On Sunday, ONEOK (OKE) announced that it would buy Magellan Midstream Partners LP (MMP) for $18.8 billion in cash and stocks. Many noted that ONEOK, a company that is primarily focused on the provision, gathering, and processing of Natural Gas (NG) can now become one of the US’ biggest pipeline companies following this purchase. The purchase also means that ONEOK would add Oil (CL), another important energy commodity to its services. However, perhaps surprisingly, following this megadeal announcement, ONEOK’s stock price tumbled by 9.1% up till now.
So what are ONEOK and Magellan exactly, what do you need to know about this deal, how are these companies faring in light of it, and why might ONEOK be tumbling following such a huge deal? Here’s an overview of the ONEOK-Magellan deal:
What Are ONEOK and Magellan?
Simply put, Magellan is an Oklahoma-based company that owns and operates ammonia and petroleum pipelines in the Mid-Continent oil province and is listed on the New York Stock Exchange (NYSE). Similar to Magellan, ONEOK is also based in Oklahoma, but unlike the former, it does not specialize in Crude Oil but rather in Natural Gas.
All About the Billion Dollars Deal
The $18.8 billion deal includes Magellan’s assumed debt, resulting in the formation of a merged entity with a combined valuation of $60 billion.
In addition, according to ONEOK, the agreement entails providing Magellan shareholders with $25 in addition to 0.667 shares of ONEOK for each Magellan share they possess which translates to a value of $67.50 per share.
ONEOK’s CEO, Pierce Norton II, also stated that the merger will help the Natural Gas-focused company dab into Oil and expand its business into other niches and can also enhance its “ability to participate in the ongoing energy transformation with an increased presence in sustainable fuel and hydrogen corridors.” As for Magellan’s CEO, Aaron Milford, stated that this deal will grant Magellan’s shareholders access to an “upfront crash component” with ONEOK’S dividend.
The acquisition will result in ONEOK becoming the owner of the United States' lengthiest pipeline for refined petroleum products, as well as granting them access to about half of the US refining capacity. This will also place ONEOK among the US’ top 5 biggest pipeline operators, so why is ONEOK’s stock tumbling instead of soaring on this news?
What May Be Pushing ONEOK Downward?
Following the announcement, ONEOK’s stock slid by 9.1% which may come as a surprise to some given the aforementioned remarks made by the company’s CEO and given the fact that this deal can increase the chances of ONEOK expanding its business as it delves into new energy sources.
While there may be many reasons that could have pushed ONEOK downward, some analysts believe that although purchases or mergers can sometimes be accompanied by a risk-averse sentiment, this particular deal can be “especially tricky.”
Some analysts even predicted this negative outcome for ONEOK as they hold the belief that this deal dilutes the value for current shareholders due to increased debt and also forces ONEOK shareholders to embrace a diversification strategy that involves expanding into the Oil sector. This is why some analysts believe that investors may have turned away from ONEOK.
On the flip side, it may be worth noting that other analysts “view the deal as largely positive given the relatively low valuation versus recent deal and the potential earning growth profile of the assets all while maintaining largely solid financial.” Nonetheless, the overall sentiment seems to waver between bullish and bearish, therefore, it remains to be seen whether this deal would render fruitful to ONEOK. (Source:Investopedia)
Interestingly enough, whereas ONEOK’s stock plunged, it seems that Magellan is experiencing a more positive trend. This is because, following Sunday’s news, Magellan’s stock price soared by 13.3%. Nevertheless, the markets are known for their volatility and can often be unpredictable. As such, the fortunes can always turn around, which is why traders, analysts, and investors may want to keep track of any substantial energy-related news.
Traders may also want to stay on top of Oil and Natural Gas price patterns to see if any new changes materialize or if this merger can have any effect on these energy commodities’ movements. Although it is not yet clear if this deal has any effect on Oil and Natural Gas prices, as of the time of the writing and since yesterday black gold rose slightly by 0.11% while Natural Gas fell slightly by 0.08%. In other words, overall, the related energy commodities were relatively unscathed but traders may want to keep a keen eye on any potential changes to come.