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Exports are the Big Prize of OKE-MMP Combo

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The Daley Note: May 26, 2023

What might the market be missing in the ONEOK (OKE) and Magellan Midstream (MMP) combination? The $18.8B cash-and-stock deal has seen a tepid response from investors so far. Based on East Daley Analytics’ review, the unappreciated value could come from exports.

OKE management is guiding to $100-300MM in revenue synergies once the two companies merge. Using our OKE/MMP Financial Blueprints and commodity forecasts, East Daley is putting those claims to the test. While we’re skeptical of upside potential from NGL and crude bundling, we expect OKE has plenty of room to boost margins and sales in MMP’s butane blending business.

5.25 tdn

Our final analysis of the looks at the upside potential from exports. In our view, exports is the most exciting commercial opportunity from the OKE-MMP combination. MMP brings exports expertise to the table, and owns or has an interest in three facilities along the Houston Ship Channel that can handle a variety of liquids products. One of those facilities, Seabrook Logistics (50% MMP stake), can export 960 Mb/d of crude but was only 27% utilized in 4Q22, according to East Daley’s Crude Network Model (see figure).

If OKE and its partner, LBC Terminals, can repurpose 50% of Seabrook’s unused capacity for LPG exports, the company’s Gulf Coast LPG export capacity would rival that of Targa Resources’ (TRGP) Galena Park facility (460 Mb/d vs 444 Mb/d at TRGP - Galena Park). At 75% utilization, we estimate Seabrook could generate ~$200MM gross EBITDA annually, or $100MM net to OKE/MMP.

MMP also wholly owns its own Galena Park terminal, though East Daley believes it primarily supports MMP’s refined products storage and blending business. Galena Park could also be an interesting LPG export conversion project, as OKE would have a one-stop shop for butane blending and LPG exports while retaining more of the upside. - Ajay Bakshani, CFA Tickers: MMP, OKE, TRGP.


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