Sunday, May 14, 2023

ONEOK to Acquire Magellan Midstream Partners ($MMP $OKE)

Well, we had a post in the hopper about first quarter earnings for Magellan Midstream Partners (MMP), but they just announced a takeover deal tonight:

ONEOK, Inc. (OKE) and Magellan Midstream Partners, L.P.("Magellan") today announced that they have executed a definitive merger agreement under which ONEOK will acquire all outstanding units of Magellan in a cash-and-stock transaction valued at approximately $18.8 billion including assumed debt, resulting in a combined company with a total enterprise value of $60.0 billion. The consideration will consist of $25.00 in cash and 0.6670 shares of ONEOK common stock for each outstanding Magellan common unit, representing a current implied value to each Magellan unitholder of $67.50 per unit, for a 22% premium, based on May 12, 2023 closing prices.

Transaction details:

Magellan will be merged into a newly created 100% wholly-owned subsidiary of ONEOK. Each Magellan unitholder will receive $25.00 in cash and 0.6670 shares of ONEOK stock per unit. This represents a 22% premium to the Magellan closing price on May 12, 2023.

The transaction is expected to close in the third quarter of 2023 and has been unanimously approved by the board of directors of both companies. ONEOK has secured $5.25 billion in fully committed bridge financing for the proposed cash consideration. The closing of the transaction is subject to customary closing conditions, including the approvals of both ONEOK shareholders and Magellan unitholders, as well as Hart Scott Rodino Act clearance.

The transaction will be a taxable event for Magellan unitholders and will cause ONEOK to have a step-up in tax basis approximately equal to the aggregate purchase price of Magellan units and Magellan debt assumed (approximately $18.8 billion). The premium and cash portion of the consideration may assist with potential tax implications for Magellan unitholders occurring from this transaction. This transaction is expected to defer significant corporate cash tax liability into future periods for the combined entity.

ONEOK [background: PDF] published a presentation about the transaction. A couple of interesting slides about what the combined entity would look like:

Investors on Twitter have mixed feelings about the deal. In its quarterly announcement, Magellan had said that it was planning to raise its refined products rates by 11% this July, and was projecting distributable cash flow of $6.03 per unit for 2023. That is an 11% implied shareholder yield on the per-announcement price and an 8.9% yield on the announced deal price.   

By the way, interesting to read the Magellan management comments on the Q1 conference call about the effect of economic recession on refined fuel demand.

So as we think about recessions, our refined products business has shown itself through the decades really are being really resilient. So it's not like if we move into a recession, we would expect drastic changes in our total volume and the demand as we see it today, is remaining very healthy. The one product that we move that may be more sensitive to a recession than others is diesel versus gasoline. Diesel seems to be a little more economically sensitive than gasoline, which is driven by daily consumer behavior, and that seems to be fairly static through time, even in a recessionary environment.

So gasoline's less sensitive diesel's a little more sensitive. But when you put it all together, we just really have a resilient business and I wouldn't expect there to be a dramatic decrease if we enter a recession. And I would also note, we've got history that shows us that once you get on the other side of that recession, it comes back very quickly. So we're watching the recession potential, but I just don't see a material impact on our business or volumes as a result of it.

The big decision everyone will have to make is whether they want to sell the news or hold and take the OKE shares. Note that OKE is a C-corp, so one K-1 will be going away no matter what if the deal closes. The fact that the transaction is (or may) be taxable is unfortunate for long term holders, who might otherwise have given this to their heirs with a stepped-up basis.

OKE is in the S&P 500 and seems to be mostly owned by index funds and ETFs. You can see management's holdings (and stock awards) in the proxy statement.


CP said...

In February 2014, Oneok spun off its natural gas distribution companies–Oklahoma Natural Gas, Kansas Gas Service, and Texas Gas Services–into a separate publicly traded company, ONE Gas. For all intents and purposes, Oneok had spun out the core of the original Oklahoma Natural Gas.

For many years until 2017, Oneok was an MLP and issued its holders a K-1 every year. That year it became a regular company (C-corporation) and it issues its stockholders a yearly 1099 summarizing their income from the company.

CP said...

Market Conditions and Business Update - We experienced increased volumes in the first quarter 2023, compared with the first quarter 2022, due primarily to increased producer activity across our operations. In the remainder of 2023, we expect to benefit from the completion of our Demicks Lake III natural gas processing plant and our MB-5 fractionator, highlighting our extensive and integrated assets that are located in, and connected to, some of the most productive shale basins in the United States. Although the energy industry has experienced many commodity cycles, we have positioned ourselves to reduce exposure to direct commodity price volatility. Each of our three reportable segments are primarily fee-based, and we expect our consolidated earnings to be approximately 90% fee-based in 2023. While our Natural Gas Gathering and Processing segment’s earnings are primarily fee-based, we have direct commodity price exposure related primarily to fee with POP contracts, and we have hedged approximately 70% of our forecasted equity volumes for the remainder of 2023. In addition, our Natural Gas Gathering and Processing and Natural Gas Liquids segments are exposed to volumetric risk as a result of drilling and completion activity, severe weather disruptions, operational outages, global crude oil, NGL and natural gas demand, changes in gas-to-oil ratios and normal volumetric well declines. Our Natural Gas Pipelines segment is not exposed to significant volumetric risk due to nearly all of our capacity being subscribed under long-term, firm fee-based contracts.

CP said...

Natural Gas Liquids - owns and operates facilities that gather, fractionate, treat and distribute NGLs and store purity NGLs, primarily in Oklahoma, Kansas, Texas, New Mexico and the Rocky Mountain region, which includes the Williston, Powder River and DJ Basins. We provide midstream services to producers of NGLs and deliver those products to the two primary market centers: one in the Mid-Continent in Conway, Kansas, and the other in the Gulf Coast in Mont Belvieu, Texas. We own or have an ownership interest in FERC-regulated NGL gathering and distribution pipelines in Oklahoma, Kansas, Texas, New Mexico, Montana, North Dakota, Wyoming and Colorado, and terminal and storage facilities in Kansas, Nebraska, Iowa and Illinois. We have a 50% ownership interest in Overland Pass, which operates an interstate NGL pipeline originating in Wyoming and Colorado and terminating in Kansas. The majority of the pipeline-connected natural gas processing plants in the Williston Basin, Oklahoma, Kansas and the Texas Panhandle are connected to our NGL gathering systems. We lease rail cars and own and operate truck- and rail-loading and -unloading facilities connected to our NGL fractionation, storage and pipeline assets. We also own FERC-regulated NGL distribution pipelines in Kansas, Nebraska, Iowa, Illinois and Indiana that connect our Mid-Continent assets with Midwest markets, including Chicago, Illinois. A portion of our ONEOK North System transports refined petroleum products, including unleaded gasoline and diesel, from Kansas to Iowa.

Natural Gas Gathering and Processing - provides midstream services to producers in North Dakota, Montana, Wyoming, Kansas and Oklahoma. Raw natural gas is typically gathered at the wellhead, compressed and transported through pipelines to our processing facilities. Most raw natural gas produced at the wellhead also contains a mixture of NGL components, including ethane, propane, iso-butane, normal butane and natural gasoline. Processed natural gas, usually referred to as residue natural gas, is then recompressed and delivered to natural gas pipelines, storage facilities and end users. The NGLs separated from the raw natural gas are sold and delivered through NGL pipelines to fractionation facilities for further processing.

Natural Gas Pipelines - our assets are connected to key supply areas and demand centers, including export markets in Mexico via Roadrunner and supply areas in Canada and the United States via our interstate and intrastate natural gas pipelines and Northern Border, which enable us to provide essential natural gas transportation and storage services. Continued demand from local distribution companies, electric-generation facilities and large industrial companies supported low-cost expansions that position us well to provide additional services to our customers when needed.

CP said...

November 2021:
Even without growing earnings, if Magellan traded to a 5% dividend yield (where it was in 2017-2018), that would be 60% upside to the current share price, or $80. A $60 call for Jan 2024 last traded for $1.30. If the stock revalues between now and then, that's 15x upside. [An ATM $50 call has IV of only 13% and trades for $4. That would be 7.5x upside with breakeven at $54 - MMP traded at $53.5 in June.]

That Jan 2024 $50 call is trading for $14.20 today, a 3.55x bagger.

Can't believe the IV on an inflation-protected real asset was only 13%...

AllanF said...

The fact that the transaction is (or may) be taxable is unfortunate for long term holders, who might otherwise have given this to their heirs with a stepped-up basis.

Really coming to dislike this aspect of MLP's. I was familiar with it, but assumed it was more a theoretical risk than a real risk. As it turns out, like a hundred year flood, these things seem to hit way more than once a hundred years. Feels more like once every 5-10.

EPD might be the only one you're safe with given the huge insider ownership.