My name is Theresa Chen. I'm the Midstream and Refining Analyst here at Barclays. It is my pleasure to introduce our next company, ONEOK. From ONEOK, we have Pierce Norton, CEO, Sheridan Swords, EVP of Commercial, and Walt Hulse, CFO. Welcome, everyone.
Thank you, Theresa.
Thank you. Glad to be here.
We're happy to have you, especially after, you know, so many announcements, as of recent. But, maybe starting with your, most recent announcement, nearly a week after the, news of the EnLink and Medallion Midstream interest from, GIP, the acquisition. Can you tell us about the, growth and margin generation opportunities that these assets bring, to ONEOK, that maybe you otherwise would not have had?
So Theresa, you mentioned the fact that we've done a few acquisitions here, basically in the last year. I'd start out by saying they're a little bit different. So our Magellan acquisition was really defined. We defined synergies a little bit differently than we do with the last acquisition we did with EnLink and Medallion. And so in the Magellan deal, we defined synergies as those particular projects that neither company could have done by themselves. Something that it needed to be brought together to actually exercise, you know, those synergies. This one, because it's in businesses that we're currently in, which is gathering and processing and the crude oil piece of this, we're able to define synergies in a different way.
And that different way is, is what can these two companies do more of together than they could not have done otherwise apart? And so that's the reason that we talked about feeding and filling our assets when we got on the last analyst call. And so that's really what this this is about. It's about taking two sets of assets and being able to do more with them. The ONEOK assets probably brings more to the table with the EnLink assets and the Medallion assets because of the long-haul capability we have and the connectivity we have downstream. And so that's what really defines the synergies. I'll let Sheridan and Walt kind of talk a little more specific about the synergies themselves.
Yeah, Pierce, I would say, as you think about bringing value to EnLink, how ONEOK does that, we're gonna make EnLink and Medallion more competitive, so they can go out there and compete for volume and bring in more to the supply, supplying our long-haul pipes. And I would say, as you think about it with EnLink and the NGLs, we had said on the West Texas Pipeline, that we don't need gathering and processing to be able to acquire liquids or supply our pipelines. But with the EnLink and Medallion, they allow us to do that at a much higher margin, a much better margin to bring those in as we further integrate.
So we think about it as we are gonna make them more competitive so they can go out and compete, or we can go out and compete for more liquids on the G&P side, and definitely more crude oil with Medallion going into our long-haul pipes into the Houston area, where we have more touch points with the premier crude distribution system on the Houston Ship Channel.
And if you look online at our investor deck that we used with the conference call last week, you'll see the very first slide is a map of of our businesses from the Mid-Continent down to the Gulf Coast. And we put four pink boxes around the EnLink businesses, and Medallion fits right into that Permian business that is down there in the left-hand corner. And what you really see when you look at that map is that EnLink had four disparate businesses that weren't connected and integrated. But when you lay the ONEOK map on top of it, all of those are connected, so that we're able to take their assets and bring them into the integrated value chain, and get those extra margin dollars from touching those molecules in more ways.
So we're very excited about the strategic and asset fit between the assets.
Very good. Now, I wanna get to the synergy targets, the, you know, 250 base case and the 450-plus upside case. So how did you come to these targets, to begin with? And understanding that the nature of the synergies are inherently different than the Magellan acquisition synergies, but do you have a breakdown in mind, a categorization of sorts, for these synergies as well?
Well, let me talk about the process first, as to how it is that we we do these particular kind of type of analysis. Anytime we do an acquisition, we bring some teams together, and we actually ask them one question: What is it that we can do now more of, in this case, than we could do separately? And so they identify specific projects. That ends up being kind of your ultimate case or what we would call kind of the art of the possible. And then we start to whittle that down by assuming different differences on volumes. We assume differences on rates, and just, you know, the probabilities that some might have.
And so just to give you a for example, there may be some sort of an operational synergy that we look at and say, "We got 100% chance of doing that." You may look at some of the commercial synergies and say, "We got 75% chance of that, or 50% or 30 or 40." And then we risk weight all those, and that's the way we get to kind of that the 400 number and then the 250 number. So it's a risk-weighted analysis. It's the same thing that we did in the Magellan acquisition. We did the same thing, same thing here, but it's a lot about-...
volume, and like we said, adding more volume into those systems and adding more volume into our systems, and having a better control, better competition for not only the new well connect and the new wells that are being drilled, but also those that may be coming off of some contract with somebody else. We feel like we've got a better competitive advantage to attract those volumes to our system.
The only thing I'd add to that is in true ONEOK fashion, we are fairly conservative on doing that. So we're we're very comfortable with the range that we've put out there. And we're hoping as we work with Magellan, we'll see the same kind of success as we get our teams in there working on it, and being able to talk to the other company's teams and be innovative, that we grow these synergies beyond what we've stated.
And what we've talked here a lot about volume growth as synergies and opportunities. There are some opportunities. Clearly, there are cost synergies that will come out. But beyond that, there are some synergies, just to, you know, for example, EnLink has around, right around 200,000 barrels a day of frac capacity. Sheridan's gonna be able to utilize that in a much more efficient fashion. We already supply Louisiana fracs with supply out of the Mid-Continent, so we'll be able to optimize that. EnLink had a small frac out in North Texas, and we'll be able to use that frac to then supply our refined products business for the blending business in the Dallas-Fort Worth area or up into Southern Oklahoma, where they didn't have the opportunity to do that because they weren't in the refined products business.
The fact that we have the fully integrated value chain just opens up opportunities that EnLink and then Medallion didn't have as a standalone company.
Makes sense. And in addition to some of the complementary aspects of the existing footprints between these businesses, the EnLink assets also give you, you know, dry gas infrastructure, importantly, an entry into LNG feed gas in Louisiana, as well as natural gas storage opportunities. So how do you see these assets complementing the rest of your business? And are there, you know, obvious opportunities for expansion projects within this footprint?
So the first thing that I would say about an intrastate business, it's the concept that that's kind of the last mile that gets you to the end-use customer. And in this particular case, a lot of industrial load, there's ammonia plants that are on the system down there. There's more ammonia plants that are being permitted. You've got some potential hydrogen plants that are coming on down there. You've got also your LNG, and then not to mention the natural gas utility business that's already connected down there. This system is really unique in the fact that, you know, when I first started in the industry back in the 1980s, 25% of all the natural gas in the United States was actually coming out of the Gulf Coast area.
So a lot of the gas would come onshore and then be distributed, but because of the volume, these pipes are very large. Some of them are 30- and 36-inch pipes, which is a little different than when you go into other parts of the nation, especially up in, like, Oklahoma and Texas, where we operate intrastate assets that are much smaller in diameter, but it's because of the way it used to be built and used to be designed. But that last mile concept is really important because that last mile is usually a really expensive mile, and so those are already connected to a lot of the loads that are already down there.
And so we're really excited about what we can potentially do down there, especially with expanding the storage part, because I think that's a very critical thing. As we go through the different varying extremes of the weather events that we have, you're gonna see a lot more swings in the amount of energy that you're gonna need. And the more and more wind and solar that you put on, you got more intermittent power that's coming on. And I didn't even mention electric generation, but that's usually loads that are really supplied off these intrastate assets. So much different than interstate, and we really, really like the intrastate businesses. They're, they're really, really good businesses.
They're really steady for us in Oklahoma and Texas, and I think they'll be the same way down in Louisiana, provide some maybe even some more growth opportunities.
Great. With these transactions announced, how has it changed, if it has, your capital allocation views and strategy?
My short answer is it's not, so I'll let Walt explain on that.
Sorry. As Pierce said, we aren't changing anything as we sit here today, but clearly, this is a a very strong free cash flow accretive transaction, both of them together, so we will have more cash available. You know, we're taking on some debt here to acquire both entities. The rating agencies couldn't have been more supportive in their discussions as we announced the transaction. They're looking at the increased scale and diversity of cash flow, so we'll use that cash flow to return to our three-and-a-half times target, but we can do that, we can construct what we have on the drawing board today and still, still our dividend growth that we've said and still execute on the stock buyback that we've put in.
If everything goes according to plan, you know, we've only allocated 75%-85% of legacy ONEOK cash flow in that capital allocation plan, so clearly, we'll have a little bit more CapEx as we look at more businesses, but with that excess free cash flow over the coming years, you know, we're hopeful that we'll even be able to enhance that capital allocation strategy.
One thing that we really see, though, Theresa, is what our number one core priority is to reinvest in really high return projects. And the more assets you have, you may not even know what they are today, but they will usually spawn other good opportunities to invest capital and get really, really good returns with the concentration we have all over the United States now.
And this focus is reflected in your current results, without the contribution of these recently announced acquisitions. From a base business perspective, with the progress that you've already made in 2024 and the momentum behind you, can you just remind us, at this point, what are the puts and takes that would get you towards the high versus low end of your annual guidance?
Well, I would say that, you know, A, we're already halfway through 2024. And I think we've pretty much taken the low end off the table. So we're very confident in our midpoint and maybe even higher than that. The thing that can move the business around primarily happens at the end of the year is whether or not you have some really extreme cold fronts or cold weather maybe in December, and what that might do to your volumes. Last year, we had a very mild December, and we actually went into January with a lot of momentum because we had way higher volumes than what we had anticipated. The weather events, you know, in 2024, kind of came at the first part of this year.
And so you just have to kind of see what the, what the weather's gonna do, but we're not anticipating anything material.
Great. And then staying on the existing business, would you be able to give an update on the progress with the Magellan synergies to date? And as you integrate these assets, have there been any surprises along the way?
The surprises have been good surprises, and I'll let Sheridan kind of answer more directly to that question.
Yeah, that's right. In 2020, we've come out and said in 2024, we're going to capture $175 million of synergies, and, and we are very, very pleased where we're at this time. We're progressing that forward. And then we said we'd come out with $125 million and another $125 million in 2025. And obviously, we've accelerated some of the 2026 synergies into 2025 with the Easton acquisition that we said is there. So we feel very good that we're gonna be at or above what we've come out. And I think as we said before, the surprises that we've had is really this, we've gotten the two teams together and really let our people be innovative and really think about how they can make money together and, and collaboration.
They have really come up with some very unique ideas, some very good ideas that we've been able to execute on, and I think that's really, really what is pushing us above what our synergy targets were. And then we're really looking forward to doing that with the EnLink and Medallion acquisitions as well, that we're pretty confident with the synergies we've stated. When we get people together and people will really understand the nuts and bolts of this business, what's going on, and they start looking at things, it's gonna be pretty exciting to see that happen.
And then, on the recent acquisition of Easton Energy, how does this help you capture further value in the U.S. Gulf Coast, between your NGL and refined product asset bases?
Well if you just take a step back and look at the NGL and refined products business, especially down in the Gulf Coast, you have a big hub of NGLs at our Mont Belvieu facility. That's the bottom end of our whole NGL assets, the whole bottom of the value chain, and then over on the refined products system, they have a premier distribution, storage, terminaling business on that side of it, so it's very early on, we knew that to be able to capture our synergies, we needed to be able to tie these two together. Magellan already is not only for themselves using NGLs for blending and refined products, but off of their MMP in Galena Park or their marine terminals, they have customers with big needs for NGLs.
So we knew we needed to connect these two together, and we knew there was gonna be two ways to do that. We could either build a new system, which was kind of our number one as we went into this, or we could try to buy a system that was out there. We knew Easton was out there. We had, even before Magellan, that was an asset that we had on our radar, that when its time came and it was gonna come up for sale, we wanted to take a hard push at it. But as we saw the opportunity with Magellan, we knew we had to act quickly because either we're going to start building a pipe or put the Easton in. And the Easton gives us a couple of different things. One thing is it's a lot faster.
Most of the pipes are already in ground, and we have to just connect it to our system. It's actually cheaper because it comes with existing business, and that existing business is primarily coming from NGLs, already coming from our Mont Belvieu business, going to other marine terminals. In fact, we've been able to grow that business. Today, in a very short period of time, we have increased the throughput on the Easton system by over 50%, and we haven't even made a connection to any of the Magellan assets. We're sure as that continues to go forward.
But we think here, in a very short period of time, into the mid-2024, 2025 and late 2025, we'll have the connections into our Magellan systems, that we will once again be able to offer a bundling service to a lot of our storage and terminaling customers by being able to supply them NGLs that they're now getting from other locations, as well as be able to supply other terminals on the Houston Ship Channel through Easton by being tied into our NGL infrastructure. So we're pretty excited about how the Easton is gonna fit in. So we actually think it's much better than what we ever imagined.
The only thing I'd add to that, Theresa, is that, you know, in summary, you know, with the amount that we paid for it, we had a really good return. You already heard that we've been able to put a considerable amount more volume, and there was a lot of capacity left on the system. So when we fill that up, when we get all the connections made, we will fill that up because that's in our control. And then the third thing is it gets us connectivity at scale, which is really important to getting the synergies that we had planned on having in the refined products and the crude oil business.
Got it. Now, I'm deeply curious as to who you're taking all those volumes from, but that will be for another day. Turning to the G&P side of things. So within this segment, what are you seeing in terms of producer activity in the Rocky Mountain region as well as the Mid-Con? And for the Bakken, in particular, the region's production outlook remains a topic of fierce debate that you've defended, you know, over and over again, and I would like for you to do that one more time. What can you tell us about your long-term view of Bakken inventories, producer efficiencies, and any other drivers that could be impactful to your volumes in the region?
Well Theresa, right now, I'd say if you start up in the Bakken, there's 37 rigs running right now up there. That's just more than enough to grow the volume that's in the Bakken. And we continue to see our producer customers be innovative on their drilling techniques. You know, we've talked a lot about three-mile laterals, how they can be much more efficient of that. They're getting different completion techniques up there. A lot of our conversations with them, they talk about how the core, you know, is expanding and they can continue to drop to push down breakeven costs of what they could drill and produce up there as well.
So in all our conversations with them we're having, we are very confident there's decades of inventory left up in that area, especially across the span of the system that we have going forward. If you move down into the Mid-Continent, you know, we've said for a long period of time that the Mid-Continent is going to be kind of flat. We have seen a lot of resurgence on the west side of the Mid-Continent, and a lot of activity over there, and this is definitely an area that, we have assets in, and so does EnLink, that the two of us together, working together, is going to be very beneficial on that western side of the state.
But also in the main part of the state, the STACK, we're seeing a lot of activity, a lot of growth in there that we think now more the Mid-Continent is going to have a low single-digit growth going forward than we hadn't seen before, and then we also think about the Mid-Continent as having a little bit of an option value around natural gas prices, so if natural gas prices rise, you'll see more drilling rigs come into more of the gassier area of the Mid-Continent. Now we're more in the oilier area, but you'll see more in the gassier, condensate-heavy area of the state, so if that happens, you'll really see volumes take off, so in summary, we think that the Bakken's got a lot of growth left into it. I think we've had to defend ourselves time and time again.
I think most of the time we've been right on that and then in the Mid-Continent, we are seeing, we're getting a little more excited about what's coming out and the potential growth that we have in the Mid-Continent, that before that, we're seeing it more as just steady.
One of the ways we defend ourselves up there, Theresa, is our service that we provide. It's a very customer-focused service, because of the connectivity that we have in multiple plants up there, which is what we call a super system. So if we have a plant that needs to go down for a turnaround, which they all do, because there is maintenance to be done on those plants, it's seamless to the producer. They don't know that the plant's down, the volume still moves because we can move it around to different areas. So that's very important. Actually, one of the sales pitches we have from a commercial standpoint is we actually go to the individual producers and quantify what one percent of downtime in our system accounts for them on a crude oil price.
And it is significant because 90%-95% of all the economics in those wells up there come off the crude oil, not the natural gas and not the natural gas liquids. So it's very important to keep that runtime and the reliability up, and we think that is our competitive advantage up there. Somebody may try to undercut us on rates, but the value is in what is it that we bring to them in moving their crude.
Got it. So with this ample and visible backlog of of projects and growth ahead of you, and then taking into account the new acquisitions, and I imagine it might cost some money to realize all those commercial synergies, longer term, with the assets that you have currently and then you're about to acquire, what do you think is a reasonable run rate for annual CapEx on a go-forward basis?
Sure, well, without giving formal guidance for 2025 , I think if we just kind of look at where we sit today, we've got MB-6 wrapping up, we've got the expansion of Elk Creek wrapping up, and we have the West Texas NGL system wrapping up. Two out of the three of those will be done here in the fourth quarter, and the other one in the early in the first quarter. So we've got what our largest projects kind of rolling off. Since those were, we said those were in their tail end stage, we've announced two new transactions, our Medford rebuild, and then our refined products pipeline out to Denver.
Net-net between the three that are rolling off and the two that are rolling on, we would still see a reduction in our CapEx if you just look at the base business. So you know, clearly, there are going to be some more opportunities. I would say that the synergy expenditures or CapEx associated with synergy in the EnLink and Medallion, the way these assets sit on top of each other, the way they're they're ready to be connected, and capital is not really the driver for those. Very short connections to get the Medallion system plugged into our long-haul pipes, for example. So we see more opportunities on the expand and extend type of strategy that we have. So
So I think if you look at CapEx over the, you know, the next several years, where we are today to slightly lower, you'll be fine. But if you think about that in the context of free cash flow, you know, as you look out a few years, we see free cash flow going out to that $5 billion a year range. So as a percentage of free cash flow, our CapEx will be coming down, but probably stay in and around this range to slightly lower in the next few years.
Understood. So we started at the beginning this discussion with the progress on the acquisitions and just the sheer number of transformative transactions you've announced with last week's included. At this point, you've extended ONEOK scale and scope across multiple commodity value chains and multiple basins. So from here, how do you view your positioning within the competitive landscape with versus similarly large and diversified midstream peers?
As I listen to you, ask that question, I think you may have answered it. You know, when you say we have considerable scope and scale. Three years ago, we sat down as a management team and said, "Okay, what do we do? What do we need to do on the M&A front, to best enhance our shareholder value?" We came up with basically nine key areas that we wanted to focus on. One of them was scope and scale. Then there's others there. Once we did Magellan, we went back and revisited those, and in between time, we're talking to our board, every single board meeting about what is it that we need to add, what do we need to subtract, those kind of things as we do these acquisitions.
So you've really kind of answered your question is, you know, when you take the expand and extend model, and you get back into the gathering and processing, what goes into our liquids lines, what goes into our gas lines, what goes into our fractionators, what goes through connectivity in different locations over to refined products in our crude oil business, and now being gathering in the crude oil business, then we feel very, very confident in the future, that we're gonna be highly competitive and very successful.
Very good. Well, thank you all so much for your participation and all the color.