Earnings Call Transcript - OKE Q1 2026

Operator, Operator

Good morning, and welcome to ONEOK's First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded. With that, it is my pleasure to turn the program over to Megan Patterson, Vice President, Investor Relations. You may now begin.

Megan Patterson, Vice President, Investor Relations

Thank you, Angela. Welcome to ONEOK's First Quarter 2026 Earnings Call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are available 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 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer.

Pierce Norton, President and Chief Executive Officer

Thank you, Megan, and good morning, everyone, and thank you for joining us today. Joining me on the call are Walt Hulse, Chief Financial Officer; Randy Lentz, Chief Operating Officer; and Sheridan Swords, our Chief Commercial Officer. Yesterday, we reported first quarter earnings and raised our 2026 financial guidance, reflecting strong performance and building momentum. Before we get into the quarter, I'd like to take a step back and frame the environment we're operating in and how we think about ONEOK's role within it. Energy markets remain dynamic, but long-term fundamentals are strong. It remains clear that the U.S. energy infrastructure is essential for economic growth, industrial competitiveness, power demand and global energy security. Midstream's role is similar. We connect supply and demand safely and efficiently across cycles, not around them. That's where ONEOK differentiates itself. We built a regionally diversified integrated platform at scale across natural gas liquids, natural gas, crude oil and refined products, anchored by an innovative employee base, the interconnectivity of our assets, customer relationships and a predominantly fee-based model. Our systems sit in and around some of the most resilient basins and durable demand centers, including power generation, industrial demand and export markets. As we look to the remainder of 2026, our high-level priorities remain consistent: operate safely and reliably, execute our capital growth program with discipline, maintain balance sheet strength and financial flexibility, and leverage our integrated asset advantage and strong customer relationships to continue driving volume growth across all of our systems. These priorities are grounded in what we see across the U.S. energy landscape where long-term demand remains constructive, both domestically and globally. U.S. natural gas demand is growing, across power generation for emerging data center demand, industrial activity and liquefied natural gas exports. LNG export capacity alone is projected to more than double over the next decade, reinforcing the durable global call on U.S. energy and natural gas infrastructure. Sixty-five percent of U.S. natural gas production contains recoverable natural gas liquids. That means the infrastructure to handle natural gas liquids must be addressed alongside natural gas. This requires full value chain infrastructure and continued investments in natural gas, natural gas liquids, crude oil and refined product assets by companies like ONEOK. At the same time, NGL demand remains strong globally, driven by petrochemical and international markets, with U.S. supply playing an increasingly critical role. And finally, the resilience and innovation of the U.S. energy industry continues to stand out through consistent efficiency gains and reliable results. Recent global events have only reinforced the importance of secure, resilient energy supply — and the critical role U.S. energy plays in providing it. The world has seen that the most expensive energy is the energy that does not show up. As global demand continues to grow, infrastructure not supply is the constraint, and that is exactly where ONEOK is positioned, providing scalable, strategically located infrastructure with capacity and the ability to respond to evolving demand dynamics. I'll now turn the call over to Walt Hulse for our financial update.

Walter Hulse, Chief Financial Officer

Thank you, Pierce. As Pierce mentioned, we are increasing our 2026 financial guidance, reflecting the strong performance we delivered in the first quarter across ONEOK's integrated systems and our higher expectations for the remainder of the year. We now expect 2026 net income to increase to a midpoint of approximately $3.5 billion, with diluted earnings per share increasing to a midpoint of $5.53. We are also increasing our adjusted EBITDA guidance to a midpoint of $8.25 billion. These updates reflect strong underlying business segment performance as well as increased opportunities across our system, driven in part by a more constructive market environment that developed late in the first quarter. As we move into the back half of the year, the combination of higher volumes, completed projects and market tailwinds should be reflected more clearly in our results for the balance of this year and into 2027. Our total 2026 capital expenditure guidance remains unchanged at $2.7 billion to $3.2 billion. Turning to the first quarter performance, ONEOK reported net income of $776 million or $1.23 per diluted share, a 12% increase compared with the first quarter of 2025. Results included a noncash impairment of $60 million or $0.07 per diluted share after tax related to our Powder Springs logistics joint venture in the refined products and crude segment. Adjusted EBITDA for the quarter totaled approximately $2 billion, a 13% year-over-year increase driven by higher volumes and strong segment-level performance. As market conditions strengthened towards the end of the quarter, we also saw additional opportunities across our system. We continue to expect the first quarter to be our lowest EBITDA quarter of the year, consistent with our typical annual cadence and seasonal dynamics. Importantly, our balance sheet and capital framework remains strong. We continue to prioritize financial flexibility while investing in the business and returning capital to shareholders. In April, we redeemed nearly $500 million of outstanding notes due July 2026, and we entered into a $1.2 billion term loan further enhancing balance sheet flexibility in a rapidly changing market. Our results reflect the same themes that underpin our strategy: a high-quality largely fee-based earnings mix, strong performance across our integrated systems and disciplined cost and capital management. And our increased financial guidance reflects both this consistent execution year-to-date and improving market dynamics. I'll turn it over to Randy for an operational and large capital projects update.

Randy Lentz, Chief Operating Officer

Thank you, Walt. From an operational standpoint, our focus remains on safe and reliable performance across our integrated assets. Our teams continue to execute well across all four business segments, managing normal seasonality and weather-related impacts. The scale and diversity of our systems allow us to absorb those seasonal dynamics while continuing to provide reliable service to our customers. Winter storms created temporary wellhead freeze-offs that briefly reduced throughput. But as a reminder, there was no material downtime on our assets related to those impacts and those effects were already reflected in our original 2026 guidance. Turning to capital projects, we've made strong progress so far this year. In the first quarter, we completed the relocation of our 150 million cubic feet per day natural gas processing plant from North Texas to the Midland Basin. We expect a steady ramp-up of volumes as producer activity remains solid in the area. We're also on track to complete expansions of our Delaware Basin processing assets in the third quarter, increasing our capacity in the basin by 110 million cubic feet per day, in addition to our 300 million cubic feet per day Bighorn processing plant that remains on schedule for completion in mid-2027. In the Powder River Basin, we're on track to complete construction of our 60 million cubic feet per day in-field plant in the fourth quarter of 2026. This plant will increase our processing capacity in the Powder River to more than 100 million cubic feet per day; we expect capacity to come quickly from wells already drilled and expected to be drilled by our 15% joint venture partner. Across other segments, our Denver area refined products pipeline expansion will add 35,000 barrels per day of capacity when it enters service midyear and Phase 1 of our Medford NGL fractionator will add 100,000 barrels per day of Mid-Continent fractionation capacity in the fourth quarter. These projects remain on schedule and are positioned to deliver meaningful near-term benefits by improving reliability, expanding connectivity and increasing optionality while also creating long-term durable value across our footprint. I'll now turn it over to Sheridan for a commercial update.

Sheridan Swords, Chief Commercial Officer

Thank you, Randy. Commercially, we continue to see active engagement across our asset portfolio. Demand is supported by downstream users, particularly from power generation, industrial and petrochemical demand and export-linked markets. These dynamics reinforce the importance of strategically located infrastructure and long-term relationships. Looking at the first quarter, we delivered strong year-over-year volume performance across our assets despite typically seasonal headwinds. Starting with the Natural Gas Liquids segment, performance was led by broad-based volume growth across all three of our core regions. In the Rocky Mountain region, NGL volumes increased 11% year-over-year, driven by higher base volume and increased ethane recovery. In the Mid-Continent, volumes increased 4% year-over-year, driven entirely by C3+ volume, even as the region experienced some temporary impacts of winter storage earlier in the quarter. In the Gulf Coast Permian region, volumes increased more than 30% year-over-year, primarily reflecting base volume growth from newly connected third-party plants that were delayed last year as well as higher short-term volume opportunity. From a global perspective, NGL demand remained structurally strong, and recent geopolitical dynamics have further reinforced the attractiveness of the U.S. supply. Requests for capacity on our announced LPG export dock were already increasing and have accelerated more recently as customers look to move supply toward the U.S. Turning to the refined products and crude segment, year-over-year refined products volumes increased 12%, supported by strong gasoline and diesel demand, refinery maintenance dynamics, favorable regional basis differentials and wide crack spreads that drove strong refinery utilization. Blending volumes were also strong during the quarter. We entered the spring blending season significantly hedged, which limited our exposure to butane spreads. Historically wide basis differentials between New York Harbor, where we hedge, and the Mid-Continent, where we sell product, also impacted realized margins. Looking ahead, we've secured additional hedges on fall volumes at higher prices and extended new hedges into spring 2027. Importantly, blending volumes continue to be driven primarily by system throughput rather than EPA RVP waivers, which typically create only modest incremental opportunities. Increased gasoline throughput and completed synergy projects provide a much greater benefit allowing us to optimize blending activity across our system. More broadly, the reach and flexibility of our refined product systems remain a key advantage. We are the only refined products pipeline system with bidirectional access between the Mid-Continent and the Gulf Coast, which allows us to attract incremental volume and respond to changing market conditions. Demand fundamentals remain strong. We continue to see very strong diesel demand across our system, which we expect to remain as we move into the spring agricultural season. We also anticipate a robust summer travel season supporting gasoline demand across our footprint. Additionally, jet fuel supply remains constrained for an extended period; we could see incremental demand for gasoline. Refined products exports have increased in recent months amid global supply tightness, particularly related to diesel, and we are well positioned with dock capacity across multiple Gulf Coast marine facilities. Crude dock utilization remained robust at our highly contracted joint venture, and we are in discussions to extend our contract-expiring capacity at favorable rates. Finally, higher-margin Permian crude oil gathering volumes increased compared with the fourth quarter as activity in the basin remains favorable and disciplined. Moving to the Natural Gathering and Processing segment, we delivered strong year-over-year volume growth, led by the Mid-Continent where volumes increased 7%. Mid-Continent producers continue to focus activity across both gas-focused and liquid-rich plays, and we have rigs currently operating on more than 1 million dedicated acres in this region. In the Rocky Mountain region, processed volumes increased year-over-year even with winter weather and heater treater impacts. As operating conditions normalize, we expect volumes to strengthen in the second and third quarters. There are currently 11 rigs on our dedicated acreage with producers continuing to drive efficiency gains through longer laterals. In the Permian Basin, processed volumes increased 4% year-over-year, and we currently have 11 rigs operating across our footprint. As Randy mentioned earlier, our expanded capacity in the Permian enhances system flexibility and positions us well to support producers' development plans across both the Midland and Delaware Basins. Customer activity remains strong, and we are increasingly encouraged by the depth of opportunities the Permian Basin brings to our portfolio. From a financial perspective, realized commodity prices were lower in the first quarter as a result of entering the year fully hedged. Importantly, underlying throughput volumes increased year-over-year across all regions, reinforcing the long-term earning capacity and resilience of our gathering and processing portfolio. Producer behavior remains disciplined and execution-focused. We are seeing some acceleration in completion activity, which supports our confidence in the 2026 volume outlook. That confidence is driven by direct visibility into producer plans rather than an expectation of higher commodity prices. This view is consistent with recent earnings commentary for oilfield services companies, which noted early signs of increasing activity, particularly among private and single-basin operators. DUC inventories can also provide an avenue for this acceleration. Our producer base across ONEOK's approximately 7 Bcf per day system is well balanced among large public companies, private operators and private equity-backed producers. That diversity provides both scale and durability while allowing activity to adjust incrementally. I'll close with our Natural Gas Pipeline segment, where strong results continued in the first quarter with all regions outperforming expectations. Results benefited from wider-than-planned Waha to Katy location price differentials as well as incremental marketing opportunities created by winter storm firmness across our Louisiana assets. Looking ahead, we expect Waha to Katy differentials to normalize as new pipeline egress comes online in the second half of the year. Firm transportation demand remains strong, with high contracted capacity and strong utilization of the system. We also continue to see significant interest from data center-related opportunities in Oklahoma and Texas and we remain in advanced discussions with several counterparties. Additionally, LNG-related demand remains strong, both near term and long term, reinforcing the durability of demand for our natural gas pipeline assets. Pierce, that concludes my remarks.

Pierce Norton, President and Chief Executive Officer

Thank you, Sheridan, Randy and Walt for those comments. To close, I'll come back to where I started. The energy landscape will continue to evolve, but the need for reliable, scalable U.S. energy infrastructure is not cyclical. It is driven by long-term demand fundamentals. ONEOK is built for this environment, having an integrated platform with capacity, a strong balance sheet and disciplined execution. Results in durable long-term value creation. Most importantly, none of this happens without our people. I want to thank our employees for their continued focus on safety, operational excellence, innovation and service. And thank you to our investors for your continued trust and support in ONEOK. With that, operator, we're now ready to take questions.

Operator, Operator

Our first question will come from Spiro Dounis with Citi.

Spiro Dounis, Analyst (Citi)

Maybe let us start with the improved outlook, just for a little more granularity on how much of that $150 million move is maybe early realized here in the first quarter? I guess, what level of visibility you have on the remaining forward component. Sheridan, you mentioned sort of hedging out butane through '27. Just curious how much of that forward look is locked in?

Walter Hulse, Chief Financial Officer

Spiro, it's Walt. So first of all, I just want to clarify, the winter storm turn was already in our guidance. So we had zero impact from that as it related to the increase. The increase was really a blend of stronger volume expectations driven by higher commodity prices, continued expected differential opportunities, and then we, of course, expect to realize some benefit from the higher commodity prices. Though we are hedged, typically, we're hedged about 75% going into a year. But with the higher volume expectations, any volumes we receive going forward will enjoy the full benefit of these higher commodity prices.

Spiro Dounis, Analyst (Citi)

Understood. Well, second one maybe for you as well, just pivoting to capital allocation. So once again, you're trending a little bit stronger than expected. Could you just level set us — I know you're thinking about the timing to sort of reach your leverage targets here. And when you do free up that cash flow, just where are you thinking about buybacks or any other uses of that free cash?

Walter Hulse, Chief Financial Officer

Sure. Well, nothing's really changed from our capital expenditure plan, as you know, and Randy mentioned, our projects are on time and right on budget. So we expect to start completing those this year with the Denver project finishing up and Medford Phase 1 finishing up, as well as some of the smaller things. As those wind down — as we've stated in the past, most of our larger CapEx will be completed by midyear of 2027. That's when we'll really see the free cash flow kicking in. We're headed towards our leverage targets. Clearly, with the increased EBITDA expectations, as that denominator rises, we'll get there faster. But we continue to pay down debt and we'll be in a position to meet our targets and return capital to shareholders appropriately. I want to make sure that everybody understands our first objective is always to invest in high-return capital projects. As we see those come in, we'll definitely try to prioritize those. But our expectation is free cash flow will be available for our dividend, our debt repayment as well as other forms of returning capital to shareholders.

Operator, Operator

Our next question comes from Theresa Chen with Barclays.

Theresa Chen, Analyst (Barclays)

Going back to your comments on the upstream outlook, though it's still early on, can you elaborate further on recent conversations with your producer customers? What are your near- and medium-term expectations for upstream activity in your areas of service? And where do you think prices will need to stabilize in the outer years to stimulate a material uptick in production? How long would it take to see these volumes potentially materialize on your system?

Sheridan Swords, Chief Commercial Officer

Theresa, this is Sheridan. The first thing we're seeing with producers is what we call leaning into production. That starts with bringing any downtime back up quickly. We also see them bringing on more completion crews, which impacts DUC inventories — moving drilled but uncompleted wells forward or bringing wells that had been down back online quicker than they would in a lower-price environment. We are starting to see some producers looking for additional rigs to bring online. As we see the current environment where a lot of people anticipate the back end of the curve coming up, customers are getting more excited about future prices. Obviously, when rigs are brought on, that activity tends to be more delayed into the back half of '26 and early '27. But, as I said earlier, more completion crews being active and getting downtime back online will be the more near-term effect on volumes.

Theresa Chen, Analyst (Barclays)

And the second question is related to your export infrastructure and your outlook there, given the call on U.S. energy resources and export infrastructure, in particular within your existing liquids export docks on the heels of recently building out the connectivity between Mont Belvieu, East Houston and your Pasadena joint venture: what kind of upside could you potentially furnish whether it be optimization on utilization or spot cargoes or even additional brownfield investment in Pasadena? And then on the LPG front, can you just talk through the commercialization process at this point? Have conversations with potential counterparties accelerated?

Sheridan Swords, Chief Commercial Officer

Yes. Starting with our existing facilities, as you mentioned, we have two marine export facilities for refined products on the Houston Ship Channel and our Pasadena joint venture. We have seen increased activity across those docks going forward. We still have more room that we could expand and we are in conversations with customers around that. So there could be some upside in that area. On our crude dock, it is highly utilized right now. We have a lot more interest there, and what we're seeing is the opportunity to extend contracts or increase turns at more favorable rates than we historically have seen. So we see some tailwinds not only in '26, but beyond in both of our export facilities. Concerning our LPG dock, yes, we are seeing an acceleration of interest. We were seeing interest before the Middle East conflict and we're seeing even more of that interest now. Right now, we are not concerned at all about finishing the contracting of our targeted utilization of that dock in the relative near future.

Pierce Norton, President and Chief Executive Officer

Theresa, I want to add something to what Sheridan said. Prior to the recent conflicts, the U.S. and the Middle East were the main regions expanding LNG facilities over the next five years. If damage has been done to other regions' expansion plans, the incremental capacity will likely land back in the United States. With LNG going from roughly 18 Bcf to 30 Bcf by 2030, and given that over 65% of U.S. gas has recoverable NGLs, that will drive a lot of NGL growth in the U.S. We're well positioned for that. Sheridan did a great job explaining the LPG exports; it's a very constructive backdrop for future volume growth at ONEOK.

Theresa Chen, Analyst (Barclays)

If I could just squeeze in a final one. Your fractionator in the Gulf Coast, what utilization is that seeing currently? And what's your recontracting timeline for that?

Sheridan Swords, Chief Commercial Officer

It's highly utilized right now, especially with the spreads that we're seeing. We have recently recontracted that for term, so it will be contracted for the foreseeable future and we will be running at high utilization rates.

Operator, Operator

Our next question comes from Michael Blum with Wells Fargo.

Michael Blum, Analyst (Wells Fargo)

I wanted to go back to your comment on hedges. You said you entered the year about 75% hedged. Wondering if you can give us a sense specifically on butane blending, if that's the case as well, if you're 75% hedged going into the year? And then is there any kind of seasonality to these hedges? Are they more back-end weighted, front-end loaded or how that plays out?

Sheridan Swords, Chief Commercial Officer

Yes, Michael. We came in highly hedged for the first quarter on the butane to RBOB hedges. We did have some space to hedge further out into the fourth quarter and we have hedged that at much higher prices after the recent Middle East events. The thing we're really seeing on butane that's exciting for us right now is increased gasoline volume across our system, which gives us even more opportunity to blend. Couple that with our synergy projects that we brought online and we have good tailwinds behind our blending operation, both here in the first quarter, when you see a lot of blending, and in the fourth quarter when we see the fall blending season.

Michael Blum, Analyst (Wells Fargo)

Okay. Great. I appreciate that. And then I just wanted to ask the status of the potential Sunbelt Connector project. As I'm sure you're aware, Western Gateway appears close to moving forward. So wondering if there's a possibility that you could somehow join that project in some capacity if it does reach FID or if there's a path for both projects?

Sheridan Swords, Chief Commercial Officer

Yes, Michael. As I've said before, we think there's only room for one project. If either one of these projects goes forward, we think it will benefit us by allowing volume to flow out of the Gulf Coast into the Mid-Continent and potentially on to Arizona. We also think we have the ability to supply it out of the Gulf Coast given our connectivity to refiners on the Gulf Coast and the ease of getting into the El Paso area.

Operator, Operator

Our next question comes from Jean Ann Salisbury with Bank of America.

Indraneel Mitra, Analyst (Bank of America)

You touched on technical difficulty. Can you give a little more color about how export opportunities may be possible in your systems in 2025, how that would fit with your portion, and anything you would consider to increase that volume?

Walter Hulse, Chief Financial Officer

Jean, you were breaking up quite badly there. It's very difficult to understand what you're saying. Could you try that again, maybe pick up your handset?

Jean Ann Salisbury, Analyst (Bank of America)

Yes, sorry about that. I was asking about NGL volumes and what it would take for them to increase on your system?

Sheridan Swords, Chief Commercial Officer

I mean the butane or blending volumes are related to blending. We've been increasing that for the last three years. Each season, we've been able to blend more on our system as we continue to move forward, especially as we brought these synergy projects online. To see a meaningful uptick on our system, we need more gasoline volume across our system, and we are seeing that now. We can see that grow as we go into the rest of the year and into the fourth quarter, especially if jet fuel continues to tighten and some consumers shift more to vehicle travel.

Jean Ann Salisbury, Analyst (Bank of America)

Okay. Hopefully that's clearer. Sorry about that. My other question was that the Waha spread was stronger than expected this year. Can you remind us if you use that exposure over the course of the year or if it's all in 2027?

Sheridan Swords, Chief Commercial Officer

Breaking up a little bit, Jean, but I think you asked if the Waha to Katy spread was wider this year in the first quarter than anticipated and whether we captured that. We were able to capture that. We see that continue through the second quarter into the third quarter when additional pipeline capacity will come online and then it will normalize at that time.

Operator, Operator

Our next question comes from Jeremy Tonet with JPMorgan.

Jeremy Tonet, Analyst (JPMorgan)

Just wanted to touch on the guidance thoughts on EBITDA for the year. If I look at 1Q results and granted there were items that might not repeat. But if I annualize that, that would pretty much get you to the bottom end of the guide. And if I look at last year, I look at the difference between 1Q and 4Q, it's a pretty big step up and you talk about seasonality over the course of the year. I was wondering, if you could just help us think about shaping of the year, EBITDA by quarter, if that's going to vary from your pattern before? Or is there kind of conservatism built into your guidance expectations at this point?

Walter Hulse, Chief Financial Officer

Jeremy, I'll just point you back to the earnings presentation, I think it's Page 5, where we've tried to reflect the shape of that as well as demonstrate how the first quarter was the lowest. So we expect the shape of that curve to continue. The only thing that might change a little bit is an upward slope if we see some enhanced volume in the later part of the year. So no change on the front end and hopefully a bigger change on the back end.

Jeremy Tonet, Analyst (JPMorgan)

Got it. So annualizing the first quarter would — does that slope put you over the top end, it seems like. So it seems like a good year shaping up there. I was wondering, as we think about the uplift in the '26 guide, how much of that do you see recurring in '27?

Walter Hulse, Chief Financial Officer

I think we're positioned very well to go into '27 with a strong tailwind behind us and really have some nice volume growth and strength. I'd remind you that we have a significant amount of operating leverage on our Bakken pipeline and on the West Texas LPG pipeline out of the Mid-Continent. So as volumes pick up in the basins we serve, we don't have incremental CapEx that needs to be spent; that flows to the bottom line. We're looking positively as we go into '27. Clearly, we've had some benefit from some differentials that may not be there next year, but our system is diverse and we find differentials all the time. As we bring on Medford, we might see a pickup in north-south differentials as well. So we're positioned to capture opportunities across our integrated system whenever they present themselves.

Operator, Operator

Our next question comes from Manav Gupta with UBS.

Manav Gupta, Analyst (UBS)

A question on spreads: will the new pipelines and increased flows push prices higher and support your volumes? Conversely, if that gas reaches the Gulf Coast and creates an oversupply there, could that dislocate pricing in South Texas? If so, are there ways to capitalize on that opportunity?

Sheridan Swords, Chief Commercial Officer

I think it's more volume. I think what you're asking about is could there be a cut in natural gas prices as we see more volume come on, especially as we see more pipelines down into the Gulf Coast area. Obviously, we're seeing more LNG assets being brought online that will take that volume up. So we don't think we're going to see an overall deterioration in the Katy area as these LNG projects come on and also as we see more AI projects coming online as well.

Operator, Operator

Our next question comes from Julien Dumoulin-Smith with Jefferies.

Robert Mosca, Analyst (for Jefferies)

This is Rob Mosca on for Julien. The final FERC oil pipeline index came in better than expected. Can you help contextualize what this means for your refined products and crude segment and give a refresh on how much of that segment is actually exposed to those FERC index interstate oil pipeline rates? Does this outcome meaningfully change your earnings outlook for that segment over the next five years?

Sheridan Swords, Chief Commercial Officer

This is Sheridan. Yes, the index did come in better than expected, which is beneficial to us. I'll remind you that about 70% of our volume on the refined products and crude system is market-based rates, not FERC index. So the impact in 2026 is going to be marginal. There's a compounding effect as we continue to go forward that will build out a little more each year, so it's a nice little tailwind, but it doesn't substantially change our outlook for the segment.

Robert Mosca, Analyst (for Jefferies)

Understood. And then maybe just turning back to the guide. If the current commodity environment simply holds, should we think there's upside or something additive to guidance for the remainder of the year? How much of that impact are you already factoring into the rest of your outlook?

Walter Hulse, Chief Financial Officer

One of the things you hear from many larger producers is that the back end of the curve probably isn't fully reflecting the physical damage that's been done in parts of the Middle East. So our expectation is the curve could strengthen throughout the year. We have not factored that into our guidance. Should that happen, we'll enjoy that benefit going forward. If that results in more volume, that's positive for us. It takes time to bring on rigs, so maybe we get a little impact in the fourth quarter, but that would send us into '27 with momentum.

Operator, Operator

Our next question comes from Jackie Koletas with Goldman Sachs.

Jacqueline Koletas, Analyst (Goldman Sachs)

Just going back to the guide, one more quickly. How would you frame up the magnitude of the optimization upside that's now expected relative to that $150 million of year-over-year headwinds that was previously assumed?

Walter Hulse, Chief Financial Officer

We knew going into our guidance that certain pipelines would be constrained at least through the first two quarters and into the third, so that was factored into our guidance. A portion of the Waha spread has been a little stronger than we had expected and we've captured some incremental benefit. But a good portion was already in our guidance. When you look at the bridge from 2025 into 2026, a portion related to hedging was at lower pricing in '25, and that was factored in as well. The potential upside is if we get more volume and enjoy higher rates on that volume. Also, about 25% of our exposure was unhedged and will enjoy higher prices.

Jacqueline Koletas, Analyst (Goldman Sachs)

That's clear. And then just another — can you touch on incremental opportunities within the natural gas segment longer term? You've benefited from price differentials today; how are you thinking about exposure to power demand and how those commercial discussions have trended recently?

Sheridan Swords, Chief Commercial Officer

We are in advanced discussions with both AI operators and power customers right now. We have several projects in the queue and others behind them that we're working on as they continue to move forward. We are excited about what we see in the natural gas demand sector and where our assets sit, especially in the Oklahoma and Texas region for power and AI demand. We expect to have projects in 2026 and 2027. It's a good time to be in the natural gas segment.

Pierce Norton, President and Chief Executive Officer

What I would add is that when we first started talking about AI-related power opportunities, we saw smaller, more local projects. As we've talked to more hyperscalers, the volumes they require now will require us to reach back further into our systems and build larger pipelines. That's the big change from where we were one to two years ago.

Operator, Operator

Our next question comes from Keith Stanley with Wolfe Research.

Keith Stanley, Analyst (Wolfe Research)

Wanted to follow up on Western Gateway. As you assess what that project could do to the market, do you see it mainly as an opportunity for longer-haul volumes on your system out of the Gulf Coast? Or do you think this could create constraints and meaningful new growth investments like the Denver project to expand pipeline capacity?

Sheridan Swords, Chief Commercial Officer

I think it's a bit of both. If we start shipping volume out of the Gulf Coast up into the Mid-Continent to fulfill volume that's leaving the Mid-Continent, that means a longer tariff because the volume will be moving a longer distance. Our tariff from Gulf Coast out to El Paso is one of our higher tariffs; increasing that volume would have a positive impact. Also, as demand increases, we would see more expansion of product on our system as people shift more supply out of the Gulf Coast to meet access into Phoenix and California markets.

Keith Stanley, Analyst (Wolfe Research)

Second question: Bakken volumes were only down 2% to 3% versus Q4, which seemed better than the seasonal guidance you had pointed to last quarter. Would you say Bakken volumes surprised to the upside in Q1 versus what you were expecting?

Sheridan Swords, Chief Commercial Officer

Yes, a little bit. Winter is always variable and we try to average it over the quarters. So it can be surprising where winter actually hits and when volumes come online. Outside of winter storm impacts, we were a bit surprised with our volumes in the Bakken.

Operator, Operator

Our next question comes from Brandon Bingham with Scotiabank.

Brandon Bingham, Analyst (Scotiabank)

I'd like to talk about your Permian processing capacity portfolio and how you see that evolving in light of resilient gas production. Some operators in the basin are more optimistic about run-rate capacity additions annually. How are you incorporating that into your portfolio moving forward?

Sheridan Swords, Chief Commercial Officer

Randy mentioned we recently relocated a 150 million cubic feet per day processing plant from the Barnett to the Midland Basin. That plant will ramp over time. Behind that, we have low-cost capacity expansions in the Delaware — 110 million cubic feet per day coming later this year — and we announced a 300 million cubic feet per day plant for the Delaware beyond that. Those are what we have announced and we continue to look for more opportunities. We're in discussions on RFPs, especially in the Delaware, with the potential to expand capacity beyond what we see today. We remain optimistic about growth out of the Permian Basin and continue to pursue additional capacity where it makes sense.

Brandon Bingham, Analyst (Scotiabank)

Great. I also wanted to go back to comments about better volume expectations this year as part of the guidance increase. Could you frame how the new volume expectations compare to the midpoints within the businesses? The ranges didn't necessarily change, but it sounds like within those ranges the expectation is better now.

Walter Hulse, Chief Financial Officer

Our increase in guidance was balanced across what we've seen in volumes. Sheridan mentioned we had a little bit stronger first quarter volumes in some areas than we might have historically expected given heater treater impacts, etc. We've projected that forward. It remains to be seen what higher commodity prices will do for producer activity. Smaller producers may be quicker to come back, while larger exploration companies may wait for the curve to reflect fundamentals. We're not trying to get too far ahead of our volume expectations but in this commodity environment we would expect to go into '27 with a nice tailwind.

Operator, Operator

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

Sunil Sibal, Analyst (Seaport Global Securities)

My first question related to hedging. You mentioned you put in some hedges for '27 also. Could you indicate how much of your total 2027 commodity price exposure is hedged now?

Walter Hulse, Chief Financial Officer

We're not going to get into specifics, but we've taken opportunities to capture at least a portion of what we see in '27. We've been focused on the tail end of '26 and across our various businesses we've cleared in some portion of '27 at this point. Many markets we serve don't have a lot of liquidity in '27 or the backwardation is such that we wouldn't want to hedge too far out. So we've been opportunistic where it makes sense and we'll continue to look throughout the year.

Pierce Norton, President and Chief Executive Officer

Sunil, we also have a programmatic hedging approach where we automatically hedge a certain percentage as the year goes back out. We don't try to time the market; we hedge methodically because our earnings are largely volume times rate and we don't want to speculate excessively on hedging.

Sunil Sibal, Analyst (Seaport Global Securities)

Understood. One clarification on the potential projects you mentioned in Texas and Oklahoma for data center clients: should we think about those as significant CapEx opportunities with larger midstream investments, or more incremental, smaller CapEx opportunities?

Walter Hulse, Chief Financial Officer

As we've looked forward for '27 and beyond, we've thought about a run rate of around $600 million of maintenance CapEx, about $1 billion of routine growth CapEx, and then another $500 million to $600 million of unallocated growth to get you around a little over $2 billion of run rate. These projects, while larger than early expectations, will fit into that unallocated bucket — projects that we thought might be $50 million are turning out to be $400 million to $700 million. They fit in the window we left open and are coming in at attractive returns.

Operator, Operator

Our next question comes from Gabe Moreen with Mizuho.

Gabriel Moreen, Analyst (Mizuho)

If I could ask about ethane economics, having improved quite a bit here over the last month or two, are you seeing any change in behavior on ethane extraction as it relates to either the Bakken or the Mid-Continent going into Louisiana? Curious if things have changed on that end at all?

Sheridan Swords, Chief Commercial Officer

Gabe, ethane economics in the U.S. are very strong and our petrochemical customers are operating at very high utilization rates. We're seeing discretionary ethane extraction from the Bakken and at times out of Oklahoma be attractive, and that's driving some of the volumes we mentioned coming out of the Mid-Continent and the Bakken as we send ethane into our Louisiana crackers and fractionators. We do expect good tailwinds on ethane coming out of the Bakken through the rest of the year.

Gabriel Moreen, Analyst (Mizuho)

Great. Quick follow-up: the Powder River Basin new plant — any visibility to more capacity there? And there was a callout for Northern Border performance during the quarter — was that one-time or a step-up in ratable earnings?

Sheridan Swords, Chief Commercial Officer

On the Powder River, we've been working on that 60 million cubic feet per day plant for a period of time with a JV producer in the area. We're getting more excited about what we see there and expect it to fill fairly quickly. We do see opportunity for more volume and will continue to evaluate that. Northern Border is pretty steady; its outperformance is modest and we see that kind of slight upside from time to time. We expect steady performance throughout the year.

Pierce Norton, President and Chief Executive Officer

In the Powder River, the volumes reflect the amount of area and dedication. There's plenty of running room up there to continue to drill in the Powder River play.

Operator, Operator

Our next question comes from Jason Gabelman with TD Cowen.

Jason Gabelman, Analyst (TD Cowen)

I wanted to go back to full year guidance. In your slide deck from last quarter, your initial 2026 outlook was predicated at $75 oil which implied about $8.7 billion of EBITDA. Oil moved down so the outlook moved lower, but oil has now moved higher. I understand hedging dynamics mean maybe you don't capture all the upside this year. Would you expect to get back to capturing that upside next year based on where the curves are right now?

Walter Hulse, Chief Financial Officer

You're right that realized price environment matters and it takes time to work through and for rigs to react. When there wasn't as much rig activity as expected, it had an impact. We do think we'll see the type of strength we expected as volumes pick up if prices stay or go higher, especially in the back end of the curve. I won't give specific numbers, but that is the dynamic we expect to play out into next year.

Jason Gabelman, Analyst (TD Cowen)

Great. And just a quick follow-up on a comment you made: did I hear you right that some of the data center-related projects that you thought might be $50 million are now coming in at $400 million to $700 million?

Walter Hulse, Chief Financial Officer

Yes. Originally, when these opportunities first surfaced a couple years ago, specs were smaller. As hyperscalers talk about multi-gigawatt facilities, you can't just take that gas off a fully contracted pipeline. That has caused us to think about reaching back into our system and building larger pipelines. The project sizes have increased, but the value to hyperscalers remains very strong and the economics are still attractive for them, so they are supportive of the investments needed.

Operator, Operator

And our final question comes from Gabe Dowd with Truist.

Unknown Analyst (for Truist), Analyst (Truist)

Just quickly back to upstream conversations: curious if there's any notable difference in behavior or price that operators need to see when you talk to public versus private operators. Especially as current rig activity is largely driven by private operators in the Bakken for your footprint?

Sheridan Swords, Chief Commercial Officer

Yes, this is Sheridan. We are definitely seeing more activity and talk about activity among private operators compared with public companies. Larger integrated companies remain disciplined. The private equity and smaller independents are starting to bring rigs and completions on more quickly. As the back end of the curve moves up and the physical market reflects what we're seeing, larger companies may lean in more at that time. Even among larger players, we see a focus on getting wells back up quickly and completing wells faster. Rig deployment, however, is currently more pronounced in the private sector.

Pierce Norton, President and Chief Executive Officer

One other element worth mentioning is the emphasis producers are placing on efficiency — longer laterals and better completion practices. So we shouldn't get too hung up on rig counts because the rigs that are running are much more efficient and productive on a per-well basis.

Operator, Operator

That concludes our question-and-answer session. I would now like to turn the call back over to Megan Patterson for closing remarks.

Megan Patterson, Vice President, Investor Relations

Our current period for the second quarter starts when we close our books in early July and extends until we release earnings in early August. We'll provide details for that conference call at a later date. Our IR team will be available throughout the day for any follow-up. Thank you for joining us, and have a great day.

Operator, Operator

Thank you. That concludes today's call. You may now disconnect your lines at this time, and have a wonderful day.