EnLink Midstream, LLC (OKE) Earnings Call Transcript & Summary

Good day, and welcome to the ONEOK to acquire Medallion and controlling interest in EnLink Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the call to Andrew Ziola, Vice President of Investor Relations. Please go ahead.

Thank you, Andrea, and good morning, everyone. Thank you for joining today's call to discuss yesterday's announcement. Along with our press release, we provided a presentation deck on our website with many helpful maps that describes the highlights of these announced transactions. We will also post a replay of this call as soon as it's available. Our speakers today will be Pierce Norton, ONEOK's President and Chief Executive Officer; and Walt Hulse, ONEOK's Executive Vice President, Chief Financial Officer, Treasurer, Investor Relations and Corporate Development. Also available to answer your questions are Sheridan Swords, Executive Vice President, Commercial Liquids and Natural Gas Gathering and Processing; and Kevin Burdick, Executive Vice President and Chief Enterprise Services Officer. Statements made during this call that might include ONEOK's, EnLink's and Medallion's expectations or predictions, including this transaction 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. Please refer to the legal disclosures on Page 2 of the presentation as well as a discussion in our SEC and regulatory filings of factors that could cause actual results to differ. After our prepared remarks, management will be available to take your questions. [Operator Instructions] With that, I'll turn the call over to Pierce.

Thanks, Andrew. Good morning, everyone, and thank you for joining us. Yesterday, we announced 2 separate significant transactions, both with Global Infrastructure Partners. The first is a definitive agreement under which ONEOK will acquire GIP's entire interest in EnLink Midstream consisting of 43% of EnLink's common units and the 100% interest in the managing member for a total cash consideration of $3.3 billion. Following the close of this transaction, ONEOK intends to pursue the acquisition of the publicly held interest in EnLink, the other 57% of EnLink's common units in a tax-free transaction through an exchange of EnLink units for ONEOK shares. We also announced the second transaction today with GIP under a separate definitive agreement, under which ONEOK will pay $2.6 billion to acquire all equity interest in Medallion Midstream including the expected purchase of the portion in a joint venture it doesn't already own representing approximately 6% of the aggregate $2.6 billion purchase price. Medallion is the largest privately held crude gathering and transportation system in the Permian's Midland Basin. ONEOK has a long-standing reputation of being intentional in building a premier energy infrastructure company, and these announced transactions further solidified that status by adding these complementary assets, allowing us to continue expanding and extending our value chain. We are particularly excited to meaningfully increase our company's presence in the Permian Basin, a region that is expected to continue driving the majority of oil and gas growth in the United States. ONEOK has demonstrated its ability to bring assets together and capture synergies, most recently through our transformative acquisition of Magellan last year. We are confident these accretive transactions will further create value for all of our stakeholders, and allow us to provide enhanced offerings across ONEOK's integrated platforms. As with Magellan, each of these transactions was considered in the context of our broader strategy and plan and long-term goals, including delivering value to our stakeholders by providing essential energy services. We remain focused on identifying opportunities and building sustainable businesses for the future growth, and these transactions check all the boxes, satisfying our intentional acquisition criteria. I'm now going to briefly discuss the key highlights of the transactions and their alignment with our strategic priorities. Following that, I'll pass the call over to Walt, who will talk you through the transaction terms and financial details. There are 5 key points to explain the strategic rationale behind these transactions. First, these businesses will help to establish a fully integrated Permian Basin platform at scale for ONEOK and are highly complementary to our existing Permian NGL and crude infrastructure platforms. Through these acquisitions, we will be adding 1.6 billion cubic feet per day of Permian natural gas processing capacity and 1.6 million barrels per day of Permian crude gathering capacity. ONEOK expects to capitalize on these expanded and integrated platforms in the Permian Basin to drive new service offerings for our producers. Second, these transactions will expand and extend ONEOK's operating footprint in the Mid-Continent and North Texas. Specifically, the EnLink transaction will enhance our existing integrated gas and NGL platforms in Oklahoma and will provide us with natural gas gathering and processing operations in North Texas that produce solid cash flows and are directly connected to Mont Belvieu via ONEOK's NGL pipelines. Third, EnLink will also provide ONEOK with a new position in Louisiana. That includes 220,000 barrels a day of NGL fractionation capacity and approximately 4 billion cubic feet per day of natural gas pipeline capacity, both of which are connected to key demand centers and are positioned to help get our products to markets domestically and around the world. ONEOK expects the natural gas transmission assets to benefit from strong industrial demand growth related to power generation for data centers, LNG export terminals and existing and permitted ammonia and hydrogen facilities. Fourth, these immediately accretive transactions will support our capital allocation strategy and provide significant financial benefits, Walt will provide more details on the financial specifics in a moment. And fifth, we expect to achieve significant synergies through both transactions. We expect to drive meaningful commercial synergies from owning Medallion's crude gathering system in the Permian Basin that connects with our long-haul crude pipelines and ultimately to the East Houston crude distribution system. Additionally, we see key commercial and operational synergies potential from EnLink through the integration of our Mid-Continent gathering and processing systems and optimization of our combined Gulf Coast NGL assets. We have a proven track record of identifying and realizing synergies to unlock value. Following the acquisition of Medallion and the proposed second step, purchase of the publicly held interest in EnLink in a tax-free transaction, ONEOK believes that these and other complementary activities will be completed and will result in annual synergies of approximately $250 million to $450 million within 3 years. As pointed out on Slide 8 of our investor deck, this range represents less than half of the total unrisked identified potential. What is also important to point out is that these transactions bring employees workforces that share a common culture of safe, reliable and sustainable operations and a strong commitment to the communities where we work and live. I want to take a moment to acknowledge the dedication of both employee groups from EnLink and Medallion whose hard work has shaped these companies into what they are today. We look forward to welcoming them to ONEOK. ONEOK will continue to be headquartered in Tulsa and expects to maintain a meaningful employee presence in both Dallas and Houston metropolitan areas. I'm eager and excited to see what we can achieve together moving forward. Finally, I'm confident that we have a path to completion. Both transactions were unanimously approved by ONEOK's Board of Directors. They are subject to customary closing conditions, including Hart-Scott-Rodino Act clearance. We expect to complete both the Medallion acquisition and the purchase of GIP's interest in EnLink Midstream early in the fourth quarter of 2024. I'll now turn the call over to Walt to address the additional financial components of the transaction.

Thank you, Pierce. As we detailed in the press release, ONEOK will be acquiring Medallion Midstream and the controlling interest in EnLink from GIP in a cash transaction valued at $5.9 billion. GIP's common units in EnLink are being purchased for a total value of $3 billion or $14.90 per unit, representing a 12.8% premium to EnLink's closing market price on August 27. $300 million of the total $3.3 billion purchase for EnLink is for GIP's 100% interest in the managing member of EnLink. EnLink will become a consolidated subsidiary of ONEOK for GAAP financial reporting purposes. The $2.6 billion purchase of Medallion represents approximately 6.3x estimated 2025 EBITDA, including our expected run rate synergies. ONEOK has obtained financing commitments for up to $6 billion to fund the aggregate cash consideration and other expenses in connection with the EnLink and Medallion transactions. The transactions are not cross-conditional and are expected to close early in the fourth quarter of 2024, as Pierce said. After the closing of the purchase of GIP's interest in EnLink, ONEOK intends to pursue the acquisition of the publicly held common units of EnLink in a second step tax-free transaction. Both the EnLink and Medallion transactions are expected to be immediately accretive to earnings per share in 2025 with EPS accretion to average more than 5% from 2025 through 2028 and free cash flow per share accretion averaging more than 15% from 2025 to 2028. The fully combined ONEOK including Medallion's and EnLink's complementary asset base and strong fee-based businesses will benefit from enhanced diversification and produce significant free cash flow by increasing ONEOK's annual Permian Basin EBITDA by approximately $700 million with expected future growth. We also expect to realize significant synergy opportunities, reducing leverage and further increasing value for our ONEOK shareholders. The expected accretion will further bolster ONEOK's capital allocation strategy with our stated annual dividend growth rate of 3% to 4% and our intention to execute on our $2 billion stock repurchase plan to be completed by year-end 2027. We also still expect that our allocation of capital to dividends and stock repurchases will trend towards 75% to 85% of free cash flow after capital expenditures. We do see the potential for future enhancement to our existing return of capital policy as debt is further reduced and synergies are realized. For 2025, we expect ONEOK's total combined adjusted EBITDA to be comfortably above $8 billion, practically double ONEOK's EBITDA run rate prior to the Magellan acquisition. We are truly transforming and scaling this company through a diversified portfolio of integrated businesses with resilient cash flow to drive superior returns for investors. Our investment-grade credit ratings will remain strong. ONEOK expects pro forma 2025 year-end net debt-to-EBITDA of approximately 3.9x. We are confident these transactions will improve our company's overall credit attributes and expect leverage to trend towards our previously announced target of 3.5x during 2026 as growth projects are placed into service. Pierce, that concludes my remarks.

Thank you, Walt. Before we move to the Q&A section of the call, I want to quickly summarize how these transactions will strengthen our long-term value proposition for all of our stakeholders. With these transactions, ONEOK will establish a fully integrated, scaled Permian Basin platform that will drive new service offerings for our producers, both EnLink and Medallion share a deep commitment to our values of operating our assets safely, reliably and in an environmentally responsible way. These transactions will further support our capital allocation strategy, positioning ONEOK to return even more capital to shareholders over time by continuing to invest in higher return projects and paying a highly attractive dividend with stock repurchases. And EnLink and Medallion will immediately be accretive to ONEOK's earnings per share and free cash flow. Moving forward, we will continue to focus on industry-leading returns on invested capital while maintaining our strong balance sheet and investment-grade credit ratings. Ultimately, these acquisitions mark another exciting milestone in our company's history. Our employees continue to demonstrate their ability to successfully integrate companies and realize synergies, and I am confident that our team will do it again with the help from our new EnLink and Medallion employees, building on our long and distinguished record of shareholder value creation. We look forward to closing these transactions and delivering on all the meaningful benefits we've outlined today. We're proud of our employees and their contributions to the company, and are excited about the future and look forward to welcoming Medallion's and EnLink's well-respected employees to ONEOK. With that, I'll turn the call back to Andrew Ziola.

Thank you, Pierce. That concludes our prepared remarks. We're now ready for your questions. [Operator Instructions] Operator, please open the lines.

[Operator Instructions] Our first question will come from Theresa Chen of Barclays.

I'd like to dig into the details related to your expected synergies on Slide 8. Maybe just beginning with what is Medallion's current EBITDA and of the $250 million, how much of that is cost savings versus enhanced commercial flexibility and such? And the delta between the $250 million to the $450 million, what exactly needs to happen in terms of commercial execution to get there? And then if any details related to the green bar, which looks like could be upwards of $1 billion, would be great as well.

Theresa, this is Pierce. I want to make a kind of a big picture comment before we answer your specific question. if you'll remember with Magellan, we described our synergies in 3 categories. It was batching, blending and bundling. This acquisition is really more mainstream and we would characterize that as feed and fill. And what I mean by that is the feeding part gives us security of supply. And the fill part means that the capacity of our integrated assets would be full up from the operating leverage that we have currently in our asset base and with the asset base that we're picking up from Magellan and EnLink. So I'll let Walt and Sheridan answer your question a little more specifically.

Theresa, we're not going to get into specifics of the EBITDA of Medallion. But I think you can back in pretty easily to the range given some of the factors that we've put out there. The business has been growing at a fantastic rate and is producing a fantastic EBITDA and is expected to continue to do so. The synergies that we have -- that we're focused on are vastly weighted towards commercial opportunities. And as Pierce just said, the ability to fill the operating leverage in our business. So while there will definitely be some commercial -- some cost synergies related to public company expenses, especially with Step 2, we're really excited about the commercial synergy opportunity.

The next question comes from Michael Blum of Wells Fargo.

I'm wondering if you can tell us what percent of EnLink's Permian NGL volumes currently move on your West Texas LPG pipeline and for volumes that are not on the system, what's the average length of those contracts?

Michael, this is Sheridan. We're not going to get into too much detail on length of contracts or volume. But I would say there is plenty of volume still left on EnLink system that in time can be moved over to our system, some sooner rather than later, but we do see a pretty good uplift from that.

And Michael, this is Pierce. This acquisition really allows us to compete for those additional volumes that are going to be coming up in the future that might be going over to somebody else right now.

The next question comes from Jeremy Tonet of JPMorgan.

Just wanted to touch base on the Permian. Clearly, ONEOK is assembling a more substantial position platform in the Permian here. But the Permian is highly competitive. I'm just wondering as you've established this bigger footprint here, how you think about competing versus other established players in a very competitive base? What differentiates ONEOK?

Jeremy, this is Sheridan. As we have said before, we think we have one of the low-cost providing pipelines out of there. And with the Medford fractionator being a low cost, we think on our integrated value standpoint, we have a low -- very low-cost option to get out of there. You couple that with these 2 assets and being able to secure supply, we think we're going to be able to very much with the combination not only take the volume that's currently on their system, not [ flying ] onto our system but be able to more grow the business to create even more supply coming into our pipeline. This enhances our ability to compete versus what we had before, and we thought we could compete very well with what we had before.

And Jeremy, the only thing I'd add to that is we can go to that customer, that producer and say, we can move your barrels of oil. We can move your gas, we can process your gas, we can move your NGLs, we can fractionate those NGLs. So we provide a full suite of services kind of a one-stop shop, and we think that's going to give us a really strong competitive advantage in the Permian.

The next question comes from Keith Stanley of Wolfe Research.

First, I just wanted to check. Are there any notable implications for future cash taxes for ONEOK from these deals, especially the purchase of the GIP stake in EnLink?

No, it really won't change our tax position in any meaningful way. There is an NOL at EnLink that will be somewhat limited. But our NOL that we have at ONEOK will be further utilized. As you remember, in the past, we said that we would only be able to utilize a portion of it before we went into the AMT. So we've got room to cover off the additional income and then still would expect to go into the AMT in that 2027 time frame.

Great. And second question just on integrating the Permian G&P with your pipeline and frac assets, does having EnLink in that G&P position change how you think about your interest in getting into NGL exports at some point? Does it make it more important? Does it make it less important, just how you're thinking about that?

This is Sheridan. I think as we continue to look at NGL exports, we're going to continue to evaluate all the options that we have out there. Obviously, this gives us even more supply to be able to support someone if that's what we decide to do. But it doesn't necessarily mean that we have to have exports.

The next question comes from Harry Mateer of Barclays.

Wondering if you can talk a little bit about the deleveraging path here, maybe in terms of how much is gross debt reduction versus EBITDA growth, and how that might be factoring into your financing plans? Are you planning to do all $6 million in bonds? Do you expect to use some prepayable, maybe bank debt in the mix. Curious on any thoughts there.

Harry, we have the number of maturities coming up over the next several years as well. So we'll have opportunities for debt reduction as we go forward and look at those various maturities. I think at the early stages of this, we would expect the preponderance of this acquisition debt to be turned out into the long-term market. And then over time, we can use those other maturities to manage the pay down of debt over time.

And then just a follow-up on that. What do you think in terms of financial synergies here? I mean, EnLink has some like preferred hybrids that get quasi-debt treatment from the agencies, something ONEOK historically hasn't had in its capital structure. So do you see opportunities to extract some financial interest expense savings as part of this as well?

Yes. Clearly, we have a lower cost of capital and have access to the capital markets on basis that would be more attractive, especially than those preferred.

The next question comes from Manav Gupta of UBS.

I had a broader question. Slide 4. Pre-Magellan NGL was like 57% of the mix. Now post these deals, it has dropped to 35% and obviously Refined and Crude will be 27%. So trying to understand why this is the right mix, why this is a better mix? And why for your strategic reasons, this mix makes more sense versus what you had pre-Magellan?

This is Pierce. I am going to start out, and I'll let Walt, Sheridan weigh in on this as well. But from where I sit, it's a very balanced mix, and they also support one another. So these molecules that touch one part of our asset base also flows through to the other pieces of our portfolio and our platform. And I think that's very important. And I would -- I don't think I can emphasize enough that this is a highly, highly fee-based business, so we really haven't changed the mix at the core that we're a volume times fee business. So we definitely haven't introduced what we would consider more risk into the company with this portfolio, and we really like the blend that we're going to -- that we have. Walt, do you have anything to add to that?

Well, I would just focus you on Page 4 of the investor deck that we put out. The first step of the -- of our growth here through the Magellan acquisition and the inclusion of the Refined products in Crude reduce the NGL is the largest sector but gave us a demand pull set of cash flows that was incredibly stable and diversified our cash flow mix. With the second transaction and the combination of that NGL and Refined products together, the G&P actually is just slightly below what it was before we even entered down this acquisition path. So we think we've got a great mix, a mix that has regional diversity, that has supply push, demand pull, and a significant different product mix. So we're very pleased with the split up and I think that pie chart on Page 4 kind of lays it out for you.

A very quick follow-up. It looks like you would like to acquire the remaining publicly held units of ENLC and I'm just trying to understand, is there a time frame associated with that, like is it a 2025 event? Is it 2026? Or it will just be opportunistic in nature?

We will -- we have said that once we close this transaction, we will then turn to looking to do a tax-free transaction. We're going to do that on our time frame, but we have the full intention of bringing those units into the ONEOK shareholder base.

The only thing that I'd add to that, if you look at the previous ownership with GIP, they were a financial owner, we are a strategic owner. So we're going to have some opinions as to how we can create the most amount of value because GIP didn't bring assets to the table, ONEOK does bring assets to the table.

The last question will be from Sunil Sibal of Seaport Global.

I wanted to start off on Slide 8. In the base case synergies of $250 million realizing over 3 years. So how should we think about timing on that? It seems like from your comments, a good chunk of this base case synergies are commercial. So I was just curious how should we think about the cadence of realizing of those and then their growth to $450 million and forward?

So Sunil, this is Sheridan. I think if we think about the cadence on this as obviously said within 3 years. We think there's a minimal capital that needs to be spent. So we'll see some things come up right away. There will be something -- some of the synergies, [indiscernible] for some short-term contracts to come up as well. But we'll see a little bit of a push in the beginning and then it will grow through the next 3 years.

Okay. And then I'm curious, is there any opportunities for portfolio optimization also, i.e., some assets which you could divest in terms of accelerating the deleveraging. Is that something that is kind of under consideration, too?

Right now, I don't think we're looking at any optimization or divestiture of any of the assets we have across our system. We really like the assets we have today and how they fit together. So don't see anything that we'll be divesting anytime soon.

The last question will come from Tristan Richardson of Scotiabank.

Maybe just a follow-up on an earlier question on the synergies. The concept of feed and fill, I think, is really interesting both on the crude side and the NGL side. But it also seems like you have downstream opportunities, integrating Houston and Louisiana business. I mean maybe if we look geographically, where do you see sort of the most potential or the most low-hanging fruit as you look at sort of that light blue bar and moving up to the green bar.

Tristan, this is Pierce. I'm glad you pointed back to the feed and fill. We actually see opportunities across everything. If you'll -- the reason that we drew those pink dotted lines around the EnLink and Medallion assets is those assets were basically on an island. And if you look at the way our assets overlay those, we connect all those islands. So we kind of build the bridge to the value that you need to create for the molecules that are coming out of all those basins. The last thing I'd leave you with is for those of us who've been around the industry for decades, we used to have a saying that good maps make good deals. And what we mean by that is when you take a map that looks that good, just that concentrated, you're taking assets that are in close proximity to one another, and it allows you to operate those more efficiently, and achieve the connectivity that you need to get all the value across all value streams with the lowest amount of capital.

This concludes our question-and-answer session. I would like to turn the call back over to Andrew Ziola for any closing remarks.

All right. Thank you all. Thank you all for joining us this morning. IR will be available for any follow-ups throughout the day. Have a good day.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.