Magellan Unitholders Should Be Happy With Premium, While Oneok Adds Wide-Moat Assets

Oneok has agreed to acquire Magellan Midstream Partners MMP in a cash and stock deal that values Magellan at $67.50 per unit. Based on our current Oneok fair value estimate of $61, we are increasing our Magellan fair value to $66 per unit. We will maintain our narrow moat and wide moat ratings for Oneok and Magellan while we continue to analyze the implications of the deal and incorporate Magellan into our Oneok model.

Broadly, we think the deal is an excellent one for both parties. It offers a compelling valuation for Magellan unitholders with a valuation well ahead of our stand-alone fair value estimate of $55 per unit. Further, with Oneok assets added to the equation, it provides ample opportunities to direct Magellan cash flows toward attractive investment opportunities, as Oneok has typically found no shortage of investment opportunities across its asset network with $10 billion in growth capital expected to be invested between 2018 and 2023. The deal removes a growing concern for Magellan unitholders, as growth capital spending levels of $120 million in 2023 are a fraction of pre-COVID-19 levels, raising more questions about future growth. The transaction also makes Magellan’s buybacks of $1.34 billion since 2020 at an average price of under $50 a unit a really good deal. Finally, Magellan unitholders will now own part of a corporation that is a member of the S&P 500, removing the risks of changes to the U.S. tax code either eliminating or reducing the tax advantages of a master limited partnerships over the long run.

For Oneok, the deal adds a wide-moat partnership with an exemplary management team that is throwing off very substantial cash flows. The quality of management is such that we hope that Oneok will seek to retain many of the key executives and senior managers, and we think the odds are decent especially as Magellan CEO Aaron Milford only took over the partnership in early 2022.