Fitch Ratings has affirmed ONEOK, Inc. (OKE) and ONEOK Partners, L.P.'s Long-Term Issuer Default Ratings (IDR) and senior unsecured ratings at 'BBB'. Debt at OKE and ONEOK Partners is cross guaranteed.

Fitch has also affirmed OKE's Short-Term IDR and CP rating at 'F2'. The Rating Outlook is Stable.

The ratings reflect OKE's integrated midstream platform, which handles, processes and transports natural gas, natural gas liquids (NGLs), refined products and crude oil, the company's significant size and scale, and diversity across several basins and hydrocarbons. The credit profile is supported by greater than 85% of revenue and cash flow coming from providing fixed-fee midstream services and a ratable hedging policy, for remaining direct commodity price spread exposure.

Additionally, OKE has leverage that is currently elevated, but Fitch expects rapid post-acquisition deleveraging to lead to leverage that is strongly positioned in the rating category by 2024-2025. Offsetting factors include a high exposure to volumetric risks and higher direct commodity price risk, compared to other midstream peers.

Key Rating Drivers

Diversity and Scale: OKE has increased the diversity of its cash flows as well as added scale with its acquisition of Magellan Midstream Partners (MMP). Just under one third of 2024 EBITDA is expected to come from the MMP refined products and crude businesses, complimenting OKE's existing natural gas and NGLs focused franchises. In addition to typical corporate-type synergies and larger purchasing power benefits, OKE is working towards capturing more value along the hydrocarbons path from wellhead to end market as well as more efficiently running the previously separate two systems.

On scale, Fitch expects OKE EBITDA to approach $6 billion (on Fitch's calculation) in the near-term, compared to between roughly $3.0 and $4.5 billion in 2020-2023, moving OKE solidly into the category of large, integrated midstream player. Collectively, OKE has a stronger business profile after its acquisition of MMP.

Strong Base Business Performance: 2023 performance, excluding any impacts from the MMP transaction, was very strong and exceeded Fitch's expectations, as well as most of management's guidance. OKE posted double digit yoy NGLs volume growth in its three operating regions, supported by strong increases in underlying natural gas production in those areas.

On the gathering and processing (G&P) side, well connects exceeded the high end of management's guidance in both the Rocky Mountain and Mid-Continent regions, supporting 13% and 15% yoy processed volume increases, respectively. Lastly, the natural gas pipeline segment saw a meaningful increase in long-term storage contract rates, highlighting the value the company's asset have within the markets they serve.

The strong 2023 results, combined with the above-mentioned benefits of the MMP acquisition, support Fitch's expectation for a quick return to leverage that is strong for the rating category.

Predominantly Fixed-Fee for Service: The company generates 85%-95% of its revenue under fixed-fee contracts with customers. The remaining 5%-15% of revenue is generated from contracts that subject the company to direct commodity price exposure (mostly through percentage of proceeds [POP] arrangements). OKE hedges a large part of this direct commodity price exposure on a rolling basis and currently has 60% of its expected 2024 exposure locked in.

Largely Volume Exposed: While the company generates most of its revenue under fixed-fee arrangements, the majority of those contracts are subject to volume risk. The risk was demonstrated during 2020 when OKE and other midstream companies were affected by reduced supply and demand. 2Q20 EBITDA was down 24% compared with 1Q20.

The NGL and G&P segments (combined about 60% of EBITDA) are most exposed. Volumes in the NGL segment, OKE's largest, are sensitive to the NGL price differential between NGL hubs in the Mid-Continent and Mont Belvieu and the price of ethane compared to natural gas, driving ethane rejection. Some revenue assurance is provided by the natural gas pipeline segment (roughly 10% of EBITDA), generating revenues under fee-based demand charge contracts and the NGL pipelines that are supported by some minimum volume commitment contracts.

Expected Deleveraging: OKE posted 2023 leverage of 5.0x, which included the full debt amount related to the MMP acquisition with only roughly one-quarter of the related EBITDA. Fitch expects 2024 leverage of around 4.0x and forecasts leverage to remain in a tight range around that level throughout the forecast period. Leverage at this level positions OKE strongly in its rating category.

Linkage Considerations: There is a parent subsidiary relationship between OKE and ONEOK Partners. Fitch determines OKE's standalone credit profile (SCP) based on consolidated metrics. Fitch believes ONEOK Partners has a stronger SCP than OKE. As such, Fitch has followed the stronger subsidiary path. The debt of ONEOK Partners is guaranteed by OKE with cross guarantees by ONEOK Partners for OKE's obligations.

Legal ring fencing is deemed to be open as there are minimal limitations between the two entities. Access and control is also considered to be open given, for example, the pooled cash management between the entities. Due to these linkage considerations, Fitch rates both entities based on the consolidated credit profile and assigns them the same IDRs.

Derivation Summary

Both OKE and Kinder Morgan, Inc. (KMI; BBB/Stable) are geographically diversified midstream issuers that are rated 'BBB.' After the MMP acquisition, OKE is roughly 20% smaller than KMI, as measured by annual EBITDA. KMI's business risk is lower, benefitting from its long-haul pipeline businesses, regulated by the U.S. Federal Energy Regulatory Commission (FERC), that generate revenue under take-or-pay contracts, offsetting a higher leverage profile. KMI's leverage is expected to range between 4.5x-4.7x over the forecast period, while Fitch forecasts OKE's leverage to be around 4.0x in 2024 and beyond.

Another peer is The Williams Companies, Inc. (WMB; BBB/Stable). OKE is slightly smaller in size than WMB. WMB is more geographically diverse with a nationwide presence and has lower business risk, with about half of its EBITDA from FERC-regulated natural gas pipelines. Fitch considers the FERC one of the most supportive regulatory bodies in the U.S. Historically, WMB has had much higher leverage, offsetting the more favorable business profile, but Fitch expects WMB and OKE to have roughly similar leverage in 2024.

Key Assumptions

The Fitch price deck for crude oil and natural gas informs the price assumptions for NGLs, natural gas and the unhedged volumes;

EBITDA expands over the forecast period due to growth projects that come into service and continued volume improvement, in addition to achieved MMP acquisition synergies;

Dividends grow at a low single-digit rate;

Total annual capex in a range of $1.5 billion to $2.0 billion;

Interest rates consistent with the Fitch Global Economic Outlook.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade

An increase in the portion of EBITDA coming from revenue assurance-type contracts sustained over the forecast;

EBITDA leverage forecast at or below 3.7x on a sustained basis.

Factors that could, individually or collectively, lead to negative rating action/downgrade

EBITDA leverage forecast at or above 4.7x on a sustained basis;

Unfavorable changes in the business mix or financial policies that result in a weaker credit profile.

Liquidity and Debt Structure

Strong Liquidity: OKE has a $2.5 billion senior unsecured revolving credit facility that matures in June 2027. As of Dec. 31, 2023, the company had cash on hand of approximately $338 million and full availability under its revolver. The credit agreement has a leverage covenant that requires the company to have a debt to EBITDA ratio lower than 5.0x outside of acquisition periods and below 5.5x during an acquisition period (which was effective through March 31, 2024). OKE was in compliance with its covenants as of Dec. 31, 2023, and leverage as defined by the bank agreement was 3.6x.

OKE's maturities are manageable with its nearest maturities coming in 3Q24. The September 2023 notes were repaid in February and June 2023. Additionally, during 2023 the company repurchased in the open market $322 million of unsecured notes for $280 million. The company has $484 million of senior notes due in 2024, just over $1.1 billion due in 2025 and $2 billion due in 2026.

Issuer Profile

ONEOK, Inc. is a large, integrated midstream company. The company's more than 50,000-mile pipeline network transports natural gas, NGLs, refined products and crude oil through different regions of the central U.S.

Summary of Financial Adjustments

Fitch calculates midstream energy companies' EBITDA by use of cash distributions from unconsolidated affiliates rather than by use of equity in earnings. Non-cash mark-to-market expenses of various types are added back to the base profit figure to arrive at EBITDA.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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