ONEOK, Inc.’s Recent Acquisition Now Looks Even Smarter

ONEOK (NYSE: OKE) has made several shrewd moves over the past few years, which have positioned it to grow its high-yielding dividend at a high rate. One of the latest is its recent deal to buy out Martin Midstream Partners' (NASDAQ: MMLP) 20% interest in the West Texas LPG pipeline system. With full control of that pipeline, the company can more aggressively pursue expansion opportunities, which recently led it to secure a second project on the system that positions it for even more growth.

Taking advantage of a cash-strapped partner

The West Texas LPG pipeline, which moves natural gas liquids (NGLs), has become increasingly important to ONEOK's growth over the past year. It all started last October when the company and then-partner Martin Midstream Partners secured long-term contracts with several third parties to expand the pipeline into the Delaware Basin side of the Permian. The companies planned to invest $200 million into the project to build a 120-mile pipeline to transport up to 110,000 barrels per day (BPD) as well as two new pump stations and some looping pipeline along the existing 2,600-mile system to handle the additional volumes.

While Martin Midstream Partners agreed to fund its 20% share of that project, the company's financial situation has deteriorated over the past year. With the master limited partnership paying out everything that comes in to support its sky-high distribution -- which has further weakened its balance sheet by pushing its leverage ratio even higher -- it's struggling to afford both its distribution and growth projects. Because of that, Martin Midstream agreed to sell its 20% stake in West Texas LPG to ONEOK in July for $195 million.

The deal was a win for both companies. In Martin Midstream's case, it was able to use that cash infusion to reduce its leverage ratio from a deeply concerning 5.46 times to a safer level of 4.36 times. Further, the sale will reduce the company's growth capital spending needs by $24.2 million for the remainder of the year. Meanwhile, ONEOK CEO Terry Spencer commented on the transaction by saying: "Acquiring the remaining interest in West Texas LPG is a strategic step in our broader Permian Basin strategy. A wholly owned West Texas LPG allows ONEOK to more effectively integrate it into the rest of our extensive NGL system, positioning us for future expansion opportunities currently under development."

Ready for round two

With full control of the system and with the first phase of expansion entering service this quarter, ONEOK has been able to pounce on additional expansion opportunities. It announced one of them this week, unveiling plans to invest another $295 million in the system after it secured long-term contracts with six third-party natural gas processing plants in the Permian that should produce up to 60,000 BPD of NGLs.

This project will consist of four new pump stations, two pump station upgrades, and looping pipeline to boost West Texas LPG's mainline capacity by 80,000 BPD. The company will also build additional infrastructure to connect West Texas LPG with its Arbuckle II Pipeline project. Arbuckle II is a $1.36 billion, 530-mile pipeline that will transport up to 400,000 BPD of NGLs from Oklahoma to the company's NGL hub in Mont Belvieu, Texas. The company expects that pipeline to be in service in the first quarter of 2020, which coincides with the timeline on the second West Texas LPG expansion.

CEO Terry Spencer noted that this second expansion project on the West Texas LPG pipeline system would not only serve the "continued growth in the Permian Basin" but "positions ONEOK for additional future expansion opportunities in the Permian." With the system flowing right through the heart of the Permian Basin, where production of NGLs is on pace to grow by more than 800,000 BPD over the next decade -- double its current rate -- ONEOK should be able to continue expanding this system in the coming years.

Strategically positioned to continue growing

ONEOK's decision to buy out its former partner and take full control of the West Texas LPG Pipeline is proving to be a smart move. Not only can it pursue growth projects without first having to check with its cash-strapped former partner, but it can more fully integrate it into its larger network, like it's doing by linking it to Arbuckle II. Those two factors could provide the company with even more fuel to increase its dividend in the coming years.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends ONEOK. The Motley Fool has a disclosure policy.