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

Hello again, everybody. For those who don't know me, I'm Keith Stanley, I run our midstream group here at Wolfe Research and very happy to have ONEOK senior management with us as well today. We have Pierce Norton, CEO, Sheridan Swords, Chief Commercial Officer. Sorry, Sheridan; and Walt Hulse, CFO. So thank you all for joining us. As I said in the last one, please feel free to throw your questions in, just raise your hands and happy to have you participate in the conversation. Maybe we could start just strategically with kind of a look back in time. The company has been probably one of the more acquisitive in the midstream space and roughly double the size of the company with M&A. So can you just talk through some of the strategic rationale on some of these transactions? And how you're positioned looking forward if you expect to continue to be fairly acquisitive in the future?

So I'll start. Well, Sheridan, fill in on this. But I think our inquisitiveness actually goes back all the way to the early 2000s. We went through a period of time back there where we actually did quite a few acquisitions. The theory was that you get yourself positioned acquisition-wise, to expand and extend all those assets that you're collecting. So we did that, and then we kind of went through a period of organic growth where we spend billions of dollars across the middle part of the United States, aggregating these different assets that we bought. And then we ran into a period here where we felt like that we needed to do more M&A on the specific criteria. So we socialized that with the Board. We came up with this holistic criteria that we're looking for. We created some questions around that. And before we did any sort of looking at companies and then we started putting these companies kind of through this filter. And then that's where we ended up doing Magellan, we did Easton, we did EnLink. We did Medallion and several of these companies, we've actually done, I think, 5 acquisitions company NGP in 2 years. So we're very pleased with where we are right now. We feel like we're back in a position now where we can continue to expand and extend. So they're good projects that we're doing these extension zone, but they're also complementary because they're contiguously integrated to the assets that we have. So we're in a position now where we can be very patient about what we do next, and our focus right now is on integration.

Pierce, I think I recall a time in the past where you said there was actually a list of companies that you identified as ones that you could add value to. Is that list now smaller today, would you say, on potential opportunities that make sense?

Well, I would say they're different because the list is it more because of what it is the criteria that maybe you have satisfied currently, but you still need -- see the need of doing some other things. So I'll give you a couple of examples. One of the things that we want to do originally back in 2021 kind of time frame, it took us until 2023 to get it done. But is to diversify, try to diversify a little bit out of the Bakken and to some other areas we wanted to go into businesses that were more what we call a demand pull instead of demand push and which kind of get from supply and demand is another way to look at that. So having done that, we do we still want to diversify even more Sure. But right now, expand and extend is our main focus. So as the criteria changes, so do the possibilities of the companies. But right now, we don't see anything out there that we can't be patient on. And so we're going to continue to do what we're doing, which is continue integration, continue to get through. We'll talk about this probably a little bit, but what is it that we need to do to prove to the market that we're -- we have the great assets that we have. So Walt, you had any other comments on that?

No. I think that if you go back to that original criteria, we were looking for something that was going to be credit-accretive that was going to give us scale. We clearly think that we achieved a couple of those and kind of took them off the list and putting ourselves in a position. Pierce mentioned that we had spent a lot of capital growing the business originally. When we got to about a $4 billion mark in a 10-year period, we went from $1.4 billion of EBITDA in an 8-year period to 4. And then we saw that we really needed to do some things to reposition the business for the next couple of decades to get ourselves back in a position where we would have an asset base that we could expand and extend. So we did the acquisitions that we've done. Now you look at some of the projects that have come off of that, like the Denver expansion of the refined products pipeline to feed the dumber or international airport. That's a perfect example of taking the new assets that we acquired and using our model of extend and expand into a new market. continuing to grow those assets off of the existing footprint.

Okay. So I think you mentioned kind of convincing the market of the strategy of the acquisitions. What do you think the market is misunderstanding or underappreciating about the ONEOK story these days?

I think it's just how to model the business that has done 5 acquisitions in 2 years. I think that's the biggest thing because we had gotten very predictable. We still actually are predictable. It's just that once we go through, we don't give quarterly guidance. We gave an annual guidance when you look at kind of won't be printed in the first quarter, multiply by 4, you come up short of what our guidance was for 2025. So I think there is some skepticism there. And as we went in the second quarter, we proved the second quarter has been in the first quarter. We're about to print our third quarter numbers, you'll see what those are here shortly. So I think it's just a matter of proving the people, here's what these assets can do together and seeing the different profile that these assets have together over a year and understanding what is it that changes from quarter-to-quarter that makes these earnings go up. And I think once we get through another couple of quarters here, I think a lot of that is going to be well understood.

So with that backdrop, any commentary on how volumes have been tracking in some of your key basins relative to expectations through the summer months?

Yes. I mean, obviously, we always see an uptick in volume through the summer months. We've kind of said for a period of time that we get winter. I tell everybody, we get winter every year in the Bakken. So once we come off from the Bakken and the winter and sometimes takes a little bit to come back on. Had a little bit winter weather earlier this year. And so our volumes are ramping to a level that we are getting back to where we thought they could get close to at this time of the year. A little bit delayed. There has been a little bit of tamping of volume on some of the producers but we're still growing, still look to continue to grow into the future as in the Bakken. The one that's really been kind of a surprise to us here, not just issue for the last couple of years has been the Mid-Continent. There's a Turkey formation over on the western edge of the state that there's 4 or 5 different producers out there that have really been leaning into that and been growing that area out there that has actually -- for a long period of time, I thought the Mid-Continent would be kind of flattish to stand forward, but now we are actually seeing growth from that area has continued to go forward. Out there, then the Permian is growing. We continue to grow in the Permian. Continue to see those volumes come up. Continue to poke up CDPs. Continue to see growth out of acreage that's been dedicated to us on the inlet volume that continues to come on. So on the G&P side, all the areas we're seeing growth even though admittedly, a little bit tampered down from what we thought it would be when we had $75 crude oil versus $65 crude oil we're seeing today, we still see good growth on that. And the NGLs kind of reflect that as well, as we continue in there. We still continue to grow across that. Our growth out of the Bakken has been a little bit more better than -- has been good this year versus the G&P, and that's because of our discretionary ethane. We've seen a bigger opportunity this year to bring more ethane out at wider spreads than we have in the past. So we've been able to go -- so you get a little bit of uptick on that side of continue to go forward. So overall, I think we're sitting in a very good spot heading into the back half of this year.

A little more color on the on the Bakken as it relates to winter. There's two factors there. One is, A, it gets told, everybody knows that, right? But a producer will turn almost, call it, a heater treater during the coldest part of the winter to keep the oil flowing, which is where the -- most of their economics come from. Well, that actually takes away they'll take that off the tailgate of where they're producing from and actually use that in a heater tree. So it actually turns our volume down about 10%. The other pieces are what is the severity of the winter events that you have. So the cold weather actually is not -- it doesn't move the needle as far as shutting in volumes or whatever, but a severe windstorm ice storm, 4-foot snows that cover the road, so the producers can't get in there to service their wells. Those are the things -- those are the two main factors that happen in the Bakken.

Sure. And any comments across your geographies on your expectations for 2026? Understanding that producers haven't fully finalized their plans. Just assuming oil prices stay around where they are in kind of the mid-60 levels.

Where we see now in producer activity in our areas we see in the Bakken, we've seen modest growth up there on the GAAP side of it, there's enough activity to keep that going forward. Obviously, the producers, as you said, are in your budgeting time frame. Due to the quality of producers we have in that area, we really don't see them making a material change in what's going on in the Bakken. So we'll see -- we're really expecting to see some loss growth going into 2026. We talked about in the Mid-Continent. As I said, we're very pleased on that side. The one thing I always think about the Mid-Continent is almost like an option that we have on gas prices. Do we continue to see more LNG come online if we see any more uptick in gas prices, you could see some people in the mid-continent. I talked about the Cherokee, but in the SCOOP and the STACK come in and go to more of the gas part of that play, which still is pretty NGL rich forward. The Permian is -- continues to be the Permian. I mean there's some people talking about there may be a little bit of a slowdown on rigs in there, but we are seeing producers being much more efficient, drilling longer laterals, being able to get more out with less, and we still consider to see pretty good growth coming out of the Permian going forward. Overall, we see crude oil being fairly flattish, around 13 million a day out of the United States. But you still have to even maintain , you're going to have to drill. You're going to drill different areas. And so we think that Permian continue to grow at the detriment of some other areas we'll be able to keep up with their declines. People won't fell as much as there, but we definitely think that Permian is going to be one that's going to take up a lot of the slack on the oil side, which will make much greater.

So with the volume growth you expect, so the company has a target of mid- to upper single-digit growth in 2026 EBITDA. Can you walk through what is the basis for that. Volume growth sounds like you're expecting modest volume growth kind of across the system. How important are some of the capital projects that you're bringing on? And then how meaningful are some of the remaining integration-related synergies to your '26 growth?

Sure. Well, it is kind of a different story this year than it has been historically over the previous years, where it was very volumetric driven by producer activity. Clearly, we are 90% volume times rate based on a fee. So that's our key business. But we've got a number of projects, some of them synergy-related that are being completed right now and will be completed as we go into the balance of the year or in 2026. Each of those kind of gives us an incremental stair step up. And a couple of examples. When we bought Magellan, we needed to connect our Mont Belvieu facility to the 3 distribution centers in East Houston. We were going to build a pipeline to do that. That was going to take us about 3.5 years. We had the opportunity to buy Easton. When we bought Easton, but we still had to connect that to the other -- to all those entities. We're just now completing that kind of as we speak. And that now enables us to get that next wave of synergies out of the Magellan acquisition. And what it really is doing is it's providing us the opportunity to provide blend stock to not only our own assets but to the customer assets at these various terminals out of our system. Up until this point of 2025, that opportunity didn't exist. So we now see that kicking in, and it will go forward in through '26 and beyond. We were doing a very similar thing where we connected our Conway frac facility to Kansas City, Tulsa and Cushing to enable us to vastly reduce the logistics of blending around the Magellan system in the Mid-Continent. That's going to be completed here in the fourth quarter. So we'll see that full benefit going into 2026. In 2026, we're going to complete the Denver project, where we're expanding the refined products line out to the Denver airport. That's a fully backed project. There's enormous growth at DIA. And so that's been driven by jet fuel, but gives us an opportunity to serve all products as we can batch up that line. So that kicks in '26 as well. And then there are a number of smaller projects that we haven't even been out public with, but they are basically just taking either pinch points away or making connections. Another good example would be Medallion as we continue to make the connections to get Medallion volumes on to our long-haul crude pipes. We start to see that continue to fall in. Those are -- there incremental stair steps, we're still going to see nice volume growth across our system. And typically in previous years, that would be what really kind of drove growth. But here, we've got some stairs step so they're going to take us up.

I guess what would you say are the key risk to executing on that 2026 growth outlook and your level of confidence in it right now?

Well, I think that everything I just described is completely in our control. So I don't think there's a whole lot of risk. Most of it is in the later stages of completion from a construction standpoint. So I really don't see that as an issue. Clearly, with crude in the low 60s, we're going to need to see what producer activity is across all patients. To the extent that, that slows a little bit, that could have a volumetric impact that could slow the growth. We do think we're going to continue to get growth in each of these basins. Potentially, maybe not at the rate that we thought it was gonna be. So that to me is probably the biggest risk. But I think it's important to note that in '16 and then '20 when crude broke down into the 20s and in 2020, it went down to negative and came back up. When we were coming back up through the 40s, you would hear producers say, if we could only get to the 60s, we will coin money. Well, they're going to take to 75, 80, and that felt real good for all of us. I mean, we all enjoyed that. My sense is that if we stay here in the 60s, that will go back to being the norm and they can make good money in the 60s, and they'll continue to press on. We have the benefit of having kind of the who's who of customers. Most of the majors or the large independents that are going to continue to drill through cycles. They want to maintain their crews. They want to continue to produce. So we don't expect them to really back off in this environment.

Any questions in the audience at all? Okay. I wanted to ask on the Sunbelt Connector project, definitely an interesting one that I think people probably weren't expecting big refined products pipeline that would run from El Paso, Texas to Phoenix. Just what you're seeing there as far as the opportunity level of customer demand potential cost and returns for a project like that.

So really, when we think about the SunBelt connector, what we're seeing is, is that today, Phoenix is a growing market. It's growing from population, which is driving unleaded demand growth. And we're also seeing a growth in Jet fuel as they expand their airport out there. Right now, Phoenix has said by 2 pipelines, 1 pipeline is coming from El Paso into Phoenix, and that one is full and the other one is coming out of California into Phoenix as well. And as we see rationalization of refineries in the California area, we see that more and more of that refined products is going to want to stay in California and I say "we" and that there are a lot of -- the people were talking to, share this point of view, going forward. So we see an opportunity to be able to line into Phoenix and be able to bring in not only refined products from the Gulf Coast through our system, but also from coal in the Upper Midwest as well. And we've had people talk to us about being put on this system. So -- and definitely, with the administrations that we have in there right now, we think we have a unique opportunity to be able to get some pipeline like this in. And we saw enough interest as we talk to different people and done all the scoping and everything else to go out and do a binding open season. So we have a 2-month open season that we're talking to people getting men on what that's going to be. And the cost and return is what we have is -- we've looked at under many different scenarios of how much people would sign up for. And depending on what they sign up or is going to drive what the capital cost can be. So we have some different scenarios where if depending on where it is larger or smaller, what capital we get put in there to go ahead and get this pipeline in either put into a case where we could ramp up to it or put some optionality and to upsize it a little bit in the beginning. So we really need to see what comes back from our customers and how much they're willing to sign up will really tell you how about the capital is going to be on that. It will be -- we talked about, we think it will be a very nice return on this project. One is we will put a little bit bigger pipe in the ground. We've already said we're going to put a 24-inch line from El Paso to Phoenix. And that -- what we don't need -- we've not seen the demand from our customers for our pipeline that big. One thing is if we get a lower level, we will have to put any pump stations on that so you won't have any power cost. It's going to be very easy to move it out there. But putting that bigger pipe in gives you the opportunity to expand it into the future. If you continue to see more rationalization in California, continue to see growth and you need more pipeline capacity in that we kind of see it as a onetime shot to be a pipeline in there, we want to be able to put additional pumps on there and to be able to expand the capacity. And if you do that as we've done in other 5 lines, and the return on the project would be very, very nice.

And what's the time line and permitting look like on a project like this? I think we all know what the gas pipeline project would look like. But what does it look like on the pipeline?

On the liquids line, you don't have to go through the FERC process. You still have to go through the EPA and the core of engineers and typical process they have to go through on any pipeline. But what we are seeing at this time is on some of our other projects that we're doing whether or not that be the Denver expansion or our Texas City export dock is that we are getting permits to lot worker than we were in the past. And so that time frame has really been on down. So right now, we think it's under 2 years to get ir permitted.

And then about a year or 2 construction?

Right.