ONEOK, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

ONEOK is a leading midstream service provider in the US, owning and operating a large network of natural gas and natural gas liquids (NGL) pipelines and processing facilities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ONEOK’s primary business is the transportation, processing, and storage of natural gas and NGLs. They also market, gather and fractionate NGLs. Their operations are predominately in the mid-continent, Rocky Mountain, and the Permian Basin regions, making them a critical link in the energy supply chain.

Business Overview

ONEOK is a midstream company that connects natural gas and NGL producers to end markets. Their operations can be broken down into the following key segments:

  • Natural Gas Gathering and Processing: This segment includes gathering pipelines, processing plants, and natural gas gathering and transportation facilities. ONEOK’s operations include more than 5,000 gathering and processing sites in Oklahoma, Kansas, North Dakota, Wyoming, and Texas.

This is ONEOK’s most important segment which has been generating the most revenues.

  • Natural Gas Pipelines: ONEOK operates a natural gas pipeline system throughout much of the Midwestern United States. These interstate pipelines primarily transport natural gas to markets in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, and Wisconsin.

  • Natural Gas Liquids: This involves the operations of its NGL pipelines as well as fractionation, distribution, and storage facilities. ONEOK’s NGL network has about 10,000 miles of pipelines connecting production centers in the Rocky Mountain and Mid-Continent regions to key market hubs, primarily in Texas.

The energy sector is undergoing significant transformation, driven by factors such as the energy transition, increased global energy demand, and technological advancements. ONEOK’s business is heavily influenced by:

  • Growing Natural Gas and NGL Demand: Global demand for both natural gas and NGLs is expected to increase over the next decade, driven by industrial growth and the shift from coal to cleaner fuels. While many are focused on energy transitions such as renewables, it’s important to note that fossil fuels are still expected to be a major source of energy for the next decades.
  • Increased Focus on Energy Security: Governments around the world are increasing their focus on ensuring energy security, particularly since recent geopolitical events. This is likely to support investments in natural gas and NGL infrastructure and is likely to increase demand for the types of services offered by ONEOK.
  • Technological Advancement: Innovations in exploration and production techniques, particularly the application of multi-stage hydraulic fracturing, are enabling producers to extract more resources more efficiently. This should have a positive impact on the volumes of gas and NGLs that ONEOK’s pipelines can handle.
  • Regulatory and Environmental Landscape: More stringent environmental regulations are expected, which could force companies to make more investments in energy transitions and may impact cost. However, these can also create opportunities to provide solutions for gas emissions.

Competitive Landscape

ONEOK operates in a highly competitive market, facing several types of competitors across its segments.

  • Direct Competitors: These are midstream companies that compete in the same regions and offer similar services. This includes pipeline companies that also transport NGL and natural gas.
  • Producers: If producers have their own means of transportation and processing, they are a competitive threat to ONEOK.
  • Downstream Companies: Large companies that consume natural gas or NGLs and therefore, own the processing facilities as well, may be considered a competition.
  • Inter-fuel Competition: Competition with other energy sources is also an important threat to ONEOK’s core business, especially with companies such as those in renewables.
  • Commodity and Geographic Specific Factors: ONEOK faces varying economic and competitive conditions based on region and local regulations.

What Makes ONEOK Different

While ONEOK faces stiff competition, they also have some competitive advantages that make it different.

  • Asset Base: ONEOK has a large and complex network of assets including pipelines, processing facilities, storage facilities, and transportation assets spread in the mid-continent, rocky mountain, and Permian basin regions. These regions are some of the most productive areas in the US, which gives ONEOK the ability to draw in volumes, and therefore generate revenue.
  • Geographic Diversity: ONEOK’s operations are spread out over several important regions, reducing their exposure to any one geographic downturn. A big part of ONEOK’s strategy involves maintaining a large presence in the prolific natural gas and NGL-rich basins, which helps drive revenue.
  • Contracted Revenue: The company tries to contract its operations under long-term agreements to try to generate dependable revenues. This reduces a significant portion of the risk and volatility, and may create pricing power with customers.

Financials In-Depth

ONEOK’s financial performance shows solid returns on its assets, but it also has high debt. Here are some key financial observations of ONEOK, based on reports from 2021-2024:

Income Statement Analysis:

  • Revenue: ONEOK generates revenue through its three primary segments. In the latest report, Natural Gas Gathering & Processing contributed the most to the revenue. Revenue is volatile and is tied directly to the commodities prices of natural gas and NGLs and also the volumes transported by the company.

In the latest quarterly report, Natural Gas Gathering and Processing revenues are up primarily due to increased volumes, and not necessarily higher prices.

  • Adjusted EBITDA: Adj. EBITDA is a Non-GAAP measure of profitability that shows recurring earnings from operations. ONEOK’s adjusted EBITDA shows a nice trend of growth over the last few years.

As noted by the company in their financial report, “We do not view Adjusted EBITDA as an indicator of our future profitability”

  • Depreciation and Amortization: The company has high depreciation and amortization which is mostly due to its high-capital investments in long lived assets, like its pipelines and processing facilities.

  • Net Income: ONEOK’s net income can be variable and impacted by expenses that are both cyclical, as well as one-time charges such as acquisitions, restructurings, impairments, and others, such as changes in tax rates, interest rates, gains or losses on asset sales, etc. This high volatility makes it harder to have a solid picture of a predictable operating performance.

Balance Sheet Analysis:

  • Current Assets: Cash, receivables, and inventories are the dominant components of its current assets.
  • PP&E: ONEOK is capital-intensive, and that is evidenced by its large property, plant, and equipment on the balance sheet. Much of ONEOK’s capital is in long-lived assets, which can decrease its flexibility and ability to quickly respond to market conditions.
  • Goodwill and Intangible Assets: Given ONEOK’s strategy of expansion by acquisition, intangible assets such as goodwill, contracts, customer agreements, etc., make up a sizable portion of their balance sheet. This also increases their depreciation expense.
  • Debt: ONEOK has a considerable amount of debt, but this is common for midstream companies, because much of their assets are long term. Much of this debt is related to the company’s financing activities to fund its projects. The company also carries a substantial amount of debt-equivalents such as pension obligations and long-term financial leases.
  • Equity: The company’s equity levels have been affected due to negative retained earnings, which have been affected by large losses in recent years. The amount of retained earnings also can fluctuate as a result of changes in earnings and or share buyback programs.

Cash Flow Analysis:

  • Cash Flow from Operations: ONEOK’s cash from operations has had some inconsistencies and dips in the recent quarters. This implies a potential instability in its ability to generate profits and invest in projects, which may ultimately impact growth.
  • Investing Cash Flow: The investing cash flow has been mostly negative, due to large capital expenditures on new and existing projects. However, there has also been investments into acquisitions of other midstream operators.
  • Financing Cash Flow: ONEOK’s financing cash flow has been highly dependent on debt and is very variable, which is tied to its debt strategy. They are also engaging in share repurchases.

Key Observations:

  • Revenue Volatility: Due to it being linked to commodities prices, ONEOK’s revenue stream is volatile and varies along with commodity prices. Since the company also provides transmission services, their revenues also are tied to the actual volume of natural gas and NGLs they handle and therefore, are affected by production, capacity, and supply chain variables.
  • Leveraged Balance Sheet: The company does have a high debt level on its balance sheet, and it is important for investors to understand the long-term trends in interest rates and the company’s ability to repay its debts, and maintain its credit ratings in the coming years. The company has made note of its ongoing strategy to reduce its debts in the coming years.
  • Capital Intensive Nature: Due to its operations requiring highly capital intensive assets, the company has to incur substantial costs for maintenance, replacement, and acquisitions. So, these have to be watched closely.
  • Operational Efficiency: ONEOK has shown efforts to increase efficiency, however their operating margins have also varied with fluctuations in expenses.

Moat Rating: 2 / 5

ONEOK’s competitive advantages provide a narrow moat. While it has some barriers to entry that protect its business to a certain degree, the overall level is not sufficient to qualify for a wide moat.

  • Strength in its Operations: ONEOK has some advantages in terms of its massive network and operational efficiency that allows it to operate economically. However, many competitors may be able to mimic some of these advantages, or could take over markets by offering a more attractive price with lower cost structures.
  • Customer Contracts: These help to lock-in profits and stabilize them, but they are not impenetrable and can be negotiated again upon expiry.

Risks That Can Harm the Moat and Business

Several factors could potentially weaken ONEOK’s competitive advantages:

  • Regulatory Risk: Changes in regulations, such as government subsidies, tax policy, restrictions on fossil fuels, or environmental laws could all have a direct and significant impact on the long-term prospects of the company. Any actions taken by government that favor renewable energy over fossil fuels might reduce demand for ONEOK’s products and services.
  • Commodity Prices: Since the company’s financial fortunes are directly tied to the prices of the commodities they transport, any change in commodity prices would directly impact the financials.
  • Technological Disruption: Emerging technology that is more cost efficient or is less prone to carbon emissions can reduce the reliance on pipelines for transporting fuel. Specifically a breakthrough in renewables, hydrogen, or energy storage technology can negatively affect the long-term prospects of the company.
  • Competition: The company is part of a very competitive landscape that has no lack of participants, a loss of market share to new or existing competitors would have a great impact on future financials. Specifically, intense competition in the midstream industry can lead to lower operating margins.
  • Economic Cyclicality: ONEOK is exposed to a large degree to macroeconomic conditions and will usually face downturns when the economy is weak. Any such downturns can severely impact business revenues, profitability, and cash flow.
  • Financial Risk: ONEOK’s high debt loads could increase its vulnerability to interest rate increases, making their debt more expensive and reducing potential earnings. Moreover, the presence of these obligations limits the ability of ONEOK to utilize debt to further growth, and limits how much they may return in dividends and share buybacks.
  • Project Completion Risk: ONEOK is actively engaged in multiple projects that are related to expansions and modernizations. Any issues related to project management that result in overruns or delays can affect planned costs and revenue.
  • Operational Risks: The company must continue to maintain high reliability and safety metrics for its pipelines, processing facilities, and storage assets. Failure to do so could negatively affect their revenue.
  • Integration Risks: ONEOK’s aggressive acquisition strategy, while increasing its size, also causes issues with integrating the new businesses with their own operations, culture, and legacy systems.

Business Resilience

ONEOK’s long-term resilience is subject to numerous risks, but the presence of some factors may help them weather the coming years and continue generating profits:

  • High-Demand Energy Infrastructure: As long as the world’s economy still depends on natural gas and NGL, ONEOK will have a steady stream of customers and revenues who need to use their operations. While long-term demand may fluctuate due to changing global priorities, these fuels are not expected to diminish in importance any time soon.
  • Long-Term Contracts: ONEOK’s business model centers around having long-term contracts. These contracts provide stability in revenue, even when market prices are volatile. This provides some stability and resiliency.
  • Dominant Market Position: In their primary operational areas, ONEOK has a leading position that allows it to generate consistent profits from the volume of the natural gas and NGLs that passes through their network of assets. This gives them a certain degree of pricing power and stability during downturns.

Understandability: 3 / 5

ONEOK’s business model is somewhat complex.

  • While the midstream business is easy to understand in terms of basic flow of products, there is a lack of transparency as to how the profits are generated. Also, the financial statements are quite complicated, and there are a lot of factors that can influence revenue, cash flow, and earnings. To truly understand the business, a good amount of financial analysis is needed.
  • It also is a bit complicated to understand the specific areas where the company generates a moat and what are the risks to that moat.
  • The interconnectedness of pipelines and processing plants, as well as multiple commodities being transported further complicates analysis.

Balance Sheet Health: 3 / 5

ONEOK’s balance sheet appears reasonably healthy, however it does come with its own caveats.

  • Strong Asset Base: The company has a large, diversified asset base including pipelines, processing plants, and storage assets.
  • High Debt: The high debt amounts on the balance sheet do make the company’s financial profile riskier. Interest expense will also be affected by changing interest rates and they should look to hedge their risks.

  • Variable Cash Flows: Fluctuations in commodity prices can lead to variations in the company’s cash flows, reducing its financial stability.

  • Low-Growth Potential: Given a lack of growth in earnings and relatively high payouts in dividends, ONEOK does not have as much flexibility for its future and may have a higher risk profile due to its debts.

Recent Concerns

  • Increased Volatility in Commodities: The recent rise in volatility in oil and gas, coupled with geopolitical uncertainty, and rising inflation, has made the short-term prospects of the company harder to predict.
  • Increased Debt: While they are trying to reduce the amount of debt they have on the balance sheet, this is still an ongoing process.

Management Comments: Despite these challenges, ONEOK’s management team has expressed their confidence in the long-term business, citing the essential nature of their services and the growing demand for natural gas. They are also focusing on implementing better operational practices to enhance the efficiency of their operations. Finally, they also have a well-hedged position that helps protect them from short term swings in the commodities prices. They also appear to be in a good position to utilize tax credits.