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In Might 2023, it was introduced that Oneok would try to accumulate Magellan Midstream Companions. On the time of the announcement, the acquisition valued Magellan Midstream Companions at $67.50 per share. This represented a major premium to the place shares have been buying and selling close to $55 per share. On the day of the announcement, Oneok took a ten p.c dive on the information however has since recovered.
The vote on whether or not the merger can be accredited by unitholders is about for September 21 at 10 am CST and there was some organized opposition to the merger. It is crucial that unitholders who plan to vote have the data essential to make an knowledgeable choice. Each corporations have laid out the explanation why the merger is smart for unitholders.
With the voting simply days away, it will likely be thrilling and fascinating to look at the end result as there are two adamantly opposed sides of the deal.
Historical past of Magellan Midstream Companions
Earlier than I cowl the small print of the acquisition, I all the time wish to cowl the temporary historical past of the corporate in query. Magellan Midstream Companions initially started buying and selling publicly as Williams Power Companions in February 2001. A few years later, the corporate modified its identify to Magellan Midstream Companions in September 2003.
Previous to February 2001, the corporate was a part of a portfolio of corporations beneath the broader umbrella of the Williams Corporations, headquartered in Tulsa, Oklahoma.
The Williams Corporations might sound acquainted as it’s presently a publicly traded Fortune 500 firm that focuses on electrical energy technology and pure fuel transportation and processing. In 2011, the Williams Corporations additionally spun off their vitality exploration and manufacturing property into WPX Power.
WPX Power not too long ago merged with Devon Power in 2021, as I wrote about right here, and held a powerful portfolio of property.
The historical past of the Williams Corporations goes again to 1908 when the 2 Williams Brothers, started a building enterprise that reworked right into a pipeline building firm that originated in Fort Smith, Arkansas.
The pipeline business was a small however rising business and had beforehand been confined to the northeastern states the place oil was first found. On the flip of the century, oil started to be found in southern states comparable to Texas and Oklahoma.
Throughout World Battle II, The Williams Firm performed an essential function in connecting pipelines to the Jap United States to make sure a steady provide of vitality within the occasion that america was attacked. On this unlikely occasion, it will have the ability to entry vitality from completely different areas of america.
What’s Oneok Getting?
Since being separated from The Williams Corporations, Magellan Midstream Companions has had a stable monitor document and in the present day owns a powerful portfolio of midstream property. In response to their web site, this contains:
- 80 completely different product terminals.
- 100 million barrels of petroleum product storage.
- 2,200 miles of crude oil pipelines.
- 9,700 miles of refined product pipelines.
- 1,100 miles of ammonia pipelines.
Magellan owns many key property, however one asset that may be very strategic in my thoughts is the Lengthy Horn Pipeline that runs from El Paso to Houston. At current, this pipeline transports roughly 275,000 barrels of crude oil per day to the Houston space. In 2019, it was reported that Magellan was exploring a sale of a 35 p.c stake within the pipeline however based mostly on my analysis, it didn’t comply with via with the sale. I do not know the precise geographical location of this pipeline in relation to Permian Oil Manufacturing, however I think this pipeline will obtain loads of demand within the coming years as most E&P corporations are closely targeted on the Permian Basin.
This map beneath highlights the corporate’s property within the jap United States, however one can see their different property within the south and Midwest as nicely.
Advantages of the Merger
As laid out by the Oneok presentation slide beneath, like many acquisitions, they see the advantages of the acquisition as being:
- Variety of their sources of free money circulate.
- Higher returns on invested capital based mostly on their business management.
- A lovely dividend which in the end, is anticipated from.
- Higher development alternatives which they weren’t particular the place they see these coming from.
- Sturdy(er) stability sheet.
New Asset Profile
This slide demonstrates the asset profile of the brand new firm. Enterprise Product Companions and Oneok could have a really comparable product profile with Pure Gasoline Liquids making up the most important portion of the corporate’s merchandise.
Synergies
The corporate believes that over time they’ll save as much as $700 million via batching, mixing, bundling, and storage optimization. The corporate has positioned a forty five% adjusted danger weighting which brings it to what they consider is a conservative quantity of $415 million in synergy financial savings between the businesses.
- Batching means they’ll mix a product into the identical pipeline as a substitute of utilizing two pipelines for a similar product comparable to NGLs.
- Mixing means they’ll combine extra merchandise with a view to create extra higher-value merchandise.
- Bundling means the identical as what it will imply once you purchase insurance coverage merchandise. The corporate will have the ability to provide the next number of merchandise to prospects, thereby growing worth to the shopper.
- Storage Optimization means the corporate can mix storage services and doubtlessly use them extra effectively to maximise income.
The Buy Premium
Magellan would love its shareholders to grasp that they consider Oneok is paying a premium above what a) the market would worth Magellan at and b) above what one other purchaser would pay. The slides beneath present that the acquisition value locations the EV/2023E EBITDA ratio at 12.3 instances which is considerably above what most comparable corporations commerce for available on the market. (see slide beneath).
Moreover, the Magellan management believes that if the transaction does not succeed, there can be a major decline within the share value. And if it trades according to friends, it will decline to roughly $48.66. Though this can be true, that is each a short-term and fear-based methodology to attempt to create their desired consequence. That mentioned, the argument additionally has validity when contemplating the time worth of cash. Is the premium that may very well be obtained in the present day value ready in the long run to obtain a premium that’s larger. With out figuring out when that day would in the future come, it’s not possible to make certain.
Even for those who believed Magellan deserved the next value, it will possible make extra sense to take the premium that Oneok is providing after which take that cash and spend money on an identical midstream firm you consider presents a greater worth… or maintain Oneok for the long-term.
Proxy Agency’s Affirmation
There have been a number of massive proxy corporations on each side of the difficulty. Listed below are a few quotes from two corporations that got here out in favor of the acquisition not too long ago.
This is a quote from the agency Glass Lewis:
To make certain, every unitholder should resolve, based mostly on their particular person circumstances and maybe different broader assumptions, whether or not the proposed merger is suitable and wise to them, notably when it comes to the ensuing acceleration of deferred taxes… After assessment, we consider the Firm has largely introduced a convincing case that the proposed merger ought to usually yield better after-tax worth to unitholders in comparison with the standalone different. Primarily based on these components, and absent a superior obtainable different, we consider the proposed merger warrants unitholder help presently.
The agency ISS was quoted as saying this:
…on condition that tax penalties differ amongst holders, the phrases suggest a right away realization of worth, and the strategic rationale seems cheap, unitholders are beneficial to help the transaction with warning.
These have been simply a few quotes from some corporations in favor of the deal. On this subsequent part, I’ll current the aspect’s place that opposes the deal.
The Opposition’s Argument
There are some massive unitholders of MMP which have voiced robust opposition to the acquisition. The corporate Power Earnings Companions, LLC owns roughly 3 p.c of Magellan Midstream Companions and is one unitholder that strongly opposes the acquisition. They’ve a devoted web site to share their viewpoint discovered here. I’ve copied a number of of a very powerful slides from their presentation beneath however if you wish to hear their full argument, I like to recommend visiting their website.
Adjustments in MMP’s Outlook
Power Earnings Companions believes that Magellan’s administration has achieved a whole 180-degree flip of their outlook for his or her business. The slide beneath demonstrates quotes from their 2022 analyst day in comparison with the 2023 presentation that attempted to promote the concept of acquisition to unitholders.
What Synergies?
EIP supplies on this slide, varied quotes from business analysts that declare that the synergies the 2 corporations tout usually are not actually there. Right here we see a number of analysts saying comparable issues in regards to the supposed synergies the mixed firm hopes to learn from.
Taxes Matter, However Not Major Drawback
EIP has been represented as saying the tax implications of the deal take a piece out of the deal premium. In different phrases, the premium being paid by Oneok will not be ample sufficient to make up for the tax penalties. Nevertheless, EIP states that that is essential, however not the first purpose the deal is unhealthy. They declare that since they’re a “youthful” holder of MMP items, that their tax implications usually are not as unhealthy in comparison with somebody who has been holding the items for for much longer.
Reasonably, the corporate opposes the deal totally on its lack of “strategic advantage.”
Questions Unanswered
Power Earnings Companions believes these are the questions that the Magellan Administration workforce has but to reply.
- EIP claims that the gross sales course of was not carried out in a fulsome method, which means it was not thorough sufficient.
- EIP additionally claims that Magellan’s Board has not engaged with their arguments or considerations.
- EIP wish to see another evaluation exhibiting the advantages of changing to a C-Corp, which is what Oneok presently is structured as.
- EIP claims that Oneok has a monitor document of delivering inferior returns.
- EIP wish to know why Oneok cannot obtain these synergies that it’s searching for with out swallowing up Magellan’s property.
Tax Implications and MMP Response
Magellan is taken into account an MLP or Grasp Restricted Partnership and its unitholders have distinctive tax benefits. Oneok, Inc. alternatively, will not be a Grasp Restricted Partnership. Grasp Restricted Partnerships have tax benefits in that any funding in an MLP is taken into account a contribution of capital. Subsequently, any “dividend” cost is taken into account a return of capital to the unitholder and is subsequently, not taxed till the dividends exceed the quantity of capital contributed, or the unitholder sells and removes their capital from the MLP.
One of many largest pushbacks towards the merger is that it’s going to create a taxable occasion for Magellan unitholders. It’s because Oneok is paying every unitholder $25 money for every unit. This distribution within the type of money will create tax implications.
Nevertheless, Magellan unitholders are additionally receiving .667 shares of Oneok in alternate for every share of Magellan. This transition from Magellan shares into Oneok shares will create a taxable occasion as I perceive it, as your items can be swapped into Oneok shares.
For these which are involved with tax penalties, Magellan Midstream Companions makes the declare that 60 p.c of unitholders promote inside 5 years anyway and so any tax penalties will in the end be realized on a 5-year horizon finally.
It is usually essential to know that Oneok Inc. is structured as a C-Corp and never an MLP, and so the tax advantages from the MLP construction will even now not exist.
Magellan Administration lays out its response to a few of the tax considerations on this slide beneath.
Aaron Milford, the CEO of Magellan not too long ago mentioned this in regards to the potential taxes.
Would you like $45 after the tax-free deal, or would you favor $55 now with the upside of the professional forma as a result of what I believe is misunderstood is that this transaction will not be creating these taxes; these taxes exist in both state of affairs, and anytime a unit holder needs to promote a unit, they are going to pay taxes.
Conclusion
So, if you’re a Magellan unitholder, hopefully, you discovered this compilation of information helpful. The Oneok and Magellan administration is certainly in favor of this acquisition. Most of the arguments from each side are troublesome to quantify precisely and can be distinctive to every unitholder, particularly in the case of tax penalties.
If the acquisition goes via, will it really carry better synergies? For those who consider it is going to, then Oneok shares can be value holding. For those who do not suppose it is going to, then hopefully you may pocket the premium that Oneok paid and go deploy your capital some other place. (ought to the acquisition be accepted).
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