TULSA Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of ONEOK Inc earnings conference call or presentation Wednesday, November 4, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * T.D. Eureste ONEOK, Inc. - IR * Terry Spencer ONEOK, Inc. - President, CEO * Derek Reiners ONEOK, Inc. - SVP, CFO, Treasurer * Sheridan Swords ONEOK, Inc. - SVP Natural Gas Liquids ONEOK Partners * Kevin Burdick ONEOK, Inc. - VP Natural Gas Gathering & Processing ================================================================================ Conference Call Participants ================================================================================ * Eric Genco Citigroup - Analyst * Christine Cho Barclays Capital - Analyst * Craig Schere Tuohy Brothers - Analyst * Kristina Kazarian Deutsche Bank - Analyst * Becca Followill US Capital Advisors - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the third-quarter 2015 ONEOK and ONEOK Partners earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to your host, Mr. T.D. Eureste. Please go ahead, sir. -------------------------------------------------------------------------------- T.D. Eureste, ONEOK, Inc. - IR [2] -------------------------------------------------------------------------------- Thank you and welcome to the ONEOK and ONEOK Partners third-quarter 2015 earnings conference call. A reminder that statements made during this call that might include ONEOK or ONEOK Partners expectations or projections should be considered forward-looking statements and are covered by the Safe Harbor provisions of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any 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 CEO of ONEOK and ONEOK Partners. Terry? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [3] -------------------------------------------------------------------------------- Thank you, T.D. Good morning and thank you for joining us today and for your continued interest in ONEOK and ONEOK Partners. On this conference call is Walt Hulse, Executive Vice President of Strategic Planning and Corporate Affairs; Derek Reiners, our Chief Financial Officer; Wes Christensen, Senior Vice President, Operations; Sheridan Swords, Senior Vice President, Natural Gas Liquids; Kevin Burdick, Vice President, Natural Gas Gathering & Processing; and Phil May, Vice President, Natural Gas Pipelines. As a reminder, key financial and operational information has been updated in a short presentation and is posted on ONEOK's and ONEOK Partners' websites. Please refer to this presentation and to the earnings releases for variance explanations and key metrics. Before we discuss our third-quarter performance and operational updates, I would like to reiterate our continued confidence in ONEOK and ONEOK Partners ending the year within our 2015 guidance ranges. Additionally, we expect ONEOK Partners to maintain 2016 distribution coverage of greater than 1.0 times and to significantly reduce our commodity exposure in the gathering and processing segment, as we remain confident in completing substantially all of our renegotiations on Williston Basin contracts in 2015, which we expect will increase our fee-based margin in this segment to more than 70% in 2016, up from approximately 50% in 2015. As we outlined our 2015 financial and volume growth expectations earlier in the year, we emphasized that the Partnership's volumes and earnings would be weighted towards the second half of the year. We saw this growth in the third quarter as we continued to see earnings growth sequentially and we reached record volumes in the gathering and processing segment and natural gas liquids segments in September. Even in these challenging market conditions, our well-positioned 36,000-mile integrated natural gas and natural gas liquids pipeline network is providing growth opportunities in the basins where we operate. We're executing on these opportunities by continuing to focus primarily on organic growth projects and initiatives that reduce our commodity exposure and make long-term economic and strategic sense for our business. Before I can give an update on our three segments, I will now turn the call over to Derek for a brief discussion of ONEOK and ONEOK Partners financials. Derek? -------------------------------------------------------------------------------- Derek Reiners, ONEOK, Inc. - SVP, CFO, Treasurer [4] -------------------------------------------------------------------------------- Thank you, Terry. Starting at the Partnership, our 2015 EBITDA contribution continues to increase sequentially, as anticipated. We expect EBITDA to once again be higher in the fourth quarter 2015 and to be within our 2015 financial guidance EBITDA range for the year. The Partnership's third-quarter EBITDA of just over $400 million increased 4% compared with the same period in 2014, in spite of a nearly 67% drop in NGL prices. For the third quarter, our coverage ratio improved to 0.91 times coverage, a substantial improvement when you consider the increased number of units outstanding following our large equity offering in August. We did accelerate the timing of the issuance from our original plans. Additionally, the Partnership's third-quarter EBITDA and coverage ratio were impacted negatively by approximately $16 million in the natural gas gathering and processing and natural gas liquids segments combined, due to unplanned operational outages at the Partnership's natural gas gathering and processing facilities in the Williston Basin. Terry will provide more detail on this in his remarks. The Partnership has a solid balance sheet and ample liquidity to support our current capital program, including access to our commercial paper program and credit facility. Leverage was also reduced with higher EBITDA and the recent equity issuance. As of September 30, ONEOK Partners had an adjusted debt to EBITDA ratio of 4.3. The Partnership remains committed to its investment-grade credit rating and will continue to make prudent financial decisions to protect the balance sheet. In August, the Partnership raised $750 million of equity from ONEOK and funds managed by Kayne Anderson Capital Advisors, one of the Partnership's largest institutional unitholders. This equity issuance fulfilled the Partnership's 2015 equity needs and is expected to satisfy equity needs well into 2016. Before we move on to ONEOK, I would like to point out our reduced commodity price sensitivity, resulting from the contract restructuring efforts in our gathering and processing segment. As we restructure contracts to more fee-based arrangements, our exposure to commodity prices will be reduced. As a result of the restructuring, we have realigned the Partnership's natural gas volumes hedged to reflect the revised natural gas equity volumes expected in 2016 and have provided updated hedging tables and sensitivities in the news release. At ONEOK, our liquidity remains strong, with all of our $300 million credit facility available and a very strong third-quarter dividend coverage ratio of 1.34 times. ONEOK increased its investment in the Partnership by using proceeds from a $500 million notes offering and cash on hand to purchase $650 million of ONEOK Partners units. ONEOK also contributed approximately $15 million to maintain its 2% general partner interest in ONEOK Partners. With the increased ownership percentage in ONEOK Partners and at the current distribution levels, annual distributions received from the Partnership are expected to increase by more than $100 million. In October, ONEOK increased its dividend by $0.01 per share or 2% to $0.615 per share, resulting in an annualized dividend of $2.46 per share. ONEOK's decision to increase the dividend reflects the Partnership's expected natural gas liquids and natural gas volume growth, the success in re-contracting efforts, and the recent investment in ONEOK Partners. We continue to have confidence in the Partnership's ability to execute its growth strategies, allowing ONEOK to enhance its dividend. This concludes my remarks. Terry will now take a closer look at each of our business segments. Terry? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [5] -------------------------------------------------------------------------------- Thank you, Derek. Starting with our natural gas liquids segment, the segment continued its earnings growth over the second quarter 2015 as natural gas liquids volumes increased in our highest margin areas. We continue to see strong natural gas liquids volume growth in the Williston Basin and in the Mid-Continent's Cana-Woodford Shale Stack and SCOOP areas. In the Williston Basin, we are reaching record natural gas liquids gathered volumes quicker than we had originally expected and increased the amount of Bakken NGL pipeline volumes we expect to reach in the fourth quarter by 10,000 barrels per day from our previous target. In the Mid-Continent, we have increased the fourth-quarter NGL gathered volume we expect to reach by 40,000 barrels per day from our previous target. This increase represents spot volumes we anticipate in order to meet customer needs in the fourth quarter. Moving on to our fractionated volumes, we continued to see increased ethane fractionated due to decreased ethane rejection in the Williston Basin in the third quarter and we expect decreased levels of ethane rejection to continue. We also saw more than 23,000 barrels per day of incremental spot volumes on our system in the third quarter as we were able to utilize our fractionation assets to meet customer demand. We expect to see increased levels of incremental spot volume on our system throughout the remainder of the year and expect to reach approximately 645,000 barrels per day fractionated in the fourth quarter. This represents an increase of 65,000 barrels per day from our previous target, of which approximately 40,000 barrels per day are spot volumes. And finally, in recent weeks we have seen Conway-to-Mont Belvieu ethane price differentials range from $0.02 to $0.03 per gallon and we expect this range to continue for the remainder of this year. Our natural gas pipelines business continues to provide the Partnership with primarily fee-based earnings and long-term firm demand contracts. As of the third quarter, this segment was approximately 97% fee based, with additional new primarily fee-based projects underway. One of these new projects is the Roadrunner Gas Transmission pipeline project, which reached an important milestone this quarter when it received approval for a presidential permit and authorization from the Federal Energy Regulatory Commission. The permit allows for the construction and operation of the border-crossing pipeline, which will export natural gas from the Permian Basin in west Texas to Mexico. Construction is underway and we still expect the first phase to be complete during the first quarter 2016. The natural gas gathering and processing segment's third-quarter results increased sequentially from the second quarter to the third quarter 2015 and we expect a very strong fourth quarter. We already hit record volumes in September in the Williston Basin and our largest producer in the Mid-Continent is making progress completing wells drilled in the first half of the year. Let's take a closer look at the Williston Basin. Starting off with well connects, we connected more than 720 wells through the third quarter, exceeding our original 2015 target of 700 wells. We are increasing our 2015 well connect target to 825 wells by year-end, which will bring additional volumes to our system in the remainder of 2015 and into 2016. We are reaching record natural gas gathered volumes quicker than we had originally expected. These volumes are the result of multiple factors, including increased well connects, the completion of three of our six compression projects, continued improvements in well performance, and the inventory of flared gas available to capture on our acreage dedication. We saw natural gas gathered volumes reached 685 million cubic feet per day in September, which we previously expected to reach in the fourth quarter. We now expect to reach 710 million cubic feet per day in the fourth quarter in advance of our 200 million cubic foot per day Lonesome Creek plant coming online. In North Dakota, we continue to actively participate on the flaring task force, which provides policy and flaring target recommendations to the North Dakota Industrial Commission, or the NDIC. The NDIC recently passed updated gas capture percentages and timing, as well as providing a 90-day bank concept for producers who exceed the gas capture targets. These changes are not expected to have a material impact on our volume growth into 2016. While we continue to estimate 145 million cubic feet per day of flared gas on our acreage dedications, we expect that the additional capacity from our Lonesome Creek and Bear Creek plants and associated pipelines and compression projects will deliver the necessary infrastructure to assist our customers in staying well above the NDIC gas capture targets. In the Mid-Continent, our largest producer in the Cana-Woodford did experience minor timing delays in well completion. However, we continue to be on track to reach 910 million cubic feet per day in the fourth quarter. With another quarter complete, we have continued confidence in the success of our contract restructuring efforts. We have renegotiated many contracts to significantly increase the fee-based components and continue to actively work with our producers to similarly restructure additional contracts. We are starting to see the average fee rate increase in our financial results. For the third quarter, the segment reported a $0.43 average fee rate, which is nearly a 20% increase compared with a year ago. We expect this rate to significantly increase as we complete substantially all of our Williston Basin contract renegotiations in 2015 and receive the full benefit of the increased fee-based margins in 2016. Operationally, we expect our Lonesome Creek plant to be completed by the end of this month, and as we complete the startup process, we expect the facility to start ramping up in mid-December. We also expect to complete the remaining three compressor stations in the fourth quarter, which will provide the infrastructure for Lonesome Creek to be approximately half-full by the second quarter 2016. As I already pointed out, our natural gas volumes are at record highs earlier than anticipated. This is the result of both new and existing wells performing better than anyone anticipated in the Williston Basin and our seasoned operators working diligently to maximize our assets not only in the Williston, but across our 36,000-mile integrated system. Our Company has a history of operating safely and reliably. However, the occasional mechanical-related outage will occur, resulting in downtime. As mentioned previously, we did experience some unplanned operational outages this quarter at several of our natural gas gathering and processing facilities in the Williston Basin, which were resolved. This downtime allowed us to complete work that will help us further improve our mechanical reliability and runtime. The Partnership's volume growth through the first nine months of the year has provided us the ability to increase the target natural gas and natural gas liquids volumes we expect to reach in the fourth quarter. And as we have seen our volume expectations met and in some cases exceeded, we have been able to confidently reaffirm our financial guidance ranges for 2015. Our volume growth through the end of 2015, combined with the success we have had converting portions of our commodity-exposed margin to fee-based earnings, is positively positioning our business through these challenging times. Before I finish with our opening remarks, I would like to comment on another topic relating to the notion of a C-Corp general partner acquiring the master limited partnership it controls, also commonly referred to as a rollup transaction. We have seen a number of these rollups either announced or completed over the past year and we continue to field questions regarding our interest level in pursuing such a transaction. As I have stated a number of times in the past, we remain focused on executing our key strategies to enhance shareholder and unitholder value by, among other things, reducing commodity price exposure, improving margins, enhancing our cost of capital, and growing earnings while providing quality services to our customers. Additionally, we continue to evaluate structural alternatives and strategic acquisition opportunities that may or may not make sense for us. The idea of a rollup of ONEOK Partners into ONEOK is one such alternative that we continue to evaluate, while monitoring the various announced rollup transactions for relevant market data and commentary. As I have said before, our current structure continues to serve us well and remain committed to investors at both ONEOK and at the Partnership to create value and reduce risk. In December, we plan to provide ONEOK's and ONEOK Partners' preliminary financial and volume guidance expectations for 2016. As always, thank you for your continued support of ONEOK and ONEOK Partners and thank you to our dedicated employees for your hard work and continued commitment to our Company. Your innovative ideas and reliable operations continue to strengthen our business and allow us to better serve our customers while navigating these uncertain times. Operator, we are now ready for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Eric Genco, Citi. -------------------------------------------------------------------------------- Eric Genco, Citigroup - Analyst [2] -------------------------------------------------------------------------------- Congrats on the progress on the POP to fee negotiations. It is good to see some of those benefits trickling in ahead of 2016. That said, I just want to focus a little bit on the outage and the volume outlook you provided over the last two quarters in the earnings presentation, and I mostly just want to make sure that I'm not misinterpreting some of these numbers so I don't accidentally set a bar a little too high on some of them. If you look at the 3Q NGL gathered volume numbers of [786], versus the ones on page 4 of the PowerPoint, I assume that the delta there has to do with the outage. And I just want to see, as we look into some of the 4Q numbers that you're talking about in terms of being reached, how you think that should compare with an average number, particularly as you're including some spot volumes in there? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [3] -------------------------------------------------------------------------------- Sheridan. -------------------------------------------------------------------------------- Sheridan Swords, ONEOK, Inc. - SVP Natural Gas Liquids ONEOK Partners [4] -------------------------------------------------------------------------------- Obviously, the [reach] number is actually what we anticipate we will max at, the max volume we will get on our system, not an average. So the average will be less than that over the quarter and the spot volumes are not for the whole quarter. They're only for a certain period of the quarter, so you will see it down, on average. -------------------------------------------------------------------------------- Eric Genco, Citigroup - Analyst [5] -------------------------------------------------------------------------------- Okay. Is it order of magnitude similar to what we saw in the third quarter or is there some way that you can provide that? Because I just feel like sometimes if that is sitting there, then people may interpret that and just want to try to get a sense for how to triangulate that. -------------------------------------------------------------------------------- Sheridan Swords, ONEOK, Inc. - SVP Natural Gas Liquids ONEOK Partners [6] -------------------------------------------------------------------------------- I would say it is probably -- our gathered volume is probably maybe around 5%. The average is 5% down from the peak. -------------------------------------------------------------------------------- Eric Genco, Citigroup - Analyst [7] -------------------------------------------------------------------------------- Okay, all right, that's very helpful. And then, I guess next I was interested in maintenance CapEx is tracking below the full-year guidance of $142 million. Should we expect a major catch-up in 4Q? Or if $142 million is still the right number, that would imply 4Q maintenance CapEx at double the rate of the first nine months. Is that reasonable or how should we be thinking about that? -------------------------------------------------------------------------------- Derek Reiners, ONEOK, Inc. - SVP, CFO, Treasurer [8] -------------------------------------------------------------------------------- This is Derek. We are expecting maintenance capital to be a little bit lower than the $142 million that we had previously guided. I think we are looking at about $130 million. That's lower mostly just due to timing, as well as being able to get the projects done a bit less costly than we had previously indicated, just based on cost compression primarily. -------------------------------------------------------------------------------- Eric Genco, Citigroup - Analyst [9] -------------------------------------------------------------------------------- Okay, all right. Thank you very much. Appreciate it, congrats. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Christine Cho, Barclays. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [11] -------------------------------------------------------------------------------- Hi, everyone, congrats on a good quarter. I wanted to talk about your well connects first. You guys are connecting 125 more wells than you originally anticipated earlier this year. It looks like the DUCs are also continuing to grow, yet rig count has fallen substantially. We all hear about oil services guys doing more with less. Do you have any productivity metrics you can share with us, maybe how many days it takes to drill and complete a well back now versus January? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [12] -------------------------------------------------------------------------------- Kevin. -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [13] -------------------------------------------------------------------------------- Yes, Christine, yes, we do. Maybe not specific to January, but most definitely we see efficiencies really at all levels when you think about the producers and what they are able to accomplish, especially in the Williston. From a rig efficiency perspective, if you think historically over -- and maybe a couple of years ago, they were drilling -- each rig would be able to drill 12 to 14 wells per year. Now they're up, on average, maybe in the 18 to 20 wells per year range. Cost reductions have been consistent across producers in the 20% to 30% range as they are able to lower the cost to drill and complete wells. And then, just the performance, the completion technologies that they're using now. We are seeing 30% to 40% improvements in IP rates over the last six to 12 months. So, the combination of all those factors really, absolutely, they're able to do more with less. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [14] -------------------------------------------------------------------------------- Okay, great. And then on the west Texas LPG pipeline volumes, it looked like those were revised lower for fourth quarter versus what you guided us towards last quarter. Can you talk about what's going on there? Is the production behind your system slowing or is there something else? I'm just a little surprised it's come down, given I thought you guys had the cheapest rate in the region. And, also, what does it do to the timing of the expansions for the pipeline? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [15] -------------------------------------------------------------------------------- Christine, what I would say is that the main reason we brought that down is we are not seeing the short-haul volume out in west Texas that we had anticipated would come on. Now that's our lowest margin volume out there, so it is just going from certain spots in west Texas to other spots in west Texas. And we have -- we did see a slight reduction in long-haul volume when we increased our rates. And on the subject of lowest rates in the region, in July we increased our rates out there and brought them more in line with market, so that's why we saw a little bit of this movement on the short-haul volume. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [16] -------------------------------------------------------------------------------- Does that change the -- your thinking about the expansions on the pipe? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [17] -------------------------------------------------------------------------------- The expansions will be driven by -- no. The expansions are driven by new plants being put on out there and we are still in active negotiations with processors out there to back that expansion, and they are still going well. So, I don't think that has any impact on our expansions, mainly because our expansion will be a long-haul expansion and not have anything to do with the short-haul volume. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [18] -------------------------------------------------------------------------------- Okay. When do you expect the pipeline to be expanded, just on your current conversations? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [19] -------------------------------------------------------------------------------- As we always, it will be when we get the ink on paper, but we are probably looking into 2017. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [20] -------------------------------------------------------------------------------- Okay. And then, I just wanted to go to your comments on the spot volumes. It looks like you guys are seeing some on the NGL system, the gathering, and also fractionation volumes. What is driving this exactly and why would this go away in 2016? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [21] -------------------------------------------------------------------------------- The spot volumes are being driven by some frac outages in Mont Belvieu and also volume that is anticipating some new fracs being come on that will come on in later 4Q. So that's why we don't think it will be into 2016, this specific volume. Now we do see some opportunities from some spot volume in first quarter, but it would be different spot volume, but it's really just volume that has a home, but, unfortunately, the frac feeder had some issues or the frac is not up yet. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [22] -------------------------------------------------------------------------------- Okay, and then lastly, at the parent level when I think about the dividend, you guys are going to see increased cash flow from higher LP unit count and NGP, but how should we think about the increases for the parent? You guys talk about navigating through uncertain times. How should we think about how much you want to keep on the balance sheet just in case you guys do have to help out OKS again next year if things don't materially improve? -------------------------------------------------------------------------------- Derek Reiners, ONEOK, Inc. - SVP, CFO, Treasurer [23] -------------------------------------------------------------------------------- Christine, this is Derek. Really no change in our stance here. As we did earlier in the year, we still expect to retain additional cash at ONEOK as we go through this uncertain times. There is value to that in having optionality down the road, so I wouldn't expect a big change at this point in our approach. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [24] -------------------------------------------------------------------------------- Okay, so -- -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [25] -------------------------------------------------------------------------------- Christine, this is Terry. We will just continue to look at it quarter to quarter, as we have said in the past. The environment continues to be very uncertain, and so really, in that respect, nothing has changed, so we will -- like I say, we will just continue to look at it quarter to quarter and assess the market environment. -------------------------------------------------------------------------------- Christine Cho, Barclays Capital - Analyst [26] -------------------------------------------------------------------------------- Okay, thank you for all the color. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Craig Schere, Tuohy Brothers. -------------------------------------------------------------------------------- Craig Schere, Tuohy Brothers - Analyst [28] -------------------------------------------------------------------------------- Congratulations on (multiple speakers). Good volume guidance here. So on Christine's question about drivers for increased well connects, do you see some of this better two-half performance working down the flaring versus what you originally anticipated by year-end? -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [29] -------------------------------------------------------------------------------- As I think about well connects, this is Kevin, if you think about well connects, a lot of the increase was really driven -- we had really higher than expectations early in the year with the well connects. As we move forward and we think about the well connects for the rest of this year, yes, those will connect wells that will be coming online at some point in the near future and the combination of those, but then also when we get the infrastructure in place, we will have -- that is really what will pull the flaring numbers down, if that is getting at your question. -------------------------------------------------------------------------------- Craig Schere, Tuohy Brothers - Analyst [30] -------------------------------------------------------------------------------- Okay, so when those plants come online, that's still available there. My concern was that we aren't missing out on that buffer there. We are not counting what might be hitting in 2016 and the second half 2015 is what I'm getting at. -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [31] -------------------------------------------------------------------------------- As we -- (multiple speakers) I guess I am struggling a little bit. We think about the -- it is the combination of the well connects and the flared gas. We don't necessarily bucket that well connects is going to put out the flares. As we put more infrastructure in place with our three more compressor stations in fourth quarter and the Lonesome Creek plant, as we connect new wells, as the drilled but uncompleted backlog comes down, that infrastructure will be there to capture the volume, so we absolutely expect our flaring -- our gas captured to go up and our flared percentage to go down. Does that answer your question, Craig? -------------------------------------------------------------------------------- Craig Schere, Tuohy Brothers - Analyst [32] -------------------------------------------------------------------------------- Yes, I think that does. And can you provide some more details about the ethane recovery? Is that increasing off the 20,000 a day that started in June? -------------------------------------------------------------------------------- Unidentified Company Representative [33] -------------------------------------------------------------------------------- The ethane recovery out of the Bakken is running about 22,000 barrels a day. -------------------------------------------------------------------------------- Craig Schere, Tuohy Brothers - Analyst [34] -------------------------------------------------------------------------------- Okay, and we are making a lot of great headway on the contract restructurings in the Bakken. Obviously, you have a lot of leverage there because the wet gas is a very small portion of the wells and [you] are needed to get those wells in compliance. How do you see prospects for Mid-Continent contractor structures? -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [35] -------------------------------------------------------------------------------- This is Kevin again. Yes, the Williston, the Bakken gets a lot of the focus as we talk about our recontracting efforts, but we are making great progress in Oklahoma as well. It is obviously a much different competitive landscape as we think about the producers there and we have got a different customer mix. When we think about dealing with there is a lot more contracts with smaller volumes and so, but we are actively pursuing opportunities to convert more of our margin to fee based in the Mid-Continent, just like we are in the Williston. -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [36] -------------------------------------------------------------------------------- I guess the key -- Craig, the only thing I would add to that is that the thing you have to understand is in the Williston Basin, there is only about 10 contracts that represented 75% of our volume, so we're not talking about hundreds of contracts. When you go to the Mid-Continent, though, you are talking about hundreds and hundreds of contracts, and so from a pragmatic standpoint or practical standpoint, as you move forward with trying to restructure contracts in the Mid-Continent, as we are doing in the Williston, you got some -- you just got a lot more contracts, a lot more producers, and the volumes under those contracts are much smaller. So it creates some practical challenges in terms of trying to get that done. Obviously, that's in addition to the competitive landscape point that Kevin brought up. -------------------------------------------------------------------------------- Craig Schere, Tuohy Brothers - Analyst [37] -------------------------------------------------------------------------------- Understood. And last question, given the increasing prospects out of the Bakken and the volume guidance rising, what are the prospects for bringing back onto the table some of the deferred projects up there? Particularly given the needs that are only extended, I think, a few months versus originally I was thinking maybe a couple years in terms of that flaring compliance, it seems the producers don't have forever to wait on these decisions. -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [38] -------------------------------------------------------------------------------- Craig, as we have said in the past on the suspended projects, if we could see sustained prices, crude oil prices, in that $65, $70 range, there is a good likelihood that drilling will stimulate and the demand for that capacity will come back. And so, that's how we are thinking about it right now. We are not there, obviously, in this current -- in the current environment, we're not there yet, but certainly we are hopeful that we can get there. And clearly, our view is that prices will improve. The trick, obviously, is how much and when. But, yes, if we can see that $65 to $70 barrel range, I think it is very likely we could kick those projects back on. -------------------------------------------------------------------------------- Craig Schere, Tuohy Brothers - Analyst [39] -------------------------------------------------------------------------------- Fair enough. Thank you. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Kristina Kazarian, Deutsche Bank. -------------------------------------------------------------------------------- Kristina Kazarian, Deutsche Bank - Analyst [41] -------------------------------------------------------------------------------- Nice job on the increase in operating income number from contract mix. Quick question, though, Terry, I know you mentioned expecting substantially all of these to be renegotiated. Can you just help me think about the uplift relative to where we are in the process? So, say we're at 10, have two changed or is it more like we're at the point of eight now? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [42] -------------------------------------------------------------------------------- Actually, I will let Kevin handle that, Kristina. -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [43] -------------------------------------------------------------------------------- Well, without getting into specifics, we have made -- we have made a lot of progress. I think you are seeing some of that already reflected in our financials. I would expect to see continued improvements in the fourth quarter, and then the full effect we will get in 2016. But we are at or ahead of really where we expected to be in that process as we move towards the end of the year. -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [44] -------------------------------------------------------------------------------- The only thing I would add to that is the negotiations have gone well. The producers absolutely need -- they need the services. They need other features that they currently don't have in their contracts. Discussions and negotiations have been very constructive and we are well down the road to getting this all wrapped up by the end of the year. So progress is good and discussions have been very positive. -------------------------------------------------------------------------------- Kristina Kazarian, Deutsche Bank - Analyst [45] -------------------------------------------------------------------------------- Great. And then, can you guys help me -- walk me through the one-time coverage for calendar-year 2016 guidance? How do you guys get there? What should I be thinking about in terms of -- I know you haven't given formal 2016 guidance yet, but commodity growth assumptions that go into that? Is it for the entire year 1 times coverage or is it hit this at some point in calendar-year 2016? Anything that would be great. -------------------------------------------------------------------------------- Unidentified Company Representative [46] -------------------------------------------------------------------------------- Yes, we have every intention of providing in early to mid December our 2016 outlook, so we will have a lot of that information for you in terms of volumes. Now we have already provided some volume transparency for 2016, but we will have -- in December of this year, we will have all that put together and for guidance purposes and we will have -- we will release that mid-December or so. -------------------------------------------------------------------------------- Kristina Kazarian, Deutsche Bank - Analyst [47] -------------------------------------------------------------------------------- Thank you there, and then lastly for me, can you just give an update on the balance sheet and how conversations are going with the rating agencies, especially at the OKS level? -------------------------------------------------------------------------------- Derek Reiners, ONEOK, Inc. - SVP, CFO, Treasurer [48] -------------------------------------------------------------------------------- Yes, this is Derek. Certainly, we have conversations with the agencies. They're aware of our strategies and particular contract renegotiations that we've talked about, and they certainly see our progress there. I think my view is the agencies, like the rest of us, are concerned about commodity prices longer term, so they're looking to see us continue to progress as we reduce our commodity exposure. So I think all that is going well. They understand we are. Of course, we placed the equity this quarter, so our leverage is coming down, which is good. So I think all those things are positives for us. -------------------------------------------------------------------------------- Kristina Kazarian, Deutsche Bank - Analyst [49] -------------------------------------------------------------------------------- Okay, thanks, guys. Nice job today. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Jeremy Tonet, JPMorgan. -------------------------------------------------------------------------------- Unidentified Participant [51] -------------------------------------------------------------------------------- This is actually Chris on for Jeremy. Congrats on the strong quarter. My question was -- my first question is on contract restructuring. So you guys already had G&P volumes or G&P average fee rates increase about 20% in 3Q. And so, I'm just trying to get a better understanding of how that run rate is going to change going into the fourth quarter and how much potential upside there is looking into 2016? -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [52] -------------------------------------------------------------------------------- This is Kevin. As we -- like I just mentioned, as we move into the fourth quarter, yes, you would expect to continue to see that fee rate to improve and go up, and even further as we move into 2016. We have given the margin mix, what we expect of a 70% -- more than 70% fee in 2016, but beyond that, getting into specific margins, we will see more as we issue our guidance coming up. -------------------------------------------------------------------------------- Unidentified Participant [53] -------------------------------------------------------------------------------- Got it, and so you guys noted that the Williston's contract restructurings should be done by year-end, so could we think of 3Q as maybe more than 50% baked in or -- -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [54] -------------------------------------------------------------------------------- I will just go back to my previous remarks that as we move forward through this, we're where we are at or where we expected we would be at this point, and we still feel very confident that we are going to get those substantially all complete by the end of the year. -------------------------------------------------------------------------------- Unidentified Participant [55] -------------------------------------------------------------------------------- Great, that's helpful, and then I guess on Bakken flaring, I guess you have seen some regulations pushed back, and so do you see any additional risks to potential regulatory changes there? -------------------------------------------------------------------------------- Kevin Burdick, ONEOK, Inc. - VP Natural Gas Gathering & Processing [56] -------------------------------------------------------------------------------- No, we don't. As we think about the gas capture targets as we bring on our Lonesome Creek facility, that is going to -- there will be a step change as we think about our gas capture behind our system, and then with Bear Creek coming online in the third quarter of 2016, we will see another step change down, and that lines up with the gas capture target increases, so we feel very good about being able to provide the services so that our customers will stay well above that. -------------------------------------------------------------------------------- Unidentified Participant [57] -------------------------------------------------------------------------------- And then on your natural gas liquids pipeline operating margins per barrel, those slightly declined over the quarter. And so, Bakken actually was increased as a percentage of the volume pie and so I was just trying to get an understanding of the drivers there. -------------------------------------------------------------------------------- Derek Reiners, ONEOK, Inc. - SVP, CFO, Treasurer [58] -------------------------------------------------------------------------------- The decrease in the margin? -------------------------------------------------------------------------------- Unidentified Participant [59] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Derek Reiners, ONEOK, Inc. - SVP, CFO, Treasurer [60] -------------------------------------------------------------------------------- We have had more volume come out of the Powder River. We have had some increased volume out of the Powder River portion, which has a lower fee on that -- on those barrels, and then we have had some other volumes come on that have some Conway pricing, so they don't have as highest margins as well, so that's what is driving that down just slightly. -------------------------------------------------------------------------------- Unidentified Participant [61] -------------------------------------------------------------------------------- Got it. That makes sense. I think that's it for me. Thanks, guys. Thanks for all the color. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- (Operator Instructions). Becca Followill, US Capital Advisors. -------------------------------------------------------------------------------- Becca Followill, US Capital Advisors - Analyst [63] -------------------------------------------------------------------------------- Back on the Bakken and the Williston re-contracting, I know that you value your customer relationships dearly, but can you talk a little bit about how that is impacted by effectively raising the rates and how the new rates compare with some competitors in the region? Are you still competitive or does it hurt long-term relationships? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [64] -------------------------------------------------------------------------------- Well, let me just make a general comment. No, we don't believe it will. As an industry, we have been through this cycle many times and we have been through these -- we went through this cycle in the early 2000 time frame, renegotiating keep-whole contracts actually to POPs, in many cases. And so, now, here we are today. So those relationships, yes, anytime you go through a contract renegotiation effort, it can create some stress on a relationship, but the fact of the matter is that the producers value quality service and as long as we continue to provide quality service, our relationships are going to be good. And that's what we have done up there. There is nobody else up in the basin that really can provide that broad range of service that we provide, which includes the natural gas liquids, in addition to the gathering and processing services we provide. So we are differentiated in that respect not only from the quality of services, but obviously our sheer size. So, really, no, we have worked -- we could have taken an approach that was much more abrupt, but we have chosen to take a very positive and proactive approach, giving the producers the opportunity to talk with us and tell us what their specific needs are. And so, it has been a fairly long process throughout this year, and I think our producers appreciate that positive dialogue. So no, we don't believe that our producer relationships have been damaged or set back in any way. -------------------------------------------------------------------------------- Becca Followill, US Capital Advisors - Analyst [65] -------------------------------------------------------------------------------- Thank you. And then, great volume guidance for the fourth quarter and then going to the 2016, but of course we always want more. So, so much of 2015 and 2016 was driven by the flaring capture and new plants coming online and compression. Do you have any preliminary outlook for 2017 if we are in a sustained $45 to $50 oil price environment? -------------------------------------------------------------------------------- Terry Spencer, ONEOK, Inc. - President, CEO [66] -------------------------------------------------------------------------------- Actually, no. We have not provided that publicly. We continue to -- our belief is that the environment is going to get much better, and as we see production turnover start to happen, I think it is going to be very abrupt as we move into -- and I say production, I am talking about crude oil from a macro perspective. So, really, we don't see that $40 environment sustaining out into that period of time. That's probably as aggressive as we will get on an outlook that far out. But we have really not provided any sort of public guidance on 2017 yet. The outlook for 2016 still looks very solid, and so we don't see -- we don't expect any sort of significant downturn as we move to the latter part of the year, which would set you up for a lower 2017. We really don't see that. -------------------------------------------------------------------------------- Becca Followill, US Capital Advisors - Analyst [67] -------------------------------------------------------------------------------- Okay, great. Thank you, guys. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- (Operator Instructions). Mr. Eureste, we have no further questions at this time. I'd like to turn the conference back over to you for any additional or further remarks. -------------------------------------------------------------------------------- T.D. Eureste, ONEOK, Inc. - IR [69] -------------------------------------------------------------------------------- Thank you. Our quiet period for the fourth quarter starts when we close our books in early January and extends until earnings are released after the market closes on February 22, followed by a conference call on February 23. Thank you for joining us. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.
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