Why We Booked A 610% Gain From Our Oldest Holding…
It’s official. Our oldest holding over at High-Yield Investing is no longer in our portfolio.
We’ve owned it since 2005. And now, 18 years later, we left with a 610% gain.
It wasn’t necessarily our choice to remove it from the portfolio. But we’re happy with the result.
As I wrote about here, Oneok (NYSE: OKE) made Magellan Midstream Partners an offer it couldn’t refuse.
And now, OKE’s $18.8 billion merger with Magellan Midstream Partners is complete. The transaction, which was first unveiled back in May, was finalized on September 25th.
Oneok shareholders voted overwhelmingly (96%) in favor of the union. There were a few holdouts in the Magellan camp due to tax concerns (which we already discussed). But in the end, the majority consented, and the proposed deal went through without a hitch.
The Ride Of A Lifetime
As mentioned earlier, Magellan was first added to the portfolio in 2005. And it raised distributions 58 times between then and now, quadrupling the payout.
Our yield-on-cost was around 20%. And our total return crushed the broader market during that time. Very few investors are likely to experience that in their investing careers.
But I’m equally excited about this new chapter.
The combination of these two market leaders will create a $60 billion midstream giant with 25,000 miles of liquids pipelines and an unrivaled collection of gathering, processing, fractionation, and storage systems stretching from the Gulf Coast to the Rocky Mountains. The deal is expected to yield $200+ million in annual cost-savings synergies, resulting in 20% or better free cash flow per share accretion over the next few years.
As per the terms, MMP shareholders received $25 in cash and 0.67 shares of OKE for each share of MMP held. As of the September 25th transaction date, that represented a total consideration of $69.38 per share.
A New Midstream Powerhouse (More Deals To Come?)
Oneok is mostly geared to the gathering and processing of natural gas. The company specializes in transporting ethane and other natural gas liquid (NGL) feedstocks to hungry petrochemical plants on the Gulf Coast.
Like most midstream service providers, the bulk (about 90%) of Oneok’s cash flows are tethered to fixed contracts that have already been signed and sealed. The greater the flow of products pumped through its networks, the more it earns. And throughout volume continues to rise, increasing 14% in the Rocky Mountain region last quarter and 26% on the Gulf Coast.
The combination of these two market leaders has created a $60 billion midstream giant with 25,000 miles of liquids pipelines and an unrivaled collection of gathering, processing, fractionation, and storage systems stretching from the Gulf Coast to the Rocky Mountains. The deal is expected to yield $200+ million in annual cost-savings synergies, resulting in 20% or better free cash flow per share accretion over the next few years.
We probably haven’t seen the last of deals like this one, either.
As I wrote about here, U.S. energy infrastructure is experiencing severe logistical roadblocks. There is no quick and easy solution. It will take hundreds of billions to bring large-scale projects online to address the situation. Not to mention years and years. That’s assuming you can get the green light in the first place, which is increasingly difficult in this political climate.
All of this provides ample incentive for consolidation. Moreover, accretive deals like this tend to spur more consolidation – as if the synergies and scale advantages aren’t enough of an incentive.
If you owned a stake in MMP, you may want to consider reinvesting the cash portion of the offer back into additional OKE shares.
Based on pro-forma cash flows and a previously stated 85% payout ratio, I anticipate an initial dividend yield in the 7% neighborhood. Looking ahead, both organizations have growth projects in the development pipeline to keep distributions moving forward.
As it stands, Oneok just raised its full-year earnings and EBITDA guidance following a strong 26% increase in natural gas liquids throughout volume at its Gulf Coast and Permian Basin facilities. I will watch for the first post-merger quarterly results, which are released on October 31st. But for now, after assimilating MMP’s assets, OKE is a solid option for income investors.
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