The Daley Note: October 17, 2023
Earnings season start this week for 3Q23, and no midstream company has more to reveal than ONEOK (OKE). The company completed its merger with Magellan Midstream Partners (MMP) on September 25, and will provide a first update to investors following close of the $19B deal.
EDA profiled the $19B OKE-MMP merger when it was announced in May 2023. We expect the MMP assets will add ~$26MM to OKE’s 3Q23 Adj. EBITDA, and $412MM in 4Q23 for its first full quarter.
MMP’s Refined Products system accounts for 43% of those earnings. We expect the system to grow marginally Y-o-Y at between 0.15-.25% per year, but expansions to new demand centers like El Paso will boost growth. MMP was in the process of expanding capacity on its El Paso line, and we expect the expansion to start service in 1Q24 and help overall system volumes grow by 3% Y-o-Y. Add to that the 13.32% FERC-indexed tariff escalator, which applies to 30% of MMP’s lines, and we expect EBITDA to grow by 8% to $686MM in 2024.
On the crude oil side, we continue to expect risk for the BridgeTex system (MMP owns a 30% stake). Volumes on the pipe from the Permian to Gulf Coast have fallen, and anchor shipper Occidental (OXY) appears to be shipping on other pipelines and opting to pay deficiency charges to BridgeTex. The contract is set to expire in late 2024 and exacerbates the re-contracting risk; we expect EBITDA will be halved to ~$12MM in 2025. However, other crude pipes like Longhorn should continue to benefit from growing Permian volumes.
The MMP acquisition pushes leverage for ONEOK from 2.8x to 4.9x in the OKE Financial Blueprint; the high-quality cash flows from MMP will help the company de-lever to 3.9x by YE24. We expect FCF After Distributions to grow from $1.60 to $1.80/share, leaving plenty of room for OKE to fund new growth projects like the Saguaro Connector Pipeline while paying down debt and growing shareholder returns.—Ajay Bakshani, CFA Tickers: OKE, OXY.
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