The following discussion and analysis should be read in conjunction with our
unaudited Consolidated Financial Statements and the Notes to Consolidated
Financial Statements in this Quarterly Report, as well as our Annual Report.
RECENT DEVELOPMENTS
Please refer to the "Financial Results and Operating Information" and "Liquidity
and Capital Resources" sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations in this Quarterly Report for
additional information.
Market Conditions - Late in the first quarter 2020, the energy industry
experienced historic events that led to a simultaneous demand and supply shock.
The World Health Organization declared the novel strain of COVID-19 a global
pandemic and recommended containment and mitigation measures worldwide, which
contributed to a massive economic slowdown and decreased demand for crude oil.
In addition, Saudi Arabia and Russia increased production of crude oil as the
two countries competed for market share. As a result, the global supply of crude
oil significantly exceeded demand and led to a collapse in crude oil prices.
Despite recently announced production cuts from many oil producing countries,
supply exceeds demand, crude oil storage is near capacity and prices remain
volatile. WTI crude oil dipped below $20.00 per barrel in the month of March and
declined to an average of approximately $45.00 per barrel in the first quarter
2020, compared with an average of approximately $55.00 per barrel in the first
quarter 2019. The collapse in crude oil prices and demand for energy commodities
has also contributed to lower NGL product prices and lower natural gas prices,
which is creating challenges for crude oil and natural gas producers as they
assess their future drilling and production plans.
In response to these events, we are taking steps to manage potential impacts of
the COVID-19 outbreak on our employees, customers and the communities where we
operate and do business. As always, we remain focused on operating our assets
safely, reliably and in an environmentally responsible manner. We are taking
actions to continue safe operations, protect our workforce and implement
appropriate cost reduction measures. We have reduced our planned 2020
capital-growth expenditures by approximately $900 million. We continue to
monitor the COVID-19 outbreak and have implemented our business continuity
plans. ONEOK is a critical infrastructure business as defined by the United
States Department of Homeland Security, and, therefore, our workforce remains
fully engaged in the midst of government issued stay-at-home orders. We
implemented remote work procedures when possible to protect the safety of our
employees and their families, and have taken extra precautions for our employees
who work in the field or need to report to a ONEOK facility, such as increased
facility access restrictions and sanitation procedures. We continue to implement
risk-management and cybersecurity measures designed to ensure that our systems
remain functional in order to both serve our operational needs and to provide
service to our customers. We have reduced work performed by contractors and
continue to look for opportunities to reduce expenses.
Due to the current commodity price and market environment, we experienced a
significant decline in our share price and market capitalization, and performed
a Step 1 analysis to test our goodwill for impairment and evaluated certain
long-lived asset groups and equity investments for impairment. As a result, we
recorded $641.8 million in noncash impairment charges,
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which had an adverse impact on our first-quarter 2020 financial results.
However, we expect to maintain sufficient liquidity and financial stability in
2020 due to cash flows from operations and our $2.5 Billion Credit Agreement.
Our credit ratings have not been negatively affected by these events. In March
2020, the CARES Act was signed into law in response to the COVID-19 pandemic,
and we opted into the CARES Act 401(k) hardship withdrawal and loan deferral
programs for employees. While this legislation includes tax provisions that will
modestly benefit us, we do not expect the CARES Act to materially impact us.
Due to the current commodity price environment and expected rig reductions, we
expect adverse impact to our volume expectations and cash flows in 2020;
however, we expect this impact to be partially mitigated by the significant
amount of flared natural gas in the Williston Basin and our fully contracted
positions in the Permian Basin. We are monitoring producers' drilling,
completion and production plans and are evaluating the impact on our future
volume expectations. We are also monitoring regulatory developments in several
of the states where we operate, where regulators are considering imposing limits
on oil production, which could further impact our volume expectations. The
energy industry has historically experienced down cycles from disruptive events,
and as a result, we have previously positioned ourselves to minimize exposure to
direct commodity price volatility and volumetric risk. Each of our three
reportable segment's earnings are primarily fee-based, and we expect our
consolidated earnings to be approximately 90% fee-based in 2020. While our
Natural Gas Gathering and Processing segment's earnings are primarily fee-based,
we have some direct commodity price exposure related primarily to POP contracts.
Under certain POP with fee contracts, our contractual fees and POP percentage
may increase or decrease if production volumes, delivery pressures or commodity
prices change relative to specified thresholds. In addition, although our
Natural Gas Gathering and Processing and Natural Gas Liquids segments generate
primarily fee-based earnings, those segments' results of operations are exposed
to volumetric risk as a result of reduced drilling and completion activity,
declining well productivity, severe weather disruptions, operational outages and
ethane demand. Our Natural Gas Pipelines segment is not exposed to significant
volumetric risk due to nearly all our capacity being subscribed under long-term
firm contracts.
See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk,
in this Quarterly Report for more information on our exposure to market risk.
Williston Basin Natural Gas Capture - In our Natural Gas Gathering and
Processing segment, gathered and processed volumes increased in the first
quarter 2020, compared with the same period in 2019, due primarily to increased
processing capacity from completed capital-growth projects, the capture of
natural gas previously flared by producers and new well connections. Our Demicks
Lake I natural gas processing plant was placed in service in October 2019, and
our Demicks Lake II natural gas processing plant was placed in service in the
first quarter 2020, increasing our total processing capacity to approximately
1.5 Bcf/d in the Williston Basin. These plants enable us to capture natural gas
previously flared by producers on our more than 3 million dedicated acres in the
Williston Basin. The current weakened commodity price environment is creating
challenges for producers, and we expect decreased drilling and completion
activity for the remainder of 2020.
Northern Border Pipeline, which provides key natural gas takeaway capacity out
of the Williston Basin, recently notified shippers that it plans to place limits
on the Btu content of the residue natural gas it receives in order to meet
downstream pipeline specifications. When these limits take effect, natural gas
processors in the Williston Basin may recover incremental ethane into the NGL
stream in order to lower the Btu content of the residue natural gas delivered to
Northern Border Pipeline. As a result, ethane deliveries to our NGL system may
increase.
Mid-Continent Region - Due to the current commodity price environment, we expect
a decline in demand for our services in all of our segments in the Mid-Continent
as producers decrease drilling and completion activities in this region.
NGLs - In our Natural Gas Liquids segment, we are the largest NGL takeaway
provider in the Rocky Mountain region where volumes continued to increase in the
first quarter 2020, compared with the same period in 2019, from our new and
existing processing plants, third-party processing plants and volumes previously
flared by producers. As a result, we have reached approximately 240 MBbl/d of
NGLs transported out of this region to downstream market centers through our
integrated value chain, which was strengthened through our recently completed
capital-growth projects. Our Elk Creek pipeline was completed in two phases
during the second half of 2019, and we have completed construction of our
Arbuckle II pipeline. During the first quarter 2020, we completed construction
of our MB-4 fractionator, with a capacity of 125 MBbl/d, which is fully
contracted. These additions were needed to accommodate the Rocky Mountain and
Permian region volume growth we have experienced. However, due to recent events,
the current weakened commodity price environment is creating challenges for
producers across our system, and we expect decreased drilling and completion
activity in the remainder of 2020.
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Growth Projects - We operate an integrated, reliable and diversified network of
natural gas gathering, processing, storage and transportation assets connecting
NGL supply in the Rocky Mountain, Permian and Mid-Continent regions with key
market centers. Since the beginning of 2018, we have completed several
capital-growth projects that include NGL pipelines, NGL fractionators, natural
gas processing plants and related natural gas and NGL infrastructure. Due to the
collapse in crude oil prices and massive decline in demand for energy
commodities, we reduced our planned 2020 capital-growth expenditures by
approximately $900 million, including the suspension of our recently announced
plans to construct the Demicks Lake III natural gas processing plant, a fourth
expansion of the West Texas LPG pipeline system and reduction in the scope of
the expansion of our Elk Creek pipeline. We have also paused various other
projects as noted in the table below, which can be restarted quickly when
drilling activity resumes. We expect capital expenditures to continue to
decrease for the remainder of 2020 and into 2021. Our announced large
capital-growth projects that have recently been completed or are in various
stages of construction are outlined in the table below:
Original
Approximate Target
Project Scope Costs (a) Completion
Natural Gas Gathering and Processing (In millions)
Demicks Lake I plant 200 MMcf/d processing plant and $400 Completed
and related related gathering infrastructure in October 2019
infrastructure the core of the Williston Basin
Supported by acreage dedications
with long-term primarily fee-based
contracts
Demicks Lake II 200 MMcf/d processing plant and $410 Completed
plant and related related gathering infrastructure in January 2020
infrastructure the core of the Williston Basin
Supported by acreage dedications
with long-term primarily fee-based
contracts
Bear Creek plant 200 MMcf/d processing plant $405 First Quarter
expansion and expansion and related gathering 2021(b)
related infrastructure in the Williston
infrastructure Basin
Supported by acreage dedications
with long-term primarily fee-based
contracts
(a) - Excludes capitalized interest/AFUDC.
(b) - Given the current environment, we paused the majority of construction activities
on this project and do not expect to complete construction by the original target
completion date.
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Original
Approximate Target
Project Scope Costs (a) Completion
Natural Gas Liquids
Elk Creek pipeline 900-mile NGL pipeline from the $1,400 Completed
and related Williston Basin to the Mid-Continent December 2019
infrastructure region, with capacity of up to
240 MBbl/d, and related
infrastructure
Anchored by long-term contracts
Expansion capability up to 400
MBbl/d with additional pump
facilities
Arbuckle II pipeline 530-mile NGL pipeline from the STACK $1,360 Completed
and related area to Mont Belvieu, Texas, and March 2020
infrastructure related infrastructure
Supported by long-term contracts
Expansion capability up to 1 MMBbl/d
West Texas LPG Increasing mainline capacity by 80 $295 First Quarter
pipeline expansion MBbl/d with additional pump
2020 (b)
and Arbuckle II facilities and pipeline looping
connection Connecting West Texas LPG pipeline
system to the Arbuckle II pipeline
Supported by long-term dedicated
production from six third-party
processing plants expected to
produce up to 60 MBbl/d
MB-4 fractionator 125 MBbl/d NGL fractionator in Mont $575 Completed
and related Belvieu, Texas, and related March 2020 (c)
infrastructure infrastructure, which includes
additional NGL storage in Mont
Belvieu
Fully contracted with long-term
contracts
Bakken NGL pipeline 75-mile NGL pipeline in the $100 Fourth Quarter
extension Williston Basin connecting to a 2020
third-party processing plant
Supported by a long-term contract
with a minimum volume commitment
Arbuckle II Provide additional takeaway capacity $240 First Quarter
extension project in the STACK area 2021
and additional
gathering Allow increasing volumes on the Elk
infrastructure Creek pipeline access to
fractionation capacity at Mont
Belvieu, Texas
Arbuckle II pipeline Increasing mainline capacity with $60 First Quarter
expansion
additional pump facilities 2021
Increases capacity to 500 MBbl/d
MB-5 fractionator 125 MBbl/d NGL fractionator in Mont $750 First Quarter
and related Belvieu, Texas, and related 2021 (d)
infrastructure infrastructure, which includes
additional NGL storage in Mont
Belvieu
Fully contracted with long-term
contracts
West Texas LPG Increasing mainline capacity by 40 $145 First Quarter
pipeline expansion MBbl/d
2021 (d)
Supported by long-term dedicated
production from third-party
processing plants expected to
produce up to 45 MBbl/d
Mid-Continent 65 MBbl/d of expansions at our $150 First Quarter
fractionation Mid-Continent NGL facilities 2021 (d)
facility expansions
(a) - Excludes capitalized interest/AFUDC.
(b) - We completed expansions to increase mainline capacity by approximately 45
MBbl/d and expect to complete the remaining portion of this project, which was
delayed due to weather, in May 2020.
(c) - We completed 75 MBbl/d in December 2019 and completed the remaining 50
MBbl/d in March 2020.
(d) - Given the current environment, we paused the majority of construction
activities on these projects and do not expect to complete construction by the
original target completion dates.
Ethane Production - Ethane volumes under long-term contracts delivered to our
NGL system have generally been increasing since 2017, primarily as a result of
NGL demand increasing from exports and petrochemical companies completing
ethylene production projects and plant expansions. Our completed NGL
capital-growth projects have helped alleviate system constraints, enabling
additional NGLs, including ethane, to reach the Mont Belvieu, Texas, market
center. However, ethane volumes delivered to our NGL system averaged 385 MBbl/d
in the first quarter 2020, compared with 411 MBbl/d in the first quarter 2019,
with the decrease primarily due to ethane rejection. Due to the collapse of
energy prices in March 2020 and continuing volatility, we expect that higher
ethane rejection is likely to continue through the remainder of 2020.
Impairments - Based on the results of our goodwill impairment test and
evaluation of certain long-lived asset groups and equity investments for
impairment, we recorded the following impairment charges:
Natural Gas Gathering and Processing - For the three months ended March 31,
2020, we recorded $380.5 million of noncash impairment charges related primarily
to certain long-lived asset groups that were not recoverable, $153.4 million of
noncash
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impairment charges related to goodwill and $30.5 million of noncash impairment
charges related to our 10.2% investment in Venice Energy Services Company.
Natural Gas Liquids - For the three months ended March 31, 2020, we recorded
$70.2 million of noncash impairment charges related to certain inactive assets
and $7.2 million of noncash impairment charges related to our 50% investment in
Chisholm Pipeline Company.
For additional information on our impairment charges, see Note A of the Notes to
Consolidated Financial Statements in this Quarterly Report.
Debt Issuances and Repurchases - In early March 2020, we completed an
underwritten public offering of $1.75 billion senior unsecured notes consisting
of $400 million, 2.2% senior notes due 2025; $850 million, 3.1% senior notes due
2030; and $500 million, 4.5% senior notes due 2050. The net proceeds, after
deducting underwriting discounts, commissions and offering expenses, were
$1.73 billion. A portion of the proceeds were used to pay all outstanding
amounts under our commercial paper program. The remainder was, and will be, used
for general corporate purposes, which may include repayment of existing
indebtedness and funding capital expenditures. In March 2020, we repurchased in
the open market $67.0 million outstanding principal of certain of our senior
notes for an aggregate repurchase price of $50.5 million with cash on hand. In
connection with these open market repurchases, we recognized a $15.8 million
gain on extinguishment of debt, which is included in other income in our
Consolidated Statement of Income for the three months ended March 31, 2020.
Dividends - In February 2020, we paid a quarterly dividend of $0.935 per share
($3.74 per share on an annualized basis), an increase of 9% compared with the
same quarter in the prior year. We declared a quarterly dividend of $0.935 per
share ($3.74 per share on an annualized basis) in April 2020. The quarterly
dividend will be paid May 14, 2020, to shareholders of record at the close of
business on April 27, 2020.
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