Rick Gross - Barclays
Next up is ONEOK. I know it's early in the morning, but I am going to need a little problem solving some math, and so I was hoping the audience would help me out.
Last year these guys were here, and they indicated that they had announced capital projects totaling $3.4 billion to $4.4 billion. So far this year, they have added $2.9 billion to $3.2 billion to that total. They started with an unannounced backlog of $2 billion, and they continue to have an unannounced backlog of $2 billion, so I was really happy that Terry Spencer, President of ONEOK is here to kind of help me out with that, and I am also glad that he brought an awful lot of people, because I know it's a hard problem, where he brought Robert Martinovich to help him with the CFO questions and Dan Harrison to help him with administration and help you folks with some of the IR things, and we appreciate these guys being here to solve the problem.
Thanks, Rick. It's pleasure to be here today. Thanks for your interest in ONEOK and ONEOK Partners.
Before we get started today, I want to introduce few folks here to my right. Robert Martinovich, our Chief Financial Officer. I can't miss him, and Dan Harrison, our Senior Vice President of Communications and Investor Affairs and Human Resources, now. Then Andrew Ziola, our Director of Investor Affairs and Communications is back here somewhere with us, so. Thanks to appreciate having them along.
Let's get rolling here, and I won't spend any time on the forward-looking statement. You all know that very well. We are going to cover a number of topics today, and we've done this before. A number of times, we've talked about our vision and strategy. We will get into some detail about our assets and well we are positioned we'll talk about our track record and commitment to disciplined growth and we'll talk about our proven ability to create value for all of our stakeholders.
Touching on our vision, we over the past decade, whether it's through internal projects or acquisitions have been the result of executing our vision. Two main points about our vision, we have re-bundled services across the value chain to provide our customers with premium services. We have also applied our capabilities as a natural gatherer, transporter and marketer and distributor to other products in particular natural gas liquids and crude oil. We do this while providing non-discretionary services to our producers, our processor customers, which means the services are required to get their products to market. We'll talk about that here in a bit more detail and what I mean by non-discretionary services.
Our key strategies include growing ONEOK Partners, which is our primary growth engine and we are two-thirds of each incremental EBITDA dollar at ONEOK Partners is return to ONEOK's cash, enabling ONEOK to continue to grow it's free cash flow. For opportunities such as potentially growing the ONEOK dividend by 40% from 2012 to 2014, and buying back ONEOK shares and we'll talk some more about that here in a moment.
We've successively improved our returns at ONEOK's three regulated utilities and continue to shrink our contracted transportation and storage capacity at our energy services business while rebasing our cost structure there. We continue to evaluate acquisition opportunities that either of the entities and we do this while maintaining a strong balance sheet and investment grade credit ratings at both, ONEOK and ONEOK Partners.
Touching on our assets, we are very well positioned. We have assets to fit, work well together, connecting prolific supply bases to the key market hubs, with proven growth in and around our operating footprint which now, as Rick indicated, is approximately $6 billion in investments in the partnership planned through 2015, and a $2 billion-plus backlog of unannounced projects. We also have a demonstrated ability to create value for our investors and customers.
What we've got three primary business segments at ONEOK. ONEOK Partners, of course, provides the non-discretionary services that I indicated earlier to our producer, processors and customers generating predominantly fee-based earnings and significant cash to ONEOK. The distribution segment provides value by generating and anchoring our investment grade credit rating. The execution of right strategies over the past few years have led to an increase in sustainable earnings and close the gap between actual and allowed returns on equity. Our Energy Services segment adds value by providing utilities with secure and reliable supplies of natural gas.
At ONEOK Partners, our integrated operations connect prolific supplies to key markets, and as you will see later, we continue to expand our operations into growing areas of supply, and we'll talk a bit more about some of the shale plays here in a moment.
Our earnings at the partnership, as I indicated earlier, are predominately fee-based and have range between 50% and 68% since 2007, and we have a financially strong and supported general partner in ONEOK, which sounds more than 43% of our outstanding units.
This map really tells the story before you hear. We are active in a number of prolific shale plays across the U.S. In particular the Bakken Shale in the Williston Basin in North Dakota has provided us with a number of opportunities to develop both, natural gas and NGL-related infrastructure and as well crude oil.
The Cana-Woodford Shale, located primarily in Oklahoma in the Granite Wash developments in Western Oklahoma, and the Texas, Panhandle, continue to grow and those places contain a produced natural gas that contains high quantities of natural gas liquids and that's a good thing for us as our infrastructure, our NGL infrastructure in particular is very well positioned in those place.
Touching on the other two segments within ONEOK. Our natural gas distribution business consists primarily of three gas utilities that have a strong customer base with more than 2 million customers, a rate base of about $2 billion and approximately 2,800 employees. We serve residential, commercial, industrial and transportation customers in all three states, Kansas Oklahoma and Texas, and we are the largest natural gas utility in Oklahoma and Kansas and the third largest in Texas, where we serve Austin and El Paso among other communities.
Our last business segment in ONEOK is our energy services segment. In that business, we have a network of lead storage and transportation assets that enable us to provide our customers, which are primarily utilities with premium services. We buy natural gas from a diverse mix of supply sources and these are leased storage and transportation capacity to provide bundled and reliable services to natural gas and electric utilities, plus an array of industrial, retail and natural gas customers.
As I have mentioned before, ONEOK and ONEOK partners have a proven track record of growing not only our assets and earnings, but also our dividends to our ONEOK shareholders and our distributions to our ONEOK unit holders, and that the partnership in particular, the projects we completed in 2009 are contributing to our volume and earnings growth that we are currently experiencing and we have more than $6 billion of announced internal growth projects in the Bakken Shale, the Midcontinent and the Gulf Coast. In our natural gas liquids, our natural gas gathering and processing segments and most recently our crude oil business.
We've also had this $2 billion backlog of projects that we'll announce when we secure sufficient supply commitments. Now we've talked about that $2 billion backlog from time-to-time. It's not a real scientific number, but what it does reflect is the level of capital investments that we are currently evaluating that are in the evaluation and development stage. As those projects come together and as we secure those commitments, as we've done in the past, we'll announce those projects. Thanks, Rick, for bringing that up the opportunity to provide some color.
When we talk about growth at ONEOK Partners, we've got to highlight the crude oil, natural gas and NGL development that's occurring in the prolific Bakken Shale in the Williston Basin. When our projects that we've announced in the Bakken are completed, we will have invested in our gathering and processing segment almost $1.5 billion to construct for new natural gas processing plants at a capacity of 100 million cubic feet per day each. They are in North Dakota, the Garden Creek number one and two plants. The Stateline's number one and two plants and we divide county gas gathering system. These projects together will increase our current processing capacity in the Bakken Shale to approximately 500 million cubic feet per day.
We are also investing in new well connect, system expansions and upgrades to our gathering and compression assets which are associated with these new plant to get supplies to those processing facilities and those investments are backed by percent or contracts with acreage dedications and a fee-based component.
Talking amore about the Bakken Shale, we are making major NGL infrastructure investment in the Bakken as well, and those investments are backed primarily by the NGL production from our existing and new processing plants that I just talked about on the previous slide.
We have begun construction on a 500-mile Bakken NGL pipeline that's going to be in service during the first half of 2013, which will transport unfractionated or raw NGLs to the Conway and Mont Belvieu market hubs. It will utilize a pipeline. We already own a 50% ownership in, which is our Overland Pass pipeline, and the NGLs will be fractionated at our Williston fractionator, which is also in a process of being expanded.
One of the key points I would like to make about the Bakken NGL pipeline is that it will for the first time allow processing plant in the Bakken or in the Williston Basin to recover and transport ethane which currently is not possible.
In the Bakken, and we have to talk about the crude oil, it is a prolific crude oil play with projection expected to increased well over 1 million barrels per day within the next five years, because of that growth crude oil takeaway capacity in general is absolutely required for this area. In order to connect this additional supply to the marketplace that's being developed, we've announced plans to build the crude oil pipeline to bring like-suite and when I say suite low to no hydrogen sulfide crude oil from the Bakken Shale to the crude oil hub in Cushing, Oklahoma. The 1,300 mile Bakken crude oil express pipeline will parallel more than 80% of current and planned NGL pipelines and it is expected to be in service by early 2015.
Late this month, we expect to hold an open season as we continue to negotiate with anchor shippers on the project. For producers this new pipeline provides a reliable mode of transportation at a lower cost versus other alternatives. It allows them to increase their netbacks and receive the benefits of their high quality crude oil, so that's the unique thing about this particular pipeline is that it will focus on light-sweet crude, which too many of those producers is an advantage. That way they can ensure when their barrels get to Cushing, they have that same light-sweet barrel, which is very important to them.
Okay. We are also investing approximately $700 million to construction additional NGL infrastructure including a new pipeline to accommodate the growing NGL supplies in the Mid-Continent and to help levitate the transportation constrains between the Mid-Continent and the Gulf Coast, we are constructing or we have developed and announced the Sterling III Pipeline.
The Sterling III Pipeline will be a 570-mile pipeline to transport unfractionated NGLs or purity NGLs from the Mid-Continent to the Gulf Coast and we'll be reconfiguring our existing Sterling I and Sterling II Pipeline, our distribution pipeline, so they can transport either un-fractioned NGLs and/or purity NGL products, so an important project for the industry.
Well, you can't really get away with just building pipeline. If you are in the NGL business, you soon or later have to build fractionation capacity and we are doing that and we are investing about $1 billion to construct two new fractionators and related infrastructure including NGL storage and an ethane propane splitter at Mont Belvieu. The two new fracts that I am referring to are our MB-2 and MB-3 fractionators that will both, handle approximately 75,000 barrels per day a piece.
As I mentioned earlier, we have a significant backlog of future growth projects that we will announce as they continue to be developed and as we secure commitments. The projects here are more the same. More the same that I have talked about infrastructure development, natural gas processing plants pipeline NGL fractionation and storage facilities, and crude oil-related infrastructure. As I indicated before, we will announce those at the appropriate time.
Let's take a quick look at the corporate structure. ONEOK, Inc. as many of you are aware, is the sole general partner and owns almost 43% of the LP units in ONEOK Partners. ONEOK also owns three natural gas utilities and an energy marketing business. We like our current structure, which we evaluate routinely to ensure it continues to fit our vision and create value for our shareholders as you will see the benefit is self-evident allying one of the captured growth at ONEOK Partners through increased unit holder distributions. In addition, our structure creates an investment vehicle for investors who want the benefit of owning an MLP without having to invest directly in one and it provides us with flexibility and access to two balance sheets to fund large growth projects or acquisitions.
Well, the successful execution of our vision and strategy has created exceptional value for ONEOK shareholders. As you can see from this chart, our dividend has grown on average of 13% for year more than doubling since 2006, and we've become the general partner and significant owner in ONEOK Partners. Our total return to our shareholders has been significantly exceeding the S&P index during the three-year, five-year and 10-year timeframe demonstrating our attractiveness and it's a long-term investment, so some pretty impressive charts.
Since ONEOK became the general partner in 2006, of the partnership, we've created exceptional value for our unit holders through distribution growth and this chart here displays that. We've increased our distribution 23 times period representing an 8% compound annual growth rate or 65% in total.
The partnership provides ONEOK with significant cash and as you can see from this chart, it's up into the right. It's growing and as a result of the partnership's ongoing growth programs enabling ONEOK to increase dividends, purchase additional units at ONEOK Partners and buyback shares of ONEOK. As you can see these distributions to ONEOK have increased at a 20% compound annual growth rate since ONEOK assumed the sole general partnership role in 2006, one of the very impressive slide.
When you talk about ONEOK, you have to think about free cash flow and free cash of ONEOK, which is shown in green on this smart chart, provides us the flexibility to do a number of things, to purchase assets, to perhaps increase our investments in ONEOK Partners to increase the dividend and/or repurchase shares.
In 2011, we repurchased $300 million of ONEOK common stock, and recently in 2012, we repurchased another $150 million. We have $300 million remaining in our stock repurchase plan at this point and it still remains a valuable option in our toolkit.
Our uses of cash are not determined by a single formula or a set priority. They are dynamic and depend up on the market and what opportunities present us at that particular point in time. The bottom line, our free cash flow provides us with a lot of financial flexibility and options.
All right. In ramping up, we remain focused on creating value through our strategically located assets that connect supply with demand. We've demonstrated our ability to grow and have identified additional opportunities to continue that trend.
With that, we'll be happy to take any questions that you all might have.
Hi, good morning. Could you comment on what you are seeing in the acquisition market and what your priorities would be to the extent assets or companies became available?
Well, certainly. The acquisition market, at least in our view, remains very frothy. The multiples are high in particular those companies who need to enter into areas and want to grow are willing to pay some pretty high multiples.
One of the things that we're always very cautious about at ONEOK is making sure we don't pay too much, and that's one of the things you can't really recover from if you too much, so we've recognized a frothy. In order for something to really excite us and attract our capital, it's going to have to be something that fits within the vision and strategy that I mentioned earlier. It has to fit with our value chain, it has to geographically make some sense for us and we are probably not going to step back in some foreign geographic area, some place significantly outside of our footprint, so we are going to stay generally in area that we are familiar with and in particular in area where we can gain and develop a competitive advantage.
Hi. There is a lot of infrastructure being built between and Conway and Belvieu over the next couple of years. Could you help us understand what risk and opportunity that presents to you and help us quantify that too?
Good question. Yes. There is quite a bit of infrastructure that is being developed. We are not the only parties developing infrastructure between Conway and Belvieu. Those projects are quite simply being developed to handle the supply growth that's occurring, not just in the Mid-Continent, but that's occurring in the Rockies, okay? Those are not necessarily basis play type pipelines. Those are pipelines and infrastructure that is being developed to provide fee-based services to move these products to the marketplace, so it's not really in our game. It is really truly about moving supply to the marketplace and that's really what it is.
In the case of ONEOK, we are expanding infrastructure that already exist, we already have infrastructure between Conway and Belvieu, and we are significantly increasing that capability to move these products from the supply areas to the market and certainly that does position us for continued growth. Good question.
Several years ago, we had a big boom in gas building and it led to lots of inflationary pressures. We've got another building boom on the liquid side. If you've seen any cost pressures in the business in why might it'd be different on the gas side.
Rick has another great question. We are not seeing the same kind of pressure. What we saw back in that 2006-2007 timeframe, there were some major projects being built like Rex, like Midcontinent Express. Those were very large pipeline projects that absorbed a tremendous amount of welding and contract labor. Welders in particular were darn near-impossible to find that welders could just about name their price. We struggled a bit when we built the Overland Pass Pipeline, because of that. We were concerned because we weren't sure we had enough contractors that would actually be willing to bid on that project back in that timeframe.
Today it's entirely different. When we bid projects and we are bidding projects as we speak. We have absolutely no problem getting more than enough contractors interested and bidding on these projects, and I think that's due in large part that there are not massive projects that are currently underway, there's a lot of relatively moderate projects out there. There was not anything like a Rex or Midcontinent Express today.
As gas supply response to these prices in the open market, and if you start seeing a decrease in gas production in the U.S., which basin in your view you have the biggest risk from a gathering and processing, from a volume standpoint and could you help us understand where you exposure to if there are some.
Sure. Most of our business are in the NGL-rich basin. Okay? As I have mentioned earlier, the development that's happening in the Midcontinent and in particular Cana-Woodford shale, the Bakken. We do have an area where we do have some risk, a considerable amount of risk although it's not significant really to our bottom line, is in the Powder River Basin, which is a coal bed methane gas play, it's a dry gas play, has no natural gas liquids opportunity whatsoever.
However, there is some Niobrara developments that is happening in that same region and we do have assets and we may be able to ultimately capitalize on rich natural gas coming out of that area, but as it sits today the coal bed methane gas that we are tapped into, that our gathering systems are tapped into, there's little to no development happening right now and that business represents a very small almost de minimis portion of our margin.
Can you just give us any update on partners hedging into 2013? Obviously, ethane prices in NGLs come down quite a bit, but they seem to stabilize. Can you just kind of your view and if you can update partner's hedging for next year and just kind of what outlook is now on NGLs just given the current state of the market.
As we sit today, for 2012, we are in a pretty good shape. Well over 70% of our commodity exposure is hedged. As you look into 2013, we are about 80-plus percent hedged on our natural gas position, but very little of our natural gas hedged at this point in time. We typically are pretty opportunistic as it relates to hedging. We do target trying to have about 75% of our commodity exposure hedged. We are not there yet on NGLs, but we are starting to see some price response in terms of the crude.
We've got strengthening crude prices somewhat above our expectations at this point in time in the year, so we think there is going to be some opportunity to do some hedging on the NGL front here in the not too distant future. We look at it continually. We have a team of people devoted to managing our commodity price exposure, so I am highly confident that we are going to be doing some here in not too distant future.
When you said 75%, is that typically by for 2013 by the end of 2012, going into the year?
Yes. We don't have a set time. Okay? To get to that 75% it's nearly a guideline to make sure that we've got enough leeway, enough margin in the event that for whatever reason the volumes don't produce, so we don't become over hedged or over extended on our hedges. The 75% is a pretty good general target for us, but we do not have a set specific time at which we will be 75% hedged. Like I said, we are pretty opportunistic.
All right. No other question. Thank you very much and great to hear the interest in ONEOK and ONEOK Partners. Thanks for coming.
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