Midstream energy M&A entered a new stage recently: ONEOK Inc. (OKE) offered $25 in cash and 0.667 of its own shares for Magellan Midstream Partners (MMP). Expect more major North American midstream companies and MLPs to join forces in coming months, counsels Elliott Gue, editor of Energy and Income Advisor.

In the first couple years of this energy upcycle, we’ve seen a handful of deals in the midstream sector. These are the steady companies on the energy value chain operating between the wellhead to the end user—transporting, gathering, processing and storing oil, natural gas, natural gas liquids and refined products.

Up to now, midstream acquisitions this cycle have been mostly one-sided affairs, for example Shell Plc’s (SHEL) take under of its former affiliate Shell Midstream—which really had no other choice. Energy Transfer LP’s (ET) now closed purchase of Lotus Midstream from a private capital owner is another.

A picture containing text, sky, logo, screenshot  Description automatically generatedIn each case, an already large company grew bigger by offering cash to a motivated seller for an asset it wanted. And we believe we’ll see more of this type of deal in coming months.

ONEOK’s offer for Magellan, however, is the first time this cycle we’ve seen major midstream companies try to combine forces for mutual benefit. On their own, both are fresh off reporting strong Q1 results and guidance that supports low-single digit percentage dividend growth the next few years. Operating cash flow funds all capital spending as well as dividends. And both have modest debt refinancing needs the next few years with zero reliance on variable rate debt.

Together, however, ONEOK/Magellan will be the fourth largest US midstream company. And assuming they win approval of shareholders and clear federal anti-trust scrutiny to meet an expected Q3 close, the parties expect to realize free cash flow accretion of “more than 20 percent” per share for 2024-27. Annual earnings per share accretion is expected at 3 to 7 percent.

Some early critics of the merger have pointed out ONEOK and Magellan have largely complimentary assets, meaning few opportunities to immediately scale up in certain regions. Rather, opportunities to cut costs will come mostly from corporate overhead.

But by uniting ONEOK’s mostly natural gas and NGLs network with Magellan’s crude oil and refined products transport, the new company will have far more places to invest capital than either company standing alone.

A number of factors will affect ONEOK’s share price between now and a planned late summer close, including potentially a drop in the overall stock market. But with a well-covered and recently increased dividend yield of nearly 7 percent and trading at less than 13 times expected next 12 months earnings, there’s also no froth in the current price.

There’s also a very real possibility Magellan will see a counteroffer. That doesn’t appear to be a possibility many analysts are considering, which also means it’s not priced in. But as we’ve said, Magellan is a solid franchise.

Recommended Action: Buy MMP...

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