ONEOK, Inc.

Good day, and welcome to the third quarter 2020 One Oak earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Viola. Please go ahead, sir.

Thank you, Sarah, and good morning, and welcome to One Oak's third 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. 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 is Terry Spencer, President and Chief Executive Officer. Terry?

Thank you, 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. The entire third quarter results were driven primarily by curtailed volume returning to our system and increased ethane recovery. The majority of volume across our operations has now exceeded pre-pandemic levels. and better represents our volume expectations prior to the widespread production curtailments being last quarter. We're in a much improved position today than we were on our second quarter call. Back in July, we discussed the expectation for curtailed volume to return in the third quarter. Now, just three months later, not only has essentially all of the curtailed volume on our system returned, that are returned at a faster rate than expected. This momentum, especially from September, is expected to continue with the fourth quarter being just as good, if not better, than the third quarter, which also sets a good baseline into 2021. Additionally, we've successfully captured more previously flared natural gas in the Wilson Basin, leading the effort to reduce flaring even as production has returned in the region. In August, we captured a higher percentage of gas than the statewide average of 92%, an opportunity we've discussed for numerous quarters. Infrastructure put in place earlier this year and the hard work of our employees allowed us to help producers in the region decrease flaring, allowing both our customers and one-off to benefit from previously uncaptured earnings. This is just one example of our continued focus on customer service, safety, and environmental responsibility, despite the challenges of operating and conducting business during a global pandemic. Operating conditions have greatly improved from second quarter lows, but there is still uncertainty around the pandemic and the economic recovery. Despite that uncertainty, we remain focused on continuing to meet the needs of our customers. Our conversations with producers are increasingly positive as commodity prices have shown some stability and demand has shown positive signs. These conversations have now shifted more towards 2021, indicating the potential for an improving pace of drilling and completion activity next year. As curtailed volumes have recovered, so have our earnings. We now expect 2020 earnings to approach the midpoint of our previously provided outlook ranges which Walt will discuss shortly. On our last call, I shared our outlook for 2021, and today the backdrop is even stronger. Volumes in the Bakken ramped throughout the third quarter, setting us up for a strong fourth quarter in 2021. We expect to achieve double-digit earnings growth in 2021 compared with our new and updated 2020 outlook. As it relates to our dividend, Distributable cash flow this quarter exceeded the dividend by $125 million. With earnings strength expected in the fourth quarter and into 2021, we expect distributable cash flow to cover both the dividend and our 2021 capital expenditures as we continue on our path to deleveraging. As always has been the case, the dividend remains a potential lever we could pull if our deleveraging expectations are not being met. This quarter demonstrated the reliability of our assets, the unwavering dedication of our employees, and the resiliency of our extensive and integrated businesses. While the second quarter was challenging, our employees remained focused on serving customer needs and preparing our assets for the eventual return of curtailed volume. The key infrastructure projects we completed prior to the pandemic create substantial capacity for future growth as markets continue to improve. With that, I'll turn the call over to Walt. Thank you, Terry. 1OAK's third quarter 2020 net income totaled $312 million, or 70 cents per share. Third quarter adjusted EBITDA totaled $747 million, a 15% increase year over year and a 40% increase compared with the second quarter of 2020. Distributable cash flow was more than $540 million in the third quarter, a 12% increase year over year with a healthy dividend coverage of 1.3 times. We also generated more than $125 million of distributable cash flow in excessive dividends paid during the quarter, an 11% increase compared with the same period last year. Our September 30 net debt to EBITDA on an annualized run rate basis was 4.6 times, as we saw a significant step up in EBITDA in the third quarter from the return of curtailed volume across our system. We continue to manage our leverage towards four times or less and maintain three and a half times as our long-term aspirational goal. We ended the third quarter with no borrowings on our $2.5 billion credit facility and nearly $450 million in cash. Last week, the Board of Directors declared a dividend of 93.5 cents, or $3.74 per share on an annualized basis, unchanged from the previous quarter. We took proactive steps earlier this year to provide ample liquidity and protect our investment grade ratings. We've demonstrated our ability to access the capital markets, even during challenging market conditions, and have been able to use our balance sheet flexibility to help guide financial decisions throughout this period of uncertainty. We've proactively paid off upcoming debt maturities and have been opportunistic in repurchasing more than $200 million of debt through open market repurchases in the first nine months of the year. From an upcoming debt maturity standpoint, we have no maturities due before 2022. As Terry mentioned, with yesterday's earnings, we announced that we now expect 2020 net income and adjusted EBITDA results to be higher, approaching the midpoint of our previously provided outlook ranges. Our improved outlook is supported by the volume strength we're seeing across our assets, the pace that curtailed volumes returned, and our ability to capture previously flared gas results in an earnings run rate more in line with our original 2020 expectations and providing a clearer path to our continued deleveraging. Yesterday, we also announced the early completion of our two remaining active projects, the Bakken NGL pipeline extension and Arbuckle II pipeline extension. which were originally scheduled for completion in the fourth quarter 2020 and first quarter 2021, respectively. Third quarter CapEx included dollars pulled forward from the fourth quarter in 2021 for these projects and routine growth capital primarily for WellConnects and maintenance activities. We have now substantially completed all of our active capital growth projects. We continue to expect a run rate of total annual capital expenditures, including maintenance and growth, of $300 million to $400 million. This base level of annual capital will be maintained until producer activity levels provide visibility to volume growth warranting expanded capacity. But as always, we remain flexible with the ability to restart projects quickly as customer needs change. Recent conversations with producers, particularly those who have substantial positions in the Dunn County area of the Williston Basin, are indicating that more rigs will return in 2021, resulting in a potential need to restart Bear Creek II construction if this activity materializes. Even in this scenario, our 2021 capital expenditures would likely be in the $500 million range. We now expect our cost-saving measures to total approximately $130 million this year compared with our 2020 plan. Through September, we've recognized approximately $100 million in savings and continue to look for additional efficiencies. From a financial perspective, we remain well positioned with ample liquidity and balance sheet strength to withstand additional market uncertainty should it arise. and to be opportunistic in the event of a faster-paced recovery. I'll now turn the call over to Kevin for a closer look at our operations. Thank you, Walt. With nearly all curtailed production back online by the end of the third quarter, we saw a large step up in MGL and natural gas volumes across our system compared with the second quarter. MGL volumes across all of our operating areas exceeded pre-pandemic levels in the third quarter. and natural gas volumes processed in the Rocky Mountain region have reached more than 1.2 billion cubic feet per day in October. I'll start with the natural gas liquid segment. Third quarter NGL raw feed throughput volumes across our system increased 7% year over year and 15% compared with the second quarter. In the Rocky Mountain region, which is our highest margin business, volumes are averaging approximately 245,000 barrels per day in October, a 14% increase over our third quarter 2020 average and a more than 50% increase from the second quarter 2020. The return of curtailed production, completion of ducts, and increased flared gas capture have contributed to higher volumes. As the primary MGL takeaway provider from the region, our natural gas liquid segment not only benefits from the gas captured on one of its dedicated acreage, but also from many third-party plants across the basin. With more than 130,000 barrels per day of available capacity out of the region and the ability to expand capacity with minimal capital if needed, there's a long runway to grow with our customers. We expect MGL earnings in the region to see additional benefit from two other areas as we move into 2021. First, the early completion of our Bakken MGL pipeline extension in August. This lateral extension connects our system with an area of Williams County which has historically had limited MGL transportation options. In addition to the original contract with an expanding third party plant in the area, We've also contracted two additional third-party plants near the pipeline. Volume has already started flowing on the extension, and we expect a continued ramp into next year. As a reminder, this project is also supported by a minimum volume commitment. Second, we expect to transport all of our Williston and Powder River Basin volumes exclusively on our Elk Creek and Bakken pipelines beginning very early next year, once we complete a low-cost pump expansion on Elk Creek, which will reduce our transportation costs paid to overly-passed pipelines. In the Mid-Continent region, we completed the Arbuckle II pipeline extension in August earlier than our target date of the first quarter of 2021. This extension improves connectivity from our Elk Creek pipeline to the Arbuckle II pipeline, allowing increasing Rocky Mountain volumes the optionality to be transported to the Mont Bellevue market hub. Increasing petrochemical demand and favorable ethane economics resulted in significant ethane recovery across the mid-continent region through a good portion of the third quarter. Our raw feed throughput volumes in the region increased 9% compared with the second quarter of 2020, largely due to ethane recovery. Ethane volumes in the Mid-Continent averaged more than 245,000 barrels per day in the third quarter 2020, compared with the second quarter 2020 average of 210,000 barrels per day, a more than 17% increase driven by nearly all of our Mid-Continent plant connections recovering ethane in July and August. In September, we saw a reversal back to ethane rejection as pricing and volumes were impacted by decreased petrochemical demand due to Hurricane Laura. We have seen some plants in the mid-continent return to recovery this month, but expect FAA volumes on our system to fluctuate for the remainder of 2020 and into 2021. In the Permian Gulf Coast region, third quarter MGL raw feed throughput volumes increased 16% compared with the second quarter 2020, benefiting from returning volumes and approximately 30,000 barrels per day of short-term fractionation homing volumes. Even without the additional short-term volume, raw feed throughput in the region still increased more than 6% compared with the second quarter. As we've mentioned previously, we continue to offload 25,000 barrels per day on third-party MGL pipes, This firm contract will expire at the end of the year, which will eliminate this expense as we move these barrels to our integrated system. Moving on to the natural gas gathering and processing segment. Total natural gas volumes processed increased 13% compared with the second quarter 2020. And processing volumes in the Rocky Mountain region have reached more than 1.2 billion cubic feet per day in October. a more than 16% increase from our third quarter average. The return of curtailed volumes to our system in the Williston Basin drove the third quarter average fee rate to 94 cents per MMBTU compared to 71 cents in the second quarter. As a number of high fee percentage, large producers brought production back online, some sooner than expected. Going forward, we expect the average fee rate to remain around this level. There are 13 rigs currently operating in the Williston Basin, with eight on our dedicated acreage, which is an increase from the past few months. Drilled but uncompleted wells in the basin total more than 850, with approximately 400 on our dedicated acreage. We said previously that it takes 15 to 20 well completions per month to maintain our processing volumes around 1.1 to 1.2 BCF per day. This is a relatively small number of well completions considering we have averaged 28 completions per month through the first nine months of 2020. When we factor in our current volume levels, a significant duct inventory that is profitable to complete in this price environment, the rigs currently on the system, and some additional flared gas opportunities, we have ample inventory to support current volume levels through 2021, assuming no increase in producer activity during that timeframe. Of course, any additional producer activity in the basin would present upside, resulting in more wells drilled and or completed, driving higher volumes and ultimately earnings for 1OAK. Slide 7 in our earnings presentation has been updated to illustrate the ability to maintain current natural gas processing levels with minimal well completions. This slide is meant to be a representation, not guidance, or an indication of our expected future volumes. For reference, there are four to five factories in the region today, each with the capability to complete five to six wells per month. In addition to the substantial inventory of wells on our system, other volume tailwinds in the basin include rising gas to oil ratios, and additional gas capture opportunities. DLRs have continued to increase and remain well over 2 to 1, the result of activity concentrated in the core of the basin and maturing wells. This level of gas production suggests that even in a flat or slightly declining crude oil production environment, we could still see stable to increasing gas volumes in the region. The latest North Dakota data, which is for the month of August, showed 215 million cubic feet per day still flaring in the basin, with approximately 80 million cubic feet per day of that on One Oaks dedicated acreage. Statewide flaring in August decreased to 8% compared with nearly 20% at the same time last year. As Terry mentioned, flaring on One Oaks acreage was below the statewide average. a reflection of the infrastructure that our employees have worked hard to construct and operate in the region over the last decade, and specifically over the last couple of years. With 1.5 BCF of processing capacity, we will continue to push to capture even more of the gas produced as we move through 2021. In the natural gas pipeline segment, we reported another strong quarter of stable fee-based earnings, the firm capacity remaining nearly 95% contracted. The segment continues to be a stable fee-based earnings driver for the company, providing essential natural gas to end-use customers. Terry, that concludes my remarks. Thanks, Kevin. That was a great overview of a strong quarter, headlined by the expected return of volumes and a solid demonstration of the resiliency of our businesses. This quarter was not only marked with volume-related milestones and accomplishments. In August, we issued our 12th Annual Sustainability and ESG Report. And just recently, we received notable ESG-related recognitions, including being recognized by Just Capital for the second year in a row as the industry leader in the energy equipment and services sector and receiving an award for environmental excellence from the Environmental Federation of Oklahoma. We're always evaluating ways to improve our ESG-related performance and enhance our long-term business sustainability. This includes planning and preparing for potential changes to our industry, customer needs, or the broader demand for energy. There has been much discussion about the future state of the energy industry, and we get asked frequently what our role could be in a low-carbon world. The answer is simple. One Oak has always promoted a business culture prioritizing safety, environmental responsibility and profitability in all that we do. And as we always have, we will do our homework to gain knowledge and prepare diligently for the future as our industry continues to meet the world's energy needs in an environmentally responsible way. Whether it's actively evaluating the use of renewable energy at our facilities, developing carbon capturing projects, or setting the feasibility of using our extensive assets for hydrogen transportation and storage, our commitment to environmental stewardship remains steadfast. Our assets, their location, and our midstream skill set is compatible with many of these types of projects, but they still need to make strategic sense for our business. In many cases, technology or large-scale application may be further into the future. But we'll continue to evaluate opportunities that fit within our businesses. Because we absolutely believe that our large and extensive infrastructure has a vital role to play in the long-term energy transition. And while we evaluate new and future opportunities, I want to thank our employees for doing what they do best, operating our assets safely and responsibly, and transporting the essential MGLs and natural gas that are used to heat your home, generate electricity, and create the many end-use products that help us lead healthier, safer, and more productive lives. With that, operator, we are now ready for questions.