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“We completed the acquisition just over a month ago. And since then, we have been fully focused on integration activities,” said Pierce Norton, ONEOK president and CEO, during the company’s third quarter earnings conference call Oct. 1.
ONEOK closed the deal with Magellan on Sept. 25, days after Magellan shareholders narrowly voted in favor of the plan. The merger created a midstream giant with a combined market capitalization of $40 billion, combining ONEOK’s gas and NGL lines with Magellan’s crude and refined products transport system. The company has more than 25,000 miles of liquids-oriented pipeline and assets on the Gulf Coast and U.S. interior and is now the fourth largest player in the market.
On Oct.1, company executives avoided further details on plans for the new assets, saying they were considering the best moves 35 days after the deal was closed.
“At this point, we’ve got around 250 different opportunities (for synergies) that we’ve identified,” said Kevin Burdick, ONEOK’s executive vice president. “And now we’re going through and prioritizing those based on value, time to achieve, is there capital required, things like that.”
To organize the changes, the company has divided its opportunities into four areas for the time being: batching, blending, bundling and a catch-all category for everything else.
Batching involves using the same pipeline for multiple commodities, depending on need, allowing the company to send NGLs or crude to markets that one or the other was unable to reach prior to the merger.
ONEOK executives said the blending opportunities, focusing on unleaded gas, butane and NGLs, would allow the company to mix products for a higher value. Bundling will happen as the company combines its services with amenities from Magellan that ONEOK previously did not offer.
Otherwise, the company plans to take advantage of the flexibility offered by a greater storage capacity for its products and the expertise offered by Magellan’s presence on the Gulf Coast. The company is considering expanding its NGL infrastructure for overseas shipment.
“We’ve said all along that what Magellan brings to us is the expertise to operate docks and to build docks and to just really understand the dynamics of marketing across docks,” Norton said. “We don’t expect to necessarily turn any of those docks into anything other than what they are currently doing. But we do believe that global demand will continue to grow both in crude and both in probably refined products and liquefied petroleum gas and propane.”
Executives said the company has so far identified $450 million in additional earnings through synergy in the next four years.
“As we look at the synergies, … there is going to be a variety of scenarios that play out. Some will get very quickly, potentially by the end of the year,” said Burdick. “There may be others that are going to take some capital and some effort to put things in the pipeline in the ground or other activities like that, that may span out of ways. So, it will be a blend.
“But I think again, the focus here is that our confidence level in achieving these things continues to grow as we get more information.”
Outside of the Magellan merger, ONEOK announced plans to finish the final loop on the West Texas NGL pipeline system to connect with the Arbuckle II pipeline. The project, expected to cost $520 million, will increase the company’s capacity to move products out of the Permian Basin to 740,000 bbl/d from 300,000 bbl/d.
ONEOK acquired the West Texas NGL pipeline from Chevron in 2014. As in its plans for Magellan assets, the company plans to use the system for NGLs, crude and refined products. The expansion project is slated for completion in the first part of 2025. The Arbuckle II pipeline was developed to transport NGLs from Oklahoma to ONEOK’s facilities at Mont Belvieu, Texas.
With the expansion of capacity, company executives said they could consider getting in the G&P market to maximize leverage on the pipeline runs, but they aren’t immediately making moves.
“If it makes sense, we will get into [G&P] and do that. But so far, we have been able to contract and expand that pipeline without having a G&P presence,” said Sheridan Swords, ONEOK executive vice president.
While executives were busy considering how to implement the merger with Magellan, ONEOK reported a strong third quarter, seeing double-digit growth in NGL and natural gas processing volumes, and a net income increase of 5% to $454 million. Net income during third quarter 2022 was $432 million.
Third quarter capex increased by $71 million over the same period last year to $398 million.
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