Business Overview and History: ONEOK, Inc. (OKE) is a leading midstream service provider, specializing in the gathering, processing, storage, and transportation of natural gas, natural gas liquids (NGLs), and crude oil across the United States. With its extensive asset footprint, strategic acquisitions, and commitment to operational excellence, ONEOK has solidified its position as a dominant player in the energy infrastructure space.
Incorporated in 1906 and headquartered in Tulsa, Oklahoma, ONEOK has a rich history spanning over a century. The company started as Oklahoma Natural Gas Company, providing natural gas distribution services in Oklahoma. Over the decades, ONEOK expanded its operations and evolved into a diversified midstream player, expanding its operations across the Midwest, Rocky Mountain, and Gulf Coast regions.
In the 1980s, ONEOK underwent a significant transformation, shifting its focus towards natural gas gathering, processing, transportation, and storage services. This strategic pivot allowed the company to capitalize on the growing demand for midstream infrastructure across the United States. During this period, ONEOK made several key acquisitions, including the purchase of natural gas liquids (NGL) assets from BP in 1998, which significantly expanded its NGL business.
The early 2000s marked another important phase in ONEOK's evolution. The company restructured and spun off its natural gas distribution business, allowing it to concentrate solely on its midstream operations. This strategic move enabled ONEOK to invest heavily in developing its asset base and diversifying its service offerings.
In 2019, ONEOK reached a significant milestone with the construction of the Elk Creek NGL pipeline, further enhancing its infrastructure capabilities. More recently, in 2023, ONEOK made a transformative move by acquiring Magellan Midstream Partners for $14.1 billion, further strengthening its presence in the refined products and crude oil transportation and storage segments. This strategic acquisition has already begun to bear fruit, with the company reporting strong synergies and operational efficiencies in the integration process.
While ONEOK's growth trajectory has been largely positive, the company has also faced challenges. In 2022, a fire occurred at its Medford, Oklahoma NGL fractionation facility, causing significant operational disruptions. However, ONEOK demonstrated its resilience by quickly resolving the issue, reaching a settlement with its insurers, and restoring full operations at the facility.
Financial Snapshot: ONEOK's financial performance has been robust, with the company reporting strong revenue and earnings growth in recent years. In 2023, the company generated revenue of $17.68 billion and net income of $2.66 billion, or $5.48 per diluted share. The company's operating cash flow for the year was $4.42 billion, and it generated $2.83 billion in free cash flow.
The company's strategic acquisitions have contributed significantly to its financial results. In the first three quarters of 2024, ONEOK reported revenue of $14.70 billion and net income of $2.11 billion, or $3.60 per diluted share. The company's adjusted EBITDA for the same period was $4.61 billion, a notable increase from the $3.73 billion reported in the first three quarters of 2023.
In the most recent quarter (Q3 2024), ONEOK reported revenue of $5.02 billion, net income of $693 million, operating cash flow of $1.59 billion, and free cash flow of $2.29 billion. Revenues increased 20% year-over-year, driven by higher commodity sales and services revenue. Net income increased 53% year-over-year due to the continued strength in the Rocky Mountain region, increased transportation services in the Natural Gas Pipelines segment, and a full quarter contribution from the Refined Products and Crude segment following the Magellan Acquisition in 2023.
ONEOK operates primarily in the United States, with significant assets and operations in the Midcontinent, Permian, and Rocky Mountain regions. The midstream energy industry has seen steady growth in recent years, driven by increased production of natural gas, NGLs, and crude oil from shale plays. The compound annual growth rate (CAGR) of ONEOK's revenues over the past 3 years is approximately 12%.
Liquidity: ONEOK's balance sheet remains strong, with a debt-to-capital ratio of 0.62 as of September 30, 2024. The company's liquidity position is also solid, with $6.46 billion in cash and cash equivalents, including funds set aside for the EnLink and Medallion acquisitions. As of December 31, 2023, ONEOK reported cash and cash equivalents of $338 million, a debt-to-equity ratio of 1.32x, a current ratio of 0.90x, and a quick ratio of 0.65x.
ONEOK has a $2.5 billion revolving credit facility that expires in June 2028. As of September 30, 2024, ONEOK had no outstanding borrowings under this facility, providing additional financial flexibility.
Operational Highlights and Strategic Initiatives: ONEOK's operational performance has been impressive, with the company reporting record volumes in several of its business segments. In the Natural Gas Liquids segment, the company saw a 7% year-over-year increase in Rocky Mountain NGL volumes during the third quarter of 2024, driven by higher propane and butane production. The Refined Products and Crude segment also delivered strong results, with refined products volumes reaching a new high of 1.6 million barrels per day.
To support its continued growth, ONEOK has invested significantly in strategic capital projects. The company's MB-6 fractionator and West Texas NGL pipeline expansion projects are on track for completion by the end of 2024, adding much-needed capacity to serve the growing Permian Basin. Additionally, the Elk Creek pipeline expansion in the Rocky Mountain region is expected to be completed in the first quarter of 2025, further enhancing ONEOK's NGL transportation capabilities.
The recent acquisitions of EnLink and Medallion have also opened up new avenues for growth and synergies. ONEOK is now well-positioned to leverage its expanded asset base and geographic footprint to provide integrated midstream services to producers and customers across its footprint, particularly in the Permian Basin and Louisiana markets.
ONEOK operates through four reportable business segments:
1. Natural Gas Gathering and Processing Segment: This segment gathers, treats, processes, and markets natural gas, generating revenue primarily from the sale of residue natural gas, NGLs, and condensate, as well as gathering, compression, dehydration, and processing fees.
2. Natural Gas Liquids (NGL) Segment: The NGL segment gathers, treats, fractionates, and transports NGLs, and stores, markets, and distributes Purity NGLs. Revenue is generated primarily from the sale of NGL and condensate products, as well as exchange services and transportation and storage fees.
3. Natural Gas Pipelines Segment: This segment transports and stores natural gas, generating revenue primarily from transportation and storage services.
4. Refined Products and Crude Segment: Expanded significantly in 2023 through the Magellan Midstream Partners acquisition, this segment transports, stores, distributes, blends, and markets refined products and crude oil.
Risks and Challenges: While ONEOK's growth trajectory appears promising, the company is not without its risks. The midstream industry is subject to fluctuations in commodity prices, which can impact the company's profitability. ONEOK's fee-based business model and hedging strategies have helped mitigate this risk, but the company remains exposed to some degree.
Additionally, the successful integration of the recent acquisitions, particularly EnLink and Medallion, will be critical to ONEOK's long-term success. The company must effectively leverage synergies, optimize operations, and seamlessly integrate the new assets into its existing infrastructure to realize the full potential of these transactions.
Regulatory and environmental compliance also pose ongoing challenges for ONEOK. The company must navigate a complex web of regulations and ensure the safe and responsible operation of its assets, which can be capital-intensive and time-consuming.
Outlook and Conclusion: ONEOK's strategic acquisitions, diversified asset base, and commitment to operational excellence have positioned the company for continued growth and success. The company's recent guidance update for 2024, which includes contributions from EnLink and Medallion, reflects its confidence in its ability to drive synergies and capitalize on emerging opportunities.
ONEOK has increased its full-year 2024 financial guidance on a stand-alone basis for the second time this year. The company's stand-alone 2024 adjusted EBITDA guidance, which excludes contributions from EnLink and Medallion, is well over double ONEOK's adjusted EBITDA just five years ago.
For 2024, ONEOK announced consolidated financial guidance, including contributions from EnLink and the pending Medallion acquisition, but excluding transaction costs. The consolidated guidance projects a net income midpoint of approximately $3 billion and an adjusted EBITDA midpoint of $6.625 billion. On a stand-alone basis (excluding EnLink and Medallion), ONEOK expects a net income midpoint of $2.945 billion and an adjusted EBITDA midpoint of $6.275 billion, which is $100 million higher than the previous guidance increase in April 2024.
Total stand-alone capital expenditures, including growth and maintenance, are expected to be in the range of $1.75 billion to $1.95 billion in 2024. Looking further ahead, ONEOK expects its total combined EBITDA for 2025 to be comfortably above $8 billion, which is double ONEOK's EBITDA run rate prior to the Magellan acquisition just two years ago.
ONEOK anticipates pro forma 2025 and year-end net debt-to-EBITDA of approximately 3.9x and expects leverage to trend towards their previously announced target of 3.5x in 2026.
With a strong balance sheet, robust cash flow generation, and a proven track record of disciplined capital allocation, ONEOK appears well-equipped to navigate the evolving energy landscape. As the company continues to execute on its strategic initiatives and integrate its recent acquisitions, investors may find ONEOK's story compelling in the years to come.