ONEOK Secures Traffic for Growing Midstream Network with $5.9B Deal

ONEOK’s (OKE) latest billion-dollar move to strengthen itself as a Permian Basin midstream player fills in some market sector gaps, according to analysts. And executives pulled it off without damaging the company’s credit quality rating.

ONEOK announced an overall $5.9 billion deal for a controlling interest in midstream companies EnLink Midstream (ENLC) and Medallion Midstream on Aug. 28, giving the company a fully integrated Permian Basin platform that will secure traffic on its pipelines out of the country’s most productive play.

“The acquisition is an entry for OKE into the Permian, which investors have been asking about for some time now,” said Ajay Bakshani, director of midstream equity at East Daley Analytics (EDA).

On Aug. 27, the day before the deal was announced, EDA published an analysis that recommended ONEOK purchase EnLink to guarantee traffic on its NGL network. ONEOK currently owns NGL egress capacity out of the basin but does not own gas processing plants in the area.

ONEOK is already expanding its NGL egress capacity out of the basin from 190,000 bbl/d to 380,000 bbl/d, in a project that could be completed by the end of the year, according to East Daley. EnLink’s Permian plants produced about 220,000 bbl/d of NGLs in May.

“Although OKE owns an NGL pipeline out of the basin (West TX NGL Pipeline), it never had a bigger presence and actively invested significant capital in America’s premier basin,” Bakshani said.

The strategy is not new. Most midstream merger activity over the last year resulted in large companies seeking to bolt-on gathering and processing (G&P) facilities in a shrinking and competitive Permian market.

ONEOK’s move stands out, however, as it involves all of EnLink’s assets in the south-central U.S. as well as Medallion, a crude-specific midstream company.

The Medallion acquisition shores up ONEOK’s position as a crude carrier in the Permian. Medallion is the largest privately owned crude midstream company in the region, with a footprint of more than 1,300 miles of pipeline and storage facilities, primarily in the Midland Basin.

In a conference call the day after the deal was announced, ONEOK President and CEO Pierce Norton described the Medallion deal as “feed and fill.”

“The feeding part gives us security of supply, and the fill part means that the capacity of our integrated assets would be full,” Norton said.

The company’s acquisition of EnLink’s entire system, which includes assets in north and southeast Texas, Louisiana and Oklahoma, fits into ONEOK’s network for the same reasons. The EnLink NGL network is already well connected to ONEOK.

“[EnLink’s] Anadarko G&P system primarily feeds OKE NGL pipelines already, but it is a more active system than OKE’s legacy Anadarko system,” Bakshani said. “ENLC also has a Y-grade pipe (Cajun Sibon) that connects Mont Belvieu [in Texas] to its Louisiana fractionation hub. OKE could leverage those assets and provide additional downstream connectivity, playing into.”

The Easton Energy acquisition, one of several deals over the last year, has made ONEOK into one of the fastest-growing midstream companies in the U.S.

In May 2023, ONEOK made an $18.8 billion deal to acquire Magellan Midstream Partners LP, one of the largest companies in the U.S. sector. Twelve months later, the company bought Easton’s NGL pipeline network in Southeast Texas for $280 million. In July, the company announced it was expanding a refined products pipeline to the greater Denver area in a $480 million project.

Financially, ONEOK’s credit rating from capital market company Fitch was left undamaged from the Aug. 28 deal announcement.

“Scale matters in the midstream sector, and OKE will be adding roughly $1 billion in annual EBITDA (based on OKE owning 43% of EnLink) to its existing roughly $6 billion in base EBITDA, based on Fitch’s calculation and existing assumptions,” the company wrote in an analysis of the deal. “Should OKE acquire 100% of EnLink, the EBITDA contribution could be closer to $1.75 billion.”

During the press conference, ONEOK executives said the company is planning to pursue the remainder of EnLink’s common units through a tax-free exchange for OKE’s shares.

The transaction will increase ONEOK’s leverage as the company takes on incremental debt and assumes EnLink’s unsecured debt. Fitch expects ONEOK’s leverage to increase to close to 4.0x, below Fitch’s negative leverage sensitivity of 4.7x.

“Fitch considers the diversification benefits, as well as increased scale and potential synergistic opportunities, to be offset by higher expected leverage,” the analysis said. “All of this leads to Fitch’s estimation that this transaction is neutral for OKE’s credit profile.”