The Daley Note: May 25, 2023
Investors are struggling to grasp the strategic logic of ONEOK’s (OKE) acquisition of Magellan Midstream Partners (MMP). The skepticism is reflected in the 8% decline in OKE’s share price since the companies announced the $18.8B cash-and-stock deal.
The caution is understandable given there is little to no overlap between the companies’ assets and services. Yet if investors could look further under the hood, we expect ONEOK to find some compelling synergies once it integrates the Magellan assets.
Using our OKE/MMP Financial Blueprints and commodity forecasts, East Daley Analytics breaks down the OKE–MMP merger this week to test the companies’ claim for up to $300MM in operational synergies. We earlier swiped left on the upside potential from NGL and crude bundling. On a more positive note, our review finds a lot to like in a more under-the-radar business: butane blending.
Magellan is a midstream leader in mixing butane into gasoline. With its high octane content, butane is valued by refiners as an additive to make various grades of gasoline. East Daley estimates 8% (~$108MM) of MMP’s 2022 EBITDA came from butane blending, according to the company Blueprint, with earnings growth expected in the years ahead (see figure).
While MMP brings demand, ONEOK is a top supplier and transporter of NGLs, including butane. Margins for the business will improve if OKE can generate savings from supplying, transporting, fractionating and blending its own butane. We estimate a $0.05/gal improvement in the product margin can generate an additional $25MM in EBITDA for the blending business.
On top of margin gains, there is volume upside if OKE can use its own supply of butane and NGL storage to expand MMP’s blending activities. In the OKE Blueprint, we estimate the company’s equity barrels of butane average 3 Mb/d. If OKE is not blending any butane currently and there is no overlap already with MMP’s existing butane supply, we forecast OKE could earn an additional $10-15MM per year in EBITDA as a supplier.
In the search for synergies, East Daley anticipates butane blending will be an easy lift for the OKE-MMP combo. – Ajay Bakshani, CFA Tickers: MMP, OKE.
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Review the Year Ahead in Dirty Little Secrets
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Dirty Little Secrets reviews the outlook for Midstream and commodity markets in 2023 and the years ahead. East Daley discusses the outlook for crude oil, natural gas and NGLs and the impacts to midstream assets in our 2023 Dirty Little Secrets annual market report. Click here for a copy of the 2023 Dirty Little Secrets report.
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