{"id":12160,"date":"2023-05-22T13:26:28","date_gmt":"2023-05-22T17:26:28","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/magellan-midstream-is-merging-and-others-will-follow\/"},"modified":"2023-05-22T13:26:29","modified_gmt":"2023-05-22T17:26:29","slug":"magellan-midstream-is-merging-and-others-will-follow","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=12160","title":{"rendered":"Magellan Midstream Is Merging And Others Will Follow"},"content":{"rendered":"
\n

Three companies dominate Canada\u2019s midstream energy business. In contrast, ownership of oil and gas pipelines, gathering and processing systems, storage and other related infrastructure is highly fragmented in the US. But consolidation is picking up steam.<\/p>\n

The biggest deal so far: Last week\u2019s offer from ONEOK Inc<\/strong> (OKE) for Magellan Midstream Partners<\/strong> (MMP). The merger would create the fourth largest US midstream company with combined enterprise value of $60 billion and initial yearly EBITDA of $6 billion.<\/p>\n

It\u2019s an entirely different animal from anything we\u2019ve seen so far in the sector this cycle, such as last year\u2019s buy-ins by Phillips 66<\/strong>
\n PSX
\n <\/fbs-ticker> (PSX) and Shell Plc<\/strong> (SHEL) of midstream affiliates. And it\u2019s of a much greater magnitude as well. Market value of nearly $20 billion, for example, compares with the $1.45 billion Energy Transfer LP<\/strong> (ET) paid to buy Lotus Midstream from a private capital firm earlier this month.<\/p>\n

ONEOK\/Magellan will own about 50,000 miles of pipelines and related infrastructure. Assets will be roughly evenly divided between natural gas and liquids, which range from crude oil and natural gas liquids to refined products. And the company will be a national player, servicing basins from the Bakken in the upper Midwest to the Rockies and Gulf Coast.<\/p>\n

<\/fbs-ad><\/p>\n

ONEOK and Magellan currently don\u2019t overlap much. That gives even the highly merger-skeptic Biden Administration\u2019s Justice Department few if any hard reasons to reject their union on anti-trust grounds.<\/strong> And management expects to realize $200 to $400 million in annual post-merger cost savings by 2027, which will power free cash flow per share accretion of \u201cmore than 20 percent.\u201d<\/p>\n

That\u2019s plenty of fuel to accelerate annual dividend growth from both companies\u2019 current low single digit percentages. And management\u2019s projections are based on cost savings including overhead and taxes. So they\u2019re likely to prove conservative as the energy upcycle progresses.<\/p>\n

The offer for Magellan is a substantial premium to its pre-deal price. That too is a contrast with previous midstream acquisitions this cycle, including Williams Companies\u2019<\/strong> (WMB) $1.5 billion buyout of the MountainWest pipeline system that closed in February. And unitholders will receive cash of $25 per share while maintaining upside from the energy upcycle with 0.6676 shares of ONEOK.<\/p>\n

It\u2019s fair to say the majority investor reaction to this deal so far has been skeptical. Some large ONEOK holders have complained the price is too high. The usual \u201cshareholder advocacy\u201d law firms allege the offer is too low, given the tax consequences for long-time owners of Magellan. And the general consensus among analysts\u2014reflected in a pair of recent Barron\u2019s<\/strong> articles\u2014is this is a one-off and won\u2019t be followed by more midstream M&A.<\/p>\n

Whether the offer is too high or too low is a matter of debate. And there are always tax consequences when a partnership is acquired by a C-Corp.<\/p>\n

Nonetheless, ONEOK\/Magellan is likely to close on schedule in Q3. And it won\u2019t be the last merger in US midstream, a sector not only ripe for consolidation with the means to do it.<\/strong><\/p>\n

Let\u2019s start with the means. A decade ago the US midstream sector was overbuilt. The shale-drilling boom induced record IPO volume. And the combination of cheap capital and seemingly limitless demand for infrastructure encouraged management to throw caution to the winds\u2014piling up debt to build enough pipelines to keep up with dividend growth promises.<\/p>\n

Flash forward to today following multiple bankruptcies, literally hundreds of dividend cuts and years of investor neglect if not ambivalence toward the sector. The result is the surviving US midstream companies have become almost wholly financially self-reliant.<\/p>\n

Rather than spend aggressively on CAPEX and unsustainable dividends, companies routinely generate surplus free cash flow after all their investments, debt service and dividends paid. <\/strong>Some of that surplus has gone to stock buybacks. But with credit ratings in a decided uptrend, it\u2019s increasingly available for acquisitions.<\/p>\n

As for motivation to merge, that\u2019s coming from growing scarcity of assets coupled with unprecedented and increasing barriers to building. <\/strong>Even before the Biden Administration stepped up regulation of fossil fuels, extremely well-funded \u201ckeep it in the grounders\u201d had perfected the art of delaying new pipeline construction to death in the courts.<\/p>\n

As a result, only a handful of mostly incremental projects entered service the past few years. The capacity glut of the past decade is a thing of the past.<\/p>\n

That\u2019s already showing up in improving contracting activity, now picking up steam in contrast to doomsday forecasts for plunging rates and abandoned pipelines. And it\u2019s crystal clear in the premium ONEOK is paying for Magellan.<\/p>\n

Values of oil and gas pipelines will only rise in coming years. Midstream companies may get some relief with building rules\u2014should energy permit reform become the means to a deal to extend the US federal debt limit, as some observers are speculating. But with the Federal Reserve pushing up interest rates and elevating recession risk to quell inflation, oil and gas producers staying conservative on output and ongoing court challenges to projects continuing, management will investment conservative.<\/p>\n

That makes mergers and acquisitions of other pipeline companies the surest way by far to grow earnings and dividends, at least for the next few years.<\/strong><\/p>\n

Who are the best takeover candidates? The only North American midstream company probably out of the running is Enbridge
\n
\n ENB
\n <\/fbs-ticker> Inc<\/strong> (ENB, ENB), by far the largest with market capitalization of $75 billion and almost certainly a buyer in any deal. But any of the other 51 we track in Energy and Income Advisor<\/strong> could attract a high premium takeover offer in the next 12 to 18 months\u2014especially the 90 percent or so that are Magellan\u2019s size or smaller. Let the games begin!<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Three companies dominate Canada\u2019s midstream energy business. In contrast, ownership of oil and gas pipelines, gathering and processing systems, storage and other related infrastructure is highly fragmented in the US. But consolidation is picking up steam. The biggest deal so far: Last week\u2019s offer from ONEOK Inc (OKE) for Magellan Midstream Partners (MMP). The merger […]<\/p>\n","protected":false},"author":1,"featured_media":12161,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-12160","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nMagellan Midstream Is Merging And Others Will Follow | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Three companies dominate Canada\u2019s midstream energy business. 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