Apollo Global Management, Inc. (APO) Earnings Call Transcript & Summary

Good morning, and welcome to ONEOK's Call on the recently announced Brazos Midland acquisition and minority equity investment. As a reminder, this call is being recorded. Today's call will be 3 minutes in duration. If you would like to participate in the question-and-answer session following the speakers' opening remarks, simply press star 1 on your telephone keypad. At this time, I would like to turn the conference over to Megan Patterson, Vice President, Relations. Megan, please go ahead. .

Yes. Thank you, Taren. Good morning, everyone, and thank you for joining today's 30-minute call. Along with last night's announcement, we provided a presentation deck with additional information that is available on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer.

Thank you, Megan, and good morning, everyone. And thank you for joining us. On our call is Walt Hulse, the Chief Financial Officer; Randy Lynch, Chief Operating Officer; and Sheridan Swords, Chief Commercial Officer is so available to take questions. Yesterday, we announced 2 transactions that significantly strengthened ONEOK. These announcements included a definitive agreement to acquire Brazos Midstream's Permian Midland Basin natural gas gathering and processing assets are $4.425 billion, and a $9 billion minority equity investment from Apollo that will fund the acquisition and be used to extinguish approximately $5 billion of debt lowering our debt-to-EBITDA to 3.25. Our strategic rationale is straightforward. Aquari premium, on preliminary Permian Midland Basin growth platform. Growth at feeds and fills, ONEOK's continuously integrated system, accelerate earnings and free cash flow per share and strengthen the balance sheet without issuing common equity. These transactions began creating value day 1. The acquisition is expected to be immediately accretive to earnings and free cash flow per share. It also increases momentum for the high end of our mid- to high single-digit adjusted EBITDA growth target over the next 5 to 7 years. The approximately 7.5x 2007 EBITDA acquisition multiple includes approximately $80 million of full year synergies and of 2028 expected significant Brazos growth and additional integration benefits have reduced the multiple to approximately 6x. This is a decisive step in the strategy that we have executed for years, building scale in the most attractive producing regions and connecting that supply to ONEOK's integrated system to drive long-term shareholder value. The Brazos assets provide an additional high-quality position in the core of the Permian Midland Basin, supported by approximately 600,000 dedicated acreage, leading producers active drilling rigs and long-term fixed fee contracts with weighted average remaining term of more than 12 years. This is contracted growth that creates exceptional visibility. Following completion of the Cassidy 2 plant expected in the third quarter of 2027. Brazos will have approximately 1.2 billion cubic feet per day of processing capacity and 700 miles of gathering infrastructure. These high-growth assets give ONEOK immediate scale, elevating our gathering and processing capacity position to the third largest in the Midland Basin. And provide a long runway of identified expansion opportunities in one of North America's most economic and attractive resource plays. The combination of quality, visibility and growth is difficult to replicate. It's also important to recognize that Brazos builds on a position of strength. ONEOK already operates nearly 1.8 billion cubic feet per day of natural gas processing capacity in the Permian Basin with more than 1 billion cubic feet per day of processing capacity and approximately 1,200 miles of gathering infrastructure across the Midland Basin, specifically. Earlier this year, we relocated the 150 million cubic feet a day Shatowfax plant into the Midland, further demonstrating our confidence in the basin's long-term growth outlook. ONEOK is uniquely positioned to maximize the value of these assets through our fully integrated value chain. We operate an extensive energy infrastructure system that spans from the Canadian border to the Gulf Coast, connecting gathering, processing, transportation, fractionation, storage and export capabilities across multiple commodities. Brazos volumes connect directly into that system. Natural gas and NGL production gathered and processed in the Midland can move through our West Texas NGL pipeline into our fractionation assets and ultimately to our Coast export facility as it comes online. We're not acquiring a stand-alone earnings stream. We are securing high-growth supply that can drive utilization and value creation across infrastructure throughout our system for years to come. Together, ONEOK and Brazos create 1 of the Midland Basin's largest integrated natural gas gathering and processing systems, with the transaction more than doubling our Midland Basin processing capacity to approximately 2.3 billion cubic feet per day, including plants under construction. The [indiscernible] footprint gives us greater commercial reach, operating flexibility and future development opportunities. We can optimize capacity across systems, connect more volumes to downstream infrastructure already in place and deploy capital more efficiently across a larger platform and to support the next phase of producer growth we have secured 2 additional processing plants that we can locate as needed once a final investment decision has been reached. This is another example of our disciplined and intentional approach to M&A and we are equally deliberate in how we finance the transactions. We had 2 clear objectives: fund the acquisition without issuing common equity and diluting shareholders. continue accelerating our deleveraging trajectory and maintain our financial flexibility. Minority equity investment from Apollo accomplishes both. It funds the acquisition supports our balance sheet objectives and preserves future value creation above Apollo's cap return on ONEOK's common equity shareholders. Just as importantly, it also allows us to acquire a premier Midland Basin Permian platform. While improving leverage to approximately 3.25x, well below our previously stated long-term target. That stronger balance sheet positions ONEOK to fund our organic growth project backlog and accelerates flexibility for increasing capital returns over time, including potential dividend increases and share buybacks. I'll now turn the call over to Walt to discuss the financial aspects of the transaction in more detail. Walt?

Thank you, Pierce. Let's start with an overview of the financing transaction. Funds and affiliates managed by Apollo will invest $9 billion in exchange for a nonvoting Class B interest in a newly formed holding company that will sit below One Oak and owns the operating company that holds all of ONEOK's assets. On Oki retained the Class A interest and all of the existing indebtedness will remain with the assets at the operating company. Many companies in the midstream space and other industries broadly have used variations of this insurance capital structure. However, to date, those capital raises have been done at the asset level. Our financing is the first to utilize this type of financing vehicle to raise nondilutive equity capital at the corporate level. The major difference between our transaction and the ones done previously by other companies is that the previous deals were done with a first call on the cash flow of an asset and as such, are structurally senior to all existing company debt. Our transaction is the exact opposite. We have created another funding entity above the operating entity. So all of our senior notes and other debt remains at the entity with the operating assets. The equity financing we did is structurally subordinate to all of our other existing debt. By paying down debt at the operating entity and funding that debt repayment by raising equity capital on level up at a holding entity, we have materially improved the credit profile of our operating entity, where all existing senior notes and other indebtedness remains. The Class B interest is expected to receive quarterly distributions equal to 15% of cash flow from operations, and this return is capped at a 7% internal rate of return for the first 9 years of the investment. The cap is critical. The investors in the Class B units do not participate in Brazos growth on out existing growth portfolio or future value creation. All value creation above the cap return belongs to ONEOK's existing common equity shareholders. The structure we utilized is also self-amortizing. Cash distributions above the amount required to earn the cap return reduced the Class B capital account balance. As that balance declines, more of ONEOK's economic value accrues to common shareholders. Economically, this functions much like a built-in share repurchase program. Every dollar distributed above the cap return permanently retires a portion of the outside capital account at a price we already know and that value accrues to every common shareholder. The difference is that it requires no market timing, no incremental cash beyond what the business is already generating and it happens automatically throughout the life of the investment. We can accelerate the Class B capital reduction by electing to increase the Class B distribution for any quarter from 15% to as much as 20% of cash flow from operations. Beginning on the eighth anniversary of closing or sooner if the Class B capital account reaches a balance of $200 million, ONEOK has the unilateral option to acquire the remaining Class B interest. We expect the Class B capital balance to have declined substantially by the eighth anniversary of closing. The Class B interest is nonvoting has no board representation as no liquidation preference and is structurally subordinated to all ONEOK senior debt. Importantly, we've reviewed the structure in advance with all 3 credit rating agencies each of which views the transaction as credit enhancing. Early this morning, Fitch placed ONEOK's ratings on credit weight watch positive and stated that Fitch will resolve the rating watch positive with a 1 notch upgrade to BBB+ upon closing of the minority investment and debt paydown. We expect these both to be complete by September 20. Fitch also stated that they treat the minority investment as equity under GAAP, the capital we raised is recorded as permanent equity as a noncontrolling interest. [indiscernible] Pierce mentioned earlier, we evaluated the full range of financing alternatives. Incremental debt would not have advanced our deleveraging and issuing common would have created permanent dilution and transferred a portion of our future growth to new shareholders. The minority equity investment is the only structure that funds the acquisition accelerates deleveraging and avoids common equity issuance and preserves the upside we are creating for existing ONEOK shareholders. In addition, to fund the acquisition, the proceeds from the minority equity investment will be used to extinguish $5 billion of debt through repayments, a tender offer and make-whole calls. Concurrent with the announcement of these transactions, we also announced in a separate release a tender offer for certain tranches of our senior notes because a number of the notes included in the tender, currently trade well below par, the face amount of debt we retire will potentially exceed the cash we deploy by approximately $300 million. We expect to record a modest gain on extinguishment. That gain is a onetime item, and it is excluded from the accretion figures we have discussed this morning. These actions immediately reduce our leverage below our previously stated 3.5x debt-to-EBITDA target. We expect our pro forma 2027 debt-to-EBITDA ratio to be approximately 3.25x. Going forward, we intend to maintain leverage around 3.25x debt-to-EBITDA or even lower over time. This lower leverage philosophy will give us the financial flexibility through business and commodity cycles and as organic and inorganic opportunities present themselves without stressing our balance sheet are reducing our flexibility to return capital to shareholders as appropriate. In one step, we are funding a highly accretive acquisition exceeding our deleveraging objective, avoiding common equity issuance and retaining the upside from the growth we are creating. No other financing alternative could achieve this full set of outcomes. From an accounting perspective, the investment will be reported on the balance sheet in permanent equity as a noncontrolling interest. On the income statement, approximately 7% of the investment remaining capital balance will be subtracted from net income to arrive at net income attributable to ONEOK as quarterly distributions reduce the capital balance, the average balance across 2027 is expected to be meaningfully below $9 billion, and the charges stepped down every year after -- as the balance amortizes -- that declining charge is a source of earnings per share growth that is independent of EBITDA growth due to the built-in return of capital. Free cash flow per share will reflect cash available to ONEOK common shareholders after the Class B interest and after common dividends have been paid. We know that this is a more conservative definition of free cash flow per share measure commonly used across our sector, and it's the basis for the accretion we've referenced earlier. At this time, we're maintaining our recently increased full 2026 financial guidance and will provide an additional update along with the third quarter earnings in October. Looking ahead, the minority equity investment is expected to close in the first half of September and the Brazos Midland acquisition is expected to close in the fourth quarter of 2026, subject to customary regulatory approvals and closing conditions. Pierce, I'll turn it back to you.

Thank you, Walt. The Brazos transaction strengthens our Permian position, expands our integrated system, accelerates earnings and free cash flow per share growth and enhances our long-term growth outlook. We look forward to welcoming the Brazos employees that will be joining us upon close. The minority equity investment by Apollo also allows us to achieve those objectives while accelerating deleveraging, avoiding common equity dilution and preserving the future upside for our shareholders. I want to thank the teams that worked on this acquisition for making it possible. . And as always, I want to thank our more than 6,000 employees for what they do every day to move energy critical to our economy, national security and the quality of our life. With that, operator, we're ready to take questions.

[Operator Instructions] We'll take our first question from Gabe Dowd with Truist.

Congrats on executing this transaction. I was curious if we can maybe start with Brazos and maybe give a little bit more color around current volumes on the system, what's kind of underpinning the significant EBITDA growth in 27 and 28 from current levels? And it does appear EBITDA expectations off of the capacity is a bit rich. So just kind of curious what's driving the assumptions around the Brazos ramp?

Yes. Gabe, this is Sheridan. What I would say from on the NGL side. we're receiving about 30,000 barrels a day from Brazos, and we expect that volume to reach an additional 120,000 barrels a day or up to 150,000 barrels a day by 20th on the system support that. And today, we are getting all the NGLs from that system.

But I think the supporting that growth is you've got fantastic producers with about 14 rigs currently running on the acreage. -- just recently having added a major producer with a PDP that came on. As the plants come up here, they will fill very quickly. In fact, there are already offloads going on because the plants are their production is ahead of the construction. So we see this filling very quickly and a growth profile that could grow about 20% a year from 2027 through for the next 4 years or so.

Okay. Okay. Great. That's helpful. And then I guess just a quick follow-up around the structure, a pretty interesting piece of paper. But curious if you can maybe again compare and contrast some of the options that you have here? And maybe with the increase in balance sheet capacity, how that gives you some flexibility for return of capital or maybe even more M&A down the line. And again, just kind of curious with the 7% piece of paper, taking a 5% cost of debt, maybe why you view that as making sense at this point. .

Well, we think that operating with leverage at 3.25% or lower gives us an enormous amount of flexibility to take advantage of organic and inorganic growth opportunities without stressing the balance sheet. And at the same time, as many of you have modeled as we move forward here, we're producing an enormous amount of free cash flow that will allow us to return capital to our shareholders while we're pursuing these growth opportunities and getting ourselves to the 3 quarter quicker allows us the flexibility to do all of that sooner. So we just think that -- at this point in mind moving forward, having financial flexibility and keeping leverage lower is the right strategy.

[Operator Instructions] We'll take our next question from Theresa Chen with Barclays.

I wanted to go back to your earlier comment about the momentum to get to the high end of your mid- to high single-digit EBITDA growth target over the next 5 to 7 years. With the pro forma platform, how is 1 better equipped to win market share and/or grow in the Permian -- can you provide more details on the runway of the identified expansion opportunities you alluded to? Are they organic, inorganic? Any thoughts there?

I think it's 3 things, Teresa. Number 1 is scale. This acquisition significantly increases our scale to a very competitive position in the Midland Basin. That's number one. Number two, -- there's over 600,000 acres that's dedicated under this particular contract for long-term contracts, 12 years. And number three, it has an AMI associated with it. that as the producers that are there expand into other areas, then those expansions then basically offered to us. So it's the combination of those 3 things and the fact that when they overlay our existing assets, we're able to spend less capital, move more volume and I really liked the way Brazos has built in additional capacity with a lot of these pipelines out there that's going to really, really contribute to us moving way more volume out there that we could have in the past. . I'd end by saying that these 2 companies can move more volume with less capital than they could apart.

Our next question comes from Praneeth Satish with Wells Fargo.

Just on the acquisition economics, so 7.5x. I guess if you kind of work backwards and try to get to the implied gathering and processing fee on our math, it's around $2 per MMBtu, which seems a little bit high, I guess, compared to others. Maybe if you could just unpack, I guess, what's behind that fee? Is that math correct? And how does that fee expected to evolve as you ramp up volumes here?

Yes. This is Sheridan. One thing we don't want to break down the fee or tell you what the fee is. But what I would say is that we have -- it's at market rates. We have long-term contracts. We said 12 years Safe is locked in for a period of time under our acreage dedication as we continue to grow. But we think we're in a competitive area with the services that Peer talked about, how we have bigger pipe in the area, capacity for some constrained systems out there, we think we can grow our volumes even beyond what we're showing inside in this acquisition.