Pipeline giant ONEOK (OKE 0.75%) capped a transformational year by delivering earnings that were just above the midpoint of its guidance range in the fourth quarter. The company benefited not only from the acquisition of its former MLP but also from continued improvement in energy market conditions, which fueled increasing volume across its systems. That growth appears poised to continue for quite some time given the volume of expansion projects the company has lined up over the past few months.
ONEOK results: The raw numbers
|
Metric |
Q4 2017 |
Q4 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA |
$547.7 million |
$474.1 million |
15.5% |
|
Distributable cash flow (DCF) |
$366.0 million |
$318.3 million |
15% |
|
Distribution coverage ratio |
1.28 times |
1.41 times |
(9.2%) |
Data source: ONEOK. EBITDA = earnings before interest, taxes, depreciation, and amortization.
Data source: ONEOK. Chart by author. In millions of dollars.
What happened with ONEOK this quarter?
Liquids led the way:
- Adjusted EBITDA in ONEOK's natural gas liquids (NGLs) segment rose 22% versus last year's fourth quarter, pushing its full-year total up 7% from 2016. Volume growth across ONEOK's system rose due to increased supply and a higher volume of ethane recovered from natural gas production.
- The natural gas gathering and processing segment also delivered higher earnings during the quarter, up 14% year over year, pushing its full-year total 16% ahead of 2016's level. Driving the improvement were higher volumes as producers become more efficient, as well as from recently completed growth projects.
- The only weak spot during the quarter was the natural gas pipeline segment, where earnings dipped versus last year primarily due to increased operating costs. However, full-year results rose 9%, thanks in part to the completion of the WesTex Pipeline expansion at the end of 2016.
- For the full year, ONEOK produced $1.99 billion of adjusted EBITDA, which was 7% higher than 2016 and just above the midpoint of its $1.86 billion to $2.06 billion guidance range. DCF, meanwhile, rose about 5% to $1.38 billion and was also just above the midpoint of its $1.28 billion to $1.44 billion guidance range.
- The dividend coverage ratio, on the other hand, declined because ONEOK increased the payout and issued stock to finance its expansion initiatives.
Image source: Getty Images.
What management had to say
CEO Terry Spencer commented on the results:
Producer activity and production results increased across ONEOK's operating footprint in 2017, driving volume growth and adjusted EBITDA increases compared with 2016. We continue to see production growth, largely driven by improved producer drilling economics and higher rig efficiencies.
A more stable energy market, along with increased drilling efficiencies, enabled producers to earn higher returns on new wells. That incentivized them to complete more locations last year, which fueled higher volumes across much of ONEOK's operating areas, especially in its key STACK and Bakken regions.
Looking forward
ONEOK expects those improving market conditions to persist in 2018, which should be a big year. Overall, ONEOK expects adjusted EBITDA to be in the range of $2.215 billion to $2.415 billion this year, up 16.5% at the midpoint from 2017. Likewise, DCF should rise to a range of $1.615 billion to $1.815 billion, an increase of 23.9% at the midpoint from last year.
ONEOK believes it can continue growing at a fast pace over the next few years, fueled in part by upcoming growth projects. Since last June, the company has lined up $4.2 billion of high-return expansions, including announcing another $2.3 billion last week. These projects should enter service through early 2020, providing the company with the fuel for increasing its dividend at a 9% to 11% annual rate through 2021.
