歐尼克 (OKE) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the second-quarter 2015 ONEOK and ONEOK Partners earnings call. Today's call is being recorded. And at this time I'd like to turn the conference over to Mr. T.D. Eureste. Please go ahead.

Thank you and welcome to ONEOK's and ONEOK Partners' second-quarter 2015 earnings conference call. A reminder that statements made during this call that might include ONEOK's or ONEOK Partners' expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provisions of the Securities Acts of 1933 and 1934.

Actual results could differ materially from those projected in any forward-looking statements. For discussions of factors that could cause actual results to differ please refer to our SEC filings. Our first speaker is Terry Spencer, President and CEO of ONEOK and ONEOK Partners. Terry.

Thank you, T.D. Good morning and thank you for joining today and for your continued interest in ONEOK and ONEOK Partners. On this conference call is Walt Hulse, Executive Vice President of Strategic Planning and Corporate Affairs; Derek Reiners, our Chief Financial Officer; Wes Christensen, Senior Vice President Operations; Sheridan Swords, Senior Vice President Natural Gas Liquids; Kevin Burdick, Vice President Natural Gas Gathering and Processing; and Phil May, Vice President Natural Gas Pipeline.

As noted in our second-quarter earnings results released yesterday afternoon, key financial and operational information discussed during our first-quarter earnings call has been updated in a short presentation and is posted on ONEOK's and ONEOK Partners' website. Please refer to this presentation and to the earnings releases for variance explanations and key metrics.

With the information that has already been provided I intend to keep my remarks brief today and focus on a few key areas. We will spend the majority of our time answering your questions.

To begin, even in this continued weak commodity price environment, we expect that both ONEOK and ONEOK Partners will end the year within our 2015 financial guidance ranges and we exit -- and as we exit 2015 we expect 2016 to continue to benefit from the completed and soon to be completed capital growth projects in the natural gas liquids, natural gas pipelines and natural gas gathering and processing segments.

We are seeing volume growth through the first half of the year as anticipated, particularly regarding natural gas liquids gathered and fractionated and natural gas gathered and processed. We expect these volume increases to continue into 2016. Overall the partnership's year-to-date performance positions us to achieve our natural gas gathering volume and financial objectives for the year.

I will now turn the call over to Derek for a brief discussion of ONEOK Partners' and ONEOK's financials. Derek.

Thank you, Terry. Starting at the partnership, 2015 EBITDA contrition continues to ramp up as strong volume growth is shaping up as we anticipated. We expect to grow our EBITDA in the second half of 2015 and be within our 2015 financial guidance EBITDA range of $1.51 billion to $1.73 billion. Our EBITDA growth follows the volume growth.

Even in this lower commodity price environment, the partnership's year-to-date EBITDA of $712 million is only $40 million less than in the same period in 2014, which was a record in an environment with much higher commodity prices. Our coverage ratio has improved to a 0.88 times coverage in the second quarter 2015 and we expect continued improvement in our coverage the balance of the year.

The partnership has a solid balance sheet and ample liquidity to support our current capital program, including access to our commercial paper program and credit facility. As of June 30, ONEOK Partners had an adjusted debt to EBITDA ratio of 4.5 times.

As we said, investment grade credit ratings at ONEOK Partners remain very important to us. Through the first half of 2015 our ATM program was a very effective tool for issuing equity and we continue to evaluate the overnight equity market and other sources of capital. We will continue to take a balanced approach and remain disciplined when issuing debt and equity. Additional equity is needed to continue to support our capital projects.

We continue to remain confident in our ability to raise the necessary capital to fund our capital projects at ONEOK Partners. At ONEOK our liquidity remains strong with $150 million in cash and an undrawn $300 million credit facility and a debt to EBITDA ratio of 2 times at June 30. We continue to retain excess cash at ONEOK as we navigate these uncertain times. Terry, that concludes my remarks.

Thank you, Derek. Now let's take a closer look at each of our business segments starting with our natural gas liquids segment. The segment's 2015 year-to-date results were supported by solid second-quarter performance. The segment's year-to-date operating income exceeds year-to-date 2014 operating income.

This becomes a more useful statistic when you consider that the first-quarter 2014 results greatly benefited from a historically high demand for propane, and that in 2015 the segment has experienced lower realized NGL product price differentials and narrower NGL location price differentials.

So even though year-over-year the segment was competing with the 2014 propane benefit, operating income so far in 2015 has exceeded first half 2014 totals because of the continued strong growth of fee-based revenues and volumes. Our integrated NGL system continues to benefit from providing nondiscretionary fee-based services to NGL producers by connecting growing natural gas liquids supply in the Rocky Mountain, Mid-Continent and Permian regions with key market centers.

The natural gas liquids gathered volume on the Bakken (technical difficulty) pipeline reached approximately 100,000 barrels per day in July and is expected to reach approximately 105,000 barrels per day in the fourth quarter 2015. This is an increase of approximately 20,000 barrels per day from what we expected in the first quarter as a result of decreased ethane rejection in the Rocky Mountain region. We will talk more about the reduced ethane rejection in a moment. The average bundled gathering and fractionation rate on the Bakken NGL pipeline is more than $0.30 per gallon.

Moving to our fractionated volume, in addition to the increased ethane fractionated due to the decreased ethane rejection, we also saw more than 20,000 barrels per day of incremental interruptible volumes on our system in the second quarter as we were able to utilize our fractionation assets to meet market demand.

We expect to continue to see approximately that level of incremental interruptible volume on our system into the fourth quarter. As a reminder, we do not include interruptible volumes in our fractionation volume guidance.

And finally, in recent weeks we have seen Conway-to-Mont Belvieu ethane price differentials range from $0.02 to $0.03 per gallon and we expect this range to continue for the rest of this year.

As you know, our natural gas pipelines business is primarily fee-based with long-term firm demand charge contracts. We continue to develop new projects and opportunities to grow our fee-based earnings. Just last week we announced plans to expand our ONEOK WesTex intrastate natural gas pipeline system in the Texas Panhandle and Permian Basin.

The expansion, which will complement our previously announced Roadrunner gas transmission pipeline joint venture, is already 90% subscribed with 25-year firm demand charge agreements. These projects, and the expansion of our Midwestern Gas Transmission pipeline system, are continued examples of our commitment to stable long-term fee-based earnings growth.

The natural gas gathering and processing segment's second-quarter results were significantly improved over the first quarter. Earnings for this segment are still expected to be significantly weighted towards the second half of the year, which is in line with the expected growth of our 2015 natural gas gathered and processed volumes.

We have greater confidence in our Williston Basin volume projections with six months of operating performance under our belts and good visibility into the remainder of 2015. The segment is seeing the benefit of rigs concentrated in the most productive areas, new well connections, two compressor stations completed and the current flare gas inventory.

We expect Williston Basin volume in the third quarter to reach approximately 650 million cubic feet per day as we continue to bring on additional field infrastructure. Additionally, our new well connections continue to exceed our expectations as we completed nearly as many in the first half of 2015 as we did in the first half of 2014.

We remain on track to fill our plants to approximately 685 million cubic feet per day in the fourth quarter as we complete gathering system and compression projects through the second half of the year. These new compressor stations will not only fill our existing plants, but also will provide capacity to ramp up volumes at our Lonesome Creek plant which is expected to be completed late in the fourth quarter in 2015.

In the Mid-Continent our volumes increased quarter over quarter due to incremental interruptible gathering and processing services we provide to third parties from time to time as demand dictates. In addition, a key producer in the Cana-Woodford, as expected, has now started the process of completing wells drilled in the first half of the year.

Our commercial team continues to make progress with customers on its re-contracting efforts and has seen positive results in increasing our fee-based margin while providing enhanced services to our customers.

Additionally, we reduced the level of ethane rejection in the Rocky Mountain region in June 2015 to maintain downstream NGL product quality specifications to ensure continued reliable delivery of high quality NGL products to meet the needs of our downstream markets. We expect the decreased level of ethane rejection to continue.

Our producer customers are continuing to find ways to reduce drilling costs and are doing more with less. Said another way, our producer customers are increasing volume with fewer but more efficient rigs and advanced completion technologies are increasing well production rates to levels the industry has never seen before.

Our positive operating performance through the first half of the year, combined with what our producer customers are communicating to us, has given us greater confidence in our 2015 natural gas gathering and processing volumes and momentum into 2016.

Much like 2015, our 2016 volume growth is expected to be led by growth in the Williston Basin. In the Williston we connected more than 260 new wells in the second quarter 2015 bringing our year-to-date total to more than 560 new well connections. We still expect to reach our 2015 new well connection goal of more than 700 wells and our 2016 goal of more than 600 new wells.

There continues to be an inventory of flared gas in the Williston basin and we estimate approximately 145 million cubic feet per day is dedicated to the partnership, with the majority of the wells flaring already connected to our system.

As I touched on earlier, our producer customers are doing more with less. There are approximately 40 rigs drilling in the most productive areas at any given time on our acreage dedication in Northeast McKenzie, North Dunn and Southern Williams Counties. Additionally, wells in high producing areas continue to exhibit significant performance improvements, producing 2 to 3 times more natural gas than lower producing areas.

Additionally, more than 900 wells, which have been drilled but not completed, remain in the basin. They continued drilling, flared natural gas inventory, improved well performance, and significant backlog of uncompleted wells is expected to continue and help contribute to the partnership reaching its 2016 natural gas gathered volume expectations.

Our strong natural gas liquids and natural gas volume growth in the second quarter support the volume outlook we have been communicating and provides our stakeholders additional visibility to support our volume growth outlook for the second half of the year, and, most importantly, our financial guidance expectations for 2015 and the momentum into 2016.

As always, thank you for your continued support of ONEOK and ONEOK Partners. And thank you to our dedicated employees for your hard work and continued commitment to our Company. Operator, we are ready for your questions.

(Operator Instructions). Christine Cho, Barclays.

I just wanted to start with the reduced ethane in the Rockies. When you say to maintain downstream product quality specifications, are you talking about meeting natural gas pipeline specs?

No, Christine, we are talking about natural gas liquids specifications (multiple speakers).

So -- yes, more color would be helpful.

Sure, sure. Sheridan? I will just let Sheridan talk about it.

The NGLs coming out of the Bakken have a high oxygen content and as we fractionate that oxygen is being driven into the propane. And to be -- in the butane, and to be able to get that by bringing more ethane on we can drive it into the EP where we can treat it. And we can continue to make sure that the propane is on spec for delivery into the end use market.

I see. And then I guess a [molecule] from the Rockies, how much does that generate? I am assuming it is not the full $0.30 that we usually look at for Bakken.

It is -- we are having -- it is close to that number, but there is some offset versus current ship frac or pays or demand charges that we have. So there is an offset against demand charges as well. So it is -- net-net it is not the full $0.30.

Okay. But not something for off (inaudible)?

It is close.

Yes.

Okay. I guess one of your competitors is in the process of connecting two of their NGL pipelines that would bring 50,000 barrels per day of propane from the Marcellus into the Midwest. Do you have any thoughts that you could share with us about what that level of supply could potentially do to the spreads between Belvieu/Conway?

Is that kind of supply going to overwhelm Conway? Or is there already enough excess capacity between Conway and Belvieu that it could easily go to Gulf Coast without any problems? Or does it just pretty much prevent Conway from ever trading at a premium and again like it did last year? Any color would be helpful.

Christine, what I would say is that obviously more volume into the Mid-Continent has nothing but to improve spreads. We do think there is the ability to move some propane from Conway down to Mont Belvieu, especially as you displace other products, as these are all batch pipelines, so you may move more propane than butane and more propane than the EP or ethane that you have.

But we do think there is capacity to move incrementally more volume between the two. But I think it will nominally have a widening effect on the spread and it will have a dampening effect on Conway ever trading over Belvieu, you are correct.

Okay. And then I guess last question for me -- you guys have done a sizable amount of equity on the ATM year to date. But like you said, you are going to have to do more. And because I think the market has somewhat of a wide range out there in what that number is, it kind of puts a bigger overhang on OKS.

The debt to EBITDA that you guys report is always different than what I calculate. And I suspect it is because of the project credit that is in there. But how far does the credit rating agency go in giving you that credit? Is it a year, 18 months, two years? Any color on how they view your balance sheet would be helpful.

Sure, Christine, this is Derek. On an unadjusted basis our debt to EBITDA is shown at 5.1 and we reported 4.5 on an adjusted basis. You are correct. The principle difference there is the material projects that we have underway that we receive some credit for in our covenants. So that is that delta.

On a run rate basis you are probably 1 or 2 basis points lower than that if you just took fourth quarter -- or excuse me, second quarter and multiplied that by 4. The agencies I think give us some credit for that. I'm not exactly sure to what extent; they don't exactly share all their calculations with us.

But they certainly understand that as we are in construction mode we will be issuing equity, and debt for that matter, ahead of the realization of the earnings from those projects. And so, I think there is some benefit of afforded to us in that regard. Clearly agencies look forward and think about the nature of those projects and the earnings from those projects going forward as they think about how does our leverage look going forward.

Thank you for the color.

Chris Sighinolfi, Jefferies.

Thanks for the added color this morning. Also, thanks to Walt and T.D. for the slide presentation and the added disclosure, it is very helpful to us. So just wanted to say thanks.

You are quite welcome.

A couple questions for me, I guess to follow on where Christine was going originally. The -- slide 4 where you have volumetric data, since the April update clearly the Bakken NGL volumes are up materially from April into July and you are expected [feed] grades for the fourth quarter.

You mentioned, Terry, the effects of reduced ethane rejection and interruptible volumes on 2Q results and the guidance. But I am wondering sort of on those factors, 2Q was an upside surprise for you on those fronts. So what are you seeing in the basin? And I guess what gives you confidence with the forecast? And could we see further upside from the product (technical difficulty) that you and Sheridan had mentioned as we move into the back half?

Well, Chris, we have increased confidence because our producers are performing. And we continue to have lots of discussions to get a better understanding of where they are and what their plans are. And they are executing those plans and, as we said, they are continuing to improve the cost structure and improve their technology, and really significantly outperform even in the midst of slight rig reductions in some cases.

So we have got good visibility into the quarter and that is the reason why we feel so confident about the volumes. That plays right into the natural gas liquids segment, particularly as we produce more natural gas liquids out of the Rockies and we produce more natural gas liquids out of the Mid-Continent that benefits the NGL segment. So it is all about -- it is about visibility and it is about continued communication with these producers.

And so, on the -- I guess the downstream spec elements of Sheridan's comments, is there further upside on that element of what you saw in 2Q and I guess thus far in 3Q? Or are we fairly comfortable with what those specs look like given base level of production volumes on the system?

Well, one thing I would say is that in 2Q we just started, as we stated, the ethane recovery or decreased ethane rejection in June, so you would have a full three months in the third quarter and full three months in the fourth quarter. But we think the level of ethane or close to the level of ethane that we were extracting today is enough to bring these products into a spec that we can handle and get into the end-use market.

Okay, great. Sticking with that slide, slide number 4 for the moment, it seems like the steepest projected ramp in July volumes to year end is on the West Texas system. So I just had a couple questions there. First, what is driving the ramp?

Two, it looks also like the blended tariff rate on the system maybe came up a penny from the April update. I'm wondering if that was due to any re-contracting, if I am over-reading or reading too much into something or if there is something else going on.

And then three, Terry, you had mentioned when you bought that asset the potential to fractionate barrels coming off gathered Permian volumes. So just wondering sort of when we might expect to see the fruits of that effort or if you could give us an update on it?

Sure.

Well, the first thing I would say is in July it's down a little bit, the [215,000 bpd] is down a little bit from the fact that we had some outages on the system that caused the volume to be down. Also the reason the $0.04 -- we've gone from $0.03 to $0.04 is because we have increased the tariff rates on the pipeline closer to market than from what it was. So you are seeing an increase in rates on the existing volume there.

We continue to think that we will have ramp up there as we have talked to more producers out there and we think there is opportunity for that to grow. But I do point out that the West Texas pipeline has the lowest margin on our system so it doesn't have the biggest impact.

Okay. And then on the fractionation side of it longer-term, just give an update on where we stand.

Yes. We continue to talk to producers and processors out in the Permian who are looking for a bundled service, not just transportation to fractionation and delivery into the end-use markets. So as we stated when we bought this pipeline, we think the ability to bring that bundled service to customers of the West Texas pipeline greatly enhance our ability to bring product to the line. And so, we are in negotiations with various people on the line to be able to do that.

(Inaudible).

No, I didn't have anything to add, Chris.

Okay. I guess one final thing on the asset side, it looks like Stateline de-ethanizer was moved out a little bit. Given the comments around reduced ethane rejection, I'm just wondering what drove that and any and that that movement in time would have on cost or return.

Yes, Chris, this is Kevin. The de-ethanizer was pushed back. As we got into the details of the design there was really two drivers. One was as we worked with our contractor there was some long lead time equipment that got in and pushed the dates out a little bit.

And then as we recast the dates when we applied for winter construction and looked at the efficiency we have when we run our projects through the winter that cost us some time too. I don't think it will have a material impact on our 2016 and what we are thinking there.

Okay, perfect. One final thing for me. Just, Derek, the 4.5 times debt to EBITDA leverage metric that you quoted, that is consistent with how we interpret the covenants on the credit facilities, is that right?

Yes, that is correct. It is exactly the way that we file with our banks for covenant compliance.

Okay, perfect. Thanks a lot for the added color today, guys, and congrats on a great quarter.

Kristina Kazarian, Deutsche Bank.

Quick follow up first on leverage levels. Can you talk -- I note you guys talked about this a little bit in two of the previous questions. But can you talk a little bit more about what I should be thinking on in terms of where the rating agencies want you guys to go on like a yearend run rate basis to keep an IG rating, and what that would mean for the use of the ATM or maybe even a block, and how you think about that given where the different currencies are trading right now?

Sure, this is Derek. The agencies I think have put out some guidance for us in their most recent updates. I think Moody's talks about a 4.5 times and S&P talks about 4.25 to be in those ranges. So certainly we think about that as we consider our equity needs during the year.

We have said many times the ATM has been a good tool for us and certainly would expect to continue to use that in the future. But again, we have to kind of balance the balance sheet needs, the leverage with the issuing equity at a higher yield certainly than we would like to see.

And of course as you issue additional units you pay distributions on those units, and so that impacts your coverage. So it is a balance and certainly we have regular communications with the agencies and let them know what our plans are.

Great. And then bigger picture, I know we often talk about the desire to move more from POP to fee-based and to kind of get the business so that at some point in time it could -- you guys could sustain like the one time coverage just off fee based. I know you mentioned it again today and the press release, but could we talk about progress that has been make there and timeframe to that actually occurring in your mind?

I will just make a high level comment. It is going very well, producers are engaged with us, we have had success; we have had some contracts converted more to a fee-based structure than POP. So we are expanding the fee-based component and shrinking the commodity sensitive component, it has gone well.

Producers, they want additional services, other things added to their contracts with us, other features, and we are working with them on those. So it is going well. When you think about the regions in which we operate, and particularly in the Williston Basin, it is not like hundreds of contracts that we are having to address, it is key producers and just -- it is not a whole bunch of contracts. So we expect to have some success as we continue to move forward and have success fairly quickly.

And so, when we think about that is that like a 2016, 2017, 2018. How -- just roughly frame it up maybe.

It is going to be more of a 2016 benefit to us.

Perfect. Thanks, guys. That was it for me today.

Craig Shere, Tuohy Brothers.

Good morning and congratulations. So in the last questioning when you were saying, Terry, a 2016 benefit on some of the conversion to more fee-based from POP processing contracting, is that to suggest that the vast majority, if not all, of the distribution could be covered by fee-based by then or is that more a longer-term (multiple speakers)?

No, Craig, that would be a longer-term proposition for us. I think it is a practical goal. I think it makes more sense than perhaps trying to target a percentage of fee and percentage of commodity exposure. But definitely it is a longer-term goal.

Okay. And Derek expressed the balance between tapping the ATM and keeping in mind the practical yield these units are trading at in the public market. Even with today's gains I think we are at a stair step lower price point than what you got on the ATM issuances in the second quarter.

Is there a point at which you are just not interested in public issuances and that which, without considering major structural changes, that the OKE free cash flow and balance sheet strength could be used to bridge funding needs for a few quarters?

Yes, Craig, this is Derek. I think that is a good point. Certainly OKE has some additional cash on its balance sheet today and it has certainly got capacity to raise capital there at a more attractive yield today.

I think it is important to step back and think about the underlying assets of the partnership and the types of projects that we have. Even at these higher yields those projects make sense. And so, it is something we certainly think about very often, and we could consider other types of securities other than just a common unit. We could consider -- OKE might consider participation in some form or fashion as well to help that need as well.

Great. And Terry, as we think about bottlenecks on infrastructure in terms of actually filling out the Bakken Express Pipeline, I know that right now at $45 oil that is not what people are thinking about. But thinking over time, filling up that pipeline at $0.30 plus pricing, that is bundled pricing including all downstream infrastructure.

Is the real bottleneck there fractionation that would need to be added? And how should we think about how much more fractionation is needed to fill up that pipe in terms of this whole issue of ethane rejection?

Well, Craig, it is a combination of both pipe and fractionation capacity. We are certainly not anywhere near to that point yet. But if you think about it very broadly and longer-term, if we need to get to that kind of next stair step level of production, assuming the prices stabilize and rebound, when we think about expanding that whole infrastructure it is got to be pipes.

It is a combination of loops, it is pumps and it is fractionation capacity potentially in the Mid-Continent and Gulf Coast. So you have to think about it broadly. I wouldn't characterize it as just one particular component.

And is there a bookmark you can give in terms of -- or bookends you can give in terms of how many billions of dollars of infrastructure we are talking about?

I will let Sheridan.

Well, what I would say, Craig, the other thing to realize is that fracs are not exclusive to one basin. Our system is we can move Y grade around. So would we have to add more fracs if we add more volume out of the Bakken? Possibly if we bring more volume as we are seeing more volume come out at the Scoop, the Stack and some of those areas. As that comes on that fills up our existing frac capacity as well. So [easy] to go in there.

But right now we think we have enough frac capacity for the volume on the Bakken today as it grows even in a C3 plus rejected volume. We do see a great opportunity out at the Central Oklahoma with the Stack and what is going on there in the Scoop that we think -- we do think in the future we will be building more fracs.

Okay, that is helpful. On a separate note, I was a bit surprise the optimization margins weren't more robust in the quarter, because propane spreads actually got pretty decent even though ethane was pretty anemic still. Can you update us on your ability to capture specific propane differentials even amidst the anemic ethane margins?

Well, I think the biggest thing you have to look at is when you look at the propane differential through the second quarter -- you have to realize if you are going to the Lonestar facility, which had the highest spread, there was restrictions in getting to that facility. so a lot of what we were able to capture was between Conway and the non-TET or enterprise mark. So that was down cents per gallon from that.

We continue to -- on the propane side we continue to convert a lot of our optimization capacity to fee-based. So when we do that that reduces our ability to get a wider spread on margins on what we do ship down there, because we have to ship more and more volume for our third-party people that have -- we have given them Belvieu access.

Understood. And just one more. The Bakken gathered NGL volumes are only forecast to rise 5% from July to the fourth quarter. But gathered volumes are guided to rise 14% from 2Q to 4Q. Can you elaborate on that?

The reason that gathered volumes are continuing to go up, it is definitely a growth out of our Bakken, but we also see growth coming out of the Mid-Continent as we continue to go forward on that. So I think that may be where you are seeing some of that growth happen.

I guess -- I am sorry, the first number was the NGL volumes and second was the guest gathered volumes all out of Bakken.

Oh, okay.

Craig, this is Kevin. On the gathered volumes when you look at the information we provided in the quarter, that is not necessarily a quarterly average, that is saying we will reach that capacity at some point.

So if you just do the math that is not saying that there is a -- what your number was, that is the average growth quarter over quarter, that is just if you look at our kind of a peak volume in the third quarter and a peak volume in the fourth quarter.

I got you. So the numbers are a bit apples and oranges. That helps. Thank you very much.

Jeremy Tonet, JPMorgan.

This is actually Chris on for Jeremy. I guess as noted earlier, I appreciate the color -- extra color on the slide deck. When you look at the volume outlook for the second half of 2015 you noted that captured flare gas was one of the key drivers and you also have an inventory of about 145 million cubic feet a day in ONEOK's dedicated area. And so, we were wondering whether there would be -- whether that would be more weighted towards the second half of 2015 or how much of that goes into 2016?

Well, yes, there is a considerable amount in the second half, but it certainly gives you considerable momentum going into 2016. So, it is going to carry you well into 2016 along with the newly completed wells and the backlog of uncompleted wells. So it is all kind of working together. Kevin, you got anything to add to that?

No, I would just -- the one statistic that I think is very interesting to kind of describe some of the improved performance is, if you look at the numbers provided by the state from January to May, oil production when up I think it was around 10,000 barrels a day.

But gas production, which was basically flat or maybe a 1% increase -- gas production actually went up about 150 million cubic feet a day during that same timeframe. So that demonstrates that as oil states flat with the improved gas to oil ratios, the improved performance, gas -- the gas volumes have continued to go up.

Thanks, that's helpful. I guess moving to West Texas LPG, your JV partner there noted some big expectations in terms of increased pipeline distributions. And so we are wondering, relative to your plans with that at the time of the acquisition, how are things trending? And with the recent tariff developments and your expectations for I guess returns going forward?

Well, it is going very well. With the tariff increases as well as the volume prospects that we continue to develop, we have got high expectations for the pipeline. It is a great fit with our existing infrastructure. It is of course putting us in this premier basin that we wanted to be in for some time and sets us up just for continued growth.

The performance from a financial perspective is going to improve significantly with these tariff increases and as the volumes just continue to be added, it is going to be -- it is and is going to continue to be a major contributor to this segment's profits. Sheridan, (multiple speakers).

So relative to your plan at the time of the acquisition would you say that is higher or --?

I think what our expectations when we had the acquisition were -- progressing right along those expectations.

Thanks, that is helpful. And then I guess last one for me, on the re-contracting in front in terms of the percentage of proceed contracts, for 2016 would you expect any kind of lower returns from those contract renegotiations? Or what kind of give and take do have with producer customers in that regard? Anything there would be helpful.

The strategy is to enhance our returns and obviously these contracts have been affected by the lower commodity price environment. And certainly we -- at these price levels and the resulting margins, it makes it difficult to realize an acceptable return.

So we are not going to sacrifice return. And as we continue to work with these producers and provide enhanced services we've demonstrated that we have been able to put the contracts together that make sense and then get our returns to an acceptable level.

Thanks, appreciate the color.

John Edwards, Credit Suisse.

Congrats on a nice quarter. Just coming back to the financing questions, you indicated you are open to alternative approaches here. So I take it that -- and you would also include things like [subordinated units, pick units], perhaps even cash injections from OKE using OKE equity, would that be fair?

Yes, that would be fair. We continue to evaluate all of those levers.

Okay, great. And then, I am just curious on the projects that have been suspended, Terry, kind of what is the thoughts behind those? Perhaps any color on when you think you would be able to bring those back into say execution mode.

No specific dates at this particular point in time. But again, we continue to assess the current market environment which is very volatile and uncertain. It is -- we continue to assess the environment and when the environment makes sense and when the producers need that capacity certainly we will fire those projects back up, okay. But right now we are continuing -- we are still in a wait and see mode on those suspended projects.

Okay. And then just any thoughts regarding your plans with all the recent increases in M&A activity?

Well, our plans are going to be the same. We are going to stay organically focused. To the extent we participate in M&A from a strategic asset standpoint -- that is we when people ask me about M&A I am like, okay, yes, we are interested in M&A particularly as it relates to strategic asset acquisitions like our West Texas pipeline and in the Permian.

So, yes, we are going to stay active and focused and look at opportunities. But at the end of the day what happens out there in the M&A arena, we don't have a whole lot of control over that. We will just keep our heads down and stay focused and continue to drive risk out of this business and serve our customers.

Okay, great. That is it for me. Thanks.

Michael Blum, Wells Fargo.

Just two quick ones. Just one more question on the West Texas LPG pipeline. When you acquired the asset you laid out a plan to spend a pretty significant amount of capital over the next few years and expand the capacity of the line. Obviously you have executed on increasing the rate already. Has anything changed there or is that still all kind of unplanned?

Michael, this is Sheridan. Yes, we have been talking to quite a few producers out there that will back stop a expansion. So we are progressing as planned on that and we are very hopeful here pretty soon that we will be able to come out and announce an expansion of the pipeline.

So the Permian has still been resilient and we are still seeing growth and we are getting multiple people calling us about trying to get on this pipeline. Because we still think with the assets that we have we can be extremely competitive versus the marketplace out there.

Okay, great. And then just -- I apologize if I missed this, but did you quantify the reduction of ethane rejection you saw this quarter?

Out of the Bakken it is about 20,000 barrels a day in June. So that is 20,000 barrels a day in June, so if you put over [3] you are about 7,000 barrels a day on average for the quarter.

Okay, great. Thank you.

Becca Followill, US Capital Advisors.

Sorry if this has already been asked. If it has just tell me to go listen to the -- look at the transcript. But on the ethane rejection, why is it occurring now? What has changed in having to add more ethane in to help the spec?

Well, Becca, I think the short answer, and I will let Sheridan follow-up, but I think the short answer is just the volume growth, significant volume growth that we kind of broke over to a point where the NGL production has gotten so big to the point where now this issue emerging is something significant.

Yes, I would say you are exactly right. It is fundamentally that we have had end use people call us and say that the propane is off spec and we need to clean it up.

So, it is just you reached a tipping point?

Yes.

That is right, that is right.

And then going forward, as you continue to produce volumes and you will have to produce more ethane in order to keep it in balance, is that correct?

It will be. We are working on a long-term plan that we can clean this up at our fractionators so that we do not have to continue to extract this ethane. But that is going to take some time to construct and get in place. But we are working -- our engineers are working on a long-term solution.

And the only thing I will add is that is not done for free.

So your shippers will have to pay for that?

Likely so.

Okay. Thank you, that is all I had.

Eric Genco, Citi.

I just wanted to go back to the -- and I guess not to beat a dead horse -- the percent of proceeds to fee based. Your fee-based rate ticked up to $0.39 from sort of the mid-30s this quarter. Is that related to your efforts to move towards more fee-based?

I think the short answer is yes.

And I guess as I was looking at it last night, is the strategy then to move towards more of a fee-based cut or a hybrid contract structure where maybe if commodity prices are low you get an extra fee payment? Because your equity volumes for NGLs and for residue gas actually ticked up a bit relative to the overall production levels.

And I would have thought if that was moving towards fee-based that that would have been down or flat. So, I was just curious to whether this is more of a hybrid move or whether this is a pure conversion.

Eric, this is Kevin. It will be -- it is a combination. I mean there -- we talk about converting to more of a fee-based margin. There are a variety of ways that we get there. One is, like you said, is just increasing the fees and increasing the POP percentages, that kind of trade-off. There is other ways that accomplish the same thing.

So our goal, like Terry has talked previously, is each of our customers is different. They are looking for different services. Those different services may require different strategies in how we go about working with them to get to the right mix of what is that. But in all the scenarios it does result in a higher fee, but it may not -- a fee-based margin, but it may not necessarily correlate to a lower equity volume.

And, Kevin, the only thing I would add to that is that when you think about our business as a whole, we are keenly focused on bringing new fee-based opportunities and fee-based projects to the table. And in Phil's business segment, as we mentioned in the remarks, the Roadrunner pipeline and its OWT expansion are important.

And that OWT expansion in particular is a good example of the additional projects that have spun off as a result of this Roadrunner project in establishing a conduit to those markets in Mexico. So we are going to be very focused and remain very focused on fee-based opportunities and that will help bring that fee-based percentage up as we go forward.

So is it fair to say then that that $0.39, at least probably while commodity prices remain low, is probably fairly sticky at this point? And then perhaps as commodity prices recover maybe that falls back a little bit to where it should have been, but it doesn't matter because you have retained the upside in these contracts?

No, I don't think so, Eric. I think that as we continue to renegotiate that fee should go up. So, yes, I don't think that that rate is going to be driven much by or affected much by a move in commodity prices.

Great. And I had a couple other quick ones just to sort of -- some of the numbers you gave on the last quarter's conference call, and I think you repeated them, but I just want to double check. So there is about 900 drilled uncompleted wells in the Bakken right now and I think last quarter you said about 50% is on your acreage, so that is basically the same --?

That is correct. Roughly 50%.

And I think you said last quarter that there were 50 rigs drilling on your acreage. I was curious; did you give a number for that today?

Yes, we did.

Okay, what was that? I'm sorry. I missed that.

We are in the 40 range right now.

40 range? Okay.

Yes. And again, that moves up and down, but all of that is kind of -- has been in line with our expectations.

And the only thing I would add to that is keep in mind that these IP rates, the average initial production rates on these wells just continue to skyrocket. And I was just reading some materials the other day from some of our customers, or some of our producers rather, and it is really remarkable the improvement that we are seeing. So even if you see rig reductions we are seeing these increased IP rates that are more than offsetting some of those reductions.

I think that is fair. And I think in some of the instances we've been looking at some assumptions where it takes about 24 days to drill a well and some of those things, but we are hearing some things where maybe it has fallen down to almost the 16 range for some people. So I guess rig count is not the end all be all that it used to be.

I also just wanted to ask real quick -- of the 900 drilled and completed wells in the basin, what do you view as sort of being an equilibrium number for that? I mean there is always going to be some number of uncompleted wells and I was just curious to the overall for the basin, what do you think is normal?

That is a tough one to answer. I mean because especially as producers have shifted almost entirely now to kind of the multi well pads and they will stick a rig at a spot and they will drill several wells and that -- so you kind of have an artificial working inventory, if you will, of completed -- of uncompleted wells.

I think there is some -- as we have talked with others in North Dakota is that 300 to 400 range that will kind of always be there as a working inventory as long as you are at this kind of a rig count. You may be in that range. But again, that can fluctuate as -- again, as rigs move around and dependent on what, where and how they are drilling.

Okay. Thank you very much. That's all I had.

Andy Gupta, HITE Hedge. It appears he does not have a question so we will go to Matt Niblack, HITE.

I just wanted to make sure I understood what you said at the beginning of the call properly, that you had ample liquidity, particularly given how credit metrics are calculated by your borrowers, that there is no need to issue OKS equity at these depressed valuations.

Well, I don't know that I would say that. We have been pretty clear that we expect to continue to issue equity as we balance our credit metrics with issuing at this price.

Okay. But should you be able to at least avoid the disruptive overnight offering given the ATM program?

Well, I mean we talk about the overnight markets all the time and we certainly continue to look at that option. As we have said many times, the ATM program has worked pretty well for us. We were able to get quite a bit done in the second quarter, so to avoid that overnight market issue. But I can't rule that out for you.

Okay, thank you.

And that will conclude our question-and-answer session. I would like to turn it back for any additional or closing remarks.

Thank you. Our quiet period for the third quarter starts when we close our books in early October and extends until earnings are released after the market closes on November 3, followed by our conference call on November 4. Thank you for joining us and have a good day.

Thank you very much. And that does conclude our conference for today. I would like to thank everyone for your participation and have a great day.