ONEOK, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Please standby, we are about to begin. Ladies and gentlemen, thank you for standing by. Good day. And welcome to the ONEOK and ONEOK Partners’ Third Quarter 2014 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to your host, Mr. T.D. Eureste. Please go ahead.

[T.D. Eureste:]

Thank you. And welcome to ONEOK and ONEOK Partners’ third quarter 2014 earnings conference call. 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 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:]

Thank you, T.D. Good morning. And thank you for joining us today and for your continued interest and investment in ONEOK and ONEOK Partners. On this conference call is Rob Martinovich, our Executive Vice President, Commercial; Wes Christensen, Senior Vice President, Operations; and Derek Reiners, our Chief Financial Officer. Also with us and available to answer your questions are Sheridan Swords, our Senior Vice President of Natural Gas Liquids; and Kevin Burdick, Vice President, Natural Gas Gathering and Processing. On this morning’s call, Derek will start with a review of our financial results. Rob will review our operating results, including sequential quarter variances, give a brief NGL market update and touch on the drilling economics in the basins we operate. Wes will give an update on our capital growth projects. And finally, I will elaborate on last week’s announced acquisition of the West Texas LPG and Mesquite NGL Pipelines from Chevron and I’ll have a few closing remarks. During our previous conference calls, we have shared our plans and progress for growing ONEOK and ONEOK Partners. While execution of these plans has not been without challenges, we have and will continue to execute on our key growth strategies and create value for our shareholders, unitholders and stakeholders. So, in the midst of weaker commodity prices and other market uncertainties, it is important to provide some perspective on how we will approach the future by acknowledging our actions and successes of the past. As we begin our call this morning, I’d like to touch on some of our accomplishments. ONEOK Partners’ 2014 adjusted EBITDA exceeded $1.14 billion in only nine months, which is the quickest the partnership has exceeded a $1 billion in its history and we are on track to grow our distributable cash flow in 2014 by over 20% since 2013. At ONEOK, we are clearly benefiting from this growth. We completed approximately $4.7 billion in capital investments since 2010 and expect to exceed $5 billion with the completion of the MB-3 Fractionator by the end of the year. Including these capital investments we will have invested nearly $7 billion when combined with our $2 billion capital growth program we completed between 2006 and 2009, and we have entered into yet another incredible capital growth phase at the partnership with a backlog of unannounced projects of between $4 billion and $5 billion. These completed projects are providing predominantly fee-based earnings and have contributed to record volume growth in the gathering and processing segment. The Natural Gas Liquids segment is seeing strong sequential volume growth, despite increased ethane rejection. And the recent announcement of the West Texas LPG pipeline and the Mesquite NGL pipeline, which will establish the partnership as a significant fully integrated natural gas liquids service provider in the Permian Basin, generating additional fee-based earnings and increasing the segments gathered NGL volumes nearly 40%. While NGL location price differentials remain narrow in this lower commodity price environment, let’s not lose sight of the fact that the assets we have built and are building, and acquired, increased our ability to add volumes to our systems, natural gas and natural gas liquids, and collect a fee to gather, process, fractionate, store and transport these commodities for producers, processors and customers. These services provide us, and our customers and investors with sustainable long-term value regardless of location price differentials and commodity prices. Our integrated and extensive network of midstream assets in key basins combined with our strong liquidity at ONEOK Partners leaves us well-positioned for the future. As we outlined in the earnings release last night, we revised our 2014 guidance at ONEOK Partners, due mainly to the non-cash impairment charge in the Natural Gas Gathering and Processing segments, and continued narrow Conway-to-Mont Belvieu ethane differentials. We also narrowed ONEOK’s financial guidance ranges. We’ll provide more color later in the call. Please reference the releases for the updated ranges and midpoints. To conclude my opening remarks, we remain confident in the partnerships estimated annual distribution increase of 6% to 8% between 2013 and 2016, and we continue to expect EBITDA to increase by an average of 15% to 20% annually between 2015 and 2016. The distribution growth driven by the ongoing capital program at ONEOK Partners will continue to benefit ONEOK. While our current ONEOK dividend growth rate guidance remains at 10% in 2015 and 2016, we continue to look for opportunities to support a higher dividend growth rate. At our upcoming Investor Conference on December 3rd, as is our normal practice, we will provide updated financial guidance that will include 2016 and 2017, as well as 2015 at both ONEOK and ONEOK Partners. Derek now will review ONEOK’s and ONEOK Partners’ financial highlights. Derek?

[Derek Reiners:]

Thanks, Terry, and good morning. Third quarter 2014 net income attributable to ONEOK was approximately $65 million or $0.31 per diluted share, which includes a non-cash impairment charge of $76.4 million or $0.09 per diluted share attributable to ONEOK in the gathering and processing segment of ONEOK Partners. I will discuss the impairment charge at the partnership in a few moments. ONEOK is benefiting from its pure-play general partnership strategy receiving $443 million in distributions from ONEOK Partners in the nine months of 2014, a 12% increase from the same period last year. Cash flow available for dividends for the first nine months was $478 million providing 1.33 times coverage of the ONEOK dividend. ONEOK increased its quarterly 2014 dividend for the third quarter 2014 by $1.05 per share to $0.59 per share, 55% higher than a year ago. Now moving on to ONEOK Partners, ONEOK Partners’ third quarter net income was approximately $167 million or -- $0.32 per unit, which includes a non-cash impairment charge of $76 million or $0.31 per unit in the Natural Gas Gathering and Processing segment. In the third quarter 2013, net income attributable to ONEOK Partners was $216 million, or $0.64 per unit in the second quarter 2013. The non-cash impairment charge, which is included in equity earnings from investments, resulted from the partnerships 49% equity investment in Bighorn Gas Gathering, a natural gas gathering system located in the coal-bed methane area of the Powder River Basin in Wyoming, where dry natural gas volumes continued to decline. Distributable cash flow was $293 million for the third quarter, providing coverage of 1.05 times. For the first nine months of 2014, distributable cash flow was $863 million, providing 1.11 times coverage, compared with $704 million for the same period last year, providing coverage of 1.04 times. Our long-term annual coverage ratio target remains at 1.05 to 1.15 times. The partnerships third quarter 2014 distribution increased to 0.77, an increase of approximately 7% from our third quarter 2013 distribution of $72.5 per unit. During the quarter we issued 1.4 million common units through our at-the-market equity program for a total of 4.4 million common units in the first nine months of 2014, compared with 681,000 common units issued all of last year through the program. We have ample liquidity to support the partnerships ongoing capital growth program and the recently announced acquisition, including access to nearly $1.7 billion in our commercial paper program or under our credit facility as of September 30th. At the end of the third quarter, the partnership had $54 million in cash and cash equivalents, no commercial paper outstanding and no borrowings outstanding on our credit facility, a long-term debt to capitalization ratio of 51% and a debt-to-adjusted-EBITDA ratio of 3.4 times. Our current capital structure metrics are in line with our long-term targets of 50-50 capitalization and debt-to-EBITDA ratio of less than four times. As we have done previously, we expect to utilize our commercial paper program and cash on hand to initially finance our capital investments and we’ll be disciplined and balanced in our approach to obtaining permanent financing as opportunities arise in the debt or equity markets. Rob, that concludes my remarks.

[Rob Martinovich:]

Thank you, Derek. Starting at ONEOK Partners, the Natural Gas Gathering and Processing segments third quarter 2014 operating income was up 42%, compared with the third quarter 2013, due primarily to higher natural gas volume growth in the Williston Basin and Cana-Woodford Shale, as a result of recently completed capital growth projects. From a sequential quarter comparison, operating income for the third quarter 2014 compared with the second quarter 2014 was up 25%, due to a $21 million increase due primarily to natural gas volume growth in the Williston Basin and Cana-Woodford Shale, and a $4 million increase due to changes in contract mix, offset partially by a $3 million decrease in lower net realized prices and a $5 million increase in operating costs, primarily due to timing of materials and supplies. Volumes increased sequentially quarter-over-quarter. Natural gas gathered increased 12% and natural gas process increased 15%. We have continued to see a significant ramp-up in natural gas volumes across our system and we expect to see this strong growth continue the remainder of the year and into 2015. Especially in the Williston Basin as improved producer drilling and recovery techniques have resulted in increased natural gas volumes from new wells, with Garden Creek II operating at full capacity and Garden Creek III volumes ramping up. We have updated our hedging tables in the release. We expect to execute on more natural gas and natural gas liquids hedges for 2015 during the winter heating season. As always, we will continue to monitor the market and execute hedges when opportunities are presented. The Natural Gas Liquids segments third quarter 2014 operating income was up 19%, compared with the third quarter of 2013, due to higher margin volumes delivered to the Bakken NGL pipeline and from new plants connected in the Mid-Continent region. From the sequential quarter comparison, operating income was up 9%, due to a $25 million increase in fee-based exchange service margins, which resulted primarily from higher margin volumes delivered to the Bakken NGL pipeline, a $13 million increase in optimization and marketing margins, which resulted from a more than $6 million increase from marketing, truck and rail activities, and $6 million from wider NGL product price differentials, partially offset by a $13 million decrease from narrower normal butane to iso-butane product price differentials, a $5 million decrease from lower NGL volumes as a result of increased ethane rejection and a $4 million decrease from lower operational measurement gains. Our Bakken NGL pipeline is now gathering nearly 60,000 barrels per day, an almost 50% increase from the previous update in the second quarter. We expect to see higher margin fee-based volume continue to increase with our Garden Creek III plant coming on line three months early for the remainder of the year and through 2015. The recently completed Bakken NGL pipeline expansion gives us additional capacity to transport up to 135,000 barrels per day. The Natural Gas Pipeline segments third quarter 2014 operating income was up 3% compared with the third quarter 2013, due to higher natural gas transportation revenues related to increased rates on intrastate pipelines, higher contracted capacity and higher natural gas volumes transported. From a sequential quarter comparison, operating income and equity earnings was relatively flat. Now a brief outlook on the NGL markets. The ethane rejection by natural gas processing plants connected to our NGL system is approximately 150,000 barrels per day. We expect ethane rejection will continue at least through 2016 after which new ethylene production capacity is forecasted to begin coming online. Ethane exports will also have an impact on ethane rejection levels. Current ethane demand is approximately 1.1 million barrels per day and is expected to increase to approximately 1.2 million barrels per day during the first quarter of 2015 due to decreased ethylene facility downtime. In recent weeks, we have seen Conway-to-Mont Belvieu location price differentials for ethane under $0.03 per gallon in favor of Mont Belvieu. And we expect these narrow differentials to continue for the rest of this year and during 2015. Propane exports are steady and we are seeing more propane buying in Conway for crop drying and winter demand. As a result, we expect propane location price differentials between Conway and Mont Belvieu to be in the minus $0.03 per gallon to plus $0.02 per gallon range for the remainder of 2014. While we recognize the continued near-term challenges regarding excess ethane supply, the partnership remains well positioned through its integrated network of assets in the NGL-rich basins to provide essential services to its customers for the long term. We expect the lower commodity price environment to continue through 2015, which will impact our net realized prices for natural gas, NGLs and condensate. However, we do not anticipate that the lower commodity prices will result in reduced drilling activity in the basins in which we operate. In our view, drilling continues to be economical in the basins where we operate at West Texas intermediate crude oil prices of approximately $45 to $60 a barrel in the Bakken, $50 to $65 a barrel in the Powder River, and $60 to $70 a barrel in the SCOOP. In addition, the key non-commodity price variables that impact drilling economics including well productivity and well cost should also be factored into the breakeven analysis. That concludes my comments. Wes?

[Wes Christensen:]

Thank you, Rob. A quick update on our announced capital growth program. We have revised our capital growth for 2014 to $1.7 billion from $2.1 billion. This change is a result of the timing of expenditures and has no impact on the projected capital growth, project costs or scheduled completion dates. As mentioned in last week’s announcement, the Garden Creek III natural gas processing plant was completed in October, three months ahead of schedule and on budget. We were able to utilize construction synergies with Garden Creek II to complete the facility ahead of schedule. The expansion of the Bakken NGL pipeline was completed in September and increased the pipeline’s capacity to 135,000 barrels per day from 60,000 barrels per day and the Niobrara NGL lateral connecting ONEOK Partners’ Sage Creek natural gas processing facility to the Bakken NGL pipeline was also completed in September. The MB-3 fractionator is expected to be completed in the fourth quarter 2014. I would like to point out we increased capital expenditures on Sterling III pipeline and the reconfiguration of Sterling I and Sterling II pipelines to approximately $800 million from $767 million due to higher inspection costs during winter construction and post-commissioning activities. Terry, that concludes my remarks.

[Terry Spencer:]

Thank you, Wes. Let’s discuss the strategic acquisition we announced last week, which substantially increased our operating presence in the Permian, as we already have a significant position with our natural gas pipeline segment’s ownership of the West Texas transmission intrastate natural gas pipeline system. With the acquisition of the West Texas LPG pipeline and the Mesquite NGL pipeline, the partnership’s presence in the Permian basin will be significantly stronger. And this acquisition will establish a new region for natural gas liquids growth. These assets will give us access to a major new NGL supply basin and increases our gathered NGL volumes by nearly 40%, pushing our total system-wide NGL gathered volumes to approximately 800,000 barrels per day. Our expectation is to significantly grow these assets and enhance their service capability and flexibility. Our current plans call for investing approximately $500 million between 2015 and 2019 with even more potential projects to come. ONEOK Partners expects to generate an adjusted EBITDA multiple of six to eight times between 2017 and 2020 through enhanced customer services and volume increases from pipeline capacity expansions. I should further emphasize that potential margins realized downstream from fee-based fractionation and storage services at our Mont Belvieu facilities could further enhance these multiples. Our extensive NGL operating experience and the valuable knowledge of the approximately 75 soon-to-be new employees joining us from Chevron will enable us to realize and maximize the true potential of these assets. We’d like to welcome these employees to the ONEOK team. From a commercial standpoint, we have positive long-term relationships with the customers served by these assets. Many are our current customers in other basins where we operate. Our existing NGL asset position in Mont Belvieu provides us the ability to offer these customers enhanced services including fractionation and storage, an opportunity that wasn’t available to them under the previous ownership. Although we intend to provide more detail on the call regarding our NGL growth plans in the Permian, we will be limited in certain of our discussions due to the existence of a confidentiality agreement and for the competitive nature of information relating to rate structures and strategies. Our current and future growth at the partnership has never looked stronger. We have completed approximately $2 billion in capital growth projects this year and expect to add $550 million to the completed list with the completion of the MB-3 Fractionator later in the fourth quarter. So that the partnership will have the full benefit of these completed projects in 2015. The partnership’s growth is not slowing. $2.5 billion in capital investments have been announced in 2014, including our recent acquisition. Additionally, as I mentioned earlier, we increased our unannounced backlog range to $4 billion to $5 billion from the previous range of $3 billion to $4 billion in yesterday’s earnings release. Earlier this year, our unannounced backlog was $2 billion to $3 billion. Our internal capital growth program continues to provide solid visibility into future earnings growth with assets that are well positioned in multiple producing formation, high-growth liquids rich areas such as the Williston Basin, Powder River Basin, Cana-Woodford, Stack and SCOOP plays in Oklahoma and the Permian basin. We continue to remain focused on our strategy to meet our customer’s infrastructure needs quickly and cost effectively. To put this year in perspective, our 2014 versus 2013 year-over-year distributable cash flow growth rate is over 20%, even with ethane rejection and narrow location price differentials. Despite the ethane-related headwinds, we’ve been facing this year, this has been a strong year at the partnership and we are excited for the future. We expect to continue to deliver solid returns to our unit holders and shareholders through volume growth and predominantly fee-based earnings. ONEOK as a pure play general partner continues to provide the management and resources to ONEOK Partners to execute on its growth strategies so that the partnership can increase its distributions to unit holders including ONEOK, enabling ONEOK to maximize its dividend payout to shareholders. In closing, I’d like to again thank our employees, whose dedication and commitment allow us to operate our assets safely, reliably and environmentally responsibly everyday and create exceptional value for our investors and customers. Our entire management team appreciates their efforts to make our company successful. Operator, we’re now ready for questions.

[Operator:]

Thank you. (Operator Instructions) And we will take our first question from Christine Cho with Barclays.

[Christine Cho:]

Good morning, everyone. Thanks for all the color.

[Terry Spencer:]

Good morning, Christine.

[Rob Martinovich:]

Good morning.

[Christine Cho:]

Just some clarification on the acquisition. In yesterday’s release, you say you expect the asset to eventually generate six to eight times which you reiterated on this call. If I take the $800 million purchase price and the $500 million of subsequent CapEx to get to the $1.3 billion and tack on a seven times multiple, I get $185 million of EBITDA, which my common sense tells me I am interpreting this incorrectly. So if I were to take into consideration your acquisition press release where you say you expect to double the current EBITDA of -- I am estimating $32 million that’s net to you guys. Is that what the $500 million of CapEx will get you to? And you’re expecting to spend probably a considerable amount in fractionation processing distribution, all things related downstream to get you to that all-in six to eight times number by 2017 to 2020. Is that -- am I thinking about that correctly?

[Terry Spencer:]

Well, you are partially.

[Christine Cho:]

Okay.

[Terry Spencer:]

Okay. So let me try this and here is the piece that you are missing. When we look at the growth opportunities associated with this business or with this pipeline asset, it’s going to come from primarily three things. We’ve got an existing base business that’s going to have some inherent growth that is volumes behind existing plants and new plants are going to increase as drilling continues in the Permian. A considerable portion of that volume growth does not have much capital associated with it, okay. You’ve got another bucket of enhanced services. And I can go into some detail about that. Basically providing more flexibility, more delivery capability and in particular across regions providing some packaging opportunities across regions for these customers. We expect to generate enhanced revenues from that. There’s not a whole lot of capital that goes with that bucket, okay. So then that leaves you with the system expansions where we are planning to build and construct pipeline facilities to handle new volumes, incremental volumes, for shippers that need the increased capacity. That will come at a very low multiple, okay. So when you add all of these up and you look at the final result, you come to a total six to eight multiple on the roughly $1.3 billion capital, that’s going to be spent, okay. That means -- so your multiple on that -- on the total incremental revenue that’s being generated here looks very, very low and it is very low. Because you have a lot of revenue coming that’s not going to require capital investment.

[Christine Cho:]

Okay.

[Terry Spencer:]

I hope that helps?

[Christine Cho:]

Yes, that was very helpful. Can you give us a …

[Terry Spencer:]

The last point I’m going to make is that in these numbers there is no downstream revenue coming from fractionation and storage services, okay. Let us make that clear.

[Christine Cho:]

Okay.

[Terry Spencer:]

That will be additive and can help that six to eight multiple go even lower.

[Christine Cho:]

I see. Okay, that’s very helpful. Can you give us a ballpark estimate, maybe a percentage of the barrels that’s already going to your downstream assets tied to the volumes from the acquisition. And how much is potentially “up for grabs” at some point as legacy contracts roll off? Also if you could provide average length in terms of contract, that would be helpful too.

[Wes Christensen:]

So I will handle this at a high level and what I can tell you is there is basically no volume from this system that’s coming to our fractionators, actually zero, okay.

[Christine Cho:]

Okay.

[Wes Christensen:]

So it’s all up there for grabs. We don’t know though what the contractual terms are from a fractionation standpoint. Certainly by owning this pipeline asset, we are now in a position to compete for that business. And certainly I think it would be impractical to think we could get all of it. I’m going to say we have a good chance to get in our fracs. Okay.

[Christine Cho:]

Okay. Great. That’s very helpful. And then I think in the past there has been talks about potentially converting the West Texas pipe to crude service. Was this on the table for you guys at all or do the customer contracts on the pipe prohibit you from abandoning NGL takeaway service or do you see the value in keeping NGL service due to all of the other opportunities that it brings to the table for you guys? Is it more valuable in keeping an NGL service versus if you were to convert it and just collect the toll on crude service?

[Terry Spencer:]

Well, Christine, today, it certainly has more value as an NGL pipeline. However, in this day and time you better be thinking about repurposing. Okay. So it should always be in the back of your mind is there a better application for these pipeline assets considering how valuable they are these days in the mainstream space. So while I couldn’t rule out crude for a portion of the pipeline system, it is certainly something we have to be thinking about and we do think about. But right now, we intend to operate this pipeline system as an NGL facility primarily because of those integration and downstream opportunities. That help you?

[Operator:]

(Operator Instructions) Moving on, we’ll hear from Carl Kirst with BMO Capital.

[Carl Kirst:]

Thanks. Good morning, everybody. Terry, appreciate all the color on the Permian, maybe just keying off Christine’s question though. Just trying to get a better sense, I guess perhaps as you look at the three different buckets, perhaps a bit of the ramp profile of how ultimately the 40 becomes 80 becomes 175-plus? And I ask that in the sense that if the $500 million is primarily system expansions and there is ability to increase revenue and EBITDA without the expansion of capital. Is that something that could potentially come in the earlier years, or is it basically a leverage effect on the extra volume from the system expansions?

[Terry Spencer:]

Well, Carl, what I will tell you is yes. We do see a potential by the time we get to 2017 and course to have a substantial increase in EBITDA along the lines of what we initially indicated. But particularly as we make these capital investments, which begin in the 2017 timeframe and move through the 2019 timeframe, we are going to see significant ramp up in EBITDA during that period. So basically how this will look is without including any downstream frac or storage synergies, your multiple is going to look about like this. In that 2017 timeframe, you will get to that eight multiple range. And then as you move through that 2019 timeframe, you will drop to that seven-range and then move into about 2020 into that six range.

[Carl Kirst:]

Thank you. That’s very helpful. And then maybe just sort of last question off that. Of the $500 million, is that coming from pumping expansion, or I guess I’m trying to get a better sense of? Is this something where you guys are looking at the drilling and ultimately the volume needs and so you go ahead and in effect you pre-build in order to handle that capacity? Or is the $500 million something that will be associated for instance with new incremental contracts as a gating factor, if you will?

[Terry Spencer:]

Well, I think the last part of your question, the answer to that’s yes. But I’m going to let Sheridan Swords take that question.

[Sheridan Swords:]

I think on your first part of the question, yeah, we see the expansion of the pipeline will be predominately looping of sections of the pipeline to increase its capacity, which will also, will have to increase our pumping capacity as well. But as Terry said, we anticipate through our integrated services that we will be contracting under long-term contracts with customers for our expanding capacity through the fracs.

[Terry Spencer:]

That helped you, Carl?

[Carl Kirst:]

And then maybe one last question if I can for Rob, just because you were talking about view of the NGL markets and ethane rejection at least through 2016. And perhaps my nuance on the question is an understanding that you all will give perhaps roll your guidance through to 2017 in December. I didn’t know if the ethane rejection affect will come through 2016 was just a -- we weren’t ready to look out beyond 2016, or if that was actually sort of a call where you expect perhaps a positive ethane frac spread in 2017?

[Rob Martinovich:]

Carl, I guess from our standpoint what we’re tying to add onto is obviously the beginning of those crackers coming on line in that 2017 timeframe. And I think as we have said before, it’s going to be lumpy as those come on and as the ethane supply and demand start to balance out along with the ethane exports. So, really our view hasn’t changed per se from that and so that is really where we are kind of focused on.

[Operator:]

I’m sorry. Moving on, next, we’ll go to Craig Shere with Tuohy Brothers.

[Craig Shere:]

Morning guys.

[Terry Spencer:]

Hey, Craig.

[Craig Shere:]

I’ve got to tell you, the additional color on that Permian acquisition now sounds extremely attractive.

[Terry Spencer:]

Yeah, we think so. We are glad we got it.

[Craig Shere:]

A couple ones here. Rob, can you discuss the contract changes that increased the G&P contributions sequentially? And also it looks like 2015 NGL hedges didn’t change from 2Q guidance, but the percent hedged fell. Is that a reflection of moderating ethane rejection expectation into next year, or increased propane plus volumes versus prior assumptions?

[Rob Martinovich:]

Yeah, increased propane plus volumes for your second question. With regards to the first question, could you repeat that real quick? Your first part was?

[Craig Shere:]

Changes in G&P contracts.

[Rob Martinovich:]

Yeah. That was in the Williston Basin, Craig, where we had some more fee-based business come on line between the second and third quarter. That was predominately the full amount.

[Craig Shere:]

Okay. And so that being fee-based and you think that’s more sustainable and growing?

[Rob Martinovich:]

We do. It is. That particular volume is coming from our Divide County system and so as those volumes continue to ramp up and then sustain, we will be able to maintain that benefit.

[Operator:]

And moving on, we’ll go to Chris Sighinolfi with Jefferies.

[Corey Goldman:]

Hey, guys. This is Corey filling in for Chris.

[Terry Spencer:]

Hey, Corey.

[Corey Goldman:]

Just a quick question on the gathering and processing revised volume guidance. It looks as though you are expecting a pretty flat run rate sequentially, but a pretty good step-up in terms of op income. Just wondering if you can kind of reconcile that for us and how we should think about that going forward?

[Terry Spencer:]

Sure. And certainly you can get in there and look at the -- do your own calculations, kind of for a fourth quarter average and come up. And you will see that volumes are up a tick overall in the fourth quarter over third quarter. But it depends on where those volumes are coming from. So we’re seeing a little bit more of an increase in the Williston Basin volumes and as a result, higher margin per unit there is leading to that increase in income.

[Corey Goldman:]

Got it. That’s helpful. And then one really quick one if I can follow-up. That asset sale you are expecting to book a $16 million gain on in the pipelines, can you talk about how big that total sales size is and what type of assets you are selling there?

[Terry Spencer:]

What we are doing, it’s really a two-part. We’ve got some non-strategic pad gas that we are selling, so a pretty low basis there. And then we’ve also got a small non-strategic piece of pipe that again is from a sales to value is not much more than what we’re showing there. So in total, it’s not like you’ve got a five times sales value going on to get that gain.

[Operator:]

(Operator Instructions) Moving on, we will go to John Edwards with Credit Suisse.

[John Edwards:]

Yeah. Good morning, everybody and congrats on a nice quarter. I am just curious if you could just talk a little bit about in terms of the inventory of project backlog, it has obviously risen quite a bit this year. I mean, in light of the sort of volatile commodity price environment, do you think it would be even higher, or maybe you could talk a little bit about that? And then my other question is just, what was the impact on the narrowing price differential Conway-Belvieu on the quarter and perhaps on the guidance if you could talk about those things? Thanks.

[Terry Spencer:]

Well, John, so as we look at the backlog. Okay. And I think we have provided some of this color before. We look at the breakdown of that $4 billion to $5 billion backlog. Roughly two-thirds of it actually is going to be coming from the NGL segment, the rest of it comes from gathering and processing in the natural gas pipes. And of course, much of that -- most of that NGL business is all fee-based. Okay. So as I think from a broad perspective of the inflow of projects into that $4.5 billion backlog, and as we think about the $4.5 billion backlog itself, right now we’re seeing no indications and no impact on this lower commodity price environment on those plants. Okay. We are seeing none. Okay. So that is all still intact and still looks really good. Your second question is on the op -- did that help you?

[John Edwards:]

Yeah, it does. That’s really helpful.

[Terry Spencer:]

Okay. So your second question on the optimization margins, when you look at the impact relative to what we guided to for the NGL segment, you have to note that ethane spreads have gone from about $0.07 a gallon in our guidance. We actually experienced ethane spreads at $0.025 to $0.03 for the quarter. So the impacts of the quarter relative to the quarter we guided for the NGL segment, so that delta was a negative $14 million or $15 million, roughly. Okay. So it was a pretty significant impact, or a pretty significant hole we had to come out of in order to have a pretty good quarter. And that’s an indication of the strength of the volume growth that we are seeing in not just the NGL business but the gathering and processing business as well.

[Operator:]

And moving on, we will go to Becca Followill with U.S. Capital Advisors.

[Becca Followill:]

Good morning, guys.

[Terry Spencer:]

Hi, Becca.

[Derek Reiners:]

Hi, Becca.

[Becca Followill:]

First question is on the volumes on West Texas LPG. If, hypothetically, you were able to get a significant amount of those volumes to your own fracs, would you need to construct another frac?

[Terry Spencer:]

We would be able to handle some of that volume in capacity from this new fracs that have been built and that are in the process of being built. For a period of time, there would be a substantial portion of that we could handle. But then as those volumes in those fracs continue to ramp up, we would likely have to build more frac capacity. In theory, let’s say we contracted all of it, certainly we would have to build more frac capacity. And some of that, incidentally, is in our backlog of future growth -- unannounced backlog of future growth.

[Becca Followill:]

Okay. Thank you. That answers it. Thank you. And then on the Mesquite system that comes with that, it looks like that really doesn’t generate much EBITDA right now. Can you talk about what you see in that asset, what potentially it could do for your?

[Terry Spencer:]

Well, I mean, the first thing I would tell you that it is integral to the operations of that business. But I’m going to let Sheridan provide you a little more color on your question.

[Sheridan Swords:]

Becca, basically the Mesquite pipeline’s capacity is leased to the partnership to West Texas pipeline’s capacity. So it collects a small lease fee from the partnership but it is integral to the whole operation of that. If you take Mesquite away, you would drop your throughput by quite a bit. Does that answer your question?

[Becca Followill:]

Yes. Thank you, guys.

[Terry Spencer:]

Thanks, Becca.

[Operator:]

And next we’ll go to Michael Blum with Wells Fargo.

[Michael Blum:]

Hey, guys.

[Terry Spencer:]

Hi, Michael.

[Michael Blum:]

Just two more questions on the acquisition. One, just to clarify. So currently or I guess post the closing of the deal, would you guys be a shipper on the line, or is it all third-party shippers on that line? And then when you think about expanding the capacity, would you contemplate for example your marketing business taking some of that capacity?

[Terry Spencer:]

Great question, Michael. And because it’s such a great question, I’m going to get you a great answer from Sheridan Swords.

[Sheridan Swords:]

Michael, currently we do ship on this pipeline. It’s not currently tied into our frac, but it is tied into Mont Belvieu fracs, but we ship a small amount, less than 10,000 barrels a day on that pipeline into our fracs. As we go forward and we look into the moving more volume on that, we do anticipate that our marketing affiliate will move barrels on that, especially as we offer the bundled service, integration services of both transportation and fractionation and storage. That will be done through the marketing piece.

[Michael Blum:]

Okay. And then the second question is, to get to that 6 to 8 multiple, is it strictly -- are we strictly talking about expansions and increased volumes, or you also assuming an increase in the tariff?

[Terry Spencer:]

We do anticipate it will be increased volumes on that piece. As we start talking about tariffs and rates, due to some existing confidentiality agreements and just think of the competitive nature of that question, we really can’t dive into the rate structures at this time.

[Operator:]

And our next question will come from Jeremy Tonet with JPMorgan.

[Jeremy Tonet:]

Good morning.

[Terry Spencer:]

Good morning, Jeremy.

[Jeremy Tonet:]

Thanks for taking my question. Terry, want to go back to some of the comments you had at the beginning of the call. And I think you’re talking about opportunities that could increase the 10% growth rate at OKE. And I was wondering if you might be willing to share some more color on the topic in general and if that might involve lower than expected taxes going, now that the spin-off of OGS has been completed sometime, I don’t know if you have better color into what that could look like?

[Terry Spencer:]

Well certainly, Jeremy, I can make a couple comments and Derek can follow up. But yes, we do see potentially an opportunity to increase the dividend growth rate at OKE. You have got to understand we are spending a lot of capital at OKS and certainly that it could equate to more IDR opportunity for OKE. So certainly we will look at that. This pure play structure that we have in place really sets the tone and does put us in a position to maximize the cash flow to the shareholder. So certainly as we go forward, we are going to look at that. And Derek, you got anything to add?

[Derek Reiners:]

Well, I think that’s exactly right. It will be driven primarily from OKS as OKS grows, and that will also grow distributions, particularly the IDRs at OKE. It will also provide additional depreciation deductions at OKE. So those two things in concert could provide some upside opportunity there.

[Terry Spencer:]

And Jeremy, from a tax perspective, certainly if we get some good news on bonus depreciation for example, that could help us further increase the dividend. Now you know how the process works. Our Board of Directors determines our dividend policy and we sit down and we look at all these factors and make that determination. And our expectations by the time we get to the December 3 Investor Day, if we have anything new to share with you at that point, which I suspect we will about our business in total, we will share our dividend outlook, particularly the dividend growth outlook for OKE with you.

[Jeremy Tonet:]

That all makes sense. And thank you again for the details on the acquisition. That was all very helpful. Just one last one for me, I was wondering as far as the M&A market is concerned, are you guys still active and looking at other incremental bolt-ons as well that potentially could expand the platform or kind of full with this [Technical Difficulty]?

[Terry Spencer:]

Yeah. We are looking at both, Jeremy. We are looking at asset bolt-ons, projects across the midstream space. Certainly as we said before, not all of them make any sense at all and some of them are so small in scale, they won’t move the needle. But we are looking at those. And on the M&A front, it is -- there’s a lot of chatter out in the marketplace right now. A lot of people are thinking about consolidation and a lot of people looking at their structure. However, as we kind of sit today, the weakening in the equities markets I’m sure has got some folks, who are considering M&A opportunities kind of perhaps pausing a bit and thinking hard about their strategies.

[Operator:]

(Operator Instructions) Moving on, we will go to Ted Durbin with Goldman Sachs.

[Ted Durbin:]

Hey, guys.

[Terry Spencer:]

Hey, Ted.

[Ted Durbin:]

Maybe can you just talk a bit more about, is there a broader strategy in the Permian here after the acquisition? Is this a precursor to investments in gathering processing, or even some storage? Just talk about a broader Permian strategy if there is one?

[Terry Spencer:]

Sure. Ted, there definitely is. I mean, we -- certainly with that NGL position, it could create great synergies with upstream gathering and processing assets. So yes, to the extent that there are gathering and processing opportunities and in particular those that fit well with these assets, we’re going to be very interested. However, here is the however part, the valuations that we are seeing for certain of these gathering and processing assets in the Permian are astronomical. And so that gives us pause and we’re not going to acquire gathering and processing assets at the expense of economic discipline, okay. We’re just not going to do that. I think another opportunity for us is crude. We have not only the 2,600 miles of the NGL pipelines we just acquired, but we’ve got hundreds and hundreds and hundreds of miles of natural gas pipelines too that potentially could have some other purposes in particular for crude. So that strategy is as a result of these assets and a result of us having now a kind of a wider footprint in the Permian is really going to have us looking hard at crude opportunities.

[Ted Durbin:]

That’s very helpful. Thanks. Maybe we could just come to the Bakken here. I feel like we haven’t talked about that much on this call. But as you are seeing the regulators turning the screws on the producers up there to hit flaring targets, can you just give us a sense of what the outlook is for the number of new processing plants we are going to need as you look at your supply curves going out for the next few years?

[Terry Spencer:]

Well Ted, the short answer is we’re going to need a lot more, a lot more than we have today. We have in the works enough plans to get us up to 1.2 Bcf a day and the analysts are indicating gas production could be easily 2 Bcf a day or more. What that tells me we need more processing plants. We’ve got about a 50%, as we sit today about a 50% market share up there. So I would expect a lot of those plants to come right underneath and right well within our footprint. And we have some of that in of course our unannounced backlog and some in our unannounced, unannounced backlog. So yeah, we see a lot of runway there and visibility into a lot more growth.

[Operator:]

Next we will go to Eric Genco with Citi.

[Eric Genco:]

Hi. I just had a quick question, maybe a clarification. I think you said earlier on the Permian acquisition that you are looking at sort of returns in the 2017 timeframe of eight times, 2019 seven times. And I think you said that the bulk of the $500 million of incremental capital will be spent 2017 to 2020, but I just wanted to make sure I understood that. Is basically, associated with those numbers are you saying that what sort of the gross cash invested at those times?

[Terry Spencer:]

You’ll see the 500 million, you will see $200 or $300 million spent in that ‘17 to ‘19 timeframe and the balance of it spent earlier, prior to 2017. So that’s kind of how the shape of the CapEx spend will look.

[Eric Genco:]

Okay. Thank you. And then I guess just trying to understand and maybe this is a point of clarification. You mentioned, you talked about the impact of ethane rejection in the quarter and then you mentioned sort of demand likely going up next quarter as certain plants maybe come back online. How do you really -- I mean from a GPM perspective, how do you think about things kind of over the next year and evolving? We are still in ethane rejection but should we think about this as being maybe one of the worst quarters for ethane rejection, should it get a little better gradually? And how do you think about that as you figure the Williston Basin is a greater share of the volumes in this richer gas, so I’m just trying to think about those dynamics? Thank you.

[Terry Spencer:]

That’s kind of a mouthful in terms of question, but what I will tell you is, is that I’ll try to give you the condensed answer. And that is throughout 2015, we expect prices to stay relatively low. You will see ethane prices at Belvieu probably in that low $0.20 a gallon range. So fundamentally, we’re still going to be oversupplied. We are still going to reject ethane at pretty high levels. So we’re going to continue to see this in the 2015 timeframe and we will see it continue into 2016. So we will see this narrow spread environment. We are not going to be making a whole lot of money in terms of ethane optimization for the next 18 to 24 months, and certainly we don’t have that -- we are not counting on it in our forward view. So ethane fundamentals, while we are seeing peak demand or strong demand at 1.2 -- 1.1 million to 1.2 million barrels per day, we’re balancing the market with about 350,000 barrels per day of ethane rejection as an industry. So it’s all well and good and you hear all these good things about the petchems, but quite frankly we are awash in ethane and having to reject it to balance it up. I see that those fundamentals continuing throughout 2015.

[Operator:]

And gentlemen, it appears there are no further questions. I would like to turn it back to you for any additional or closing comments.

[T.D. Eureste:]

Thanks for joining us. As Terry mentioned, the ONEOK and ONEOK Partners’ Analyst Conference is scheduled for Wednesday, December 3rd in New York. An invitation was sent out in October; please contact me if you have not received the invitation. 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 23, followed by our conference call on February 24. We will provide details on the conference call at a later date. Thank you for joining us.

[Operator:]

And once again that will conclude today’s conference. We’d like to thank everyone for their participation.