ONEOK Inc.’s stock price plunged 9% after the company unveiled plans to acquire Magellan Midstream Partners LP – one of the largest midstream deals announced in recent years. 

The two Tulsa, Oklahoma-based midstream players said on May 14 they would combine in a cash-and-stock transaction valued at $18.8 billion, including the assumption of around $5 billion in debt. 

Under the terms of the agreement, ONEOK will pay $25 in cash and 0.6670 shares of ONEOK common stock for each outstanding Magellan common unit.

“We expect to permanently finance the transaction primarily through a notes offering prior to closing,” said ONEOK CFO Walter Hulse on a May 15 conference call with analysts.

The deal is expected to deliver significant scale, operational diversification and immediate financial benefits to the combined company, ONEOK executives said. 

The combined company will own more than 25,000 miles of liquids-oriented pipelines and a sizable asset footprint in the Gulf Coast and Midcontinent markets. 

Pro Forma Asset Map
ONEOK is adding refined products and crude oil transportation segments through the acquisition of Magellan Midstream Partners. (Source: ONEOK, Magellan investor presentation) 

After closing at $63.72 per share on May 12, ONEOK’s stock closed down about 9% at $57.95 per share on May 15, according to Yahoo Finance data. However, Magellan’s units closed at $62.84 per unit on May 15, up over 13% from closing at $55.41 per unit on May 12.

“While the MLP structure has been beneficial for Magellan and our unitholders, we’ve always been open-minded to considering organizational alternatives that we believe would enhance value,” said Aaron Milford, president and CEO at Magellan, on the call.

Truist Securities analysts Neal Dingmann and Bertrand Donnes viewed the transaction as “largely positive given the relatively low valuation versus recent deals and the potential earnings growth profile of the assets,” they wrote in a May 14 research note.

They said the ONEOK-Magellan deal compares to other large U.S. midstream transactions announced in recent years, including Pembina Pipeline’s bid to acquire Inter Pipeline, DTE Energy’s spinning off of its midstream division and Brookfield Infrastructure Partners’ offer to acquire the remainder of its stake in Inter Pipeline.

Synergies and diversification

Diversification of ONEOK’s product portfolio was a key rationale for acquiring Magellan. 

ONEOK’s existing midstream system is centered around transporting, gathering and processing natural gas and NGL. By scooping up Magellan, ONEOK is adding new business segments focused on transporting refined products and crude oil. 

“That does not mean that we’re not going to continue to be very focused on those base businesses,” ONEOK CEO Pierce H. Norton II said on the analyst call. “We just look at this as adding two more base businesses to our organization.”

ONEOK aims to realize upwards of $400 million in total annual transaction synergies within two to four years of closing the acquisition. Base forecasted synergies are expected to total at least $200 million each year.

Cost savings will come primarily from two areas, Norton said: Roughly $100 million in savings will stem from a reduction in G&A expenses, he said. 

The company also aims to realize various commercial cost savings by moving more volumes through its midstream system, Norton said. Those savings will come through moves like bundling different service offerings.

“We could bundle NGL and crude services working with a single customer, say in the Permian or the Midcontinent or the D-J Basin, that actually creates value for the customer,” Norton said. “It’s more of a one-stop shop.”

Cost savings will also come from spurring new demand pull for oil, gas and NGL, and Magellan’s expertise in exporting liquids products, Norton said. 

“For every 100,000 barrels of additional product that we can move through these combined systems at $0.05/gallon, that’s an additional $75 million,” he said. “We do believe that the commercial opportunities are what’s going to drive the synergies from $200 million to the higher numbers.”

Magellan’s Houston-area distribution system connects the company’s East Houston terminal to several crude oil import and export facilities. Norton said ONEOK is considering ways to begin exporting NGL through its system after the combination, though there are no formal plans to do so in place at this point. 

The deal is expected to be accretive on an earnings-per-share basis starting in 2024; earnings per share accretion is expected to range between 3% and 7% per year from 2025 through 2027, ONEOK said.

Shareholder returns

ONEOK’s acquisition of Magellan will open up opportunities for enhanced shareholder returns, Hulse said. 

Following the combination, ONEOK will deploy some of its free cash flow toward paying down debt. The combined company expects its pro forma net debt-to-EBITDA to be approximately 4x at the end of 2024. ONEOK anticipates deleveraging below 3.5x by 2026 as future projects are placed into service. 

Moody’s Investors Service said the outlook for ONEOK’s credit rating remains stable, but placed Magellan “on review for downgrade.” 

"The acquisition of Magellan's vast refined products network will broaden and reinforce ONEOK's business model, boost its scale and diversification, reduce volatility in earnings and deliver improved returns and profitability through optimization. The use of significant equity funding and ONEOK's focus on post-acquisition debt reduction will maintain its solid leverage profile," said Elena Nadtotchi, senior vice president at Moody's.

Looking forward, ONEOK aims to continue growing its common dividend and earnings per share (EPS). The company is also considering stock buybacks to return value to investors.

“There will likely be opportunities to look further into share repurchases as well,” Hulse said.