Oneok Inc.’s energy services segment, which markets and contracts to provide natural gas and transportation, has “contributed greatly” to the company’s past, but it’s no longer a good fit with today’s marketplace, CEO John Gibson said in a conference call last week.

Oneok is disbanding the business unit, launched in 1995, and it already has begun winding down capacity contracts now in place. Historically the unit has provided baseload, swing and peaking natural gas commodity requirements on a year-round basis, leasing an average of 72.4 Bcf of storage capacity and 1.0 Bcf/d of transportation capacity in production and market areas of the United States and Canada.

“The energy services segment continues to face challenging industry conditions that show no signs of improving,” said Gibson. “Increased natural gas supply and infrastructure, coupled with lower natural gas price volatility, have narrowed seasonal and location natural gas price differentials, resulting in limited opportunities to generate revenues to cover our fixed costs on this contracted storage and transportation capacity.”

Oneok’s management believes that the energy services segment “no longer fits into our long-term strategy and vision. We will continue to focus our resources on gathering, processing, transporting, storing, fractionating and distributing natural gas, natural gas liquids and other energy commodities through our Oneok Partners and natural gas distribution segments.”

The lack of price volatility “is a big reason that Oneok is getting out of the energy services business,” said Pat Rau, NGI Director of Strategy and Research. But in the natural gas market, long a traders’ favorite for its rapid swings, that volatility “has fallen off a cliff over the last year.”

Less volatility means less trading, which is borne out in the 5% (7.53 Bcf/d) overall decline in physical gas sales transactions in 1Q2013 compared with 1Q2012, according to NGI‘s 1Q2013 Top North American Gas Marketers Ranking, a time period when the difference in production was just a fraction of a percent. Oneok was ranked No. 17 on the list of marketers with gas sales totaling 2.24 Bcf/d in 1Q2012, down 7% from 2.40 Bcf/d in 1Q212.

In the fallout, the company now has little need for capacity leasing, Oneok’s CEO said. “There aren’t any long-term opportunities, or they have become increasingly smaller on a relative basis, based on the energy conditions [the segment] faces, and the growth of our other businesses,” Gibson noted.

“I think it makes perfect sense for them in particular to divest all of the storage and transportation assets,” Genscape Inc. senior natural gas analyst Andy Krebs told NGI. “From a volatility perspective, it has been pretty dead in relation to location spreads and timing spreads…” Storage decontracting hasn’t impacted the marketplace yet, he said. “We are still in an environment when we have to have a cushion for winter demand. In particular, if you go through the list of who owns what storage, the bulk are LDCs [local distribution companies] and other groups that have a mechanism to pass along the losses, if you will, to the rate base or feed as a cost of doing business in producing gas, or something to that effect.”

The merchant players “really are the guys on the fence, and they could fall off and really go into a decontracting mode. Oneok is first, but we expect it to be more public…and for some to say, ‘it doesn’t make sense for us anymore.’ ” It may not come in splashy announcements like Oneok’s, said Krebs. “They will come quieter…in the form of companies slowly shedding their books.”

At the end of March Oneok’s energy services segment had 43 Bcf of natural gas storage leased, versus 76 Bcf a year ago, said Executive Vice President Pierce Norton, who is in charge of commercial business. It also had 800 MMcf of transportation under lease, versus 1.1 Bcf in 1Q2012.

Oneok management “still believes storage will continue in natural gas, in any commodity, to provide equilibrium in the market,” said Gibson. “It will always have some value in the marketplace. That’s why we like to own it…” through Oneok Partners, which would continue to do so.

It’s Oneok’s view “that pipelines and storage are good to own to provide services to others,” he said. “We focus on the needs of commodities to run our business, versus services to traders and marketers. Obviously, we are focused on end-users, customers as opposed to traders and marketers…”

As far as salt dome storage, has it become a dinosaur?

“I don’t believe that’s a true statement,” Gibson said in response to the question from an analyst. “I think another way of saying it is that storage and transportation are necessary in our marketplace to move commodities from one point to another, whether it’s natural gas or natural gas liquids, to own assets…For the purpose of capturing the spread or basis, that’s never been our primary focus.”

Through Oneok Partners, “we see very stable, steady earnings, which are emblematic of pipelines and storage fields that we in essence bill or contract to end-users…We do not try to capture the spreads related to location or time. I think it would be incorrect to say that salt dome storage is a dinosaur. It has a very valuable service, and we own some…It has the ability to meet the instantaneous needs of the marketplace.”

Oneok’s decision to divest gas transportation contracts is “really kind of an older story,” of which TransCanada Corp. has been part of for the past few years (see related story; NGI, May 27). TransCanada “backed up pipeline rates when the renewals went down on tight spreads. The net effect was that renewals went down even farther because the economics weren’t supportive,” said Krebs. Affiliate Great Lakes Gas Transmission, he noted, then let its capacity with TransCanada expire at the end of October.

“We saw a big drop in flows. I think we’re still concerned about ‘T’ pipes” in the Northeast, including Transcontinental Gas Pipe Line, or Transco, as well as Tennessee Gas Pipeline Co. and Tetco, “which are now seeing massive attrition from a flow perspective,” due mostly to the Marcellus Shale. “How they handle the [pipeline] decontracting should be interesting and it’s something that we’ll be watching closely.”

According to Norton, Oneok at the end of June will have 24 Bcf of storage and 100 MMcf of transportation capacity still in place. Oneok now is “prearranging storage and transportation with creditworthy firms to release capacity at an agreed-upon rate…We are posting capacity to the marketplace via bulletin boards, and we have allowed formal bids to include prearranged agreements…The creditworthy party would assume the released agreement. it would pay the pipeline and storage company the negotiated rate or bid rate, and [Oneok’s] energy services would pay the difference on the original contract.”

Oneok expects to record a noncash, after-tax write down of about $75 million in 2Q2013, which would result from releasing “a significant portion of energy services’ natural gas transportation and storage contracts to third parties,” management said. The company also expects to record additional noncash, after-tax write-downs of up to $25 million between July 1 and April 1, 2014, with most occurring in 2013, subject to the release or assignment of the remaining transportation and storage contracts.

The wind down should be nearly completed by the start of 2Q2014, but cash payments may continue on some contracts with terms expiring after April 2014. In addition to the one-time charges, the segment expects to record pre-tax operating losses of about $55 million this year and $15 million in 2014. The company’s updated 2013 net income guidance is expected to be $235-285 million, compared with its previously announced guidance range of $350-400 million.

Energy services employs about 49 people, mostly in Tulsa, but most people affected are to be offered other positions, Oneok said.

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