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Morningstar | Oneok Continues to Benefit From Healthy Volumes in 1Q; We Like Its Permian Strategy

Oneok reported a good first quarter amid a healthy increase in volumes across its assets. We plan to maintain our $70 fair value estimate and narrow moat rating. Overall EBITDA increased 12% over 2018 levels to $638 million, primarily benefiting from 8% and 7% increase in natural gas liquids (NGLs) and natural gas volumes, respectively. Key basins driving the increases were the Williston, Permian, STACK, and SCOOP areas, and we expect growth to continue given the strong demand-pull for NGLs to be moved to the Gulf Coast for use as feedstock in U.S. steam crackers or to be exported. The firm maintained its 2019 guidance of $2.6 billion in EBITDA and $1.9 billion in distributable cash flow, matching our expectations.

We like the firm's approach to expanding its midcontinent roots to the Permian Basin to take advantage of the NGL opportunity given the basin's rapidly growing volumes. Currently, Oneok serves the Permian via its West Texas LPG pipeline, where it recently acquired the remaining 20% of the asset to fully execute its strategy. The pipeline can carry 285,000 bpd, and Oneok plans to expand it to 365,000 bpd by the first quarter of 2020 and is moving NGLs from the Permian to Mont Belvieu. Oneok plans to connect the system with the Arbuckle II pipeline, which can initially carry 400,000 bpd of NGLs from the STOOP and STACK areas down to Mont Belvieu as well. The pipeline is due online in the first quarter of 2020 and can be expanded up to 1 million bpd. Now Oneok has obtained substantial exposure to Permian NGL volumes, expanded access for STOOP/STACK producers seeking to move barrels to Mont Belvieu, and could even convert the West Texas LPG pipeline to crude service if it's profitable to do so.

We also think Oneok is prudently managing its balance sheet. From a leverage standpoint, debt to EBITDA stands at 4 times. We expect this to increase to about 4.6 times by the end of 2019, due to Oneok's capital spending plans. However, as projects come online and contribute earnings, we expect Oneok to rapidly deleverage to around 3.3 times debt/EBITDA by 2022. Key projects include the Elk Creek pipeline, due online in the second half of 2019, which will initially move 240,000 bpd of NGLs from the Williston Basin to the midcontinent and can be expanded to 400,000 bpd. This project is adding much-needed capacity to the region, as the existing Bakken NGL and Overland Pass pipelines are maxed out. Oneok expects to earn a four to six times EBITDA multiple on its $1.2 billion investment. Similarly, we think Oneok is smart to add new gathering and processing capacity in the Williston Basin via its Derricks Lake I and II plants to capture gas that is being flared due to lack of infrastructure.

For more on our NGL forecast, please see our Observer published in July 2018, "The Natural Gas Liquids Rubik's Cube Solved."