AES Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 16 speakers on the call.

Operator

Good day, and welcome to the ONEOK First Quarter 2024 Earnings Conference Call and Webcast. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Andrew Ziola, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Megan, and welcome to ONEOK's Q1 2024 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 1934. Actual results could differ materially from those projected in forward looking statements.

Speaker 1

For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Just a reminder for Q and A, we ask that you limit yourself to one question

Speaker 2

and a follow-up to fit in as many of you as we can. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce? Thanks, Andrew. Good morning, everyone, and thank you for joining us.

Speaker 2

On today's call is Walt Hulse, the Chief Financial Officer, Treasurer and Executive Vice President, Investor Relations and Corporate Development and Sheridan Swords, Executive Vice President, Commercial Liquids and Natural Gas Gathering and Processing. Also available to answer your questions are Chuck Kelley, Senior Vice President of Natural Gas Pipelines and Kevin Burdick, our Executive Vice President and Chief Enterprise Services Officer. Yesterday, we announced Q1 2024 earnings and increased our full year 2024 financial guidance. Solid results during the Q1 were supported by higher year over year volumes in the Rocky Mountain region and contributions from the Refined Products and crude segment. The efforts of our employees were highlighted once again as we were able to effectively manage through the winter weather during the quarter.

Speaker 2

Heating degree days were actually higher than normal in January, but it was the temporary acute cold and excessive wind that caused a deviation from normal operations. Volumes have rebounded across our systems, and we're continuing to see volume trends higher, providing additional confidence in our expectations for the remainder of the year. Our increase to 2024 financial guidance was driven by 2 primary key factors. 1st, favorable industrial fundamentals across our systems, which is supply and demand that are contributing to volume growth and providing significant momentum for the remainder of 2024 and into 2025 and second, the continued confidence in our ability to realize meaningful commercial and cost synergies. We remain focused on the integration efforts following the acquisition of Magellan last year.

Speaker 2

Our management team has spent the past several months meeting with employees and visiting assets across all of our operations. Our employees see the value of our combined businesses and are excited about the opportunities ahead. Through collaboration between business segments and the innovation of our employees, we are on pace to exceed our 2024 synergy goals, while most importantly, putting safety first. We also see growth across our systems from producer productivity, favorable commodity prices and continued demand for our products and services or as we previously mentioned, favorable industrial fundamentals. One potential significant source of future natural gas demand is expected to increase in power generation required to serve AI driven data centers.

Speaker 2

ONEOK, like other natural gas pipeline operators, will play a role. We have already had conversations with several of our large electric power generation customers and power developers who anticipate the need for additional natural gas transportation to address this future AI data center related power demand. As the need for future power generation increases, domestic natural gas demand is projected to increase. This is going to affect the entire midstream value chain, and ONEOK is positioned to play a meaningful role. Today, we serve numerous natural gas fired power plants across our system, and many of those customers are looking to expand, some related to AI and others to address general power demand.

Speaker 2

We also continue to see supported demand and fundamentals for the NGLs and refined products across our system. Ethane remains a highly preferred feedstock for the petrochemical facilities. NGL export strengths continue and a seasonal refined product demand for travel and agriculture is picking up. We remain focused on expanding and extending our systems in ways that align with our customers and the market's needs. ONEOK, now larger in scale, will continue to support our efforts to help address domestic and international energy demand, contribute to the energy security of our nation and maintain our critical role in the long term energy transformation.

Speaker 2

With that,

Speaker 3

I'll turn the call over to Walt. Thank you, Pierce. As Pierce mentioned, we increased our 2024 financial guidance expectations. We increased our 2024 net income midpoint to $2,880,000,000 and increased our adjusted EBITDA midpoint by $75,000,000 to $6,175,000,000 This new guidance also brings up the low end of our original range, reflecting the strong fundamentals across our businesses. We remain confident in our synergy expectations.

Speaker 3

Our updated guidance still assumes we will meet or exceed our midpoint of $175,000,000 in cost and commercial synergies in 2024. We continue to expect that additional annual synergies will meet or exceed $125,000,000 in 2025. Additionally, our total 2024 capital expenditure guidance remains unchanged at $1,750,000,000 to $1,950,000,000 Now for a brief overview of our Q1 financial performance. ONEOK's Q1 2024 net income totaled $639,000,000

Speaker 4

or $1.09

Speaker 3

per share and adjusted EBITDA for the period totaled $1,440,000,000 Results were driven primarily by higher NGL and natural gas processing volumes in the Rocky Mountain region, increased transportation services in the natural gas pipeline segment and contributions from the refined products and crude segment. We saw higher consolidated operating costs in the quarter, primarily related to the timing of planned maintenance turnarounds, higher property insurance premiums and operational growth. Of note, this was the Q1 the Refined Products and Crete segment was allocated its full share of corporate costs. Therefore, compared with the Q4 of 2023, we saw an increase in operating costs for that segment and a decrease in operating costs for the other business segments as they received a lower allocation of corporate costs. As of March 31, we had no borrowings outstanding under our $2,500,000,000 credit agreement and our run rate net debt to EBITDA ratio was 3.8 times.

Speaker 3

As it relates to capital allocation, we remain focused on delivering long term value for our stakeholders through a balanced combination of high return capital projects, dividend growth, debt reduction and share repurchases. As previously discussed, we continue to see share repurchases as an important part of our capital allocation strategy and remain committed to utilizing our $2,000,000,000 share repurchase program over the next 4 years. We have significantly delevered our business in recent years, while still completing high return capital growth projects and successfully closing a transformational acquisition. We are well positioned to continue returning value to investors through a strategic and balanced capital allocation approach. I'll now turn the call over to Sheridan for a commercial update.

Speaker 4

Thank you, Walt. Beginning with the Natural Gas Liquids segment. 1st quarter NGL volumes increased 12 percent in the Rocky Mountain region year over year, including the effect of the mid January winter weather. Volumes fully recovered in February and have continued to accelerate. April volumes averaged more than 400,000 barrels of a day from the region driven by record propane plus volumes on our system and modest ethane recovery levels.

Speaker 4

The Elk Creek pipeline expansion remains on track for an early Q1 2025 completion, increasing ONEOK's total NGL capacity from the basin to 575,000 barrels per day, enabling continued volume growth and provided needed NGL takeaway capacity. Mid Continent region NGL volumes reflect the effects of 1st quarter winter weather and a 4th and a full quarter without the low margin volumes from the contract expiring in November of 2023. We expect to continue replacing the expired contracts volume with barrels at market based rates ramping through 2024. Wide gas to crude ratios remain, making ethane the most preferred feedstock of the petrochemical industry, and ethane exports remain highly utilized. These dynamics could provide tailwinds for ethane recovery throughout the remainder of the year.

Speaker 4

Our current guidance includes modest incentivized ethane recovery in the Rocky Mountain region. Moving on to the Refined Products and Crude segment. We continue to see healthy business fundamentals and consistent performance. 1st quarter refined product volumes increased compared to the Q1 of 2023. From a liquids and blending perspective, volume and margins were in line with our expectations for the quarter.

Speaker 4

With gasoline and diesel demand typically lower in the Q1, we expect volumes to ramp in the coming months as we see a pull from agriculture activity and summer driving demand. Refined product volumes will also benefit from our pipeline expansion to El Paso, which is now fully complete. The majority of the 30,000 barrels per day expansion is contracted under firm long term agreements. Moving on to the Natural Gas Gathering and Processing segment. Rocky Mountain region processing volumes increased 9% year over year, including the effect of winter weather during the quarter.

Speaker 4

By the end of January, volumes had recovered to levels achieved prior to the extreme cold. Since then, our process volumes have continued to increase, averaging nearly 1.6 Bcf per day in April. There are currently 38 rigs in the Williston Basin, with 20 on our dedicated acreage. We expect additional rigs to return as we are now into spring and for the trend of drilling longer laterals to continue. Stable rig activity and longer laterals, coupled with continued strength in our gas to oil ratios and additional producer efficiencies, provide a compelling backdrop for significant Rocky Mountain region volume growth in 2024.

Speaker 4

In the Mid Continent region, we're currently seeing more than 40 rigs in Oklahoma, with 6 operating on our acreage. With current gas prices, we expect producers to continue concentrating activity in the oilier and NGL rich areas in the region. In the Natural Gas Pipeline segment, we benefited from higher equity natural gas sales and increased firm and interruptible transportation in the Q1. Natural gas storage continues to be in high demand. Our current expansion projects including reactivating 3 Bcf, a previously idled storage in Texas and further expanding our injection capabilities in Oklahoma, enabling us to market an additional 4 Bcf of working capacity.

Speaker 4

The Texas project will be fully in service in the Q3 of 2024 and the Oklahoma expansion will be completed in the Q2 of 2025. Both projects have firm contracts extending beyond 2,030. Pierce, that concludes my remarks.

Speaker 2

Thank you, Walt and Sheridan. As you've heard, strength across our businesses is indicating a solid 24 and already providing momentum into 2025. Before we take questions, I want to once again acknowledge our employees for your continued dedication and exceptional performance in the Q1. Specifically, I'd like to recognize those of you who responded to the winter weather across our operations in January and our employees in Texas and Oklahoma who were personally affected or helped respond to the Texas Panhandle Smokehouse Creek Fire in late February early March. Our focus on reliable and responsible operations and on supporting our communities is particularly highlighted during the events like these.

Speaker 2

I'm proud to work with individuals and teams who demonstrate a service mentality of being ready and willing to rise to the challenge. We're looking forward to the rest of 2024 and beyond. And with that, operator, we are now ready for questions.

Operator

We will now begin the question and answer session. The first question comes from Jeremy Tonet with JPMorgan. Please go ahead.

Speaker 5

Hello. Good morning.

Speaker 6

Good morning, Jeremy.

Speaker 5

Just want to start off with the guidance increase, if I could. I want to dig into the component pieces there. When you're talking about volumes, it seemed like they're rebounding stronger. Just wondering if you could break down where across the system that is, if that's really the Bakken or other parts of the portfolio you're seeing better than expected strength. And at the same time, you talked about the synergy realization maybe being better than expected or or more confidence and just wondering if you could dig in a little bit more details on what the component drivers to that are as well?

Speaker 4

Jeremy, this is Sheridan. Sure. The first thing we think about volume across our system is a lot of it is coming out of the Bakken. We're seeing a strong volume as we come out of winter and with the rigs that we have running, we see that increasing strongly throughout the year. So that gives us a lot of confidence on our volume expectations range that will be more on the higher end of that.

Speaker 4

We also in our refined product segment, we're also seeing good volume into the El Paso market as our expansion was completed and came online. And for May, that expansion is already on allocation. So we feel that that complete expansion and continue to see that go through the remainder of the year. So those are two areas where we're really seeing volume increase. As we think about synergies, synergies we've gotten this company together and people working together, we are finding more and more synergies out there that we can 2025 timeline.

Speaker 4

The other thing that we have 2025 timeline. The other thing that we have going on is in the Q1, we also had 2 large planned turnarounds, 1 in the refined products segment at our refined products crude segment at our Corpus Christi terminal and the other one in our NGL segment at the NB1 fractionator. Those are one time event that really pushed up our operating cost in the Q1 that we won't see for the remainder of the year. So those are a lot of the things that give us confidence on raising our guidance.

Speaker 5

Got it. That's helpful there. Thank you. And then pivoting, in your remarks, I think you touched on the potentials for data centers to be a tailwind for the business over time. And just want to unpack that a little bit more.

Speaker 5

Do you see that as kind of a general thing that helps natural gas demand overall? Or do you see the potential, I guess, for data centers materializing proximate to your footprint, where in Oklahoma, West Texas, what have you, where there could be more, I guess, direct opportunities?

Speaker 2

Jeremy, this is Pierce. I think it's kind of all the above. If you go back the last 20 years, electrical generation load between things that were added as far as devices that you have to charge versus the efficiencies that we got from LED heights and those kind of things pretty much offset one another. So it's been really flat for the last 20 years. Kind of for the first time in a couple of decades, we're seeing a lot of momentum for needing more energy for these data centers.

Speaker 2

And a natural quick solution to that is natural gas. So we do see that that's going to increase natural demand here, specifically over the next half decade here and probably even more. When you look at it, it's yet to be seen which area is actually developed more, which means that you put a data center next to where electricity is already there and they've got enough capacity to generate the load or you switch over to putting a data center close to, say, a pipeline, where you can literally generate electricity, from a natural gas fired generation facility. That's located right beside the AI data center. So yet to be seen exactly how that comes.

Speaker 2

We've seen some interest in different areas of our system, and it's something that we're going to continue to focus on and to see just what the pace of that's going to be. But I think it's kind of all the above.

Speaker 5

That's helpful. Thanks. So on that last point, you're in current conversations with potential customers that could be proximate to your assets. Just want to make sure I had that right?

Speaker 2

Yes, we are. And whether or not it's approximate to our assets or we serve quite a few utilities. So we've had a lot of calls from utilities as well. It's yet to be seen exactly what kind of infrastructure is going to be needed in both cases.

Speaker 5

Got it. Understood. Thank you very much.

Speaker 2

Thank you.

Operator

Our next question comes from Spiro Dounis with Citi.

Speaker 7

I want to go back to synergies quickly if we could. Sharon, it sounds like in some of your comments there, you're saying you're sort of finding even more as time goes by. And I was wondering if we could tie that back to your prior targets. At one point you talked about $400,000,000 of synergies with upside to $800,000,000 I think a lot of that was sort of probability weighted. So I'm curious, are you sort of getting closer to that $800,000,000 number?

Speaker 7

If you could, maybe just provide some examples of where you've been most surprised?

Speaker 4

Yes. Spiro, we are getting more confident in moving up the ladder as we see more opportunities come out there. And we're kind of seeing it all across parts of our business. We're seeing it from as how we optimize our storage. We're seeing it how we are combining the two assets to make logistics savings better.

Speaker 4

We're seeing it as we tie the systems together, how we can demand pull NGLs in the refined products. So we're seeing it across all aspects of our business that we've talked about.

Speaker 7

Great. That's helpful color. Sorry.

Speaker 1

Now Spiro, this is Kevin. The other thing I'd just add in there is we pull in all these opportunities Sheridan talked about, not only there, but also on the we continue to identify opportunities on the G and A side as well from a cost reduction standpoint. We pull all that in, we prioritize them, we understand what the value is, the timing, any cost And then we get people assigned to them. And I think it's that transparency and accountability internally that help us get the confidence of what we're looking at and those numbers continue

Speaker 8

to improve. Spiro, this is

Speaker 2

the only thing I'd add on that is it's a comment of you get what you measure and we are measuring our synergies.

Speaker 7

Got it. Helpful. Second question, maybe just turn it to CapEx, maybe for you, Walt. Some of your peers have started to provide this sort of normalized CapEx figure that allows them to keep growing with the basin. I guess I'm just curious maybe how we should think about that for ONEOK, especially as we head into 2025 in the Q1, you've got 3 major projects coming online.

Speaker 7

It would seem like that CapEx load is going to be coming down. So just curious how you guys think about what normal looks like on the CapEx side?

Speaker 3

Well, Spiro, I'm not going to go down the 2025 guidance route yet. But I think it's fair to say, you've identified correctly that we've got 3 decent sized projects that will all roll off early in 2025. So as we look at CapEx going forward, we have much more manageable lower capital, very high return opportunities that are presenting themselves. So I think it's fair to say that we would see that trend down. And if you were to look longer term for a kind of sustainable CapEx level, it probably is lower than where we are for 2024.

Operator

Our next question comes from Tristan Richardson with Scotiabank. Please go ahead.

Speaker 9

Hey, good morning guys. Maybe just a minor one on the guidance increase. Should we think of the small Saddlehorn acquisition as part of that increase in expectations for the year? And if so, maybe kind of what proportion of the guidance increase could be could we attribute to the acquisition?

Speaker 4

Yes. We did put a little bit of the Saddlehorn increase due to into our guidance. That was part of it. But it's a small portion. You could see we probably increased and that will get from Saddlehorn by about a third.

Speaker 3

Appreciate it. But Tristan, we've known that was coming for a little bit of time. So it's not like that was the primary driver of the expansion. It's across it's really seeing strength across our entire business. And of course, a little more subtle learning doesn't hurt.

Speaker 9

Helpful context. Well, I appreciate it. And then maybe just more of a housekeeping one. How should we think about maybe the corporate cost allocation? You guys noted a $33,000,000 change within refined products crude.

Speaker 9

Should we think of all of that as attributable to kind of moving the corporate costs around? Or maybe is there a way to think about for the full year 2024, maybe what percent of total corporate costs get allocated to the segment just as we think about refined product and crude modeling?

Speaker 3

I would look over a couple of quarters to get a to see a trend there as we do that. This is the Q1 that we allocated corporate costs to that. So, surely, we took a look at it, but there could be some other corporate costs in the Q1 that might skew that a little bit. So, I would look over the next couple of quarters to get a trend, but it will proportionately carry its fair share kind of based on EBITDA contribution.

Speaker 9

Helpful. Appreciate it guys. Thank you very much.

Operator

Our next question comes from Michael Plumb with Wells Fargo. Please go ahead.

Speaker 10

Thank you. Good morning, everyone. I wanted to go back to the AI data center discussion a little bit. When you look at your gas pipeline network, how much room is there to expand capacity via compression versus having to actually build new pipe? And then if you were to increase gas pipeline capacity to serve higher power load growth, are there any upstream benefits that you'd also see?

Speaker 8

Good morning, Michael. This is Chuck. As far as capacity adds that we could look at along our footprint, As Pierce mentioned a couple of times here today, we are in conversations with existing customers on these on our pipes connected to a little more than I think the number is 40 gas fired generation facilities today. We're working there's about 15 potential projects on our systems today. Not all of those will come to fruition, but the conversations are ongoing.

Speaker 8

And of the 15, we're seeing probably 3 or 4 of those folks saying the demand is derived from the data center. So we are looking at several projects that would add looping as well as some compression depending where we are on which of our systems, whether it's the interstates up in the upper Midwest. In Oklahoma, not necessarily looping, but rather some compression projects. So it's kind of an all of the above capacity additions. And I don't recall the second part of your question.

Speaker 10

Second part was about any upstream benefits?

Speaker 2

Upstream. So Michael, what I would say there is,

Speaker 4

this is going

Speaker 2

to be a little bit of a longer answer here. But you came at it from the question of what's the capacity of an existing line and you put more demand on it and what does that look like. I'll just paint a scenario, which don't take anything from my comments that we're far along in this. But if you were to put a data center in North Dakota, it's a cold weather area, it's very advantageous for data centers and you connected it, say, to the tailgate of 1 of the plants, then you're taking load 24 hours a day and that's loaded, it frees up on transportation of gas that goes elsewhere out of that basin. We do have space to do that, but that's one way to kind of tamper down maybe a future expansion out of the North Dakota area on the transmission lines, whether or not that be WBI, whether or not that be Northern Border or actually some other generated facility for natural gas electric power generation.

Speaker 2

So that's just one example of the way I could see that it's kind of a long way answering your question, but that what I would see a benefit to the gathering and processing business.

Speaker 10

Okay, perfect. Thank you. And then, just wanted to go back on Saddlehorn for a second. I realize it's a small acquisition in the grand scheme of things, but I wonder if you could just talk in terms of strategic rationale for that asset to why you want to own more of it and just also from a capital allocation perspective, why that makes sense?

Speaker 4

Michael, this is Sheridan. I think the first thing on why we won't own it, we operate that pipeline. It's coming out of an area that we see growth in crude. In fact, the last couple of months Saddlehorn has been fully allocated. And the third is, as this was kind of instigated by planes, it has a lot of connectivity up in the area and they're seeing the benefit as well, which gives us more confidence that this is a good asset to own more of.

Speaker 10

Thank you.

Operator

Our next question comes from Theresa Chen with Barclays. Please go ahead.

Speaker 11

Good morning. In terms of the synergy outlook, just near term looking at the upcoming maintenance in Wink to Webster, is there room from a crude oil marketing activity perspective across your assets for additional synergies to capture what would likely be a temporary and volatile by middling differentials backdrop and using the excess capacity you have on BridgeTex or maybe LongHorn to a smaller extent. I realize that this does not neatly fit within your 4 categories of synergy buckets, but given that you are a significant market

Speaker 3

of commodities in general, could this be a

Speaker 11

source of additional upside? From

Speaker 3

the

Speaker 4

from the beginning saw opportunity in marketing crude oil to bring volume to our system. Specifically right now, as we think about what's going on in the next 2 months with the MEH to Midland differential kind of blowing out, we're naturally seeing more volume come to Bridgestex. That volume is up quite a bit and it's part of the reason we're even more confident that's going to continue and confidence increasing our guidance as we go forward. And with some of the maintenance that is coming up on certain pipelines, we haven't factored that in yet, but that gives us even more confidence that we'll see some strong volumes crude coming out of the Permian on our system. Marketing will add to that, but that will probably be a little bit more longer term as we get later on in the year.

Speaker 11

Got it. And going back to the AI theme, this has come up so much in recent weeks months related to natural gas transmission and storage assets. And I'm just wondering if you have any early indications or thoughts on just quantitatively what this could mean as far as the size of the EBITDA opportunity for ONEOK?

Speaker 2

Well, first of all, I think you got to look at the size that we currently are making $6,175,000,000 in EBITDA. And I think you got to look to see what kind

Speaker 3

of pace it's at.

Speaker 2

I think it's really just too early to tell.

Operator

Our next question comes from Sunil Sibal with Seaport Global Securities. Please go ahead.

Speaker 2

Hi, good morning everybody.

Speaker 12

So I just wanted to understand a little bit on the growth prospects when you think about beyond the projects, which are kind of get completed in the first half of twenty twenty five. So I was curious how would you put your growth opportunity beyond that in the 4 business buckets that you have? And then on the same line, how have your hurdle rates changed, if any, in the current environment versus the environment we had a couple of years back in terms of interest rates, etcetera?

Speaker 4

This is Sheridan again. On growth projects, we are continuing to on the synergy side, continuing to see low capital, high multiple type growth projects that we are baking in as we continue to go forward. They're coming all the time. We get more and more of them, but they're kind of factored into our overall capital plan already. We had capital in there that we would capture this, but we continue to get more excited about that growth that we see from growth projects as it relates to synergies and bringing them together.

Speaker 12

Okay.

Speaker 3

I think that you're asking about the interest rates. We aren't a company that relies heavily on short term debt. All of our debt is turned out. We have cash called the last three bonds that we've had mature. And we've said that we expect that that will probably be the case later this year that we would go down that path.

Speaker 3

So occasionally, we're in and out of the CP market to cover month to month type of things. But our business is generating cash flow to be self contained. And so we don't see any real impact from higher rates going forward.

Speaker 12

Okay, understood. And then one kind of operational one for me. It seems like in Permian NGL volumes were a little bit weak sequentially. And I was curious ending more to it than the weather issues there. And then in terms of the West Texas expansion, if you could update us on the contracting there?

Speaker 4

Yes. On the Permian, it's kind of the drop sequential in the Permian is really weather. We had the impact of weather out there. And one thing we noticed in the Permian, they're not used to weather. And anytime they get any kind of weather, it takes them a little bit more to get back up and going.

Speaker 4

So we saw some weather impact. The Q1 was a big reason for the volume decrease. As we think about contracting going forward on our West Texas pipeline expansion, it is going as we had planned. We continue to contract more volume on that. We are right where we think we need to be as we continue to go forward.

Speaker 4

We are going to continue to leverage that into the future for more plant connects and to feed our transportation and fractionation business. As we have said earlier, we already have contracted 2 plants that will be coming on this year. We have another one that's expanding. And recently, we've actually signed up some more people as well to bring more volume onto the system. So like I said, we are very comfortable where we are with the contracting on that system today on that expansion.

Speaker 4

And the expansion is on time, on budget coming up in the Q1 of 2025.

Speaker 2

Understood. Thank you.

Operator

Our next question comes from Neel Mitra with Bank of America. Please go ahead.

Speaker 6

Thanks for taking my questions. I had a couple of questions on the guidance increase. So first, it seemed like the GMP rate was $1.21 in Mcf, which was a little bit higher than the high end of the range of $1.15 to $1.20 which is the guidance. Is that something that we should roll forward or is that something that occurred with maybe MVCs in the Q1? And then second on that part, should we expect kind of a linear increase in volumes in the Bakken or should we expect another weather downturn in 4Q in terms of your budgeting?

Speaker 4

Neal, this is Sherry. First thing on your increase on the earnings on the fee rate, a lot of that is driven by our inflationary escalators that are coming and to a lesser extent volume coming from certain customers that may have a different fee structure in there. And yes, we do think that will continue going forward, that fee rate. On the volume cadences coming out of the Bakken, it can be a little bit lumpy as we bring on compressor units and everything else. We'll sometimes we'll have some big bond coming in.

Speaker 4

We do always budget for winter weather in the first in the Q4 and the Q1. But as you saw in 'twenty three, the 4th quarter did not have any weather in it and all the weather showed up in the Q1. So we spread it out over the 2 quarters in a budgeting standpoint, but we know it doesn't all show up evenly across those quarters. It usually concentrates in 1 quarter or the other.

Speaker 6

Got it. And then I wanted to clarify on the AI theme. I know this is still very early innings. But Pierce, I wanted to follow back up on kind of the opportunity you see there in North Dakota with the advantageous weather on temperatures, etcetera. Are you seeing opportunities from the wellhead to move lines to CCGTs or more so from CCGTs to data centers?

Speaker 6

And is this kind of geographically concentrated with your opportunities within your NGO footprint in the Bakken? Or are you seeing things outside of the Bakken and perhaps the Permian and Mid Con as well?

Speaker 2

Well, first of all, you're not going to take it out of the well hit because the GPMs or the gallons per 1,000 of liquids that's associated with that gas is just too high to tie it in back there. So you're going to need to get downstream of a plant. And I would also tell you that that's a theoretical scenario at this point, and that's something that we'll be exploring in the future with multiple different players. It could happen in any one of our basins. It's just that it's a little more advantageous where you can locate one of these things, where you get some really good kind of lower natural gas prices and you got a lot of natural gas supply.

Speaker 2

And the weather actually is colder. You have more kind of heating degree days, so therefore, it lessens the cooling load that you're needing on these AI facilities. So the thing I would probably say again about AI, more to come. We'll have more updates on these in the coming quarters. But again, don't think it's necessarily going to be material in the short term.

Speaker 6

Perfect. Thank you.

Operator

Our next question comes from Keith Stanley with Wolfe Research. Please go ahead.

Speaker 13

Hi, good morning. First, just a follow-up to Neil's question, but on the Rockies NGL bundled rate, that was up nicely to $0.30 in Q1. What drove that higher? And is that a good run rate for the balance of the year?

Speaker 4

What drove that Keith, this is Sheridan. What drove that rate is less incentivized ethane that came out. So that rate is going to depend a lot on how much incentivized ethane we come out, because obviously we're bringing that at a lower rate. But that $0.28 to 0 point 3 0 dollars is going to be $0.30 is going to be maybe even a little higher than that, depending if we get volume continue to ramp up and we have to manage capacity on Elk Creek through backing out ethane for C3 plus you could see it go a little bit higher there, but it's going to be in that range.

Speaker 13

Okay, great. Thank you. Second question just on going back to Saddlehorn, but are you optimistic that you could find other bolt on type opportunities like that over the course of the next year? Or was that more of a one off with Western's process? I noticed you didn't list acquisitions as part of the capital allocation priorities in your remarks.

Speaker 2

So this is Pierce. What I would tell you is we're always looking for opportunities to expand our footprint out there. That's one of the things that we look at. As far as M and A goes, we continue to be focused and actually very pleased with the integration as it's related to Magellan. So at this time, our that is our organization's primary focus, is on the integration of what we just acquired last year.

Speaker 2

I'd say that future M and A will be the same as it always has been here at Wanoak. We're going to be intentional and disciplined about what we look at.

Speaker 13

Okay. Thank you.

Operator

Our next question comes from Neal Dingmann with Truist Securities. Please go ahead.

Speaker 2

Good morning, Al. Thanks for

Speaker 14

the time. My first question, just looking at your NGL raw, just the throughput on the raw volumes there. I'm just wondering, looks like the range is a little wide. I'm just wondering, could you discuss some drivers behind that? How this is shaping up sort of year to date so far?

Speaker 12

Neil, could you repeat that question

Speaker 3

one more time?

Speaker 14

Just looking at the I'm looking specifically at Slide 8 around that at NGL raw feed throughput volumes and just sort of looking on expectations behind 24. And it's not terribly wide, but just wondering what would cause that to trend towards the higher side and how that's looking sort of year to date?

Speaker 4

On our raw feed NGL volumes, one of the big things on the raw feed NGL volumes that's going to make it go up is ethane recovery. And we've come out and said that we're going to have naturally the Rockies is going to be in a rejection, but we're going to have opportunities to incentivize that. I also said we're going to manage our capacity in our pipeline as Elk Creek's until we get the expansion on. It's up more to the high end of its capacity. Then you have the Mid Continent where we have said that's going to be kind of in and out of ethane recovery.

Speaker 4

So is that more we have the opportunity to as prices spread statewide like they kind of are today, we'll see more ethane throughout the year come out, which will drive your dry that up your raw feed throughput up. And then out of the Permian, we've always said that's going to be in full ethane recovery from here on out. So the biggest one is going to be ethane recovery. Obviously, we are seeing we've talked about volume in the Bakken that looks really, really good. We're also seeing, plentiful of rigs in the Mid Continent drilling in different areas and some of the oil rich areas, some very high GPM areas that as we go through this year, we're cautiously optimistic that we're going to see really good growth there as well.

Speaker 4

So those are some of the areas we see could push it to the high end, but definitely ethane recovery is the biggest swing here in 2024.

Speaker 14

Very helpful. And then just a second question on looking at your natural gas pipeline earnings. I'm just wondering part I saw of the sequential increase was driven by of that earnings was driven by the higher natural gas sales on volumes previously held in inventory. I'm just wondering is that something you anticipate to continue to see potential upside from these incremental volumes in inventory? I mean, is that more to come or which we think about with other volumes around associated around that?

Speaker 8

Yes, Neal, this is Chuck. Seasonality, obviously, the prices are higher in Q1. So when we set up for each calendar year, we look at our portfolio of equity gas and choose where we're going to what months we're going to sell that and then try and optimize our value there. So that was part of our plan going into Q1. Obviously, you've seen gas prices fall here in Q2, so you've got seasonality at work.

Speaker 8

So we'll just be throughout the summer as we see electric generation pick up and we'll see prices spike, we may sell into some of that. And then again, it'll be seasonal back to the winter months next year.

Speaker 2

Helpful. Thank you all.

Operator

Our next question comes from Craig Sherr with Tuohy Brothers. Please go ahead.

Speaker 15

Good morning. Thanks for fitting me in. Sheridan, back to that $0.28 to $0.30 Williston NGL bundled rates question and this issue of incented ethane recovery. Are you seeing the spread of ethane discounts required to incent recovery less than historical to the degree that we ramp up ethane? Do you see that having relative to the history less of an impact?

Speaker 4

Greg, what I'd say right now is we in the incentivized ethane that we've done so far this year, it has been at or maybe a little bit above what we've done, what you'd say more as a run rate in the past. A lot depends on not just the price of ethane, which we have good demand for ethane on the Gulf Coast, but also what the price of natural gas is in the Bakken. And so you got to look at the spread between those two. But so far, we have been very pleased with what we've been able off the ethane incentivized ethane in it.

Speaker 15

Got you. And just to finish off, do you see prospects for ethane being tailwinds year over year even into

Speaker 3

2025?

Speaker 15

And separately around the Conway to Mont Belvieu basis spreads that seems to have contracted last couple of quarters. Do you see that stuck in the doldrums for a while?

Speaker 5

Well, I'll take the last one.

Speaker 4

On the Conway to Belvieu spread, that has actually, we have had opportunities. If you look at the average through the month, it may be in a little bit of an interim month. We've had some opportunities to lock in some fairly good spreads. And our system is set up that we can lock in by component, Conway to Bellevue or Bellevue to Conway. We can lock both of those in as we go forward.

Speaker 4

We've been happy where the spreads have been at this time. Obviously, we'd always like them to be a little bit wider, but we've been able to take advantage of them. They're not going to get as wide as we saw in a long time ago where they were double digits. So not going to get there because there's still plenty of capacity to move product in between the two basins. But I think they're going to be at an acceptable range that we are going to be able to meet what our expectations are in our guidance or even exceed it.

Speaker 15

And I'm sorry, what did you say about thoughts about ethane into next year?

Speaker 4

I think as we go into next year, what you're doing is you we're continuing to have the ability to recover more ethane as production continues to grow in all basins. You will we're kind of waiting for the incremental ethane exports coming online that we'll see some coming on next year in 'twenty five and the year after that. And so what you come down to is how hard are the petchem's gone and what utilization rate that the petchem's are running. And right now with this wide crude to gas ratio that you're seeing on a global scale that puts the United States ethane petrochemical ethane crackers at a huge advantage that we're going to see them continue to try to run as hard as they can. So I think we will see you'll see the strength in that the pet chems will be running harder, but you will see a little bit more, I think, coming out due to more production.

Speaker 4

We still as we get going to how we set up our system, we still see that the Bakken is going to be an area that we will be able to incentivize ethane out at a nice rate to be able to bring it into the stack wherever that stack even if we have more volume coming out of the Mid Continent of the Permian, we still think we can Bakken in there at a nice rate.

Speaker 12

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Andrew Ziola for any closing remarks.

Speaker 1

All right. Well, thank you, everyone. Our quiet period for the Q2 starts when we close our books in July and extends until we release earnings in early August. We'll provide details for that conference call at a later date. Thank you again, and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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AES Q1 2024
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