DT Midstream (DTM) acquired ONEOK’s (OKE) wholly-owned interstate gas pipelines (Guardian, Viking, and Midwestern Gas Transmission) for $1.2B. The sale should help ONEOK, one of industry’s most active dealmakers, reduce debt following the Medallion Midstream and EnLink Midstream (ENLC) acquisitions. We anticipate earnings growth for the pipelines.
The companies announced the transaction November 19, five days before OKE bid $4.3B for the rest of EnLink. DTM expects a 10.5x 2025E adjusted EBITDA multiple from the deal, but East Daley Analytics expects even more upside if Viking Gas Transmission continues its strong 1H24 performance: EBITDA is up 137% vs 1H23, according to Federal Energy Regulatory Commission (FERC) filings. OKE recently completed a compression electrification project on Viking, which could be contributing to higher transportation revenues.
EDA forecasts performance for the assets in the Financial Blueprints, available in Energy Data Studio. The three pipelines earned $111MM in EBITDA for the latest twelve months from 2Q24, most of which came from Guardian ($62MM), followed by Midwestern Gas Transmission ($28MM) and Viking ($22MM). Given the 1H24 outperformance on Viking, though, we expect combined FY24 EBITDA will be closer to ~$128MM. Including slight growth at Guardian and Midwestern, EDA forecasts 2025 EBITDA to be ~$131MM across the pipes, implying a 9.2x EV/EBITDA multiple (see figure from the Financial Blueprints).
According to EDA’s FERC Return Calculator, 72% of revenues come from maximum tariff rates, which means these pipes would be especially susceptible to Section 5 rate case risk at FERC. Fortunately, our estimated ROEs are not too far out of bounds, but it is something to monitor closely going forward.
Alternatively, if DTM is able to invest heavily in modernization and power demand tie-ups, it could feel the need to file a Section 4 rate case and request higher rates, as we have seen recently on Williams’ Transcontinental system. — Ajay Bakshani, CFA Tickers: DTM, OKE, WMB.
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