OKE - ONEOK Makes A Massive Acquisition

2023-05-15 13:23:12 ET

Summary

• ONEOK, Inc. has announced a massive acquisition of Magellan Midstream Partners, L.P. for almost $19 billion, through cash, equity, and an assumption of debt.
• The acquisition will be substantially accretive to ONEOK's free cash flow, enabling an increase in shareholder returns above current levels.
• Overall, ONEOK, Inc. is a valuable long-term investment, especially with the acquisition, that we recommend taking advantage of.

ONEOK, Inc. ( OKE ) announced the massive acquisition of Magellan Midstream Partners, L.P. ( MMP ). The acquisition is a cash and stock deal , valuing Magellan Midstream Partners at just a hair under $19 billion. That's a sizable acquisition for ONEOK, which is worth just a hair under $30 billion, but it will enable increased shareholder returns.

Transaction Overview

The transaction is 63% stock and 37% cash, with ONEOK shareholders to own 77% of the resulting company.

Additionally, the transaction will come with $5 billion worth of net debt assumed. That's a level that ONEOK can comfortably handle. The transaction equity tie up will protect ONEOK should its share price drop substantially, while the cash component helps the company to minimize dilution. The company expects a fast closing for the transaction in Q3 2023.

In our view, the acquisition has a good breakdown of both cash and equity needed to drive shareholder returns.

Business Combination

The combined business will have a strong portfolio of assets that will enable substantial shareholder returns.

The combined company will be headquartered in Tulsa, Oklahoma, and earn primarily fee-based earnings. The companies have an incredibly strong and well-integrated portfolio of assets with connections to a number of major production fields. That will enable the combined business to generate strong shareholder returns.

One substantial business opportunity is the combined company will be able to take advantage of export opportunities and NGL / refining opportunities. That will enable increased margins per barrel and shareholder returns.

Financial Impact

The cash from the transaction will rapidly become accretive to the company's financials.

The company expects a highly diversified asset base with the transaction accretive to EPS in 2024 by roughly 5%. It's expected to continue improving for the 2025-2027 time period. Annual free cash flow ("FCF") per share is expected to improve by more than 20%, supported by both synergies and tax benefits. That FCF will enable rapid shareholder returns post dividends.

The $5 billion in dividends will cost several hundred $ million in additional annual interest. Additionally, the $8.8 billion in new equity will cost roughly $540 million in annual dividend expenditures. That means roughly $750 million in annual cash costs from the acquisition. That's versus $2 billion in additional FCF from the acquisition.

That's a strong differential the company will be able to use the additional FCF from to drive shareholder returns.

Shareholder Return Potential

Overall, the combined company will be able to generate strong shareholder returns, although it shows the company's higher valuation.

The base company will have a 6% dividend yield. Additionally, it'll have roughly $1 billion in additional post-dividend FCF, worth ~3.5%. That puts the company's net FCF yield at just under 10%, which is impressive given the continued growth investments. ONEOK is guiding for an additional several % of growth capital expenditures for the year.

We'd like to see the company focus on share repurchases with additional cash flow outside of growth capital. Still, it's clear that the acquisition will enable increased shareholder returns.

Thesis Risk

The largest risk to our thesis is two-fold.

First, there's a transactional risk. ONEOK already trades at a higher valuation, and there's no guarantee that the transaction goes through. Substantial cash could be spent on the transaction not going through. Alternatively, at a higher valuation today, investors could end up with a more expensive company if the transaction doesn't go through.

The second risk is operational risk. The company is diversified in the oil and natural gas business, but it's still concentrated in the oil and gas business overall. That means that anything that impacts the oil and gas business can hurt the company substantially.

Conclusion

ONEOK is a large company with an impressive portfolio of assets and a market capitalization of almost $30 billion. The company has recently announced a sizable acquisition of Magellan Midstream Partners, with a strong mix of debt and equity, and the acquisition is expected to be immediately accretive to EPS and FCF.

ONEOK, Inc. supports shareholder returns with a core dividend yield of 6%. Additionally, the company has several % of additional FCF each year it can use as it desires. That's on top of the company's growth capital, which it has historically generated strong returns on. Overall, that makes ONEOK a valuable investment, supported by the acquisition.

For further details see: