US pipeline companies are the bass players in the oil industry’s rock bands: for the most part, they are steadily trudging along rather than stellar shredders like ExxonMobil and Chevron. Now scarcity has turned the spotlight on their value, intensified by Oneok’s recommended offer for Magellan Midstream Partners at an enterprise value of $18.8 billion.
Regulatory barriers and legal challenges for new pipelines make existing ones attractive acquisition targets. By purchasing Magellan with cash and stock, Oneok would become one of the largest oil and gas pipeline operators in the United States.
The success of the deal depends on bullish assumptions and tax advantages. Oneok’s offer, consisting of approximately $8.8 billion in stock and $5 billion in cash, represents a 25% premium over Magellan’s three-month average unit price. The “synergies,” which aren’t clearly broken down into savings and marketing benefits, could be as high as $400 million a year, Oneok says. That would be worth about $3.2 billion taxed and capitalized, covering the premium Oneok is paying.
There is little obvious overlap from which to cut costs. Oneok carries natural gas and its by-products. Magellan moves crude oil and its derivatives. Oneok cannot use Magellan’s pipelines to tap new markets for its natural gas and vice versa.
This suggests that efficiencies would primarily come from office and personnel overheads. The two companies had approximately $800 million in combined general and administrative costs. Even if you cut that down by 25%, you’d only produce $200 million in cost savings.
However, Oneok will get a valuable tax benefit from the transaction, which it values at around $3 billion.
Like Oneok, Magellan’s business is largely paid. Pipeline usage rates are based on volume and tend to be locked into fixed contracts. This insulates traders from volatile hydrocarbon prices, reducing their risks.
Combined net debt would be about four times less than EBITDA, according to data from S&P Capital IQ. This is by no means excessive. But an 8% drop in Oneok’s share price on Monday points to justified nervousness among shareholders.
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