Oneok Earnings: Higher Volumes and Fees Boost Outlook; Details Magellan Synergies

Oneok’s OKE second-quarter earnings were strong, as the firm boosted its guidance by $100 million at the midpoint to $4.675 billion. The main drivers of the change were higher volumes and fees in the natural gas liquids segment, lower-than-expected third-party fractionation costs, and better storage and transportation fees from its natural gas pipelines business. 2023 EBITDA guidance includes a one-time $539 million positive impact due to an insurance settlement due to the Medford incident and does not include anything from Magellan.

Total capital spending guidance was updated to $1.575 billion from a midpoint of $1.375 billion last quarter, to reflect early purchases of components for larger projects for the expansion of the Elk Creek pipeline to 400,000 barrels per day and to fully loop the West Texas natural gas liquids pipeline, doubling Oneok’s natural gas liquids capacity in the Permian basin. We think these are good investments, especially if the firm sees opportunities to lock in materials pricing that can be highly volatile. After updating our model to reflect the modestly higher assumptions than our forecast (roughly $100 million higher EBITDA and a $125 million boost capital spending plans), including adjusting for Magellan’s latest results (we assume the deal closes in September 2023), our $62 fair value estimate and narrow moat rating are unchanged.

Oneok also provided more details on its proposed synergies around the Magellan merger. The firm’s base estimate at the time of the merger announcement (mid-May) was $200 million annually, capitalized at 11 times, and worth $2.2 billion, with upside to over $4 billion in synergies value. Our model assumes around $1.1 billion or so in realized synergies, and if all synergies are achieved ($4 billion-plus), our Oneok fair value estimate would increase about $6 to $7 per share to close to $68-$69 per share.