Oil prices nosedived during the second quarter because of COVID-19. Prices got so low that producers started shutting in some of their production to save money. That impacted pipeline volumes, taking a bite out of ONEOK's (NYSE:OKE) cash flow during the second quarter. 

Drilling down into ONEOK's second-quarter results

Metric

Q2 2020

Q2 2019

Year-Over-Year Change

Adjusted EBITDA

$533.9 million

$632.4 million

(15.6%)

Distributable cash flow

$300.5 million

$540.5 million

(44.4%)

Dividend coverage ratio

0.78 times

1.51 times

(48.3%)

Data source: ONEOK.

ONEOK's earnings and cash flow plummeted during the second quarter, primarily because of the impact volume curtailments had on two of its three business segments:

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

Data source: ONEOK. Chart by author.

Earnings from natural gas liquids (NGL)-related assets slumped 7.5% year over year during the second quarter. Several factors weighed on these results, including lower optimization and marketing earnings and the impact of production curtailments resulting from low oil prices.

Gas gathering and processing earnings plummeted 52.5% year over year. Dual headwinds from production curtailments and the impact of lower commodity prices on its percent of proceeds contracts drove down earnings.

On a brighter note, earnings in the company's natural gas pipelines segment rose 9% from the year-ago period. That's due to higher transportation services revenue and a contract settlement.

A natural gas well with pipelines at sunset.

Image source: Getty Images.

A look at what's ahead for ONEOK

While the second quarter was brutal, "the trends we are seeing in all of our operating areas are improving," according to CEO Terry Spencer. He further pointed out that "volumes on our systems are sharply increasing as our customers bring production back online with improvements in commodity prices, which is positive for our business in the second half of the year."

However, a new issue emerged in recent weeks as courts ordered the shutdown of two key oil pipelines in North Dakota. That has the potential to affect ONEOK's operations in the region. Between that and the continued uncertainty in the oil market, the company now expects its 2020 financial results to be at the low end of its revised guidance range. This forecast implies adjusted EBITDA closer to $2.6 billion and distributable cash flow of around $1.785 billion. That's well below its initial ranges ($3.1 billion-$3.35 billion of adjusted EBITDA and $2.245 billion-$2.505 billion of distributable cash flow) and down slightly from last year's tally ($2.58 billion in adjusted EBITDA and $2.02 billion of distributable cash flow). 

On a positive note, that's just enough money to cover the company's dividend, which will be around $1.6 billion this year. ONEOK also has $300 million to $400 million of remaining capital spending this year, which it can cover with its current liquidity. The company ended the quarter with $945 million in cash and $2.5 billion on its undrawn credit facility following two recent bond offerings and a stock sale to bolster its financial flexibility. That equity offering helped improve its leverage ratio from 4.86 times debt-to-EBITDA at the end of the first quarter to a more comfortable 4.5 at the end of the second.

A brutal quarter, but better days seem to be ahead

Crashing crude prices in the second quarter forced many of ONEOK's customers to shut off their oil pumps, affecting the volume of gas and NGLs it handled and the associated cash flow. While the industry is restarting its pumps, other headwinds are likely to keep the company's earnings to the low end of its revised guidance.

On a more positive note, the company took several steps to shore up its balance sheet this year, which should enable it to maintain its big-time dividend. Meanwhile, earnings could bounce back sharply next year if oil keeps improving. However, risks to the dividend remain since another deep dive in crude oil prices might force ONEOK to reduce its payout. Income investors might want to hold off on buying until there are clear signs that the oil market is back on solid ground.