ONEOK's (NYSE:OKE) operational and financial results bounced back big time during the third quarter as its natural gas liquids (NGL) volumes topped their pre-pandemic level. Fueling the brisk improvement were recently completed expansion projects and the return of shut-in volumes from the second quarter thanks to improving commodity prices. These factors helped shore up the foundation under the pipeline company's nearly 13%-yielding dividend. 

Drilling down into ONEOK's third-quarter results

Metric

Q3 2020

Q3 2019

Year-Over-Year Change

Adjusted EBITDA

$747.0 million

$649.8 million

15%

Distributable Cash Flow

$540.9 million

$480.9 million

12.5%

Dividend Coverage Ratio

1.3 times

1.31 times

0%

Data source: ONEOK.

ONEOK's earnings soared thanks to across-the-board improvements:

ONEOK's earnings in the third quarter of 2020 and 2019.

Data source: ONEOK. Chart by the author.

NGL earnings jumped 23% from the year-ago period thanks to higher volumes and lower rail transportation and pipeline costs. Other factors driving the higher volumes included the connection to five new natural gas processing plants this year -- including ONEOK's Demicks Lake II -- and three expanded connections to existing plants.

Natural gas gathering and processing earnings improved by 4% year over year. This segment benefited from Demicks Lake II, higher fees, improving commodity prices, and lower costs.

Finally, earnings in the natural gas pipelines segment increased by 6% from last year thanks to additional capacity contracts on its Northern Border Pipeline and lower costs.

Several pipelines with the sun shining brightly.

Image source: Getty Images.

A look at what ONEOK sees ahead

ONEOK's volumes and earnings rebounded significantly from the second quarter (more than 25% across most metrics) thanks to improving market conditions. CEO Terry Spencer noted that "NGL volumes across all of our operating areas have exceeded pre-pandemic levels, and natural gas volumes processed in the Rocky Mountain region have exceeded 1.2 billion cubic feet per day. Volumes achieved in September were more in line with our original pre-pandemic 2020 expectations."

Because of that, the company has increased earnings visibility. As such, it now expects its adjusted EBITDA to approach the midpoint of its revised guidance range of $2.6 billion to $3 billion. That would put it at about 8.5% above last year's level. While that's well below its initial outlook that EBITDA would surge 25% this year, it's also not as bad as initially feared when the oil market first cratered due to the COVID-19 outbreak. 

The company has also made significant progress on its expansion projects this year. It finished the 75-mile Bakken NGL pipeline lateral and Arbuckle II pipeline expansion in August. As a result, it has substantially completed all its currently active projects, which should reduce its annual capital spending run rate to about $300 million to $400 million until market conditions improve (more than $1 billion below this year's spending level).

With its financial results improving and major capital spending complete, ONEOK is starting to generate excess cash after funding its dividend and capital expenses. That's giving it the funds to begin chipping away at its debt and drive its leverage ratio down from its current level of 4.6 times net debt-to-adjusted EBITDA.

A swift recovery

Volumes flowing into ONEOK's various midstream systems rebounded sharply during the third quarter as oil and gas producers restarted idled wells. That helped fuel more cash into the company's coffers, giving it enough to pay its high-yielding dividend and shrinking capital expenses with room to spare. If that trend continues, the company should be able to maintain its payout.  

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