ONEOK (NYSE:OKE) expected 2020 to be a banner year. It initially thought that its earnings would soar 25%, fueled by several recently completed expansion projects.

While the company did get off to a solid start in the first quarter, plunging oil prices forced many of its customers to reduce their production and drilling activities, and far fewer volumes will flow through the pipeline company's systems this year. That will take a big bite out of its growth expectations.

A quick review of ONEOK's first-quarter earnings

Metric

Q1 2020

Q1 2019

Year-Over-Year Change

Adjusted EBITDA

$700.8 million

$637.5 million

9.9%

Distributable cash flow

$522.3 million

$506.8 million

9%

Dividend coverage ratio

1.35 

1.43 

(5.6%)

Data source: ONEOK. 

ONEOK burst out of the gates in 2020. Earnings and cash flow surged 10% and 9%, respectively, which enabled it to generate enough cash to cover its 11.7%-yielding dividend with room to spare. The pipeline company benefited from across-the-board growth in all three business segments:

ONEOK's earnings by segment in the first quarter of 2020 and 2019.

Data source: ONEOK. Chart by the author.

Earnings in the natural gas liquids (NGL) segment grew 9% year over year, fueled by higher volumes in the Rocky Mountain region and Permian Basin. Driving that growth was the recent completion of several NGL-related projects, including a section of the Arbuckle II pipeline, a fractionation plant in Texas, and expanded capacity of the West Texas liquefied petroleum gas (LPG) pipeline system.

Natural gas G&P earnings, meanwhile, rose 5%, driven by higher volumes in North Dakota's Williston Basin. One factor fueling that growth was the recently completed the Demicks Lake II gas processing plant in that region.

Finally, earnings in the natural gas pipeline segment increased by 6%. The main driver was higher volumes as a result of expansion projects completed last year as well as increased rates.

Red pipelines at an oil storage terminal.

Image source: Getty Images.

A look at ONEOK's murky outlook for 2020

While ONEOK got off to a good start this year, market conditions have deteriorated significantly over the past several weeks because of crashing crude oil prices. Many of its producing customers have slashed their drilling budgets, which will affect volumes this year. Accordingly, the company has reduced its outlook. 

While ONEOK said it's "impractical" to provide guidance, it did perform a scenario analysis based on currently available information. Those calculations led it to estimate that adjusted EBITDA is likely to range between $2.6 billion and $3 billion. That's significantly below its previous guidance range of $3.1 billion to $3.35 billion. At the midpoint, this forecast implies about 9% earnings growth.

ONEOK also further reduced its capital spending plan for the year. It now expects to invest between $1.4 billion and $1.8 billion, down roughly $1 billion from its initial view and $500 million less than its prior revision. Driving the spending decline was the decision to pause construction on several projects, including the Bear Creek natural gas processing plant in North Dakota, a fifth NGL fractionator in Texas, and an additional expansion to West Texas LPG. By further reducing spending, ONEOK will keep the pressure off its balance sheet, which saw leverage rise to 4.86 times net debt-to-EBITDA at the end of the quarter, well above its sub-4.0 target.

The company spent more than $900 million on capital projects during the first quarter, leaving it with a significantly reduced investment level for the balance of the year. It had $530 million of cash, $2.5 billion of available credit, and a business that's generating more than $100 million of free cash flow each quarter after paying the dividend to finance this remaining capital commitment.

Adjusting quickly to weakening market conditions

ONEOK's customers have taken it on the chin this year as crashing crude prices are forcing them to reduce spending. That will have some impact on volumes, which will affect the company's earnings. It's also allowing the company to pause on some expansion projects since customers won't need that capacity as fast as expected. The reduced investment level will take some pressure off ONEOK's financial profile, which will help it maintain its high-yielding dividend.