Oneok (OKE -0.39%) made a bold move this year, acquiring Magellan Midstream Partners in an $18.8 billion deal. That needle-moving transaction closed right near the end of the third quarter.
Given that timing, the deal didn't boost the company's results in the period, though it didn't need help given the strength of its existing operations. However, the merger will add to the pipeline company's already strong growth profile starting in the fourth quarter. That will give Oneok more fuel to grow its 5.9%-yielding dividend.
Underlying strength
Oneok recently reported strong third-quarter results. The midstream giant generated $1 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during the third quarter, up 11% year over year. Earnings would have been even higher if not for some additional costs associated with the Magellan deal. The company incurred $123 million in transaction-related costs during the quarter while only getting a $40 million contribution from Magellan for the six days it owned the entity in the period.
The company benefited from strong volume growth and higher fees across its legacy natural gas businesses. Natural gas liquids (NGL) volumes were up 18% in the Gulf Coast/Permian region and 6% in the Rocky Mountains. That helped fuel nearly 27% adjusted EBITDA growth in the company's NGL segment. Meanwhile, natural gas processed volumes increased by 12%. That fueled a nearly 6% increase in adjusted earnings from its natural gas gathering and processing segment. Finally, natural gas pipeline earnings also rose 6%, fueled mainly by higher rates.
The strength of the company's existing operations led it to boost its full-year guidance again without factoring in the impact of Magellan. It now expects its legacy operations to generate $4.8 billion of adjusted EBITDA this year at the midpoint of its updated guidance range. That's up $125 million from the midpoint of its prior guidance range.
An acquisition-driven boost
Oneok will start seeing the full benefit of the Magellan Midstream acquisition in the fourth quarter. The company anticipates the deal will push its consolidated adjusted EBITDA to $5.1 billion this year. That includes the negative effect of transaction costs and other acquisition-related items.
The deal will be more impactful starting next year. Oneok expects crude oil and refined products (Magellan's focus areas) to contribute 28% of its earnings in 2024. Meanwhile, it anticipates the deal will be accretive to its earnings per share starting next year, with the accretion growing to 3% to 7% annually from 2025 through 2027. In addition, it sees the deal boosting its free cash flow per share by an average of more than 20% annually from next year through 2027.
Oneok's CEO, Pierce Norton, noted in the third-quarter earnings release that with the Magellan deal complete, "we've added significant free cash flow through primarily fee-based earnings from the new refined products and crude businesses and expected tax synergies, setting up a solid foundation for 2024 performance." The company believes the tax benefits will be even more significant than the original $1.5 billion boost estimated when it announced the acquisition.
The increased free cash flow will enable Oneok to pay down acquisition-related debt, invest in high-return expansion projects, and return more cash to investors through dividends and share repurchases. The company increased its dividend payment by 2% earlier this year and intends to continue growing the payout in the future. It has delivered more than a quarter-century of dividend stability and growth.
The deal also paves the way for future growth. Oneok recently approved a plan to complete the remaining loop of the West Texas NGL pipeline to connect with its Arbuckle II pipeline. The $520 million project will start service in 2025. It gives the company the optionality to use the legacy system for NGLs, refined products, or crude oil transportation services, with the latter two capabilities being Magellan's areas of expertise.
About to stomp on the gas
Oneok's acquisition of Magellan Midstream Partners will deliver needle-moving earnings and cash flow growth over the next few years, driven by deal synergies and tax savings. That will give the company more cash flow to invest in growing its business and return to investors. It could increase its already attractive dividend at a faster pace in the future. That combination of income and upside could give Oneok the power to produce strong total returns in the coming years, making it a potentially attractive investment opportunity.
