Energy Transition

Epic $18.8 Billion Merger: ONEOK and Magellan Get Green Light from Antitrust, Ready to Reshape the Energy Landscape

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ONEOK Inc. (NYSE: OKE) has demonstrated strong financial performance and strategic initiatives in the first quarter of 2023, positioning the company for future growth. The company reported impressive net income of $1.05 billion and diluted earnings per share of $2.34, showcasing its solid operational performance. The completion of the Demicks Lake III processing plant and MB-5 fractionator has increased system capacity and sets the stage for potential revenue growth.

ONEOK’s focus on reducing debt and improving its credit profile is evident with the redemption of $500 million senior notes and the upgrade of its credit rating by Moody’s Credit Rating to Baa2 from Baa3. This highlights the company’s commitment to financial health and stock appreciation. Furthermore, the declaration of a quarterly dividend underscores its dedication to providing returns to shareholders.

The merger between ONEOK and Magellan Midstream Partners, L.P. has received regulatory approval, marking a significant milestone in the formation of one of the largest energy pipeline operators. The deal, valued at $18.8 billion, is expected to generate a free cash flow surplus of approximately $1 billion per year for the first four years, providing ample opportunities for debt reduction, growth capital, and shareholder returns. The combined company anticipates enhanced product offerings and increased export opportunities, positioning it for long-term success in the energy infrastructure industry.

Overall, ONEOK’s strong financial performance, efficient capital management, improved creditworthiness, and strategic initiatives paint a promising picture for its future growth. As the company continues to focus onoperational excellence and capitalizing on emerging opportunities, it remains an attractive investment opportunity.

Merger on Track (NYSE:OKE)

The sensational merger between Oklahoma-based energy company ONEOK Inc. (NYSE: OKE) and Magellan Midstream Partners, L.P. (NYSE: MLP) has attained a significant milestone. The Hart-Scott-Rodino Antitrust Improvements Act waiting period for this game-changing acquisition has officially expired. This regulatory approval further solidifies the formation of one of the largest energy pipeline operators by propelling the $18.8 billion merger forward.

The Deal’s Specifics

In accordance with the terms of the transaction, Magellan will be incorporated into ONEOK’s wholly-owned subsidiary. Per unit, Magellan unitholders will receive $25.00 in cash and 0.6670 shares of ONEOK common stock. This generous offer represents a 22 percent premium over the closing price of Magellan on May 12, 2023.

The completion of the merger is scheduled for the third quarter of 2023. ONEOK and Magellan’s respective boards of directors have unanimously approved this thrilling venture. ONEOK has secured a staggering $5.25 billion in fully committed bridge financing to facilitate the transaction.

Following the conclusion of the merger, the combined company will continue to be led by Pierce Norton, the current CEO of ONEOK.

A Bright Future

The combined company is projected to generate a free cash flow surplus of approximately $1 billion per year for the first four years following the anticipated closing of the transaction. The company will have a greater capacity for debt reduction, growth capital, and shareholder returns via dividends or share repurchases if it has more cash on hand. With a targeted payout ratio of less than 85%, ONEOK’s dedication to increasing its EPS and common dividend is commendable. With over 25,000 miles of liquids-oriented pipelines under its purview, the new company’s significant assets and operational know-how will result in enhanced product offerings for customers and increased international export opportunities. The combined company anticipates a pro forma net debt-to-EBITDA ratio of about 4.0 times by the end of 2023. This ratio is anticipated to fall below 3.5 times by 2026 as new development projects are implemented.

A Merger on Course

This enormous transaction unites two significant energy infrastructure players into a singular, stronger entity. The consolidation of their diverse free cash flow generation and substantial returns on invested capital will bolster the resilience of the energy infrastructure industry. Due to the low capital expenditure requirements of their predominantly demand-driven businesses, the merger of their refined products and crude oil transportation services will generate substantial free cash flow.

Forecasts of finances and antitrust clearance

The strategic merger is anticipated to produce cost, operational, and tax synergies that will begin to positively impact earnings per share (EPS) as early as 2024. From 2025 to 2027, a solid EPS accretion of 3% to 7% per year is expected. The estimated total value of the prospective tax benefits for ONEOK is approximately $3 billion, further sweetening the deal.

The antitrust clearance moves ONEOK one step closer to fulfilling the terms of the agreement, bringing this industry-altering acquisition closer to its anticipated completion in the third quarter of 2023. To proceed, the merger must receive approval from both ONEOK shareholders and Magellan unitholders.

Potential Obstacles and Voting Difficulties

Despite this significant development, prospective obstacles remain. Recent commentary by financial columnist Andrew Bary in Barron’s suggests that the completion of the transaction, once considered a foregone conclusion, may now only have a 50/50 chance, given the current share price and arbitrage spread. In addition, Energy Income Partners, a unitholder of Magellan, has stated publicly that it intends to vote against the proposed merger.

On the Way to Accomplishment

Despite these obstacles, the transaction’s antitrust clearance signifies a significant step forward. Under the provisions of the merger, Magellan will be integrated into ONEOK’s newly formed wholly-owned subsidiary. Each unitholder of Magellan will receive $25.00 in cash and 0.6670 shares of ONEOK stock. This substantial offer represents a 22% premium over the closing price of Magellan on May 12, 2023.

The impending shareholder and unitholder votes will be crucial in determining the ultimate fate of this merger that will transform the energy industry. With Pierce Norton, the current CEO of ONEOK, set to lead the combined company, the future of the energy industry may undergo a significant transition.

Sources: https://ir.oneok.com/news-and-events/press-releases/2023/05-14-2023-232007760

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