Oneok (OKE +0.33%) has been busy over the past couple of years. The midstream giant has closed several acquisitions that significantly increased its scale, diversification, and growth profile.
That wheeling and dealing has continued this month. The company recently unveiled two more deals to further enhance its scale and strengthen its financial profile. These transactions will also give it more fuel to grow its nearly 3.5%-yielding dividend.
NYSE: OKE
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The transaction binge continues
Oneok began its transformational shopping spree in May of last year, when it agreed to buy MLP Magellan Midstream Partners in an $18.8 billion cash-and-stock deal. The transaction significantly enhanced its scale and diversification, adding crude oil and refined products infrastructure to its midstream operations. The acquisition was also highly accretive, with Oneok expecting free cash flow per share accretion averaging more than 20% through 2027.
The pipeline company followed that up with two more deals this August, agreeing to buy Medallion Midstream and a controlling interest in EnLink Midstream (ENLC +0.00%) from Global Infrastructure Partners for $5.9 billion in cash. The acquisitions further expanded and extended its midstream footprint. Oneok also expected them to be immediately accretive to its free cash flow and support its capital allocation strategy, which includes increasing its dividend by 3% to 4% per year.
NYSE: ENLC
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This month, Oneok has unveiled two more transactions. It agreed to sell three natural gas pipeline systems to DT Midstream (DTM +0.76%) for $1.2 billion in cash. It followed that up by agreeing to buy the rest of EnLink that it doesn't currently own for $4.3 billion in stock.
Getting bigger and better
Oneok's latest transactions will accomplish several goals. First, the gas pipeline sales to DT Midstream will enable the company to cash in on the value of those stable pipeline assets to strengthen its balance sheet following its recent acquisition binge. The assets are a much better strategic fit for DT Midstream, which focuses on operating stable gas pipelines.
NYSE: DTM
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Meanwhile, the deal will provide Oneok with cash to repay debt. The company has targeted to achieve a leverage ratio of 3.5 times by 2026 (its level at the end of the third quarter before factoring in the recently closed Medallion Midstream and EnLink deals). In a sense, Oneok is selling these three gas pipelines to recycle that capital into Medallion and EnLink, which are more core to its business.
The company followed that up by agreeing to acquire the rest of EnLink in an all-stock deal valued at $4.3 billion. Oneok initially bought a 43% interest in EnLink for $3 billion in cash. It also purchased a 100% interest in its managing member for $300 million. The company will now issue 37 million shares -- representing 6% of its outstanding shares -- to buy out the rest of EnLink. It expects to close this transaction in the first quarter of next year.
Buying the rest of EnLink will give Oneok full control over the company's assets. EnLink operates 25 natural gas processing facilities, seven natural gas liquids (NGL) fractionators, and 13,600 miles of pipeline in Texas and Louisiana. Those assets are an ideal fit for Oneok, which also focuses on gas processing and NGL infrastructure. EnLink is also emerging as an early leader in providing pipeline transportation services for carbon capture and sequestration projects.
These latest deals will strengthen Oneok's balance sheet and further enhance its size and scale to better compete against larger midstream rivals. The company is on track to generate more than $8 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) next year, more than double its total from a few years ago. That earnings growth will give it more fuel to increase its high-yielding dividend in the coming years.
Building a leader, one deal at a time
Oneok has significantly enhanced its diversification, scale, and earnings capacity over the past couple of years by making several needle-moving acquisitions. It has become a giant in the midstream sector, putting it in a strong position to continue growing in the future. Because of that, it should have lots of fuel to increase its dividend, making it a compelling option for those seeking income and growth in the coming years.
