Gas Stock Paying 5.7% Yield with Huge Upside

Oneok (OKE) recently closed its acquisition of Magellan Midstream Partners. The deal brought together two large-scale energy infrastructure businesses to create one larger, more diversified midstream company. Oneok expects the combination with Magellan will fuel meaningful earnings and cash-flow growth over the next several years.

There's lots of upside potential to that deal. Oneok's ability to capture that opportunity could give the pipeline company more fuel to grow its 5.7%-yielding payout in the coming years.

The potential to capture higher synergies

Oneok expects its acquisition of Magellan will be immediately accretive to its earnings per share next year. It then sees the deal adding 3%-7% annually to its bottom line in the 2025 to 2027 time frame. The company expects even stronger free cash flow per share accretion of over 20% annually from 2024 to 2027. 

A big driver of that earnings accretion is the expectation that Oneok will capture at least $200 million in deal synergies. However, that's a conservative estimate. It sees near-term potential to more than double that number:


As that slide shows, Oneok sees four areas where the combined company could leverage its larger scale to capture higher earnings in the coming years. For example, its liquids pipelines have the flexibility to move refined products or natural gas liquids. Meanwhile, it could bundle services to provide more value to its customers while enhancing its existing assets.

It could also have more opportunities to export liquids to global markets. These commercial opportunities could enable Oneok to generate more income from its existing asset position. At the high end, the company could capture $415 million in synergies from the deal. That would enable it to grow its earnings faster while giving it more cash flow to pay dividends. 

Enhanced growth opportunities

Oneok also believes its larger scale will allow it to capitalize on more growth opportunities in the future. The company expects to have a strong and improving balance sheet. It anticipates generating about $1 billion in excess free cash flow per year over the next four years after paying dividends and funding growth capital projects. That will give it more money for debt reduction, financing additional capital projects, or returning extra cash to shareholders via a higher dividend or share repurchases. 

Even without additional deleveraging, Oneok's balance sheet will strengthen in the coming years as its earnings grow. It expects its leverage ratio to be around 4x next year. That should fall to 3.5x by 2026 as it completes expansion projects, including those currently under development.

Several new projects are under development, including the Saguaro Connector Pipeline, which would move natural gas to the Mexico border. Oneok hopes to approve that project by the end of this year. The company's falling leverage ratio would give it even more financial flexibility to sanction new expansion projects in the future. 

Oneok believes its expanded platform will provide new growth opportunities, especially in the energy transition. It's currently connecting six renewable natural gas facilities to its existing pipelines and expects more to come. Meanwhile, it believes Magellan's assets will further its reach to help support the movement and storage of sustainable fuels and hydrogen. 

Income with lots of upside potential

Oneok pays an attractive dividend that it should be able to grow over the next few years, fueled by its Magellan acquisition and current slate of expansion projects. Meanwhile, those growth drivers provide it with significant upside potential. It could capture additional deal synergies from the Magellan merger and secure additional expansion projects, including those focused on lower-carbon energy.

That combination of income and earnings growth upside could give Oneok the fuel to produce strong total returns in the coming years. It makes the pipeline company an intriguing option for income-seeking investors to consider.

Originally published on