Morningstar--- Oneok Continues to Benefit From a Strong Volume Recovery Business Strategy & Outlook Stephen Ellis, Sector Strategist, Oneok brings together high-quality assets, some of the strongest near- to medium-term growth prospects in our coverage as new projects ramp up in 2021, a C-Corporation structure, and a well respected management team in a compelling package.
About 90% of the firm's earnings are fee-based, 80%-90% of its customers are investment-grade, and the firm hedges its limited commodity price exposure. The growth comes at a cost, though, as unlike many of its U.S. midstream peers, Oneok is not generating excess cash to more aggressively reduce leverage or repurchase shares.
Oneok experienced more volume volatility than peers in 2020, as natural gas liquids volumes in the Rockies fell more than 20% sequentially in the second quarter but recovered to well above pre-COVID-19 levels by the end of the year, and the volume recovery has continued into 2021. The sharp decline demonstrates the challenging basin economics for producers and thus volume security for Oneok. On the flip side, concerns about Oneok's indirect exposure to the Dakota Access Pipeline and related assets have diminished as producers have lined up alternative takeaway options out of the Bakken, including rail. If DAPL were to shut down permanently (we estimate a 50% probability this could occur), Oneok's exposure is less than $50 million in EBITDA in 2021 (assuming an April shutdown), so perhaps as much as $75 million annually.
Still, Oneok's major growth opportunities in the near term lie in the Rockies and Williston Basin. Oneok's natural gas liquids volumes in the Rockies are around 300,000 barrels per day, well below its current capacity of 440,000 b/d (expandable to 540,000 b/d).
Expected growth drivers are ongoing rig activity, ethane recovery, and reducing flared gas, and every 25,000 incremental b/d is about $100 million in incremental EBITDA. In the Williston Basin, there is also substantial upside for Oneok in terms of capturing now-flared gas, as Oneok has about 250-300 million cubic feet per day of spare gathering and processing capacity and can benefit as rig activity in the area increases.