The Daley Note: May 24, 2023
ONEOK’s (OKE) plan to buy Magellan Midstream Partners (MMP) has gone down like a lead balloon with investors. OKE shares fell 9% following the $18.8B announcement and traded about 7% lower as of Tuesday. Based on East Daley’s discussions, investors are mostly in the dark about the potential commercial synergies from the midstream combination.
Indeed, the blockbuster OKE-MMP merger doesn’t present obvious gains from the asset combination. Based on East Daley’s OKE and MMP Financial Blueprints, we are struck by the lack of overlap between the two companies’ asset bases. ONEOK’s expertise is moving natural gas and NGLs, while Magellan’s focus is crude oil and refined products.
OKE made big claims for potential synergies but has provided little detail. Management guided to $100-300MM of revenue synergies from three main commercial buckets: the bundling of NGL and crude services, demand-pull dynamics for OKE’s NGL production (via MMP’s butane blending operations), and leveraging MMP’s expertise in exports.
Fortunately, East Daley’s Financial Blueprints and commodity forecasts are valuable tools for breaking down the OKE–MMP merger, allowing users to dive deeper. This week, we put the claim for synergies to the test. We start with NGL and crude bunding. Is there really earnings upside for OKE-MMP by merging the companies’ crude and NGL assets?
Based on our asset Blueprints, we are skeptical of the potential for ONEOK from NGL and crude bundling. Outside the Permian Basin, OKE is already the dominant midstream company in the NGL business. Magellan does own the Saddlehorn crude pipeline out of the Denver-Julesburg Basin. But Saddlehorn already runs relatively full, according to our Crude Network Model, and so presents limited upside from bundling.
In the Permian Basin, competition for NGL pipeline takeaway is fierce from firms with strong G&P systems, including DCP Midstream (DCP), Enterprise Products (EPD), Energy Transfer (ET) and Targa Resources (TRGP). In our NGL Network Model, we do expect OKE’s West Texas LPG volumes to grow slightly from overall Permian growth and as competing NGL pipelines (Grand Prix, Shin Oak) hit constraints until expansions come online (see figure). However, this growth would happen with or without MMP’s crude assets.
Given the intense competition in the Permian and limited upside in other basins, we struggle to find an additional 100 Mb/d of volume growth across the asset base that, according to management, could add $75MM EBITDA.
Similarly on the crude side, there may be incremental volumes and rate improvement due to overall Permian Basin growth. However, Longhorn Pipeline already runs relatively full, according to our Crude Network Model, and we do not expect shipping rates to increase enough to return earnings to 2019 levels. In our asset Blueprints, East Daley estimates MMP’s earnings from Longhorn collapsed from $172MM in 2019 to $73MM in 2022, with little growth expected through 2027.
BridgeTex Pipeline (MMP owns 30%) has more free space than Longhorn, but also has significant rate risk due to an anchor shipper potentially not recontracting in 3Q24. We forecast MMP’s share of net income will fall from $64MM in 2022 to $19MM in 2025. We expect volumes to remain stable and even grow slightly, but it would take a lot of bundling to offset that rate risk, especially in an overbuilt egress environment. – Ajay Bakshani, CFA Tickers: DCP, EPD, ET, KMI, MMP, OKE, TRGP.
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