Oneok Earnings: Strong Performance, With Magellan Tax Benefits Already to Exceed Firm’s Expectations

Oneok’s OKE third-quarter results were good, and the firm upped its 2023 EBITDA estimate by $125 million, reflecting very strong volume growth in the Permian/Gulf Coast (18%) and Rockies (6%) regions. Higher fee rates and lower fractionation costs also contributed. Well connections in the Rockies are expected to be a midpoint of 550 wells, up from earlier expectations of 500 wells, while midcontinent wells are expected to be at the high end of the 45-55 range. Rockies volumes are about three times as valuable as midcontinent connections for Oneok.

In short, Oneok continues to execute very well, and now must extend that solid execution to integrating Magellan. However, after factoring in the $175 million of transaction costs to close on Magellan, the operational upside is wiped out. Consolidated Magellan and Oneok 2023 EBITDA guidance is $5.1 billion, matching our forecast. Magellan only contributed about $40 million in EBITDA during the quarter as the merger closed in late September. As a result, we do not expect to change our $62 fair value estimate or narrow moat rating.

Oneok already expects its initial estimate of $1.5 billion of tax benefits to be exceeded, which we agree can be done, as our model already anticipated it. Our model forecasts about $1.9 billion in net present value attached to tax benefits from 2025-27. 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 (selling, general, and administrative 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).