to achieve the midpoints of our guidance ranges, which remain at $1.69 billion for net income and $3.62 billion for adjusted EBITDA. We expect total 2022 capital expenditures to trend towards the upper end of the range of our guidance range of $900 million to 1.05 billion, driven by higher producer activity levels and expansion opportunities in our natural gas pipeline business.

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

Positive drilling activity across our operations and expectations for higher natural gas and NGL volumes in the second half of 2022 support our financial guidance and continue to point to a strong volume exit rate this year. I'll now turn the call over to Kevin for a commercial update.

[Kevin Burdick, EVP and CCO at ONEOK]

Thank you, Walt. During the second quarter, we saw NGL volume growth across all our operating regions compared with the first quarter 2022. NGL volume expectations remain strong through the remainder of the year, providing confidence in achieving the midpoint of our raw feed throughput guidance for 2022. Natural gas processed volumes and well completions during the quarter were significantly impacted by the April weather events, and we now expect processed volumes to be toward the lower end of our 2022 volume guidance range.

[Kevin Burdick, EVP and CCO at ONEOK]

Let's take a closer look at our natural gas liquids segment. Total NGL raw feed throughput volumes increased 5% year-over-year and 4% compared with the first quarter 2022. Rocky Mountain Region NGL volumes increased 10% year-over-year and 5% compared with the first quarter 2022.

[Kevin Burdick, EVP and CCO at ONEOK]

Activity in the region has rebounded following the April storms as July volumes averaged more than 360,000 barrels per day, 9% higher than the second quarter average. Mid-Continent NGL volumes increased 4% compared with the first quarter 2022, driven by increased C3+ volumes as producers continued to add rigs in the basin, with a large majority of the region's NGL dedicated to ONEOK's system.

[Kevin Burdick, EVP and CCO at ONEOK]

In the Permian Basin, NGL volumes increased 10% year-over-year and 4% compared with the first quarter 2022. We recently completed a 25,000 barrel per day expansion on a portion of our West Texas NGL Pipeline in the basin to support continued expected volume growth.

[Kevin Burdick, EVP and CCO at ONEOK]

We saw increased ethane volumes on our system in the second quarter 2022 and expect continued opportunities for ethane to be recovered through the remainder of the year. We anticipate high levels of recovery in the Permian Basin, periodic recovery in the Mid-Continent, and continued opportunities to incentivize ethane recovery in the Rocky Mountain region as in-basin natural gas prices fluctuate.

[Kevin Burdick, EVP and CCO at ONEOK]

Our fractionation capacity is fully utilized following the incident at our Medford facility, and as Pierce mentioned earlier, we have worked with industry peers to secure additional fractionation and storage capacity. Medford's capacity was approximately 210,000 barrels per day of our total system-wide nameplate capacity of more than 980,000 barrels per day.

[Kevin Burdick, EVP and CCO at ONEOK]

Construction continues on our 125,000 barrel per day MB5 fractionator in Mont Belvieu, which we now expect to be complete early in the second quarter of 2023. Moving on to the natural gas gathering and processing segment. In the Rocky Mountain region, second quarter processed volumes averaged more than 1.2 billion cubic feet per day, a slight decrease compared with the first quarter 2022 due to the April weather.

[Kevin Burdick, EVP and CCO at ONEOK]

We've seen recent volumes return to pre-storm levels, and in July, volumes reached approximately 1.4 billion cubic feet per day. Through the first six months of the year, we've connected 157 wells in the region, and we continue to expect approximately 375 to 425 well connections in the region this year.

[Kevin Burdick, EVP and CCO at ONEOK]

There are currently approximately 45 rigs and 18 completion crews operating in the basin, with 21 rigs and approximately 1/2 The completion crews on our dedicated acreage. Basin-wide, rigs have more than doubled in the last 12 months from only 20 rigs total in July 2021. As we've said before, approximately 15 rigs on our acreage can maintain natural gas production at current levels. With more than 20 currently on our acreage, we expect to see higher well connections in 2023 compared with 2022 if these activity levels remain.

[Kevin Burdick, EVP and CCO at ONEOK]

The basinwide DUC inventory remains at approximately 500, with 1/2 of those on our dedicated acreage. This compares with approximately 650 DUCs in a basin a year ago. Recent producer M&A in the Williston Basin continues to show the value and long-term viability of the play.

[Kevin Burdick, EVP and CCO at ONEOK]

We see these recent announcements as positive for ONEOK as we expect increased activity from the acquirers to drive NGL and natural gas volumes to our system. In the Mid-Continent region, we continue to see increased activity with four rigs now operating on our acreage and 46 rigs basin-wide. We expect steady to increasing activity through the remainder of the year, with the majority of rigs basin-wide driving additional NGLs to our system.

[Kevin Burdick, EVP and CCO at ONEOK]

In the natural gas pipeline segment, strong second quarter results benefited from the continued increasing demand for natural gas storage and transportation services. Last quarter, we discussed a recently completed 1.1 billion cubic feet expansion of our Texas storage facilities, which is now fully subscribed through 2032. Additionally, we are expanding our storage capabilities in Oklahoma, enabling an additional 4 billion cubic feet of storage capacity to be contracted.

[Kevin Burdick, EVP and CCO at ONEOK]

This project is expected to be complete in early 2023 and is nearly 90% subscribed through 2029. We also recently completed two open seasons for additional pipeline capacity to address increased demand, one on our WesTex pipeline system in the Permian Basin, and one on our Viking pipeline in the upper Midwest.

[Kevin Burdick, EVP and CCO at ONEOK]

Both open seasons were successful, and we plan to move forward with low capital expansions on both systems. The value of our natural gas pipelines and storage assets continue to be highlighted in the outperformance we've seen from this segment so far this year. Pierce, that concludes my remarks.

[Pierce Norton, President and CEO at ONEOK]

Thank you, Walt and Kevin. As we enter the second half of 2022, we see producer activity and attractive commodity prices providing tailwinds to our business. We've affirmed our financial guidance for the year, underscoring the resiliency of our operations, earnings, and employees, who are always ready and willing to respond to changing market and operational dynamics. Challenges happen in our business, and weather is unpredictable, but how we respond is the real difference maker.

[Pierce Norton, President and CEO at ONEOK]

Operating safely, sustainably, and environmentally responsibly remains an important focus and is key to our success as a midstream operator. How we operate is important, but also how we engage with our employees, communities, and other stakeholders is also important. To learn more about our commitments in these areas, I encourage you to review our most recent corporate sustainability report, which was just published to our website last week.

[Pierce Norton, President and CEO at ONEOK]

The report details our most recent environmental, social, and governance-related performance and programs and highlights key initiatives underway across the company. Our ESG efforts are a source of pride for ONEOK, and we are committed to continuing to make progress in these important areas. With that, operator, we're now ready for questions.

[Operator]

Thank you, sir. For the interest of time, please limit your questions to only one and a follow-up question. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will take the first question from Jeremy Tonet from JPMorgan. Your line is open. Please go ahead.

[Jeremy Tonet, Managing Director and Senior Equity Research Analyst at JPMorgan]

Hi. Good morning.

[Pierce Norton, President and CEO at ONEOK]

Hey, good morning, Jeremy.

[Kevin Burdick, EVP and CCO at ONEOK]

Good morning.

[Jeremy Tonet, Managing Director and Senior Equity Research Analyst at JPMorgan]

Thanks. Just want to dig into Medford a little bit more, if possible. As we think about everything there, talked about not being material, but maybe you could help us to understand better what the threshold is for financial materiality there. Then just as far as kind of the parameters of what's happened with regards to volume offloads, where are those volumes going now, can you tell us? You said about the timeline being extended, and if this slips deeper into 2023 with this impact, might it impact your ability to offload volumes if volumes continue to grow?

[Pierce Norton, President and CEO at ONEOK]

Jeremy, I think I'll let Walt take the materiality question for us, and then we'll flip it over to Kevin and Sheridan on the offloads.

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

Well, Jeremy, I think that we're very comfortable with that comment. I'm not gonna give you our level of materiality. I will say that remember that our insurance coverage provides for a 45-day period, which we have as a standalone, and then we have business interruption insurance from that point forward. So we're very comfortable with the view of where we've come out from a materiality standpoint.

[Kevin Burdick, EVP and CCO at ONEOK]

Yeah. Jeremy, it's Kevin. On the volumes and where they're going right now, I mean, clearly a lot of them are going down to Mont Belvieu. We talked in our remarks about our industry peers that have been very helpful in securing spots for those barrels. We feel good about being able to move the volume, especially as we get to MB-5. Keep in mind, that's gonna be another 125,000 barrels a day of new capacity that will come online, you know, early in the second quarter. So that's the things we've got lined up there. Again, we feel good about being able to move the volumes.

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

One thing I'd add is we've been talking with our peers. We are very comfortable with our growth plans through 2023. Depending on how long this last, we'll be able to handle all of the volume coming in our system.

[Jeremy Tonet, Managing Director and Senior Equity Research Analyst at JPMorgan]

Got it. That's helpful. Thank you for that. Just want to pivot over towards IRA, if you could. Realize it's hot off the press, and it seems like the shape keeps changing a bit here on what the bill looks like. Just wondering, thoughts you could provide as far as how, as it currently stands, this might impact your tax profile in 2023 or going forward. As the bill is written right now, separately, would this increase or change your appetite to pursue CCS, renewables or other items like that?

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

Well, I'll handle the tax portion of that. You know, Jeremy, you're right, it's still off the presses and we're getting a lot of the details. I do think the late in the game addition of using tax depreciation versus book depreciation was a positive development for us. We don't see a real meaningful increase in our tax over the long term. We may have a little bit higher tax in the earlier years.

[Walt Hulse, CFO and EVP of Investor Relations and Corporate Development at ONEOK]

If we get into that alternative minimum tax at that 15%, that would be for an extended period of time where we would have otherwise gone to a statutory rate. While we expect, you know, some higher level of taxes, that addition to the tax depreciation was a big positive.

[Pierce Norton, President and CEO at ONEOK]

I'll take the question about CCUS. I'd like to remind everybody on the call that, you know, 36% of the natural gas demand in this country is devoted to electricity. You add to that 33% in the industrial sector. That's a total of almost 70% of the natural gas demand goes to those two forms of consumption. Anything that is done that would enhance the ability to capture carbon from natural gas being consumed is a good thing for our industry. These incentives, it's left to be seen exactly how effective they're going to be because we need to know the details.

[Pierce Norton, President and CEO at ONEOK]

It does encourage us as an industry and as a producer of natural gas and actually, you know, the liquids that are coming off the oil production and the natural gas production in these rich basins, that this will help to curb the CO2 emissions in the future. We do think that will open up some opportunities that we will look both at CCUS and hydrogen. I think it's a positive for the industry, what's happening.

[Jeremy Tonet, Managing Director and Senior Equity Research Analyst at JPMorgan]

Got it. That's helpful. I'll leave it there. Thanks.

[Operator]

We will take the next question from Brian Reynolds from UBS. Your line is open. Please go ahead.

[Brian Reynolds, Research Analyst at UBS]

Hi, good morning. Maybe touch a little bit on the 2022 reaffirmed guide. As it relates to the base business, ONEOK appears to expect to complete roughly 60% of its wells for the year in the back half of 2022. MidCon volumes, you know, look to be on track to surpass fourth quarter 2019 levels by year-end. I was just kind of curious if you could talk about, given the year-to-date impacts from weather and the Medford frac fire, how the base business is performing relative to initial year expectations in terms of activity. Thanks.

[Kevin Burdick, EVP and CCO at ONEOK]

I mean, I'll start, Brian, it's Kevin. I think the base business is performing very well. If you think about where we were going into the storms, we were right on track with everything that we had kind of outlined and laid out. The storms up in the Bakken did kind of set the basin back a couple of months, not just with the volumes flowing, but also, it was kind of a couple of months pause on or lower completions that we saw. It kind of delayed things, and that's the reason that we're gonna be at the lower end of the guidance from a volumetric perspective there.

[Kevin Burdick, EVP and CCO at ONEOK]

On the flip side, when you look at the NGL business and what they've done, both from an earnings perspective as well as a volumes perspective, and then the outperformance of the gas pipeline business, I think those two segments are performing at or better than we anticipated coming into the year. I think it sets us up nice going into 2023.

[Brian Reynolds, Research Analyst at UBS]

Great. Appreciate that color. A follow-up on the Medford frac. I know while it's probably a little bit too early, has there been any initial thoughts on potential replacement of the Medford frac and whether we could see it be built in Mont Belvieu or Conway at this time? Thanks.

[Kevin Burdick, EVP and CCO at ONEOK]

Brian, you hit it on the head. We're still really early in that process, and again, not ready to talk about, you know, timing or anything like that. We've got capacity secured, we believe, to move our volumes, and we'll keep working that until we get more information.

[Brian Reynolds, Research Analyst at UBS]

Fair enough. Enjoy the rest of your day, everyone. Thank you.

[Kevin Burdick, EVP and CCO at ONEOK]

Thank you.

[Operator]

Question from Michael Blum, Wells Fargo, your line is open. Please go ahead.

[Michael Blum, Managing Director and Senior Equity Analyst at Wells Fargo]

Thanks. Good morning, everyone. Apologies for maybe a technical question, but just so I understand it, are you going to be accruing insurance proceeds in your EBITDA results in third quarter and fourth quarter? That's how guidance is basically unchanged or is that not the case and you're just able to make it up in other areas?

[Kevin Burdick, EVP and CCO at ONEOK]

Michael, we expect to get timely recovery of our business interruption insurance. We will actually book that as we receive those proceeds. You know, that's why we said that we may have from time to time a little bit of a timing difference if we hit right at quarter end. We expect timely ongoing payments that would flow through our income statement in the normal way.

[Michael Blum, Managing Director and Senior Equity Analyst at Wells Fargo]

Okay, great. Thanks for that clarification. Also just wanted to ask about AECO gas prices, which are, you know, trading at a pretty big discount to Henry Hub. Can you just remind us how your NGL and recovery economics in the Bakken work? Will you benefit in any way from the decline in AECO gas prices? Thanks.

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

Michael, this is Sheridan. The way we buy gas at the inlet at the gas plant. We go and look at what we could sell gas at the gas plant versus what we could sell ethane in Mont Belvieu. Whatever the gas plant is receiving, that's what we can get. An AECO price is a factor in what the gas price we're receiving at the gas plant.

[Michael Blum, Managing Director and Senior Equity Analyst at Wells Fargo]

Got it. Thank you.

[Operator]

Next question from Colton Bean, Tudor, Pickering, Holt & Co. Your line is open. Please go ahead.

[Colton Bean, Managing Director at TPH]

Morning. The NGL segment had a fairly significant step-up in costs. You know, of the three drivers you mentioned, I think fuel, power, and then third-party services, do you expect an improvement in the back half of the year for any of those, or is second quarter level a pretty good run rate moving forward?

[Kevin Burdick, EVP and CCO at ONEOK]

Well, I think there are a couple of dynamics going on, Colton. The $30 million you referenced, really you got, you know, power costs were just higher, but we also had more volume, so you had more power just moving it there. Then we also had a turnaround in the second quarter, which caused us to go get some outside frac capacity during the quarter, and that's in there as well. Some of those costs will just float as power cost moves around. Some of the other costs were more one time.

[Kevin Burdick, EVP and CCO at ONEOK]

That's as we think going forward, we typically do more work like turnarounds and integrity work and other expense project type work. We'll do more of that in the summer when the weather's better. Historically, you might see a little stronger in the summer from a cost perspective on those types of activities.

[Colton Bean, Managing Director at TPH]

Understood. Just following up on the Bakken ethane discussion, I mean, it sounds like, you know, with the wider gap between AECO and Mont Belvieu pricing this quarter, would you expect any upside to that bundled rate just if you, if the incentive rate that you have to offer is now, you know, less of a discount than it would have been previously?

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

Colton, there's a lot of factors that go into that. Sometimes it impacts it, sometimes it doesn't. I think we have a good opportunity to incentivize more ethane in the second half of the year, so we're very bullish on that, but due to the regional gas prices. How it affects the overall average rate kind of depends on where the volume is coming from and the escalators that we have on our base business.

[Colton Bean, Managing Director at TPH]

Got it. Appreciate the time.

[Operator]

Next question from Theresa Chen from Barclays. Your line is open. Please go ahead.

[Theresa Chen, Managing Director at Barclays]

Hi. I just wanted to ask first on the $16.4 million increase in the NGL segment related to higher average fee rates. Can you tell us what that was related to precisely, and is that expected to carry forward?

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

Yeah, that was mainly related to inflationary escalators, for both fuel and power and inflation. We do have those inflationary escalators coming on throughout the year, so we do anticipate it will increase.

[Theresa Chen, Managing Director at Barclays]

Okay. Thank you. In your G&P segment, the $5.3 million increase due to the contract settlement during the quarter, should we expect some sort of offset in base earnings going forward as a result?

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

No, I don't believe you'll see any offset. It's just normal course of business on our large portfolio mix. You won't see any offset.

[Theresa Chen, Managing Director at Barclays]

Thank you.

[Operator]

Next question from Michael Lapides. Your line is open. Please go ahead. From Goldman Sachs.

[Michael Lapides, VP and Senior Equity Analyst at Goldman Sachs]

Hey, guys. Thank you for taking my question, and congrats on a really good quarter. Just curious, as you think about infrastructure needs going forward, given kind of some of the volume commentary about July volumes, how are you thinking over the next year or so about the need for either new processing or even a sixth frac at Mont Belvieu?

[Kevin Burdick, EVP and CCO at ONEOK]

Michael, this is Kevin. I mean, I think we're in really good shape as we've talked for the last several months. When you think about Demicks, with Demicks Lake III coming up, that gets us a nice headroom of capacity in the Bakken. We've talked about the available capacity that currently exists on Elk Creek, and then we've got low cost expansion opportunities if we need to expand that pipe.

[Kevin Burdick, EVP and CCO at ONEOK]

We just demonstrated we've got some expansion opportunities on West Texas as our volumes continue to grow out there, that we can expand that pipe in tranches. Plenty of capacity in the Mid-Continent. Obviously, with what's going on at Medford, frac capacity is tight and it's gonna remain that way until we get, you know, clarity on what's going on with Medford. Other than that, we're in excellent shape as we think about our capacities, and where we're at.

[Michael Lapides, VP and Senior Equity Analyst at Goldman Sachs]

If there's not really a need potentially, I mean, volumes could always surprise to the upside. If there's not really any need for any material new asset development in 2023, that implies that the capital budget kind of declines a ton, which, not a surprise. How's the board kind of thinking about capital allocation and uses of some of that significant free cash flow that you might be generating next year?

[Pierce Norton, President and CEO at ONEOK]

This is Pierce. The way we look at that is that we look at all the levers that's available to us. You know, we're gonna be looking at, as we get closer and closer to what Walt had mentioned about the 3.5x on the debt-to-EBITDA ratio, as we continue to go below 100% on our payout ratio, then that's gonna actually open up some of those other elements to us that we've had in the past. Of course, our first focus is gonna be on these organic opportunities because they give us the best chance to deploy, you know, capital that gives us really, really good rates of return.

[Pierce Norton, President and CEO at ONEOK]

We are proud of our ROIC that we've been able to achieve, and we are predicting that is gonna continue to go up. I think what it's gonna do is just give us more flexibility to use whatever levers that we feel like bring the most value to our shareholders.

[Michael Lapides, VP and Senior Equity Analyst at Goldman Sachs]

Got it. Thanks, guys. Much appreciated.

[Operator]

Next question from Chase Mulvehill from Bank of America. Your line is open. Please go ahead.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Hey, good morning. I wanted to come back to the G&P side of the business, and I guess a few questions. I guess, just correct me if I'm wrong, and I think your commodity or POP exposure is 15% to 20% this year. And then maybe just remind us again the gas versus NGL exposure on those POPs, and how much you have hedged versus open today. And then just maybe tie into there, kind of what you're thinking about, you know, realized G&P rates in the back half of the year.

[Kevin Burdick, EVP and CCO at ONEOK]

Chase, this is Kevin. You know, you're right. We provide the hedging information, that'll come out in our quarter, and we've provided that in the past. We are, you know, pretty well hedged, but prices have run up significantly, and we've been able to benefit from that, for the part of those contracts that aren't hedged. That's what you're seeing. And also, the other thing that's driving the price improvement is just what volumes are on what contracts. We've been fortunate to have some volumes come in on higher, in this case, higher POP-type contracts and been able to benefit from that.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Is it fair to assume in third quarter that a lot of your open volumes were natural gas as opposed to NGLs?

[Kevin Burdick, EVP and CCO at ONEOK]

Typically, from an open perspective, we hedge most of our commodities, you know, in a similar way. So you're not gonna have a higher percentage hedge necessarily of natural gas versus crude versus NGLs.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Okay. All right. If we go up to the NGL section and look at volumes and kind of where they are today, I think you said, you know, 360,000 barrels a day. If we go back and look back in April, you were doing 385,000 a day. We're not back to kind of, you know, April peak-ish levels. Yet G&P volumes in the Rockies are actually back to peak levels. Kind of help me connect the dots there. Is that Medford related or is there something else? And should we kind of ramp pretty quickly back to that 385,000?

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

I think in the first quarter announcement, this is Sheridan Swords, we came out and said we had reached 385,000, but we hadn't averaged 385,000. Actually, July at 360,000 will be our highest monthly average that we've had off the Bakken Pipeline. We continue to trend higher and as we get into August, we're trending even higher than that. From an NGL perspective on the Elk Creek Pipeline, we are back further than we were in the first quarter or even in the fourth quarter of 2021.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Okay. All right. Last one, just gonna squeeze one more in. I apologize. Just wanna confirm this. It sounds like, you know, obviously you're seeing, looking at Medford and trying to figure out when you can bring it back online. I just wanna confirm that it is not a total loss. You do not see it as a total loss at this point, correct?

[Chuck Kelley, SVP of Natural Gas Pipelines at ONEOK]

Well, I mean, the way I would say that, Rodney, is we are looking at all the pieces and parts to that facility right now. We'll be assessing that over the coming weeks as to exactly what pieces of equipment are still usable or not. We can't say emphatically right now that it's either a total loss or not a total loss. We're doing the assessments of that.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Okay. Got it. Thanks. I'll turn it back.

[Operator]

Next question from Craig Shere from Tuohy Brothers. Your line is open. Please go ahead.

[Craig Shere, Director of Research at Tuohy Brothers]

Good morning. Congrats on the quarter. One clarification on Medford. So, as far as new expense for third party fractionation or, you know, things that were contracted, you know, you ultimately get insurance recoveries, but doesn't this kind of at least limit optimization margin opportunities until something's resolved?

[Kevin Burdick, EVP and CCO at ONEOK]

Yeah. Craig, I think that we believe that we've got business interruption insurance for our entire business under that coverage and really don't see a meaningful difference from how our earnings would be sorted out in our normal guidance.

[Craig Shere, Director of Research at Tuohy Brothers]

Okay. Maybe this is expressing my own ignorance, and I apologize. You know, given the increased gas storage and storage pricing, I'm kind of assuming storage is more of a steady year-round product versus, you know, gas pipes that have more seasonality, since the storage has to fill. If that's the case, does the improving storage position in terms of capacity and pricing reduce your gas pipe seasonality?

[Chuck Kelley, SVP of Natural Gas Pipelines at ONEOK]

Craig, this is Chuck. No. See, the way we contract with our customers, frankly, these are firm fee-based contracts. What the customer tends to do is play seasonal spreads and utilize their transport and combined storage for optionality. From a pipe standpoint, we've got levelized fee earnings throughout the year. The optionality actually comes from the customer, but not the pipeline, or variability from the customer, not the pipeline.

[Craig Shere, Director of Research at Tuohy Brothers]

Gotcha. The increasing contribution of storage really doesn't impact seasonality.

[Chuck Kelley, SVP of Natural Gas Pipelines at ONEOK]

Could you repeat that?

[Craig Shere, Director of Research at Tuohy Brothers]

The fact that you're increasing the amount of storage, and the pricing is looking more attractive, that doesn't have any impact on the seasonality question.

[Chuck Kelley, SVP of Natural Gas Pipelines at ONEOK]

Correct. We're seeing a step-up in our storage revenues based on higher rates and the expansion that came online in April, and we'll have an additional expansion come online in April of 2023, where you'll see another step-up in our storage revenues.

[Pierce Norton, President and CEO at ONEOK]

Craig, the only thing I'd add to that, this is Pierce, is you know, post Winter Storm Uri, the value of storage has increased. We do have customers that lay that seasonal spread, and that benefit goes to them. We also have utilities that are putting gas into storage, you know, every single month during the summers, getting ready for that winter pull that they have during their peak demand from basically December through March.

[Craig Shere, Director of Research at Tuohy Brothers]

Gotcha. Thank you.

[Operator]

Next question from Jean Ann from Salisbury. Sorry, Jean Ann Salisbury from Bernstein. Your line is open. Please go ahead.

[Jean Ann Salisbury, Managing Director and Senior Equity Research Analyst at Bernstein]

Hi. Good morning. It looks like there's been some movement on the open season for gas takeaway options out of the Bakken, but it seems like they're targeting 2026, which is kind of a long time from now. Do you think that will be soon enough to not constrain gas growth out of the Bakken?

[Kevin Burdick, EVP and CCO at ONEOK]

Jean Ann, this is Kevin. Yeah, I think we feel good about the timing of that. You know, there's some other smaller scale things that have gone on up there that have created a little more capacity. We think that timing lines up pretty well with the kind of our outlook of where gas volumes go. I would remind you, there's still, we believe, you know, $300 to 400 million a day of Canadian gas that can be displaced coming out of the Bakken.

[Kevin Burdick, EVP and CCO at ONEOK]

There's capacity there that just may not, on the surface, look like it's there. In addition, we can always, if you get tight and we're, I say we, you know, we're wrong or we're a little bit late, you know, recover ethane to reduce the MMBtu that go into the pipe.

[Jean Ann Salisbury, Managing Director and Senior Equity Research Analyst at Bernstein]

Yes.

[Kevin Burdick, EVP and CCO at ONEOK]

We all in all, we feel good about where we're at.

[Jean Ann Salisbury, Managing Director and Senior Equity Research Analyst at Bernstein]

That makes sense. Thank you. There's been a trend of NGL integrated midstream companies buying G&P companies, which ONEOK has not really participated in. If this trend continues, do you see it potentially impacting your rates or your flows on the Gulf Coast negatively?

[Pierce Norton, President and CEO at ONEOK]

Well, I think I'll let Kevin get into the details of this, but you know, we believe that the positions that we have in the other basins are the right thing for us to pursue based on our positions with our assets and the you know the things that we see in the future.

[Pierce Norton, President and CEO at ONEOK]

I mean, it's you know could it have a downward pressure on you know some of the volumes? Yes. I'd remind everybody that the rates that we get as far as margins in the Permian and the Mid-Continent you know are some of our lowest ones. As far as having, you know, really material impact, we don't see that in the future. Kevin, you got anything to add to that?

[Kevin Burdick, EVP and CCO at ONEOK]

No, I'd just say that, you know, with some of those transactions, obviously we, you know, we take a look at a lot of things, but they just haven't been a fit for us. One of the things I would, you know, put out there is that, you know, many that we have continued to grow volumes on our West Texas LPG system. Many of those contracts have quite a bit of term left, and many of them are with producers, who have take-in-kind rights. Regardless who the processor is, we believe those volumes will stay with us. That's some of the other dynamics at play.

[Jean Ann Salisbury, Managing Director and Senior Equity Research Analyst at Bernstein]

Great. That's very helpful. That's all for me. Thank you.

[Pierce Norton, President and CEO at ONEOK]

Thank you.

[Operator]

The next question from Sunil Sibal from Seaport Global Securities. Your line is open. Please go ahead.

[Sunil Sibal, Managing Director and Senior Equity Research Analyst at Seaport Global Securities]

Yes. Hi, good morning, folks, and thanks for all the clarity on the volume trends. So, one question from me on the CapEx side of things. Could you talk a little bit about, you know, what kind of inflation trends you're seeing, you know, in terms of building costs, you know, versus what you had budgeted at the start of the year?

[Pierce Norton, President and CEO at ONEOK]

Yeah, from a cost perspective, we've probably seen more pressure on outside services, more than anything as we think about our projects. In many cases for the projects we were working on, especially MB-5 and Demicks Lake III, that equipment had been purchased years ago, before the projects were paused, so we had a lot of that taken care of.

[Pierce Norton, President and CEO at ONEOK]

On the new equipment that we're ordering and the new materials we're ordering, probably as much impact from a supply chain perspective just on a timeliness or schedule perspective than cost. Those are some of the things we're obviously watching closely and staying on top of. Hadn't impacted any of our schedule dates or our dollar amounts that we've got these projects approved for. We still feel very good that we're right on top of on budget and on schedule.

[Sunil Sibal, Managing Director and Senior Equity Research Analyst at Seaport Global Securities]

Okay. Thanks for that. One housekeeping question from me. It seems like, you know, in your reconciliation, you had called out a $10 million, you know, sequential decrease in the NGL segment from commodity price differentials. I thought the commodity price differentials kind of widened out a little bit in second quarter versus first quarter. Am I just looking at that correctly and I'm just curious about that line item?

[Kevin Burdick, EVP and CCO at ONEOK]

Sunil, this is Kevin. Yeah, that's just with our assets and with, you know, we've got assets in Conway and Mont Belvieu and storage. That's just the delta between, sometimes we have an opportunity to make money on as different prices by commodity. How different prices compare of the different commodities, in how we move barrels around and how we sell barrels. That $10 million was just sequentially lower than the first quarter, in that part of our business. It's all in—it's part of that kind of, you know, how we're optimizing our system.

[Sunil Sibal, Managing Director and Senior Equity Research Analyst at Seaport Global Securities]

Okay. Anything to read into that from, you know, for the second half of this year?

[Kevin Burdick, EVP and CCO at ONEOK]

No. That'll bounce around quarter to quarter just coming in the sequential comparison.

[Sunil Sibal, Managing Director and Senior Equity Research Analyst at Seaport Global Securities]

Got it. Thanks, thanks for all the color.

[Operator]

Next question from James Carreker from U.S. Capital Advisors. Your line is open. Please go ahead.

[James Carreker, Executive Director and Equity Research Analyst at U.S. Capital Advisors]

Hey, thanks for the question. Just thinking about the Medford outage, some more. Were those NGLs fractionated there largely sold into Conway, or were they sold down in Mont Belvieu? Just making sure that there's, you know, with that outage, there's sufficient pipe capacity to move incremental barrels down to Mont Belvieu to get fractionated.

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

James, this is Sheridan. We don't designate by frac where we sell barrels. With our integrated system, we can deliver barrels from any of our frac into the Mont Belvieu complex. With that frac being down, we can get these barrels into the Mont Belvieu complex, mainly because of our Arbuckle II asset that we had just brought online that we know had significant extra capacity on it for upside. We're able to deliver through the raw feed system down to Mont Belvieu.

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

If we need to, we can use the purity system to do that as well. Since we don't have any purities coming off the Medford fracs, we have a little bit extra capacity on that. From a pipeline perspective, we feel very good about getting the product into Mont Belvieu.

[James Carreker, Executive Director and Equity Research Analyst at U.S. Capital Advisors]

Thanks for that. I guess maybe one follow-up, maybe it's minor, but just noticed on this earnings presentation, you're now saying greater than $0.06 bundled rate on your Gulf Coast Permian volumes versus prior approximately $0.06. Is that maybe a trend that continues or any other color on what's going on there?

[Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing at ONEOK]

Yeah, a lot of it, I think we'll see our rates tick up a little bit, and you're seeing that because of the inflationary escalators that we have on our system.

[James Carreker, Executive Director and Equity Research Analyst at U.S. Capital Advisors]

Okay. Thank you.

[Pierce Norton, President and CEO at ONEOK]

Thank you.

[Operator]

It appears that there is no further question at this time. Mr. Andrew, I'd like to turn the conference back to you for any additional or closing remark.

[Andrew Ziola, VP of Investor Relations at ONEOK]

Our quiet period for the third quarter starts when we close our books in October and will extend until we release earnings in early November. We'll provide details for that conference call at a later date. Thank you all for joining us, and have a good day.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Andrew Ziola, VP of Investor Relations
• Chuck Kelley, SVP of Natural Gas Pipelines
• Kevin Burdick, EVP and CCO
• Pierce Norton, President and CEO
• Sheridan Swords, SVP of Natural Gas Liquids and Natural Gas Gathering and Processing
• Walt Hulse, CFO and EVP of Investor Relations and Corporate Development

Analysts

• Brian Reynolds, Research Analyst at UBS
• Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America
• Colton Bean, Managing Director at TPH
• Craig Shere, Director of Research at Tuohy Brothers
• James Carreker, Executive Director and Equity Research Analyst at U.S. Capital Advisors
• Jean Ann Salisbury, Managing Director and Senior Equity Research Analyst at Bernstein
• Jeremy Tonet, Managing Director and Senior Equity Research Analyst at JPMorgan
• Michael Blum, Managing Director and Senior Equity Analyst at Wells Fargo
• Michael Lapides, VP and Senior Equity Analyst at Goldman Sachs
• Sunil Sibal, Managing Director and Senior Equity Research Analyst at Seaport Global Securities
• Theresa Chen, Managing Director at Barclays