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Morningstar | Oneok Reports Strong Quarter; Boosts Guidance to Match Our Expectations

Oneok reported a strong second quarter and boosted its 2018 EBITDA guidance to a midpoint of $2.35 billion from $2.315 billion, which essentially matches our $2.36 billion forecast. As a result, we plan to maintain our $62 fair value estimate and narrow-moat rating. Oneok's assets are well located in the Scoop/Stack and Permian basins, and will benefit as steam crackers start up over the next few years, pulling ethane to the Gulf Coast and boosting volumes. Unsurprisingly, natural gas volumes processed increased 19% and natural gas liquids volumes gathered and fractionated jumped 12%. Ethane volumes on the system increased 60,000 bpd from last year, while ethane rejection dipped to 140,000 bpd from over 150,000 bpd over the same time frame.

We eventually expect ethane rejection to disappear over the next few years due to higher steam cracker demand. Similar to this quarter, where Oneok benefited from wider differentials at its marketing operations, lower ethane rejection will continue to drive marketing profits higher. Given the positive trends in volumes and marketing, overall EBITDA increased 30% from last year's levels to $602 million. We expect these trends to continue to drive Oneok's results over the next few years, aided by an over $4 billion organic investment program. Notably, the program means that the existing debt/EBITDA ratio of 3.4 times will increase to over 4.5 times in 2019 and before returning to 4 times in 2021 as the assets become operational, by our estimates.

Oneok's latest investment was the acquisition of the remaining 20% of the West Texas LPG system it did not own for $195 million, which closed at the end of July. This pipeline consists of 2,600 miles of NGL pipelines in Texas and New Mexico, primarily providing takeaway capacity in the Permian basin. As we expect the Permian to be one of the key sources of rising NGL production over the next five years, full ownership of this type of infrastructure will provide additional investment opportunities for Oneok as NGL volumes continue to increase. With ownership across gathering and processing, pipelines, and fractionation assets, Oneok still has a hole in its portfolio in terms of propane and ethane export terminal assets, which we think would be a very profitable fee-based income addition. Oneok has been strongly considering this type of opportunity for a while, mostly likely as part of a joint venture. With peers racing ahead to build terminals to take advantage of the opportunity, Oneok's window is closing a bit. However, it already has the international relationships and market access required to move its NGLs to the export market. This means the firm can take advantage of wider international differentials, but will simply pay a third party a fee for some of the final steps in the process.

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