ONEOK (OKE) Doubles Down on the Permian with $4.43 Billion Brazos Acquisition

ONEOK, Inc. (NYSE:OKE) has finalized the acquisition of Brazos Midstream's Permian Midland Basin natural-gas assets for $4.425 billion in cash. Apollo has committed a $9 billion nonvoting minority equity investment, with ONEOK allocating about $5 billion to decrease existing debt. The deal is anticipated to be immediately accretive to earnings and free cash flow per share.

The acquisition doubles ONEOK's Midland Basin processing capacity to around 2.3 billion cubic feet per day (Bcf/d), including plants still under construction. The purchased platform comprises 700 miles of gathering infrastructure, 1.2 Bcf/d of processing capacity post-Cassidy II plant completion, and approximately 600,000 acres with fixed-fee contracts ranging for more than a decade.

The primary attraction lies in the assets' quality and strategic location in one of the U.S.'s most economically significant oil and gas-producing regions.

The acquired assets are backed by 14 active drilling rigs operated by ExxonMobil, Diamondback Energy, and Double Eagle. This deal isn't merely about capacity expansion; it represents an addition of infrastructure capable of scaling alongside production from the dedicated acreage. The assets complement ONEOK's existing gathering, processing, NGL transportation, and crude infrastructure. This integration can yield value from the same barrels and molecules as they traverse ONEOK's network.

ONEOK anticipates connecting the Brazos system with downstream assets like its West Texas NGL Pipeline and the Medford NGL fractionation facility. This integration could lead to operational and commercial efficiencies that an independent entity might not achieve. The company estimates roughly $80 million in full-year synergies in its 2027 EBITDA calculation, with additional efficiencies expected as systems are integrated.

ONEOK expects this acquisition to boost both earnings and free cash flow per share in the near term, rather than requiring several years of investment for meaningful returns. The purchase price equates to approximately 7.5x the estimated 2027 EBITDA, including anticipated synergies. The valuation improves if the projected growth materializes.

At 7.5x 2027 EBITDA, the acquisition becomes more attractive, dropping to about 6.0x 2028 EBITDA. If those EBITDA projections are met, the effective acquisition multiple should decrease relatively quickly.

Unlike typical acquisitions that involve issuing shares or increasing leverage, Apollo's investment of $9 billion in a nonvoting minority interest allows ONEOK to avoid these actions. By using about $5 billion of this capital to retire debt, ONEOK anticipates reducing pro forma 2027 leverage to around 3.25x debt-to-EBITDA. This strategic move positions ONEOK close to its target for mid- to high-single-digit adjusted EBITDA growth over the next five to seven years.

The expansion in Permian infrastructure provides ONEOK with a larger platform to pursue organic projects, potentially leading to higher dividends or buybacks once the balance sheet improves. However, the biggest risk is the initial complexity of the Apollo structure, which could deter some investors. Despite this, ONEOK benefits from a diversified and stable revenue stream through long-term contracts, reducing exposure to fluctuations in Permian production growth.

The long-term contracts mitigate some risks associated with producer activity, but they don't eliminate it entirely. ONEOK's ability to integrate the assets, optimize capacity, complete the Cassidy II plant, and capture commercial benefits will be crucial in determining the investment's success.