ONEOK (NYSE:OKE) has been busy over the past few months. It closed the acquisition of its master limited partnership, shored up the balance sheet, secured several new growth projects, and significantly increased the dividend. That's in addition to operating well during the second quarter, delivering a slight bump in earnings thanks to rising volumes and fees. That kept the company on pace to hit its full-year guidance, though it did narrow the range a little bit.

ONEOK results: The raw numbers


Q2 2017

Q2 2016

Year-Over-Year Change

Adjusted EBITDA

$462.3 million

$460.2 million


Distributable cash flow

$330.1 million

$345.4 million


Distribution coverage ratio

1.5 times

1.62 times


Data source: ONEOK. EBITDA = earnings before interest, taxes, depreciation, and amortization.

Pipelines under the setting sun.

Image source: Getty Images.

What happened with ONEOK this quarter? 

Rising volumes and fees drove earnings higher:

  • Adjusted EBITDA in ONEOK's natural gas liquids segment slipped 1.2% from the year-ago period to $273.3 million. While the company benefited from higher volumes, narrower prices and higher operating costs due to the timing of routine maintenance projects offset the positives.
  • Natural gas gathering and processing segment earnings rose 16.3% versus last year to $128.3 million. Higher volumes and higher average fee rates as a result of recently restructured contracts more than offset increased costs and the slight impact of lower realized prices.
  • Earnings in the natural gas pipeline segment jumped 17.8% to $80.7 million thanks to higher rates, which more than offset an increase in operating costs due to the timing of maintenance projects.
  • While adjusted EBITDA increased, distributable cash flow came in a bit lower due to a decrease in distributions from unconsolidated affiliates, which declined from $62 million in the year-ago quarter to $49.8 million in the second quarter. 
  • That drop in distributable cash flow was the driver of the lower coverage ratio. That said, at 1.5 times it's well above average for the industry, which allowed the company to move forward with the planned 21% dividend increase upon closing the acquisition of its MLP.
  • The close of that transaction also triggered a credit rating increase, which enabled ONEOK to borrow money at cheaper rates. The company took full advantage of that last month by completing $1.2 billion of debt offerings for rates between 4% and 4.95%. It used some of that cash to repay half of its $1 billion term loan due in 2019 while also redeeming $87 million of its 6.5% notes due in 2028 and paying down its credit facility. Even after those moves the company still had $332.4 million of cash left over to help finance growth projects.
  • That cash position will come in handy since the company secured $330 million of growth projects during the quarter.

What management had to say 

CEO Terry Spencer commented on the quarter, saying:

Solid second-quarter financial results were led by strong volume growth in our natural gas gathering and processing segment in both the Williston Basin and the STACK and SCOOP areas. Producer activity remains strong in the STACK and SCOOP and in the core areas of the Permian and Williston basins.

As Spencer points out, shale drillers are ramping back up in several key plays, which drove volumes higher in many of its operating areas. Those improving volumes enabled the company to secure several expansion projects during the quarter to support the growth of its customers. For example, the company announced in June that it secured long-term contracts with EnLink Midstream Partners (NYSE: ENLK) and EnLink Midstream (NYSE:ENLC) that support the expansion of its mid-continent natural gas liquids gathering system and its Sterling III Pipeline in the STACK play of Oklahoma.

The company expects to spend $130 million to bring these projects into service by the end of next year. In addition to that, the company plans to double the processing capacity of its Canadian Valley gas processing facility in the STACK, which should start service by 2019. Supporting the $155 million to $165 million project are fee-based contract commitments from producers. These projects increase the confidence that ONEOK can deliver on its plan to grow the dividend by a 9% to 11% annual rate from 2018 through 2021.

Looking forward 

With two solid quarters in the books, ONEOK has a bit more clarity on what to expect for the full-year. As such, the company is narrowing its guidance for adjusted EBITDA, which is sees coming in the range of $1.89 billion to $2.06 billion. That's slightly lower than the midpoint of its prior range of $1.87 billion to $2.13 billion due to the expectation that it will gather fewer NGLs this year.

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