Weekly Valuation – Valutico | May 24, 2023
About the company
Oneok Inc., a prominent midstream service provider and owner of a top-tier natural gas liquids (NGL) system, operates within the United States. Connecting NGL supply across the Mid-Continent, Permian, and Rocky Mountain regions to vital market centers, Oneok plays a pivotal role in the country’s energy industry. With a comprehensive range of services encompassing natural gas gathering, processing, storage, and transportation, the company prioritizes operational safety, environmental stewardship, and corporate responsibility. As a result, Oneok has established itself as a trusted partner within the midstream sector.
About the deal
Oneok has confirmed an USD 18.8 billion cash and stock deal to acquire Magellan Midstream Partners, forming a combined entity valued at USD 60 billion. This merger is expected to be earnings accretive from 2024, with projected annual EPS accretion of 3%-7% (2025-2027) and average free cash flow per share growth exceeding 20% (2024-2027). Boasting over 25,000 miles of pipelines and considerable Gulf Coast and Mid-Continent assets, the enlarged company aims to augment customer offerings and international exports. Anticipated annual synergies surpass USD 400 million within 2-4 years
Recent Financial Performance
The company has been on a strong financial trajectory. 2022 saw a robust cash and capital structure with a staggering USD 967 million adjusted EBITDA in Q4, up by 14% from the previous year. Marked improvements in net income saw return ratios reaching new heights, with ROA at 7.06% and ROE over 26.5%. The company’s leverage ratios have also seen a healthy decrease, reflecting an effective financial strategy. Notably, Oneok is poised to leverage significant benefits from an insurance payment in 2023, forecasting a prosperous outlook for the upcoming year.
Share Price Performance
Oneok Inc.’s share price witnessed growth leading up to 2020, bolstered by its solid financial performance and stable business model. However, the COVID-19 pandemic in 2020 negatively impacted global energy demand and consequently Oneok’s earnings and share price. With the economic recovery in 2021 and a resurgence in energy demand, Oneok’s operations and financial performance improved, leading to a rebound in its share price. The company’s stock price has fluctuated between USD 51 and USD 72 over the past year, with its current trading price at USD 58.52 per share.
We analyzed Oneok by using the Discounted Cash Flow method, specifically our DCF WACC simplified approach, as well as a Trading Comparables analysis. The Discounted Cash Flow analysis produced a value of USD 21.8 billion using a WACC of 10%.
The Trading Comparables analysis resulted in a valuation range of USD 15.5 billion to USD 32.3 billion by applying the observed trading multiples EV/Sales, EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as Enterprise Products Partners L.P., Energy Transfer L.P. and Plains All American Pipeline, L.P.
Combining our DCF WACC and Trading Comparables analysis results in a valuation range of USD 17 billion to USD 25 billion. In comparison to Oneok market capitalization of USD 25.9 billion we suggest that the company is slightly overvalued.
This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.