Summary
- The vertical integration of ONEOK’s asset base, its pipeline connectivity from the Bakken to the Gulf Coast, and its footprint at both major hubs for natural gas liquids (NGL) are some of the key differentiators for OKE relative to peers.
- Complementing a stable base business, ONEOK has also prioritized growth, having completed more than $5 billion in growth projects in recent years.
- Maintaining or growing the dividend remains a focus for management as they look to build on a track record of more than 25 years with no dividend cuts.
Last week, management from ONEOK (OKE), including Walter Hulse, CFO, Treasurer, and EVP Investor Relations and Corporate Development, and Kevin Burdick, EVP and Chief Commercial Officer, participated in a fireside chat call series co-hosted by Morgan Stanley and VettaFi. As one of three midstream corporations in the S&P 500, ONEOK garners interest among a broad audience from midstream investors to generalists. Today’s note highlights key takeaways from the conversation for this diversified audience, including the unique benefits of OKE’s asset base and its capital allocation priorities.
Asset base: Integration from North Dakota to Texas.
The vertical integration of ONEOK’s asset base, its NGL pipeline connectivity from the Bakken to the Gulf Coast, and its footprint at both NGL hubs (Conway, KS, and Mont Belvieu, TX) are some of the key differentiators for OKE relative to peers. Management highlighted the integration across the natural gas and NGL value chain in the Bakken and Mid-Continent from gathering at the wellhead to natural gas processing to fractionation of NGLs into their components (propane, butane, etc.). OKE is the largest gathering and processing player in the Williston/Bakken and accounts for approximately 85% of the market share for NGL takeaway from the basin. In the Permian, OKE has both natural gas and NGL pipelines, with the NGL system feeding into its fractionation facilities at Mont Belvieu, where OKE is building its fifth fractionator (expected online in 2Q23). Production growth in the Bakken, Permian, and Mid-Con should help drive more volumes on to OKE’s systems.
Stable base business complemented by growth opportunities.
ONEOK’s integrated asset base provides stable cash flows driven by fees, as well as the opportunity to pursue growth projects at attractive returns. Management noted that approximately 90% of the company’s business is fee-based. Over the years, they have made progress in reducing commodity price exposure and strengthening the quality of their cash flows. Management prefers a conservative approach to ensure the company is well positioned for different energy cycles, with a focus on maintaining or growing the dividend (discussed more below).
Complementing a stable base business, ONEOK has also prioritized growth, having consistently grown its EBITDA every year since 2014. With more than $5 billion in projects completed in recent years, ONEOK is well positioned to capitalize on growing natural gas and NGL volumes from the areas where it operates without much additional spending. Leveraging existing assets, expansion projects can be done at attractive, above-market returns (i.e., 20-25% internal rate of return), driving more free cash flow for the company. Management strives to consistently improve return on invested capital (EBIT/Invested Capital). ROIC increased from 11.0% in 2017 to 13.6% last year.
Capital allocation prioritizes the dividend.
In terms of capital allocation, being in a position to maintain or grow the dividend is extremely important to the management team. OKE boasts more than 25 years with no dividend cuts – another differentiator among midstream peers. Beyond protecting the dividend, management has been focused on debt reduction and maintaining a strong balance sheet. With the significant backlog of growth projects completed in recent years, leverage trended higher. Management views 3.5x or lower leverage (net debt/annualized run-rate EBITDA) as its longer-term aspirational leverage goal, compared to leverage of 3.8x at the end of 2Q22. Continuing to lower leverage and getting the company’s payout ratio to a desired level are areas of focus. Once those boxes are checked, the leadership team may be in a better position to consider dividend increases and buybacks if appropriate.
Bottom Line
ONEOK has several points of differentiation relative to many of its peers, from its inclusion in the S&P 500 to its north-to-south NGL connectivity to its dividend track record.
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