ONEOK, Inc.

Please stand by. We're about to begin. Thank you for standing by. Good day and welcome to the first quarter 2020 OneOak earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead, sir.

Thank you, Paula, and good morning, everyone, and welcome to OneOak's first quarter 2020 earnings call. We issued our earnings release and presentation after the markets closed yesterday. and those materials are on our website. After our prepared remarks, we'll be available to take your questions. During the Q&A session, we would appreciate it if you limit yourself to one question. A reminder that statements made during this call that might include One Oaks 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. Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?

Thanks, Andrew. Good morning, and thank you all for joining us today. As always, we appreciate your continued trust and investment in OneOak. Joining me on today's call is Walt Hulse, Chief Financial Officer and Executive Vice President, Strategic Planning and Corporate Affairs, and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas Liquids, and Chuck Kelly, Senior Vice President, Natural Gas. On behalf of One Oak, we hope you, your families, and your colleagues are healthy as we all navigate and cope with the uncertainties surrounding the COVID-19 pandemic. As an essential critical infrastructure business, our employees continue daily work. We remain focused on operating safely and responsibly and on providing the essential services that our communities and customers rely on us for. We've asked all employees to work from home where able, and we've increased safety protocols for those critical employees continuing to work onsite. We've offered additional support to employees through temporary benefit adjustments and human resources programs and are prioritizing open communication with employees, our board of directors, and the financial community related to our COVID-19 response efforts. The current environment and worldwide impacts of this pandemic are clearly unprecedented, but as you know, COVID-19 is not the only challenge facing the energy industry right now. The commodity price collapse and resulting recent pullback in crude oil production across the country is greatly impacting our industry. As described in the earnings release, we did not provide what one would call a traditional guidance update, but we did provide a range of possible outcomes for 2020. Providing specific volume and commodity price guidance would not be appropriate for us due to the number of potential variations of outcomes that are possible for price forecasts, curtailment quantities, and the duration and pace of economic recovery on a worldwide basis, among other factors. That said, we have performed a scenario analysis, and based on currently available information, we believe the range of possible 2020 adjusted EBITDA results will likely be between $2.6 billion and $3.0 billion. While this wide range indicates potential challenges, it also has opportunity, and as we are well positioned to realize earnings growth in 2020 and 2021, if NGO markets remain resilient and storage capacity is at a premium, despite the challenges our industry faces. Now, I'd like to comment on the recent dividend announcement, which we prudently held flat at 93.5 cents per share for the quarter. As we look to the future, we expect our business to generate sufficient cash flow to pay the dividend. Our decision to significantly reduce capital spending until growth opportunities return puts us in a good position to continue returning value to our shareholders. As we always do, each quarter we'll work with our board to assess our forward views of future cash flows and the dividend as appropriately. We've been through cycles before, and we have a long track record of delivering on expected results. And most importantly, the fundamentals of our business have not changed. Our strong balance sheet and liquidity provide important financial flexibility. Our extensive and integrated assets, including available storage and key market centers, are competitively well-positioned. Our fee-for-service business model mitigates our direct commodity exposure, including the stability of our natural gas pipelines business, which has nearly 100% take-or-pay contract structures with primarily financially strong electric and utility customers. Our customers are some of the most resilient and well-capitalized in the industry with decades of proven reserves, and the demand for NGLs in the U.S. and abroad remains and there are signs that international demand is beginning to recover. All these factors provide the foundation for a resilient business that we believe is built to weather these kinds of uncertain market conditions and provide a platform to resume growth when it makes sense. The natural gas and NGM reserves in the basins served by our systems haven't moved. The reserves are still there, and we believe our ability to serve them is stronger than ever. Many of our capital growth projects have recently come online or are nearing completion. These projects have driven volume growth across our businesses, including reducing the amount of flaring in the Williston Basin as we expected up until the pandemic. As we have done in previous commodity cycles, we're able to adjust the scale and timing of our growth projects to best fit the needs of our customers. We made proactive adjustments early on in this cycle to better align our capital investments with our customers' needs and we will continue to be flexible and responsive to those needs as our view of the market evolves. Kevin will provide more detail on these projects in a moment. As history shows, how you react in markets like this will have lasting impacts for quarters and years to come. Swift financial and operational decisions made at One Oak in 2015 and 2016, while difficult at the time, set us up well for a transformational period of growth over the past few years. We're now in a great position with available integrated capacity across our system once market conditions improve. With that, I will turn the call over to Walt. Thank you, Terry. I'll start with some brief comments on our first quarter financial performance. our liquidity, and then our capital allocation strategy as we move forward. One Oak reported a net loss of $142 million in the first quarter of 2020, which includes a non-cash impairment charge of $642 million, or $1.17 per share. Excluding these non-cash impairment charges, One Oak's EPS was $0.83 per share for the first quarter. First quarter adjusted EBITDA totaled $701 million, a 10% increase compared with the first quarter of 2019. Natural gas liquids and natural gas volume growth, higher average fee rates, and higher contracted natural gas transportation capacity all contributed to year-over-year earnings growth. Distributable cash flow for the quarter for the first quarter of 2020 was $522 million, up 7% compared with the fourth quarter of 2019. And we reported healthy dividend values of 1.35 times. We also generated $136 million of distributable cash flow in excessive dividends paid during the quarter. Earlier this month, the Board of Directors declared a dividend of 93.5 cents, or $3.74 per share on an annualized basis. The recorded impairment charges in the first quarter of 2020 related primarily to long-lived assets and goodwill in the natural gas gathering and processing segment. Our asset impairment charges related to gathering and processing assets in western Oklahoma, Kansas, and the Powder River Basin. The timing of these charges was triggered by significant adverse changes in the market environment during the first quarter. From a liquidity standpoint, in early March, we completed a $1.75 billion senior notes offering and used a portion of the proceeds to repay amounts outstanding under our commercial paper program, providing us increased liquidity and balance sheet flexibility during this uncertain market environment. Our March 31 net debt to EBITDA on an annualized run rate basis was 4.86 times, and we ended the first quarter with no borrowings outstanding on our $2.5 billion credit facility and more than $530 million of cash. We are still targeting leverage of four times or less, but due to the current environment, the timeline for reaching target leverage from operating cash flows has been pushed out. As Terry mentioned, with yesterday's earnings announcement, we provided a 2020 outlook. The 2020 net income is now likely to be in the range of $500 to $900 million, which reflects the impairment charges. An adjusted EBITDA is likely to be in the range of $2.6 to $3 billion. As Terry said, the range of possible results from our multivariable scenario analysis is led us to this 2020 outlook to give our investors a sense of what we view are likely outcomes in the current environment. As the industry recovers, we will update if appropriate. From a capital allocation perspective, in early March, we suspended an additional expansion on the West Texas LPG pipeline, the Demix Lake 3 plant, and reduced the scope of the expansion on Elk Creek pipeline. Yesterday, we announced that we paused several projects and reduced our 2020 growth capital expenditures further. So far in 2020, we have reduced forecasted capital expenditures by $900 million compared with our original 2020 guidance provided in late February. Devin will discuss these adjustments to growth capital in a moment. We now expect growth capital to range between $1.4 and $1.8 billion this year, which includes more than $900 million that we've already spent in the first quarter, as we completed Arbuckle 2, Denix Lake 2, MB4, and 45,000 barrels per day of the West Texas LPG expansion. Only approximately 40% of our 2020 capital expenditures is less to spend over the remaining three quarters. Looking ahead, we can continue to significantly scale back capital. If commodity prices remain depressed and producer activities remain low, we could potentially operate in a $300 to $400 million annual capital expenditure range, which would include limited routine growth spent in alignment with our producers' needs and maintenance capital. Our flexibility to scale back capital and to adjust to our customers' needs is a significant financial tool we can use in this environment to help preserve balance sheet strength and liquidity. On the other side of the equation, we stand ready to resume these projects as producer activity returns. I'll now turn the call over to Kevin for a closer look at our completed growth projects and operations. Thank you, Walt. we saw volume growth across our system in the first quarter 2020 compared with the first quarter 2019. NGL raw feed throughput volumes increased 6% and natural gas processed volumes increased 5% year-over-year. The natural gas pipeline segment continues to deliver strong fee-based earnings as our total capacity reached 100% contracted in the first quarter. This segment which represents more than 15% of 1OC that DOP provides solid fee-based earnings and stability even through volatile commodity price environments. As Terry and Walt discussed, the volatile commodity price and demand environment makes predicting our future volumes or segment level performance very challenging. But we can provide certain data points based on the information we have at this time to help frame up the current volume and activity levels that we're seeing across our operations. Let's start with an update on our growth projects. During the first quarter, we completed and placed into service the Arbuckle 2 pipeline and the remaining capacity of our MB4 fractionator in Mont Bellevue, which is 100% contracted. We also completed 45,000 barrels per day of our fully contracted 80,000 barrel per day West Texas LPG pipeline system expansion. The remaining capacity of the expansion, which was delayed due to weather during the first quarter, is expected to be completed in May. We completed our Demex Lake 2 processing plant in January, bringing our total processing capacity in the basin to more than 1.5 billion cubic feet per day. The projects that were completed in the fourth quarter 2019 were ramping as expected until the commodity collapse in March. Demex Lake 1 which was completed in October of last year, reached near full capacity of 200 million cubic feet per day in the first quarter. Total NGL raw feed throughput volume from the Rocky Mountain region, which includes volume on both the Elk Creek and Bakken NGL pipelines, reached 240,000 barrels per day in March prior to the collapse. Compared with the fourth quarter of 2019, we saw a more than 7% increase in Rocky Mountain Region raw feed throughput volumes, as new processing plants and plant expansions were connected to our MGL system. The volumes we reached in the first quarter, combined with the quality of the basin and our customer base, give us confidence that growth will resume once demand recovers. These assets put us in a great position to capture natural gas and MGL volumes for our customers when that occurs. We announced yesterday that we are pausing the majority of construction activities on several of our remaining capital growth projects, including the expansion of our Bear Creek processing plant in the Williston Basin, construction of the MB-5 fractionator in Mont Bellevue, additional mid-continent fractionation expansion, and the third expansion of the West Texas LPG pipeline system. The decision to pause these projects reflects the changing needs of our customers and our ability to be flexible through this uncertain commodity price environment. The projects we paused can all be restarted quickly when our customer's activity resumes. Now let's take a closer look at the current activity across our operations. As we sit today, the production plans of our customers continue to evolve as market dynamics shift. Many of our customers have announced a reduction in rig activity and in some cases are curtailing existing production. In the Williston Basin, there are currently approximately 30 rigs operating with around half of those on our dedicated acreage. Many of the wells that have been curtailed on our acreage to date have been older vintage wells that produce lower volumes at a higher cost to producers. Other wells taken offline by producers were previously flaring, so they have not reduced our volume. We have also seen wells curtail that have opened up capacity for wells previously flaring to flow onto our system. These three factors have resulted in less volume coming off our system than you would expect. Given the significant backlog of flared gas, total production won't have to recover fully for our processing capacity to be highly utilized. Based on the latest reported natural gas flaring data out of North Dakota, approximately 400 million cubic feet per day was flaring in the basin with more than 200 million of that on One Oaks dedicated acreage. As Terry mentioned, Our customers in the Williston Basin are some of the most stable and well capitalized in the industry. We've had one customer this year file for bankruptcy protection. However, they continue to flow volume. We do not foresee additional significant bankruptcy risk among our largest customers in the region. In smaller scale, private producers make up approximately 15% in aggregate of our total production from the region. In the Permian Basin, Approximately 70% of our MGL volume is from the Midland Basin, one of the most resilient basins in the US. As our West Texas LPG pipeline expansion is fully completed in May, we will continue to transition volumes away from offloads we currently have with third-party MGL pipelines onto our pipeline. We are currently offloading approximately 50,000 barrels per day, and we expect to move 20,000 barrels per day over to our system in the third quarter of this year, with the remainder in the first quarter of 2021. As these volumes move onto our system, we'll be able to collect full transportation and fractionation fee rates on that volume. Additionally, our system-wide propane plus fractionation capacity remains highly utilized at approximately 85 to 90%, and over half of our 27 million barrels of underground MGL storage is available to capture opportunities in the market. We're adding 1.5 million barrels of storage in the third quarter of this year and expect to complete an additional 1.5 million barrels of storage in 2021. We have also added 3.5 million barrels of brine storage in Mont Bellevue, substantially increasing our capacity. In the NGL markets, we are seeing seasonally strong demand for propane in Conway at our rail racks and on our north system from wholesalers, as well as in Mont Bellevue from exporters. This demand is contributing to the strong relative price of propane to crude. Petrochemical facilities in both Conway and Mont Bellevue continue to have strong demand for ethane, driving the price to near-recovery economics in the Mid-Continent. Terry, that concludes my remarks. Thank you, Kevin. Our recent project completions and the volumes we've seen materialize prior to this downturn provide confidence in the growth behind our system that is available to capture once demand recovers. One of strong record of delivering on our expected results combined with our competitive integrated asset position and high-quality customer base and the best resources plays are fundamentals of our business that provide us with a foundation for stability, even through difficult commodity cycles. We have been through downturns before, and we know how to position ourselves for success as conditions improve. To our employees, both those continuing to work remotely and those who are still reporting to a facility or field location, thank you for your continued work flexibility and dedication to our company. Your focus on maintaining essential services for our customers and your commitment to continuing to operate responsibly are exceptional. During a very difficult time, you have risen to the challenge by remaining committed to the health and well-being of our company, families and communities. While the near term view of the world is changing every day, The long-term fundamentals of our strategic business remain strong and well-positioned for continued growth when global energy demand recovers. With that, operator, we're now ready for questions.