Adding Magellan Is a Solid Transaction for Oneok Despite Investor Concerns

After adding Magellan Midstream Partners MMP to our Oneok OKE model, we are increasing our Oneok fair value estimate to $62 per share from $61. Our Magellan fair value estimate remains unchanged at $66 per unit, as the cash component of the deal dilutes the impact of the modest fair value estimate increase. Our Oneok narrow moat and Magellan wide moat ratings also remain intact.

Given the size of the transaction, we consider the Magellan purchase to be a relatively low-risk transaction, with modest incremental value creation initially, underpinned by highly secure tax benefits. Our model forecasts about $1.9 billion in net present value attached to tax benefits from 2025-27, slightly higher than Oneok’s initial $1.5 billion estimate. The high degree of certainty around capturing these savings means that Oneok only needs to secure another $1.1 billion in value out of the deal via synergies (SG&A savings, capital avoidance, asset optimization, or new investment projects) to recover the $3 billion premium paid. Our model assumes about $100 million in SG&A savings (a bit more than 40% of Magellan’s existing SG&A spending), and we think the remainder of the premium can be recovered via thoughtful capital allocation. We still think there’s considerable upside to the deal over time if Oneok can execute in an outstanding way, as total tax benefits could be up to $3 billion and synergies could exceed $4 billion. If achieved, the incremental $4 billion in upside over the $3 billion premium would add about $6 to $7 per share to our fair value estimate.