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Morningstar | Oneok Announces $1.5 Billion in New Projects, Takes Advantage of Tight Fractionation Market

Oneok announced $1.5 billion in natural gas liquids and natural gas projects, reflecting the strong growth prospects for U.S. NGL production. We don't expect a material change in our $62 fair value estimate or narrow moat rating, but we view the investments positively, given the low 4 times to 6 times EBITDA multiple.

We're particularly pleased to see the $750 million fractionation expansion, which we think reflects a tightening of capacity at Mont Belvieu, as it not only allows Oneok to add 125,000 barrels per day of capacity but lays the groundwork for future expansions. We anticipate fractionation capacity at Mont Belvieu will be around 3.7 million bpd in 2022, up from 2.2 million bpd currently. Oneok's announcement takes the amount of under construction fractionation capacity at Mont Belvieu by the industry to 1.125 million bpd, so there's at least another 375,000 bpd of capacity needed, by our estimates. The announcement follows the earlier Oneok announcement of a 125,000 bpd fractionator (MB-4) in February 2018 at a cost of $575 million, demonstrating the growing opportunity. The lack of fractionation capacity has prompted new construction announcements, but it also means opportunities to earn more fees from owning storage capacity at Mont Belvieu, where we estimate Oneok has over 20 million barrels of storage capacity. Finally, as we believe the end goal for many of these NGL molecules is being exported internationally, it presents opportunities for future investment by Oneok in export infrastructure (it does not have any export assets presently), which it has been considering for some time. These assets would let Oneok earn incremental fees, as it currently takes advantage of marketing agreements with third parties for this last-mile effort.

Funding for these projects is anticipated to be via debt and excess distribution coverage, as Oneok does not anticipate any equity issuance in the near term.

The projects include a $750 million investment in a new 125,000 barrel per day fractionator (MB-5) and related infrastructure, and a $300 million investment in a 100,000 bpd extension to the Arbuckle II pipeline and related gathering infrastructure, supporting volume growth in the STACK play. These projects will be completed in the first quarter of 2021. Finally, Oneok will also invest $460 million into a 200 million cubic feet per day natural gas processing facility (Dernicks II) located in the Williston Basin, to be completed in the first quarter of 2020.

For more on our NGL forecast, please see our July Energy Observer "The Natural Gas Liquids Rubik's Cube Solved."