ONEOK's CEO Discusses Q4 2011 Results - Earnings Call Transcript

ONEOK, Inc. ( OKE)

Q4 2011 Earnings Call

February 21, 2012 11:00 am ET

Executives

Dan Harrison - VP, IR and Public Affairs

John Gibson - Chairman & CEO

Rob Martinovich - CFO

Pierce Norton - COO

Terry Spencer - President

Analysts

Stephen Maresca - Morgan Stanley

John Edwards - Morgan Keegan

Carl Kirst - BMO Capital Markets

Yves Siegel - Credit Suisse

Louis Shamie - Zimmer Lucas

Helen Ryoo - Barclays Capital

Selman Akyol - Stifel Nicolaus

Michael Blum - Wells Fargo

James Jampel - HITE

Elvira Scotto - RBC Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to today’s Fourth Quarter 2011 ONEOK and ONEOK Partners Earnings Call. Please note today’s conference is being recorded. I’ll now turn the conference over to Mr. Dan Harrison. Please go ahead, sir.

Dan Harrison

Thank you, and good morning everyone. Thanks for joining us today. Just a reminder that statements made during this call that might include ONEOK or ONEOK Partners’ expectations or predictions should be considered forward-looking statements, and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Please note that 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.

And now, John Gibson, Chairman and CEO of ONEOK and ONEOK Partners. John?

John Gibson

Thanks, Dan. Good morning, and many thanks for joining us today. As always, we appreciate your continued investment and interest in ONEOK and ONEOK Partners.

Joining me this morning are Rob Martinovich, our Chief Financial Officer, who will review our quarterly results and updated earnings guidance; Pierce Norton, our Chief Operating Officer, who will review the operating performance of ONEOK and ONEOK Partners’; and Terry Spencer, our President, who will review current market conditions, including our outlook on supply and demand for NGL, and the implications of lower commodity prices, followed by a status report on the ONEOK Partners’ growth projects.

On this morning’s conference call, I will briefly review our fourth quarter and year-end 2011 results, provide some perspective on our revised 2012 guidance, and conclude with some comments about our current and future growth.

Let’s start with ONEOK Partners fourth quarter and year-end performance. Both the year and the quarter were exceptional. Results were driven by wider NGL differentials, as well as higher volumes in our natural gas liquids, and our natural gas gathering and processing segments.

Our growth projects are on time, and on budget, and we continue to increase volume commitments for these projects. Our Garden Creek natural gas processing plant in the Williston Basin is operational, allowing producers the ability to capture additional value, while reducing the amount of flaring occurring in the Bakken shale.

Our natural gas distribution segment performed well in the quarter and for the full year. Net margins were essentially flat with operating income affected primarily by higher share-based compensation costs.

You will recall that we award all full time employees with one share of stock each time the closing price reaches a new $1 high. In 2011, we awarded 31 shares of stock at a cost of $16 million. Since the natural gas distribution segment has largest number of employees, and the allocations of this cost are on a per employee basis, it incurred a large portion of that expense. We believe it is a small price to pay for outstanding share price appreciation in 2011.

Our energy services segment continues to struggle as a result of challenging market conditions, narrow seasonal and location differentials, low natural gas prices and volatility, moderate weather conditions, and an oversupply of natural gas. While we have lowered our expectations for this business in 2012, we continue to reduce our leased storage and transportation capacity, and operating cost, but the fact remains it’s a very challenging market.

We also updated our 2012 financial guidance, increasing our earnings expectation at ONEOK and ONEOK Partners’ and raising our dividend and distribution growth forecasts for the year. Rob will provide more detail in a few minutes.

Our updated 2012 ONEOK Partners’ guidance includes higher natural gas liquids operating income than we originally forecast, $528 million today versus last fall of 2012 forecast of $395 million, but lower than the segments 2011 actual results.

Our updated NGL segment guidance is the result of an expected increase in ethane differentials between the Mid-Continent and Gulf Coast, compared with what we assumed in our original 2012 guidance. However, we expect lower NGL optimization margins in 2012, as we continue to convert some capacity to firm fee-based contracts.

In 2012, lower expected commodity prices will also impact the partnerships natural gathering and processing segment. We expect 2012 GMP segment results to be higher than 2011, but lower than we originally forecast last fall.

Rob will now review ONEOK’s financial highlights, and then Perez will review ONEOK’s operating performance. Rob?

Rob Martinovich

Thanks John, and good morning everyone. ONEOK’s fourth quarter net income increased by 38% compared with the same period last year, driven by the strong performance of ONEOK Partners.

For 2011, net income increased 8% versus 2010. Results in the distribution segment were lower due to higher employee related cost, while energy services had reduced results, due primarily to lower storage, marketing, and transportation margins, resulting from narrower seasonal spreads and natural gas price location differentials.

ONEOK’s 2011, standalone cash flow, before changes in working capital, exceeded capital expenditures and dividend payments by $213.7 million. In 2011, ONEOK received approximately $333 million in distributions from ONEOK Partners, a 10% increase over 2010.

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