US pipeline giant Oneok is set to buy Magellan Midstream Partners for $18.8 billion, creating one of the largest oil and gas infrastructure companies in North America while increasing the pace of consolidation in the hydrocarbon business.
The deal, announced Sunday, will create a company with a $60 billion venture value and a 25,000-mile pipeline network stretching from North Dakota to Texas.
Oneok CEO Pierce Norton called the deal “transformative”.
“The combination of Oneok and Magellan will create a diversified North American infrastructure company with predominantly fee-based earnings, a strong balance sheet and significant financial flexibility focused on delivering core energy products and services to our customers and continued strong returns for investors,” he said.
The deal comes as the cash-rich US oil and gas sector looks to seal deals after a prolonged drought. It would give gas-focused ONOC a significant foothold in the market for crude oil and refined products, which the company said would ensure “stable cash flows through diversified commodity cycles.”
The shale oil revolution, which has turned the United States into the world’s largest oil and gas producer, is winding down as Wall Street demands that operators focus on shareholder returns via endless drilling campaigns, making mergers and acquisitions one of the few ways to expand their footprint. .
There were a few big ticket deals struck late last year. Diamondback and Marathon Oil spent $3 billion apiece to acquire land in the Permian and Eagle Ford basins. Other deals worth nearly $5 billion struck across the sector in January, including Matador Resources’ purchase of the private equity-backed advanced Permian rig for $1.6 billion.
Bankers and lawyers predicted a “wave” of consolidation between drillers and pipeline operators this year as shale companies try to make money in a sector that could be entering an era of subdued growth.
“For me, it signals the return of fewer of the big companies that control the US oil and gas business,” said Andrew Gillick, managing director at consulting firm Enverus. “The consolidation into 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 now looking to overhaul the difficult permitting process.
“Everyone has built the pipeline infrastructure for the shale revolution,” said Raoul LeBlanc, vice president of North America exploration and production at S&P Global Commodity Insights.
“Now that shale is in harvest mode and building new pipelines is nearly impossible, it’s not surprising that we’re seeing big mergers happen — period. Expect more.”
Magellan shareholders will receive $25 in cash and 0.67 Oneok shares for each unit of stock they own, which is a 22 percent premium to the company’s closing price on Friday.
“We believe the upfront premium increases value creation for Magellan unitholders and reflects the fundamental nature of Magellan’s assets and service offerings,” said Aaron Milford, CEO of Magellan.
The deal, which was unanimously approved by both companies’ boards, is expected to close in the third quarter of the year.