ONEOK, Inc. (OKE) Earnings Call Transcript & Summary

Good morning, and welcome to ONEOK's Second Quarter 2026 Earnings Call. As a reminder, this call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Megan Patterson, Vice President, Investor Relations. Megan, please go ahead.

Thank you, Jess. Welcome to ONEOK's Second Quarter 2026 Earnings Call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are available on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer.

Thank you, Megan. Good morning, everyone, and thank you for joining us today. Joining me on the call are Walt Hulse, our Chief Financial Officer; Randy Lentz, our Chief Operating Officer; and Sheridan Swords, our Chief Commercial Officer. Yesterday, we reported second quarter earnings and raised our 2026 financial guidance for the second time this year, reflecting strong year-to-date performance and continued momentum heading into the back half of the year. Our second quarter results were driven by record NGL throughput volumes, strong refined products demand and continued volume growth across our systems. The quarter highlighted the positioning of our asset footprint, the value of our integrated platform and the outstanding execution of our employees. The broader energy backdrop remains constructive, but the more important point for ONEOK is that we are converting that backdrop into visible growth. Our footprint connects key supply basins with domestic and international demand across natural gas, natural gas liquids, crude oil and refined products. The connectivity across our business segments gives us multiple ways to grow earnings, optimize existing assets and allocate capital toward opportunities with attractive returns. Importantly, these opportunities are not confined to a single commodity or region. Our integrated system enables us to create value across multiple demand drivers, a differentiator for ONEOK. Our confidence is reflected in our long-term outlook. We continue to target mid- to high single-digit adjusted EBITDA growth over the next 5 to 7 years, supported by 3 factors that are increasingly visible. Recently completed and soon-to-be completed projects drive structural growth spanning Permian Basin processing capacity, Powder River processing capacity, Mid-Continent fractionation capacity, refined products expansions and natural gas transportation and storage capacity and LPG exports. operating leverage available across our assets, requiring little to no capital investment and allowing us to be flexible to customers' needs and timing. And finally, a growing pipeline of high-return organic projects, bolt-on acquisitions and commercial optimization are creating additional investment opportunities across our system, where commercial discussions are improving our confidence in timing, scale and returns. Our long-term strategy remains grounded in the same principles that have gotten us to where we are today, operational excellence, financial discipline and a value-driven approach to capital allocation. With that, I'll turn it over to Walt for a financial update. Walt?

Thank you, Pierce. As Pierce mentioned, our second quarter performance and strengthening outlook across our business supported a second increase to our 2026 financial expectations. We now expect a 2026 net income midpoint of $3.6 billion, a diluted earnings per share midpoint of $5.68 and an adjusted EBITDA midpoint of $8.35 billion. This represents net income and adjusted EBITDA increases of $150 million and $250 million, respectively, compared with our original guidance provided in February. At the segment level, natural gas pipelines and refined products and crude continue to perform towards the upper end of the adjusted EBITDA ranges provided in our original guidance. Natural gas liquids and gathering and processing remain well positioned through the balance of the year. Across the portfolio, organic volume growth, EBITDA from recently completed projects and attractive hedging and commercial opportunities are providing momentum in the second half of the year and into 2027. Our 2026 capital expenditure guidance remains unchanged at $2.7 billion to $3.2 billion. We expect capital spending to accelerate through the second half of the year as several major projects move towards completion, bringing us towards the upper end of our CapEx guidance range. Turning to the second quarter results. ONEOK reported net income of $965 million (sic) [ $967 million ] or $1.53 per diluted share, a 13% increase year-over-year. Adjusted EBITDA totaled $2.12 billion, up 7%, driven by volume growth and strong segment level performance. We continue to expect earnings to largely follow the normal seasonal cadence of our business as we move through the remainder of 2026. With the tailwinds, I suggest -- I just mentioned supporting second half results. Our overall financial position remains strong and continues to provide the flexibility to invest in the business, return capital to our shareholders and pursue opportunities that create long-term value. As additional guidance on the application of the One Big Beautiful Bill and the inflation reduction act has become available, we've continued to evaluate the impact of the tax legislation, particularly as it relates to acquisitions and bonus depreciation. Based on our latest analysis, we now expect approximately $2.6 billion of cumulative cash tax benefits compared with the approximately $1.5 billion we previously discussed. These additional benefits, combined with our existing tax attributes, are expected to defer meaningful cash tax payments until 2031, extending our cash tax runway by approximately 2 years and further enhancing future free cash flow generation. Higher earnings and improved free cash flow also support continued progress towards our long-term leverage target of 3.5x debt-to-EBITDA. I'll now turn it over to Randy for an operational and large capital projects update.

Thank you, Walter. Our teams continue to execute at a high level throughout the second quarter while maintaining focus on safety, reliability and customer service. Performance across the system remains strong, supported by increasing customer activity, improving asset utilization and contributions from recently completed projects. As volumes grow across our footprint, we're seeing the benefits of the connectivity and scale of our assets. We continue to advance project portfolio. And as of August 1, our Denver area refined products expansion was placed in service. This project adds 35,000 barrels per day of capacity into one of the fastest-growing markets in our footprint provides a new direct jet fuel connection to Denver International Airport. In the Permian Basin, we continue to expand processing capacity to support growing producer activity. Following our recently relocated 150 million cubic feet per day plant in the Midland Basin, we remain on track to complete 110 million cubic feet per day of Delaware Basin plant expansion projects during the third quarter. Additionally, based on production outlooks in the basin, we've increased the capacity of our Bighorn plant to 400 million cubic feet per day from an initial capacity of 300 million cubic feet per day. Bighorn remains on schedule for completion in mid-2027. Upon completion of our Permian completion, our Permian processing capacity will increase to nearly 2.4 billion cubic feet per day. In addition, along with our initial 60 million cubic feet per day cutter plant in the Powder River Basin, which was previously announced, we've begun construction on another 120 million cubic feet per day cutter 2 plant, which we expect to be online in the first quarter of 2028. And finally, Phase 1 of our Medford fractionation project remains on track for completion during the fourth quarter. Bedford Phase 1 will add 100,000 barrels per day of Mid-Continent fractionation capacity with Phase 2 expected to be completed in the first quarter of 2027. Looking ahead, the projects in service over the next several quarters are expected to add visible earnings, increased system utilization and support our long-term growth outlook. With that, I'll turn the call over to Sheridan for a commercial update.

Thank you, Randy. Commercial activity remained strong during the quarter, supported by favorable fundamentals across all 4 of our business segments. We delivered solid volume growth across our integrated system driven by increased customer activity, healthy domestic and international demand and continued production growth in key producing basins. . Starting with the Natural Gas Liquids segment. Rate throughput volumes increased 7% year-over-year, with growth across all regions. Utilization continued to increase across the system, supported by improved seasonal demand and producer activity. The Gulf Coast Permian region led performance, increasing 15% year-over-year driven by increased production volumes and the continued ramp-up of recently connected third-party plants. In the Rocky Mountain region, NGL volumes increased year-over-year even taking into account a contract roll effective at the beginning of the quarter, which was previously discussed and assumed in guidance. This was more than offset by growth across the region and continued strength in ethane recovery. Higher NGL pricing and export demand continued to support ethane recovery across all regions, and we expect these dynamics to remain favorable into the third quarter. Global NGL demand remains strong. supported by growing petrochemical demand and continued interest in securing long-term access to reliable U.S. supply. We're pleased to announce that we've reached our targeted contracting threshold at 80% for our 200,000 barrels per day of LPG export capacity, which is currently under construction as part of our export dock joint venture. The capacity is supported by high-quality counterparties and customer interest remains robust, including discussions that extend beyond the initial contracted period and into the next decade. This underscores both the growing demand for U.S.-sourced LPGs and the value of the terminals advantage locations. Turning to the Refined Products and Crude segment. Demand fundamentals remained positive during the quarter. Year-over-year Refined Products volumes shipped increased 8% and supported by gasoline and diesel demand, high refinery utilization and refinery maintenance dynamics. Blended volumes were also strong during the quarter driven by increased system throughput. Higher gasoline volumes allow us to blend more product and further optimize operations across our network. While our hedge position limited our ability to fully capture the benefit of wider spring blending spreads, we have secured additional fall hedges at higher prices and extended new hedges into spring 2027, improving visibility into future blending margins. The location and flexibility of our Refined Product system and our ability to clear barrels in a dynamic market remains significant competitive advantage. As refinery utilization remained high and product flows continue to evolve, our unique bidirectional connectivity between the Mid-Continent and Gulf Coast allow us to connect supply with the strongest demand markets, including an increasing pull for U.S. refined products and exports along the Gulf Coast. Demand for our marine export services also remain robust. At our Sabre crude export joint venture Throughput increased approximately 20% compared with the first quarter included record oil -- crude oil loadings in May. The facility remains highly contracted and under take-or-pay agreements for the foreseeable future. Midland crude gathering volumes increased 10% compared with the first quarter reflecting continued strength in this higher-margin business. Rigs have steadily increased on our Midland crude gathering position throughout the quarter and we currently have more than 30 rigs operating on our acreage. In addition, strong Houston refining and export demand drove outperformance on our long-haul crude oil pipelines. Moving to the Natural Gas Gathering and Processing segment. Volumes increased across all regions compared with both the second quarter of last year and the first quarter of this year. Producer activity remains healthy across our footprint and development plans continue to track largely in line with expectations communicated throughout the year. We maintained good visibility to the remainder of '26 and into '27. In the Permian Basin, our recently added Midland capacity expansion positions us well to support increased development activity in the Barnett formation. While our planned projects in the Delaware Basin provide additional capacity to support anticipated growth into 2027 and beyond. We currently have 11 rigs on our acreage in the Mid-Continent and 13 in the Rocky Mountain region, up 2 rigs in the Rockies compared with last quarter. Both areas experienced a seasonal pickup in activity during the second quarter, driven by higher well completions. I'll close with our Natural Gas Pipeline segment, where continued transportation demand and favorable market conditions drove another strong quarter. While how the key location price differentials continue to benefit this segment during the second quarter. We expect lower earnings in the second half of the year as Permian takeaway capacity enter service and differentials narrow, consistent with our full year outlook and guidance assumptions. Looking forward, power generation, LNG exports and industrial development continue to support increasing natural gas demand across our footprint. We continue to advance commercial discussions supporting multiple large-scale data center developments. While these projects have not yet reached FID continued commercial project reinforces our confidence and the scale and durability of the opportunity. From the power generation perspective, we were recently awarded a supply agreement for 1 gigawatt of power plant demand further expanding our participation in a growing source of natural gas demand, supporting electric generation has long been a core part of our business. Our intrastate natural gas pipeline system is already directly connected with numerous power plants across our footprint and is well positioned to serve future demand growth. Pierce, that concludes my remarks.

Thank you, Sheridan. Randy and Walter. As we step back, it's clear that demand fundamentals remain strong. in the long-term outlook for U.S. energy infrastructure remains compelling. And as we look across our business, the message is straightforward. We've raised guidance for the second time this year. extended our cash tax runway, advanced key projects and strengthen visibility into earnings growth and free cash flow through 2027. Our integrated multi-molecule platform positions us to capture opportunities across commodities, regions and demand drivers while maintaining financial and disciplined flexibility. And most importantly, none of this would be possible without the dedication of our employees and their commitment to safe, reliable and disciplined execution. With that, operator, we're ready to take questions.

[Operator Instructions] Our first question comes from Spiro Dounis with Citi.

I want to start on the growth strategy from here. Because, I think you had talked about aspiring to grow mid- to high single digits over the next few years. And curious just to get more color on that front. Specifically, how much of that growth could be underwritten by filling up the white space that you mentioned on the current system versus building out new infrastructure? You mentioned the growing backlog of projects coming. So how should we think about maybe the timing of when those projects could come to market? And maybe which verticals you see probably getting the most attention.

Okay. Spiro, I'd start out by saying that it's not one thing that's driving this -- the conclusion for us. We actually have a multi reinforcing growth drivers. Our assets are positioned in these premier growth basins in the U.S. and especially in our export markets. And the growth across our footprint is actually underpinned by basically 5 things, not just filling the white space that you mentioned. It's the continued strong Permian Mid-Continent and Powder River growth and the associated natural gas liquids. It's the stable Bakken growth through improved well productivity. It's the rising U.S. LPG export market, and there's a shift definitely in the global crude oil demand to a more reliable and a more resilient supply. And then you've got through LNG exports driving the natural gas increase across the United States is driven by the growing 30 Bcf a day or over 30 Bcf a day LNG export and your domestic natural gas fire generation and industrial demand. So these facts all give us the confidence that we have to that high single-digit EBITDA growth over the next 5 to 7 years. So it's not just one thing, it's a multitude of things, and it's across all 5 of our business segments.

Got it. Second question, maybe if you shared in just zeroing in here on the NGL segment. Looking for more color on the dynamics around the quarter. Volumes were really strong, as you pointed out, but margins may be a little bit softer overall. You talk about some of the dynamics that were driving that this quarter? And how you're thinking about margins going to the back half of the year? Should they stay at these levels? Do you think there's a reason to think you could see expansion?

Yes. As we talk about the margins, we did see a little bit of reduction in the margin -- overall margin on certain parts of our system, and this was really driven by increased ethane. We saw versus how much the increase in C3+ we had. That happened in all 3 of the seconds, Permian, Mid-Continent and the Bakken, where especially discretionary ethane out of the Bakken comes at a much lower rate than what the C3+ at full rate is getting out of the Bakken. And like I said, we did see both the increase in C3+ in the Bakken, but we also saw a greater increase in ethane. And that also became apparent in the Mid-Continent, where we had a large increase in ethane in the Mid-Continent. And those rates are tiered rates that we've had for a period of time where we charge a higher TNF rate for the C3+ than we charge for the ethane, even at full rates. . And so as that more ethane comes on, it can have a little bit of effect on our overall margins that we have in there. But we are seeing a lot of increase of [indiscernible] across our system. And one area I'd kind of note is the Permian on volume where we've seen here in the last month or 2, a strong increase in our volumes, a substantial increase in our volumes. And really look at it, it was kind of tied to the way Waha to Katy spread. As that spread came in and Waha became positive. We saw a lot more volume than we had anticipated behind our NGL system come on in that area. So we've seen July has been a great month and August is falling suit on good uptick in volume on our NGL system.

We'll go next to Jean Ann Salisbury with Bank of America. .

There's been some talk from some E&Ps year-to-date around reducing their midstream costs. In that context, can you update us on the duration of your NGL TNF contracts out of the Bakken? .

Yes. Our rates of the bucket are still extended for a period of time. We have -- really don't have anything of material coming up until late this decade and most of the stuff is into next decade. So we feel very good about our NGL rates out of the Bakken at this time.

And refined product prices and PADD IV have continued to rise year-to-date versus PADD. I believe you've said before that your Denver pipeline is mostly long-term contracted, but is there a meaningful exposure to the spread at these price levels? .

The 35,000 is signed up by firm take-or-pay contracts. Obviously, there may be a little opportunity that always our operating team finds a way to squeeze a little bit of volume out there that we may be able to get -- be able to enjoy a little bit on a spread that happens there, but it's under majority almost all of this is under long-term contracts -- long-term firm contracts. .

We'll go next to Jeremy Tonet with JPMorgan.

This is Vrathan Reddy on for Jeremy. Just potential for additional egress out of the Bakken. Just curious if you could speak to your outlook for the ethane recovery at this point, maybe ONEOK's positioning against that backdrop?

Yes. I mean our egress for NGLs out of the Bakken is strong. We still have -- we're running up around sometimes up to 500,000 barrels a day, which gives us plenty of more capacity to be able to move in there, and we can flex on the ethane if we want to. So we don't really see egress out of the Bakken being an issue in our forward plan. .

Got it. And as a follow-up, I want to dive deeper on the Mid-Con. It looks like decent producer activity within the region, there might be a contract for all next year. But curious if you could dive a little bit deeper into your outlook for the balance of '26 and into '27.

Yes. We have -- continue to have contracts that roll in the Mid-Continent different areas, and some of them were put on at higher time where margins were higher. So there will be a little bit of could be some of these contracts come back to more of what we see the market is at this time. But typically, anytime we're dealing with customers on that, there's a give and take in areas that we work with. And so there is value shifted back and forth between different basins as we've talked about as we bundle rates with our large contractors. But most of our contracts in the Mid-Con still have some term on them. For a period of time, nothing is coming up. here in the next month or 2 or even into next year. .

This is Pierce. The only thing I'd add to that is the fact that any sort of contractual movement, we've already factored that into our guidance numbers. So that's fully baked in to market rates.

We'll go next to Praneeth Satish with Wells Fargo.

I guess just turning to the Permian. So obviously, you're seeing good growth there, strong demand. When we think about West Texas LPG specifically, how much remaining uncontracted capacity do you have on this system, and how much more room do you have there to support the growth that you're seeing in the Permian? And then maybe just sticking on Permian NGLs. If I remember correctly, with some of the legacy EnLink volumes, they're moving on relatively higher-cost NGL transportation paths. And so as those contracts roll over, to what extent can those be migrated to West Texas LPG? And what's kind of the time frame for that?

What I would say on your first question is we've come out and said that with the expansion, the mainline expansion of West Texas NGL pipeline. It's -- we have capacity up to 740,000 barrels a day. So with that, and what we're seeing today, we still have plenty of capacity to meet the demand that we have coming on, both from our processing plant expansions and the growth that we're seeing from third-party plants are coming on as well as well as the opportunity to grow our processing even further than we have announced into the future. So we think we got a very good position there. A lot of operating leverage, as you would say, that we could move additional NGLs on that system. So we don't see have to expand that for a period of time. And what was second -- what was your second part of the question?

The second one was on the legacy EnLink volumes and recontracting and bringing some of that on to West Texas LPG.

Yes. As I said, there's a little over 50,000 barrels a day that we control that was brutally contracted under EnLink on another third-party pipeline -- and those contracts will start rolling off here starting a little bit later, '26 and '27, '28. And all that volume will come directly over to our NGL pipeline when they roll off.

Okay. Great. And then maybe going back to -- I think it was Jeremy's question, but I think you kind of took it as NGL egress. But I think his question in mind is -- there is a few proposed gas takeaway projects being proposed in the Bakken and seems like at least one of them may move forward, sizable projects. So I guess the question is if gas egress improves in the Bakken, how does that impact your outlook for basin growth, BTU levels and really ethane recovery? And could you see more upside from potential more production growth kind of offsetting maybe some downside from lower ethane recovery. Just how do you think about that?

Yes. I think a little bit on each time with the producers get a little bit better netbacks than anything else. So that helps them to increase the production or have more incentive to increase their production. In terms of our ethane -- discretionary ethane that we have coming out of the Bakken. Really it's based on a lot what's coming out of Canada and what's held back out of Canada is still the incremental barrel incremental mcf to come on the system. So we still think that on the ethane side will be a nice spread for us to enjoy on the discretionary side as we continue to go forward into the future. .

We'll go next to John Mackay with Goldman Sachs. .

I want to go back to some of the questions around the longer-term growth outlook. Pierce, I appreciate the kind of different drivers you called out there. Just curious if you could touch a little bit more on kind of the incremental growth spending kind of where projects could fit in there? And what you think a kind of run rate growth CapEx budget could be like to support that outlook? .

So I appreciate the question. I'm going to throw that question to Walt. the capital spending update there.

Well, as we've been talking about, we have a pretty nice backlog that is building. We've got quite a bit being completed here in '26 and '27, all of which will then bring on that EBITDA going forward. The backlog that we have is more in the midsized projects. We don't have any $1 billion plus right now on the horizon. So that should moderate our CapEx from the current levels. down into that $2 billion, $2.5 billion kind of run rate going forward. Of course, our commercial team is always out there looking for great opportunities. And to the extent we find it, we'll clearly jump on them. But I think that with that $2.5 billion run rate, call it, you're going to see some very significant free cash flow still coming to the bottom line.

I appreciate that. And maybe just a follow-up for me. You've talked a couple of times in recent calls around some of these gas laterals to feed BTM or kind of broader power gen. Could you just talk a little bit about kind of what the commercialization process has been like so far? And then maybe tying it into your last comment right there, that kind of run rate level of growth CapEx, how much of that could be going towards this vertical?

Well, I'll take the first part on the on AI data centers and power gen. Obviously, in my prepared remarks, we talked about that we have secured 1-gigawatt power gen supply contract that will be the supplier of natural gas into that system. It's a really nice project. It's not high capital. I mean it's over $100 million of capital. We'll have to spend at a very nice return at firm demand. We also are in late stages of discussions with a couple of other opportunities to be able to supply AI data centers no doubt that metalization has taken a little bit longer than what we had anticipated on some of these projects. But I think we're seeing that across the board where it just takes a little bit longer time to get them across the finish line. but we're feeling really good about our position, especially where they're at. We have a strong competitive position, and that's why we've been able to advance these discussions as far as we have.

And then on the capital, I would just say that those types of projects are really what I was talking about there kind of singles and doubles. They're in that $100 million to maybe $400 million or $500 million top end -- so fit really nicely into our capital budget going forward. And then clearly in Randy's remarks, he went through a list of other projects that we've got underway, all of which are very attractive and maybe doubles and triples there, a little bit bigger.

We'll go next to Theresa Chen with Barclays .

Given the growing global focus on energy security, reliable supply, you noted increasing commercial traction for the LPG export facility. How do you see the opportunity set for exports broadly evolving from here, both in terms of the LPG export project as well as brownfield expansion opportunities and/or recontracting to upside on your existing liquids to export infrastructure.