ONEOK, Inc. OKE announced the completion of its previously announced acquisition of Magellan Midstream Partners, L.P. This $18.8-billion merger deal created one of the largest oil and natural gas pipeline companies in the United States. The initiative is focused on providing consumers with essential energy goods and services and enabling better return opportunity for investors by creating a more diversified North American midstream infrastructure company.
The transaction involves ONEOK's acquisition of all outstanding units of Magellan through a mixture of cash and stock. Magellan’s unitholders received $25.00 in cash and 0.667 shares of ONEOK common stock for each outstanding Magellan common unit. Magellan common units will no longer be publicly traded on the New York Stock Exchange.
Benefits of the Merger
The acquisition of Magellan by ONEOK is likely to have a positive impact on the prospects of the combined company.
Owing to the acquisition, ONEOK will have access to Magellan's assets and customers that will allow it to expand operations and develop new revenue sources. Additionally, it is anticipated to produce considerable cost savings and synergies, enhancing the profitability of the merged company. ONEOK expects to achieve annual cost savings of nearly $200 million from this merger.
The agreement will open up Magellan's primarily fee-based refined products and crude oil transportation business to ONEOK. The combined infrastructure company is expected to generate stable cash flows even through diverse commodity cycles.
In the first four years, the combined company is expected to generate an average annual amount of around $1 billion. This represents a significant improvement in free cash flow after dividends and growth capital.
Oil & Gas Sector’s Consolidation
The oil and gas sector has experienced significant consolidation over the years, with many large companies acquiring smaller ones. This trend is expected to continue as companies look to streamline operations and reduce costs.
Other companies like Chevron Corporation CVX and Liberty Energy LBRT are also expanding their operations through mergers and acquisitions.
In August 2023, Chevron completed its acquisition of PDC Energy, Inc. following approval from PDC Energy shareholders. The purchase gives the global energy giant 275,000 net acres in the Denver-Julesburg Basin, next to assets already operated by Chevron, and 25,000 net acres in the Permian Basin where Chevron already has a leading position.
CVX’s long-term (three- to five-year) earnings growth rate is 14.27%. It delivered an average earnings surprise of 4.8% in the last four quarters.
In April 2023, Liberty Energy announced the purchase of Siren Energy — an integrated natural gas compression and CNG transportation company with a Permian focus. The latter offered transportation, logistics and pressure-reduction services in addition to two expandable Permian sites with a 16-MMcf-per-day capability for natural gas compression. Subject to customary closing adjustments, Liberty Energy paid an overall cash price of $78 million to acquire Siren.
The Zacks Consensus Estimate for LBRT's 2023 earnings per share (EPS) indicates a 46.5% increase year over year. The company delivered an average earnings surprise of 12.1% in the last four quarters.
Over the past three months, ONEOK’s shares have risen 11.8% compared with the industry’s 7.5% growth.
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Zacks Rank & Stock to Consider
ONEOK currently has a Zacks Rank #3 (Hold).
A better-ranked stock from the same sector is Constellation Energy Corporation CEG, sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
CEG’s long-term earnings growth rate is 23.3%. The Zacks Consensus Estimate for 2023 EPS indicates a 1,216.3% increase year over year.
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