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ONEOK Partners: How Gas Gathering, Processing Segment Makes Money

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Jul. 1 2015, Updated 1:06 p.m. ET

Operations

ONEOK Partners’ (OKS) Natural Gas Gathering and Processing segment gathers and processes natural gas. The segment contributes ~21% of the company’s overall revenues and 24% of its operating income.

Natural gas produced from oil and natural gas wells is compressed and transported to processing stations. The unprocessed gas is treated to remove NGLs (natural gas liquids) and other contaminants to produce “residue gas.” This residue gas is then delivered to end customers.

Extracted NGLs are sent for “fractionation.” Fractionation involves separating mixed NGLs into various component elements.

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The segment’s operations spread across the Hugoton and Central Kansas Uplift basins, the Cana-Woodford Shale, the Woodford Shale, the Springer Shale, the Lime formation in Oklahoma and Kansas, the Williston Basin, which includes the Bakken Shale and the Three Forks formations, and the Powder River Basin in Wyoming.

Percent-of-proceeds contracts dominate segment revenues

Percent-of-proceeds contracts account for nearly 85% of the segment’s total volumes. With percent-of-proceeds contracts, ONEOK gathers and processes natural gas on behalf of producer customers. The residue gas and NGLs produced from the processing are sold on the market. OKS then remits a pre-agreed percentage of these proceeds to the producer, and retains the remainder. Such contracts expose the segment to commodity price risks.

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Fee-based contracts, which are generally based on the volume of gas or oil gathered, processed, transmitted, fractionated, or stored, don’t depend directly on these commodity prices. Such contracts represent only ~15% of the segment’s volumes. The above graph shows the contribution of fee-based and commodity-price-based contracts to the segment’s operating income.

Why commodity supply and demand affects revenue

The supply and demand of natural gas affects the segment’s volumes. Lower energy prices have pressured oil and gas production, which might decline further in 2015. This could lead to diminished demand for gathering and processing, impacting companies such as OKS.

Next, we’ll review the Natural Gas Gathering and Processing segment’s recent operational performance.

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