万昂能源(ONEOK)

Oneok announced two transactions, selling a $9 billion stake in its operating company and purchasing Brazos Midstream, a gathering and processing operation in the Permian, for $4.45 billion. The remainder of the funds will be used to retire $5 billion in debt.

Why it matters: Oneok's transactions allow it to make the purchase without new debt and also a hefty cash outflow to Apollo. The new capital looks like preferred equity with a 7% hurdle. Any excess is directed toward the principal, up to a limit. Oneok will have no shortage of distributable cash flow in the coming years as the capital plan largely completes in 2028. We don't see the new payments as derailing accelerated shareholder returns but certainly put a ceiling on them over the near term. Should management choose to, we forecast the firm will be in a good position to fully redeem the position in 2034 before the hurdle rate increases. Additional payments made over 15% of operating cash flow will further assist, but we do not currently model more than 15% of cash from operations.

The bottom line: We are maintaining our $98 per share fair value estimate after incorporating the deals and anticipated debt reduction. We see shares as fairly valued, trading in 3-star territory. Our narrow moat rating, Standard Capital Allocation Rating, and Medium Uncertainty Rating remain unchanged.

Big picture: The Brazos acquisition makes sense from a strategic standpoint. Capturing more volumes at the wellhead will boost the firm's competitive position through the value chain ahead of the new fractionation and export dock completion in 2028. The advantage will ultimately be a more competitive position to capture growing rich gas production in the basin. As Permian volumes grow, management may be able to greenlight further investments.

We are maintaining our $98 per-share fair value estimate after incorporating the Apollo raise, Brazos Midstream acquisition, and anticipated debt reduction. The transactions each had puts and takes that ultimately canceled each other out. Brazos benefits the firm's strategic position in the Permian, while the debt reduction brings leverage ratios into line with peers.

Oneok’s business has gone through a transformational diversification over the last two years. We expect this transformation to help economic profits triple over the next five years. We see this largely due to Oneok acquiring and absorbing three midstream firms, with Magellan now the refined products and crude segment and EnLink and Medallion folding into existing segments. Most midstream firms try to buy adjacent assets that give them more touchpoints on the same molecule. By contrast, Oneok has sought to touch every type of molecule produced from North Dakota down to the Gulf Coast and expand its existing businesses. By diversifying away from its historical roots of natural gas gathering and natural gas liquids into crude storage and services, Oneok should enjoy more stable returns, regardless of swings in upstream producer activity concentrated in individual basins. It also adds a wide-moat business unit, fortifying its narrow-moat position.

Management is signaling substantial shareholder distributions after meeting its leverage target of 3.5 times net debt/EBITDA. We anticipate that Oneok will meet its target by 2027. In the long term, Oneok plans to distribute 75%-85% of free cash flow via dividends and buybacks, weighted more heavily toward dividends. This is sensible, given that fee-based revenue supports a consistent dividend-focused return policy.

We assign Oneok a narrow Morningstar Economic Moat Rating due to efficient scale. Midstream firms like Oneok command efficient scale because competitors find it difficult and unattractive to build competing transport routes. Doing so would drive returns down for the incumbent and challenger, further impairing new and expensive investments.

Oneok’s business underwent a transformational diversification in the mid-2020s. Most midstream firms attempt to acquire adjacent assets that give them more touchpoints on the same molecule. By contrast, Oneok has sought to reach every type of molecule produced in North Dakota, down to the Gulf Coast, and expand its existing businesses. By diversifying away from its historical roots in natural gas gathering and NGLs to focus on crude storage and services, Oneok should enjoy more stable returns, regardless of swings in upstream producer activity concentrated in individual basins. It also adds a wide moat business unit, fortifying its narrow moat position.

The NGL Segment Earns a Narrow Moat

NGL’s are the core of Oneok’s business, taking volumes from its own G&P segment or purchasing raw feed from others and processing it into constituent products. Internally sourced volumes offer better returns, as the molecule has been captured from the well to processing, and therefore every possible fee.

Fees are generated in a percent of proceed or flat basis, generally with a floor to protect against commodity price declines. We see these activities as defensible, mostly due to Oneok’s incumbent status and how it has positioned its operations. The facilities that process raw NGLs are fed by pipelines controlled or co-owned by Oneok then delivered to hub markets.

Disrupting Oneok’s moat would force a new entrant to invest significant capital in a basin’s gathering and production operations and processing and fractionation capacity. This usually only happens when demand for midstream services is outstripping supply, creating outsize returns. However, an incumbent player can more cheaply expand capacity to meet incremental demand, as Oneok is doing.

The NGL segment’s lack of access to international markets prevents us from assigning a wide moat. NGLs, like most petrochemicals, consistently command higher prices abroad relative to the continental US. If Oneok could take cheap NGLs and deliver them to international customers, it would result in consistently higher fees on percentage of proceeds arrangements. Furthermore, international access would allow Oneok to extract greater flat fees from producers, since the firm could realize consistently higher prices for the commodities than other marketers.

A new joint venture with MPLX, announced at the start of 2025, begins to fill this gap. The two will jointly develop a pipeline (80% owned) from Oneok's Mont Belvieu storage facility to a new export terminal (50% owned) on the Gulf of Mexico. Even so, the export terminal would have to be expanded substantially in order to create a wide moat for this segment as the throughput will amount to only 10% of raw feed volumes. Expanded and new competition at the dock has also pushed down rates for the sector.

Refined Products and Crude Oil Earn a Wide Moat

The refined products and crude oil segment boasts predominantly interstate assets, including four maritime terminals. Interstate assets are far more difficult to replicate due to development complexities, namely regulatory burdens. Furthermore, crude producers are well served, with slack capacity disincentivizing new entrants in areas such as the Permian even after its strong growth. The segment’s pipelines and terminals connect multiple basins to the Great Lakes and Gulf Coast, enabling direct connection to consumers and refiners. Refined products, such as gasoline and distillates, make up roughly two-thirds of the segment’s volumes, with the remainder coming from crude oil. Connecting gathered crude to refiners to consumers represents a moaty business, with attractive 40%-plus operating margins to match.

Natural Gas Gathering and Processing and Natural Gas Pipelines Have No Moat

Gathering and processing operations require constant reinvestment, with opportunities for disruption. The healthy margins observed in G&P operations reflect current market conditions that offer stable returns, production, and market participants. Out-of-balance market conditions could quickly threaten margins, as happened in 2014, when activity collapsed and operating margins fell below 15%. The business has become far more fixed-fee oriented rather than assuming commodity price risk as the industry had been prior to the collapse of prices.

The natural gas pipelines segment earns no moat because most of its pipelines are intrastate. Intrastate pipelines are less defensible and more easily developed. Additionally, while crude production in most areas is adequately served and possesses spare capacity to take produced crude out of the basin, natural gas remains almost uniquely underserved. Most producers are willing to sell natural gas at low prices since it’s incidental to the production of crude oil. Across most US basins, a pipeline operator transporting natural gas out of a basin can purchase gas at significant discounts to deliver to hubs. Wide margins and a growing demand for natural gas attract investment; with fewer regulatory barriers, we expect greater competition and diminishing differentials between the basin and the hub.

By acquiring Magellan, Medallion, and EnLink, Oneok opened new avenues for productively deploying capital.

The acquisitions will support further dividend growth well into the future even inclusive of dilution.

The natural gas pipelines segment is well positioned to feed international demand through Mexico and the Gulf Coast.

The NGL segment lacks international access and must sell through intermediaries or to domestic consumers.

Much of Oneok’s operations rely on G&P operations that constantly demand capital without meaningfully improving its competitive position.

While Oneok has limited its direct commodity price exposure in recent years, market dynamics may necessitate more exposure, injecting volatility into the business.