TULSA, Okla. (OBV) – Leading midstream service provider ONEOK Inc. finalized its $18.8 billion acquisition of Magellan Midstream Partners this week.
ONEOK shareholders and Magellan unitholders each held a special meeting on Sept. 21, both approving the merger.
“This is a significant day for Tulsa and the industry as we bring together the talented ONEOK and Magellan teams and look to the future as one company,” said Pierce H. Norton II, ONEOK president and chief executive officer. “Our expanded products platform will present additional opportunities in ONEOK’s core businesses and further enhance the resiliency of our company. We are committed to ensuring a smooth transition aimed at delivering on the many benefits of this combination for our customers, employees and shareholders.”
Midstream services include transportation, storage and trading of crude oil, natural gas and refined products, according to the Library of Congress.
The deal was finalized on Monday. Magellan is now a 100 percent wholly-owned subsidiary of ONEOK.
ONEOK acquired all of Magellan’s outstanding units, including assumed debt, through the cash-and-stock transaction. The combined company has a $60 billion total enterprise value.
Magellan unitholders received $25 and 0.667 shares of ONEOK common stock per outstanding Magellan common unit, representing a 22 percent premium to the Magellan closing price on May 12, 2023.
“ONEOK has a long history and track record of being at the forefront of transformational transactions. The combination of ONEOK and Magellan will create a diversified North American midstream infrastructure company with predominately fee-based earnings, a strong balance sheet and significant financial flexibility focused on delivering essential energy products and services to our customers and continued strong returns to investors,” Norton said in May. “Our expanded products platform will present further opportunities in our core businesses as well as enhance our ability to participate in the ongoing energy transformation with an increased presence in sustainable fuel and hydrogen corridors. We are excited about the future of our combined companies and look forward to welcoming Magellan’s well-respected employees to ONEOK.”
Aaron Milford, who was Magellan’s president and CEO, said in May that OKEOK and Magellan shared common goals.
“Throughout more than 20 years as a publicly traded company, Magellan has remained focused on safe and responsible operations, financial discipline and long-term investor value. We believe ONEOK shares these priorities, and we are pleased to join them in creating a stronger, more diversified midstream company,” Milford said. “We believe the premium offered maximizes value creation for Magellan’s unitholders and reflects the essential nature of Magellan’s assets and service offerings as well as the quality of our talented and innovative employees. This transaction provides a significant upfront cash component and an opportunity for Magellan investors to benefit from the attractive cash dividend offered by the combined company going forward.”
ONEOK is a Tulsa-based Fortune 500 company. Its natural gas liquids (NGL) system connects NGL supply in the Rocky Mountain, Permian and Mid-Continent regions with key market centers. It also owns a wide network of gathering, processing, fractionation, transportation and storage assets.
Magellan was also headquartered in Tulsa. It specialized in transporting, storing and distributing refined petroleum products and crude oil. It owned the nation’s longest refined petroleum products pipeline system and had access to nearly 50 percent of the nation’s refining capacity, and could store in excess of 100 million barrels of petroleum products such as gasoline, diesel fuel and crude oil.
The following strategic items were listed as strategic rational for the merger:
- Brings together two premier energy infrastructure businesses with strong returns on invested capital and diverse free cash flow generation: The transaction adds a leading, and primarily fee-based, refined products and crude oil transportation business to ONEOK. Magellan’s stable, primarily demand-driven businesses are expected to generate significant free cash flow due to low capital expenditure requirements. This acquisition creates a more resilient energy infrastructure company that is expected to produce stable cash flows through diverse commodity cycles.
- Expect to achieve immediate financial benefits, including cost, operational and tax synergies, supporting meaningful expected accretion: The transaction is expected to be earnings per share (EPS) accretive beginning in 2024 with EPS accretion of 3% to 7% per year from 2025 through 2027, and free cash flow per share accretion averaging more than 20 percent from 2024 through 2027. Base forecasted synergies are expected to total at least $200 million annually.
From a tax perspective, ONEOK expects to benefit from the step-up in Magellan’s tax basis from the transaction, thus deferring the expected impact of the new corporate alternative minimum tax from 2024 to 2027. The benefit from the basis step-up has an estimated total value of approximately $3.0 billion, which has an estimated net present value of approximately $1.5 billion. Utilization of expected tax attributes could increase if additional capital projects are put into service or acquisitions are completed, which may increase the net present value of future tax deferrals.
- Compelling long-term value proposition driven by consistent and disciplined capital allocation philosophy: The combined company is expected to experience a step change in free cash flow after dividends and growth capital by generating an average annual amount of approximately $1.0 billion in the first four years following the expected transaction close. The increase in free cash flow will provide additional cash for debt reduction, growth capital and value returned to shareholders through dividends and/or repurchasing shares. ONEOK remains committed to growing both EPS and its common dividend while targeting a payout ratio of less than 85 percent.
- Complementary and diversified asset positions with potential for additional cost and commercial synergies over time: The combined company will own more than 25,000 miles of liquids-oriented pipelines, with significant assets and operational expertise at the Gulf Coast and Mid-Continent market hubs. ONEOK anticipates this combined liquids-focused portfolio will present significant potential for enhanced customer product offerings and increased international export opportunities. We believe these activities could potentially result in total annual transaction synergies exceeding $400 million within two to four years.
- Strong investment-grade credit ratings with enhanced scale and diversification: The combined company expects pro-forma 2024 year-end net debt-to-EBITDA of approximately 4.0 times. ONEOK expects leverage to decrease below 3.5 times by 2026 as future growth projects are placed in service. Excluding certain large projects that have not yet received a final investment decision from the expected net debt-to-EBITDA calculation would accelerate the timeframe to achieve 3.5 times by approximately one year.