August 14, 2023 [argus] – The proposed $18bn merger of US midstream giants Oneok and Magellan Midstream Partners would not bring drastic change to the workings of one of the world’s largest oil price discovery terminals, Magellan’s chief executive told Argus this week.
A successful consummation of the planned marriage of crude and refined products-oriented Magellan and natural gas and natural gas liquids (NGL)-focused Oneok would create a Canada-to-US Gulf coast behemoth, with 50,000 miles of pipeline, flying under the Oneok banner. Near the southern end of that system would be the Magellan East Houston (MEH) terminal, a key pricing hub for light sweet crude from the Permian basin.
“Oneok appreciates the business and how we operate,” Magellan chief executive Aaron Milford said, so managing operations in a different way would undercut the value of the assets.
What Magellan is doing with MEH — along with its Permian pipelines that feed into the terminal — are things his company does “really, really well” and there would be very little incentive to change that.
“Quality is really important,” Milford said. Users of Magellen’s system want to make sure they “have a quality of crude oil that is wanted, demanded and needed, not only in the domestic market, but the international market, especially now that WTI is a part of Brent.”
“MEH is important to the crude market. It’s going to remain a central part of our crude business moving forward,” he said.
A “surprise” not welcome by all
The deal between the two “surprised” people when announced in May, Milford said. “People didn’t see it coming.”
In some ways Oneok and Magellan are part of a wave of consolidation in the midstream sector, with Energy Transfer snapping up Lotus Midstream earlier this year and Gibson Energy soon closing on the South Texas Gateway Terminal crude export terminal. But it also runs contrary to other efforts afoot in midstream, like Canadian rival TC Energy splitting off its liquids business.
The deal requires approval from the majority of unitholders at the upcoming 21 September vote, with the results expected to be known that day. A shareholder who does not vote will be considered a vote against the transaction, making it even more important for Milford to rally support among investors.
In June, Magellan’s fourth-largest shareholder, Energy Income Partners (EIP), objected to the deal, saying the premium being offered by Oneok was not enough to offset the tax payments Magellan unitholders would have to make.
But Milford said unitholders are starting to come around to the plan, and that the tax issue is misunderstood.
“They are taxes they already owe,” said Milford. “The simplest way to understand it is our unit holders have a tax liability that exists today” and this deal just accelerates those taxes.
But in a 17 July letter reiterating its opposition, EIP countered that argument, saying the deal undervalues Magellan unitholders’ ability to control when that tax liability is paid.
“A tax deferral has value,” EIP said in the letter.
Two systems, little overlap
Magellan brings 9,800 miles (15,800km) of oil product pipelines, 2,200 miles of crude lines and 39mn bl of storage capacity to the table. Oneok has nearly 40,000 miles of pipelines through its NGL and natural gas networks, both of which are linked to significant storage and processing capacity.
While segregation of crude streams is critical for many international buyers tapping into the US’ Permian basin, benefits of the Oneok-Magellan merger may be more apparent between refined products and NGL operations. The two systems run from near the US-Canada border down to the Gulf and a case could be made for connecting them.
“You can move NGL and refined products pretty easily on the same pipes,” said Milford. “We have the ability to optimize the way we use these assets across a very broad liquids business.”
While the Magellan acquisition includes the crude terminal at Seabrook, Texas, on Galveston Bay, the asset does not seem like a candidate for converting to NGL export service given the benefit it is seeing in growing crude exports.
“The idea of just stopping that business and doing something else with it, that doesn’t seem to make a lot of sense to us right now,” said Milford. It is more likely that services would be added at the terminal, rather than swapped, but the company would need to work with its joint venture partner LBC Tank Terminals.
Milford also pointed to open land near Magellan’s Pasadena, Texas, joint venture terminal that is primarily refined products as an option for NGL export infrastructure, but he cautioned against reading too much into that.
“Even if those assets don’t make sense, the expertise we’re going to bring applies more broadly than just the assets we already own,” said Milford.
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