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Rough Weather Conditions Kept ONEOK, Inc.'s Volume Growth at Bay

Rough winter weather, especially in North Dakota's Bakken shale, caused the results of ONEOK (NYSE: OKE) and its master limited partnership, ONEOK Partners (NYSE: OKS), to come in a bit under expectations. That said, the MLP still delivered year-over-year growth in the fourth quarter thanks in part to higher processing fees, which flowed down to ONEOK's results. Overall, the midstream general partner's cash flow available for distributions rose 2.7% year over year. However, cash flow growth is expected to increase sharply in 2017 after ONEOK completes the acquisition of its MLP.

ONEOK Partners results: The raw numbers

In millions of dollars. Data source: ONEOK Partners. Chart by author.

What happened with ONEOK this quarter? 

Rough weather weighed on volumes:

  • Adjusted EBITDA at ONEOK Partners' natural gas liquids segment slipped 9.2% to $253.6 million due to a 7% decrease in NGLs transported on gathered lines as a result of severe winter weather in December. In addition to that, the segment experienced lower short-term contracted volumes in the Mid-Continent, lower volumes and rates on its West Texas LPG System, and lower volumes in the Barnett Shale and Granite Wash regions as well as higher operating costs.
  • Natural gas pipeline segment earnings jumped 21.7% to $89.9 million due to an increase in demand charge capacity contracted during the quarter as well as higher net retained fuel as a result of increased throughput on its system.
  • Segment adjusted EBITDA in the natural gas gathering and processing segment surged 30.1% year over year to $126.6 million. A 2% increase in natural gas volumes processed thanks to recently completed growth projects helped offset the impact of inclement weather in the Bakken. The company also benefited from much higher average fee rates thanks to recently restructured contracts, with the average increasing from $0.44 in 2015 to $0.76 in 2016.
  • Overall, ONEOK Partners' adjusted EBITDA rose 4.5% year over year to $470.5 million while distributable cash flow was basically flat at $339.5 million.
  • That pushed ONEOK Partners' full-year adjusted EBITDA up to $1.84 billion, which was slightly below its $1.88 billion guidance. However, distributable cash flow was $1.41 billion, which was ahead of its $1.39 billion forecast and pushed its coverage ratio up to 1.09 times.
  • Meanwhile, ONEOK's full-year net income was $352 million, which missed the guidance expectation of $360 million. However, cash available for dividends was $680 million, which was ahead of the $675 million forecast, resulting in a full-year coverage ratio of 1.31 times, slightly ahead of its 1.3 times forecast. 

Image source: Getty Images.

What management had to say 

CEO Terry Spencer commented on the results at both companies by saying:

We experienced lower than expected natural gas and NGL volumes in the fourth quarter primarily due to increased ethane rejection and severe winter weather in the Williston Basin and Mid-Continent in December, impacting 2016 results by an estimated $15 million. However, despite weather impacts, natural gas volumes processed continued to increase in the fourth quarter, compared with the third quarter 2016. While heavy snowfall and severe weather in the Williston Basin impacted our operations early in the first quarter of 2017, February volumes have rebounded significantly.

While severe winter weather and other issues had a $15 million impact on ONEOK Partners' results during the fourth quarter, the company's results were roughly in line with guidance due to higher fees. Because of that, ONEOK also largely met the mark on its full-year expectations.

Looking forward 

Changes are afoot at ONEOK after the company agreed to acquire its MLP in a $17.2 billion deal earlier this year. That transaction will result in ONEOK Partners' investors receiving 0.985 shares of ONEOK stock for every unit they own sometime next quarter if the deal closes when expected. Meanwhile, the deal's closing will enable ONEOK to boost its dividend by 21% in 2017, with plans to deliver 9% to 11% annual growth after that through 2021 while maintaining a dividend coverage ratio of 1.2 times. The company believes that the transaction will reduce its cost of capital and make it easier to finance its expanding footprint, which includes a recently secured project to expand a pipeline in Oklahoma that should enter service early next year.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool recommends ONEOK Partners. The Motley Fool has a disclosure policy.