Last week, ONEOK Inc, finalized its acquisition of Magellan Midstream Partners. The deal produced a unique merger with some big effects on energy income investors like us.
So let’s review some pre-merger financial results and make a guess about ONEOK’s future.
In May, ONEOK Inc. (OKE) and Magellan Midstream Partners (MMP) announced an agreement for ONEOK to acquire Magellan in a deal valued at $18.8 billion. This was a unique deal: while both companies operate in the energy midstream space, ONEOK is organized as a corporation, and Magellan was structured as a master limited partnership (MLP).
The different business structures meant the deal would be a taxable event for Magellan investors. With an MLP, distributions paid are not taxable but instead reduce an investor’s cost basis. As a result, many MMP investors entered the deal with large taxable gains. Despite this issue, Magellan shareholders approved the acquisition, which is now a done deal.
Let’s look at what each company brings to the new combination.
Magellan Midstream operates a pipeline and terminal network transporting crude oil and refined products, and owns the most extensive common carrier refined products pipeline system in the U.S. The emphasis is on refined products, with 9,800 miles of pipelines and 54 terminals. Crude oil assets include 2,200 miles of pipeline and 39 million barrels of storage.
Here are MMP’s results for the first half of 2023:
- Total revenue: $1.75 billion
- Net income: $513 million/$2.52 per share
- Free cash flow: $552 million
- Distributions paid to shareholders: $425 million
ONEOK owns and operates a natural gas gathering, processing, and transport system.
Here are OKE’s results for the first half of the year:
- Total revenue: $7.53 billion
- Net income: $1.52 billion million/$3.38 per share
- Adjusted EBITDA: $2.67 billion
- Distributions paid to shareholders: $857 million
- Shares outstanding 449 million
ONEOK issued 135 million new shares in the acquisition, increasing its share count by 30%. You can see that the MMP net income adds about the same percentage to the OKE results.
At the time of the merger announcement, ONEOK said it expects the deal to be earnings accretive starting next year. Earnings growth of 3% to 7% per year is expected through 2027, with free cash flow growth of more than 20% annually.
ONEOKE has been a Dividend Hunter-recommended portfolio stock since 2018. I like the stock for its attractive 6% yield combined with a long history of dividend growth. The dividend has grown by 28% since the addition. I expect the MMP acquisition will produce high single-digit annual dividend growth.
