The feeling is almost palpable among midstreamers: In a fast-changing energy industry, the companies that gather, transport, store and export hydrocarbons need to consolidate and augment — and be smart about how they get bigger. Scale, that’s the key. That — plus complementary assets that provide synergies, lower costs and increase free cash flow, a sizable portion of which can be returned to shareholders as dividends and buybacks — is what investors are looking for. Oh, and don’t forget this important M&A goal: gaining a larger footprint and a more prominent role in the Permian, the dominant U.S. production area. ONEOK, a midstream company heretofore primarily focused on moving NGLs and natural gas, earlier this week announced an $18.8 billion agreement to acquire Magellan Midstream Partners, which is best known for pipelines that transport refined products and crude oil. In today’s RBN blog, we and our friends at East Daley Analytics kick the tires, look under the hood, and give our thoughts on the deal’s pros and potential cons.
For the past couple of years we’ve been monitoring — and blogging about — a cycle of consolidation in the U.S. midstream sector. In We Belong Together and our five-part Just the Two of Us series, we said that the COVID pandemic spurred midstreamers to scale back capital spending and instead focus on improving the efficiency of existing operations by teaming up with others that held adjoining, complementary assets — or gave the acquiring firm a strong foothold in a highly desirable production area. Among other deals, we discussed the now-implemented plan by Plains All American and Oryx Midstream to contribute assets to a new, Plains-operated crude oil pipeline joint venture in the Permian’s Delaware Basin. We also looked at Crestwood Equity Partners’ acquisition of Oasis Midstream, a combination that gave Crestwood more scale and sway in both the Bakken and the Delaware; the merger of Altus Midstream and BCP Raptor Holdco LP (the corporate parent of EagleClaw Midstream) into a new entity called Kinetik Holdings that is now the largest integrated midstreamer in the Delaware; Enterprise Products Partners’ acquisition of Navitas Midstream, which propelled Enterprise’s position in Midland Basin gas gathering and processing; Targa Resources’ acquisition of Lucid Energy Group, a large gas gatherer and processor in the northern Delaware; and, most recently, Energy Transfer’s planned acquisition of Lotus Midstream, which — we’re sensing a theme here — will give the acquiring company an even bigger footprint in the Permian.
Today, we and East Daley Analytics examine ONEOK’s recently announced plan to acquire Magellan Midstream Partners in a cash-and-stock deal valued at $18.8 billion. The deal will create the second-largest U.S. midstream company by market capitalization and the fifth-largest by enterprise value behind Energy Transfer, Enterprise Products Partners, Kinder Morgan and Williams. ONEOK will issue $8.8 billion in equity to unitholders of Magellan (a master limited partnership, or MLP), give them another $5.1 billion in cash, and assume Magellan’s $5.0 billion of debt. The $67.50/unit that Magellan unitholders will receive ($25 in cash and 0.667 ONEOK shares per unit) represents a healthy 22% premium to Magellan’s closing price last Friday. Assuming the deal secures all needed shareholder, unitholder and regulatory approvals, it is expected to close in Q3 2023.
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