US midstream ONEOK to acquire Magellan Midstream Partners in $18.8 bil deal

US midstream operator ONEOK will acquire pipeline operator Magellan Midstream Partners in an $18.8 billion cash-and-stock deal, ONEOK said late May 14, forming one of the biggest oil and gas infrastructure companies in North America.

Magellan will be merged into a newly created 100% wholly-owned subsidiary of ONEOK, with an enterprise value of $60 billion and a 25,000-mile network of pipelines stretching from North Dakota to Texas, the company said in the statement.

The deal will give ONEOK -- primarily a transporter of NGLs and natural gas -- access to Magellan's refined products and crude oil transportation business, which include the longest refined products pipeline system in the US with access to nearly half of the country's refining capacity and the ability to store more than 100 million barrels of oil products.

Magellan also owns approximately 2,200 miles of crude oil pipelines, a condensate splitter and storage facilities with an aggregate storage capacity of about 39 million barrels, of which 29 million barrels are used for contract storage, it said on its website.

The new combined liquids-focused portfolio would create export opportunities and could potentially result in total annual transaction synergies exceeding $400 million within two to four years, ONEOK added in the statement.

"Our expanded products platform will present further opportunities in our core businesses as well as enhance our ability to participate in the ongoing energy transformation with an increased presence in sustainable fuel and hydrogen corridors," said ONEOK President and CEO Pierce Norton II.

Norton highlighted the export potential of the combined company.

"We have talked a lot about exporting liquid products. That's something that Magellan does currently. And we think that this expertise is going to pay long-term benefits to our liquids products, along with continued long-term benefits to the assets that we're acquiring," he said on a May 15 call to discuss the deal.

"We do believe long term globally that these products are still going to be in high demand because of increased population growth and the fact that there's continued demand for a higher standard of living across the world, and that's going to support that demand," Norton said.

Raymond James analysts were skeptical about the commercial synergies of the deal, at least in the short term.

We "were initially somewhat pessimistic on the prospects of additional commercial synergies, though some opportunities may present themselves over time, including: 'enhanced' customer product offerings; increased international export opportunities; (speculatively) a more ambitious Permian crude oil pipeline conversion over time; energy transition participation via an increased presence in sustainable fuel and hydrogen 'corridors'; and, on a smaller scale, better butane sourcing for legacy MMP blending," the analysts said in a report.

Magellan has said it is confident its refined products business would hold up despite concerns of an economic recession.

"So as we think about recessions, our refined products business has shown itself through the decades really are being really resilient," company CEO and president Aaron Milford said on a May 4 earnings call. "So it's not like if we move into a recession, we would expect drastic changes in our total volume and the demand as we see it today is remaining very healthy. The one product that we move that may be more sensitive to a recession than others is diesel versus gasoline. Diesel seems to be a little more economically sensitive than gasoline, which is driven by daily consumer behavior, and that seems to be fairly static through time, even in a recessionary environment."

"And I would also note, we've got history that shows us that once you get on the other side of that recession, it comes back very quickly. So we're watching the recession potential, but I just don't see a material impact on our business or volumes as a result of it," he said.

S&P Global Commodity Insights expects gasoline, diesel/gasoil and jet/kero to lead demand growth in 2023 and 2024. Global demand is expected to grow by 2.1 million b/d in 2023 and 1.9 million b/d in 2024, according to S&P Global.

And biofuels production is rising as well, providing an opportunity for the newly-formed company.

US renewable diesel capacity is expected to approach 5 billion gallons in 2024, up from 1.5 billion gallons in 2022, according to S&P Global.

When asked on the call how the combined company might diversify away from its core businesses, Norton would not get into any details.

"I would start by saying when we talk about diversifying away from some of the other business that we have, that does not mean that we're not going to continue to be very focused on those base businesses," Norton said, pointing out that the direction the company takes would depend on customer demand.

"The more assets you have, the more scale you have, the more scope you have is going to provide flexibility to us," he said. "And it's going to be a flexibility for the customers that we serve. If you step back just a minute and you look at what do we do today, what we do today is we move energy products that basically meets the customers' needs for electric generation, industrial use, commercial use, residential use. But what this does in tomorrow's portfolio is you keep that particular aspect of our company of meeting those customers' needs, but you also have now introduced -- what -- and I really like Magellan's tagline here is that, 'We move energy that moves America.'"

The deal is expected to close in the third quarter and has been unanimously approved by the board of directors of both companies. Norton will continue to serve as CEO of the combined company, the statement added.