US pipeline companies are the bass players in oil industry rock bands: steady plodders for the most part rather than starry shredders such as ExxonMobil and Chevron. Now scarcity has thrown a spotlight on their value, intensified by Oneok’s recommended offer for Magellan Midstream Partners at an enterprise value of $18.8bn.
Regulatory barriers and legal challenges to new pipelines make existing ones attractive acquisition targets. By purchasing Magellan for cash and stock, Oneok would become one of the largest oil and natural gas pipeline operators in the US.
The success of the deal hinges on bullish assumptions and tax benefits. Oneok’s offer — made up of about $8.8bn in equity and $5bn in cash — represents a 25 per cent premium over Magellan’s three-month average unit price. “Synergies”, which are not clearly broken down into savings and marketing benefits, could be as much as $400mn a year, Oneok says. That would be worth about $3.2bn taxed and capitalised, covering the premium that Oneok is paying.
There is little obvious overlap from which to cut costs. Oneok transports natural gas and its byproducts. Magellan moves crude oil and its derivatives. Oneok cannot use Magellan’s oil pipelines to tap new markets for its natural gas and vice versa.
This suggests efficiencies would mostly come from office and staff overheads. The two companies had about $800mn in combined general and administrative costs. Even if you cut that down by 25 per cent, it would only yield $200mn of cost savings.
However, Oneok will get a valuable tax benefit from the transaction, which it values at about $3bn.
Like Oneok, Magellan’s business is largely fee-based. Pipeline usage fees are based on volume and tend to be locked in fixed contracts. This insulates operators from volatile hydrocarbon prices, reducing their risks.
Combined net debts would be about four times trailing ebitda, according to S&P Capital IQ data. That is hardly excessive. But an 8 per cent drop in Oneok’s share price on Monday points to justifiable nerves among shareholders.
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Oneok/Magellan: pipe dream requires brave assumptions to become reality
