US pipeline giant Oneok is set to buy Magellan Midstream Partners for $18.8bn, creating one of the biggest oil and gas infrastructure companies in North America as consolidation in the hydrocarbon business gains pace.
The deal, announced on Sunday, will create a company with an enterprise value of $60bn and a sprawling 25,000-mile network of pipelines stretching from North Dakota to Texas.
Pierce Norton, Oneok chief executive, described the transaction as “transformational”.
“The combination of Oneok and Magellan will create a diversified North American midstream infrastructure company with predominately fee-based earnings, a strong balance sheet and significant financial flexibility focused on delivering essential energy products and services to our customers and continued strong returns to investors,” he said.
The deal comes as a cash-rich US oil and gas sector looks to pick up dealmaking after a lengthy dry spell. It will give gas-focused Oneok a big foothold in the crude and refined products market, which the company said would ensure “stable cash flows through diverse commodity cycles”.
The shale revolution, which turned the US into the world’s biggest producer of both oil and gas, has begun to fade as Wall Street demands operators focus on shareholder returns over endless drilling campaigns, making mergers and acquisitions one of the few ways to expand their footprint.
There were a handful of big-ticket deals struck late last year. Diamondback and Marathon Oil shelled out $3bn apiece to acquire land in the Permian and Eagle Ford basins. Another roughly $5bn worth of deals was done across the sector in January, including Matador Resources’ purchase of private equity-backed Permian driller Advance Energy for $1.6bn.
Bankers and lawyers have forecast a “wave” of consolidation among drillers and pipeline operators this year as shale companies try to eke out gains in a sector that may be entering an era of lower growth.
“To me, it signifies a return to fewer larger companies controlling the US oil and gas business,” said Andrew Gillick, a managing director at consultancy Enverus. “Consolidation in the twilight of shale makes sense.”
New pipeline projects have become increasingly difficult to build in recent years as they are dragged through lengthy legal challenges in the courts. Lawmakers in Washington are currently looking to thrash out an overhaul of the clunky permitting process.
“Everyone built out the pipeline infrastructure for the shale revolution,” said Raoul LeBlanc, vice-president of North American upstream at S&P Global Commodity Insights.
“Now that shale is in harvest mode and it is nearly impossible to build new pipelines, it is not surprising to see big mergers taking place — period. Expect more.”
Magellan shareholders will receive $25 cash and 0.67 Oneok shares for each unit of stock they hold, representing a 22 per cent premium to the company’s closing price on Friday.
“We believe the premium offered maximises value creation for Magellan’s unit holders and reflects the essential nature of Magellan’s assets and service offerings,” said Aaron Milford, Magellan chief executive.
The deal, which has been unanimously approved by the boards of both companies, is expected to close in the third quarter of the year.
