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Oneok Forecasts Growth Opportunity Through New U.S. Ethane Demand

As it looks to reduce its credit risk in 2016, Oneok Partners LP is looking ahead to growth opportunities presented by the ethane volumes on its system currently being rejected due to low demand.

Management of the Tulsa, OK-based midstream master limited partnership (MLP) said during a combined Oneok Partners/Oneok Inc. 4Q2015 earnings call Tuesday that the partnership is well-positioned to take advantage of an anticipated uplift in U.S. ethane demand from the petrochemical sector over the next few years.

The partnership operates natural gas and NGL gathering, processing and fractionation infrastructure connecting the Gulf Coast to producing areas in the Permian Basin, Bakken Shale, the Rockies and the Midcontinent.

The company is projecting an additional 564,000 b/d of incremental ethane demand between now and 2019. Oneok’s system accounts for roughly one-third of all ethane being rejected in the United States, positioning the company to see a potential annual earnings uplift of roughly $200 million based on potential incremental transported and fractionated volumes of 150,000-180,000 b/d, management said.

“Approximately 400,000 b/d of incremental ethane demand from new world-scale petrochemical crackers is expected to come online by the third quarter of 2017, and nearly 164,000 b/d more by 1Q2019,” CEO Terry Spencer said. With “little to no additional capital expenditures needed” Oneok will be ready to “transport and fractionate substantial incremental ethane volumes once the natural gas processing plants we’re connected to transition into full ethane recovery in response to growing U.S. petrochemical demand.”

Oneok has “already constructed the natural gas liquids [NGL] infrastructure necessary to connect supply to the Gulf Coast,” he said.

Oneok’s gathered NGL volumes for 4Q2015 averaged 798,000 b/d, up from 607,000 b/d in the year-ago quarter. For full-year 2015, the company gathered an average of 769,000 b/d of NGLs, compared with 533,000 b/d in 2014. Oneok’s average fractionated volumes reached 587,000 b/d during the quarter, up from 542,000 b/d in the year-ago quarter.

During Tuesday’s call, management for Oneok affirmed the company’s initial 2016 financial and volume guidance provided in December and said the MLP plans to continue working to maintain its investment-grade credit ratings. The partnership’s 2016 plans are to spend roughly $460 million on capital-growth expenditures and another $140 million on maintenance capital.

CFO Derek Reiners said Oneok began taking “decisive steps” during 2015 to protect its investment grade ratings by “high-grading its growth projects” and reducing capital spending.

“With the financial steps we’ve taken and the momentum and volume growth in earnings leading into 2016, we expect to achieve our 2016 financial guidance,” and the partnership does not expect “to need public debt or equity issuance well into 2017,” Reiners said.

Oneok is also well-positioned in terms of counterparty credit risk, he said.

“We consider our credit exposure to be low across all three of our operating segments. The partnership had no single customer representing more than 10% of revenues and only 15 customers individually represented 1% or more of revenues,” Reiners said. “Additionally, of the top 10 customers, which represented 38% of revenue, nine are investment grade or provide full credit support.”

For its natural gas gathering and processing segment, Oneok saw volume growth in 2015 driven by completed projects in the Williston Basin. Successful contract restructuring efforts saw the segment increase its fee rate by 50% year/year, helping to offset a negative impact on operating income from lower commodity prices.

Spencer said the year ahead will bring “the full benefit” of the segment’s contract restructuring efforts, and that Oneok expects another increase in its average fee rate for 1Q2016.

In its natural gas pipelines segment, Oneok reported that the Roadrunner Gas Transmission Pipeline, a 640 MMcf/d joint venture between Oneok and a subsidiary of Fermacoa Infrastructure BV designed to transport gas out of the Permian (see Daily GPI, April 1, 2015), is on track for completion in 1Q2016 and is fully subscribed under 25-year firm fee-based commitments. Also in the Permian, construction continues on the company’s WesTex Pipeline expansion.

Oneok’s gathered natural gas volumes increased to 2.094 trillion Btu/d during 4Q2015, up from 1.934 trillion Btu/d in the year-ago period. Full-year 2015 gathered volumes averaged 1.932 trillion Btu/d, compared with 1.733 trillion Btu/d in 2014.

For the quarter, Oneok reported a consolidated net income of $25.5 million (13 cents/share), compared with a net income of $94.5 million (45 cents/share) in the year-ago quarter.

For full-year 2015, Oneok reported a net income of nearly $245 million ($1.19/share), compared with a net income of $314.1 million ($1.53/share) for full-year 2014.

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