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The oil and gas market is in the middle of its worst downturn in decades. However, thanks to a proactive approach, ONEOK (OKE 1.28%) and ONEOK Partners (OKS) have avoided some of the problems that are plaguing their peers. That plan included growing volumes and fees, which drove solid second-quarter results at both companies. As a result, they remain on pace to meet their full-year targets.

Drilling down into the numbers

ONEOK reported cash flow available for dividends of $171.8 million, up 14.8% over last year's second quarter. Driving this growth was a 15.4% increase in income received from ONEOK Partners, with that revenue growth fueled by the solid results across all three of its segments.

Adjusted EBITDA


Q2 2016 Actuals

Q2 2015 Actuals

 Growth (YOY)

Natural gas liquids

$276.6 million

$244.6 million


Natural gas gathering and processing

$110.3 million

$78.1 million


Natural gas pipelines

$68.5 million

$65.2 billion


Data source: ONEOK Partners.

The natural gas liquids segment benefited from an increase in volumes from recently connected natural gas processing plants in the Williston Basin and Mid-Continent regions. Overall, NGLs fractionated were up 10% while NGLs transported were up 3%. Partially offsetting these gains were lower minimum volume obligations, as well as lower short-term contracted volumes in the Gulf Coast region.

Contract restructuring fueling the natural gas gathering and processing segment's stunning rise after the company switched additional customers from percent-of-proceeds contracts to fee-based contracts. Those restructuring efforts alone boosted rates in that segment by 12% compared with last quarter. In addition, the company profited from higher natural gas volumes in the Williston basin because of projects that went into service. This development more than offset lower realized NGL and natural gas prices.

Finally, the natural gas pipeline segment benefited from higher transportation revenue as a result of an increase in firm demand charges.

ONEOK Partners' solid operating results fueled a 32.6% increase in its distributable cash flow. That pushed the company's distribution coverage ratio up to a very solid 1.15, well above the worrisome rate of 0.88 in the year-ago quarter. Meanwhile, dividend coverage at ONEOK remains very firm at 1.33, which is up from 1.18 in the year-ago quarter.

A look at the outlook

ONEOK's focus on increasing its fee-based earnings puts it in a stable position for the balance of the year, no matter what commodity prices do. That's why ONEOK Partners is maintaining its full-year guidance to produce approximately $1.39 billion of distributable cash flow. ONEOK, likewise, is maintaining its full-year guidance, which projects cash flow available for dividends of $675 million.

In addition, ONEOK Partners announced that it anticipates completing the second phase of its Roadrunner Gas Transmission pipeline and its WesTex Transmission pipeline in the fourth quarter, which is earlier than expected. Both projects are fully contracted and therefore will begin generating fees ahead of schedule.

Investor takeaway

ONEOK Partners mitigated most of its direct exposure to commodity prices over the past few quarters by switching additional customers to fee-based contracts. This move is paying big dividends, because it's removing some of the downward pressure on earnings. As a result, ONEOK and ONEOK Partners are on pace to deliver a solid year despite the turmoil that surrounds them.