ONEOK's $4.4B Brazos Acquisition and Apollo Investment: Dividend Implications

Acquisition Details

ONEOK (NYSE: OKE) has agreed to acquire Brazos Midstream's Permian Midland Basin natural gas gathering and processing assets for over $4.4 billion in cash. The assets include 700 miles of gathering infrastructure and 1.2 billion cubic feet per day of processing capacity, with the Cassidy II plant expected to be completed in the third quarter of next year. The acquired acreage spans 600,000 dedicated acres under long-term, fixed-fee contracts averaging 12 years remaining, with producers including ExxonMobil and Diamondback Energy. This acquisition doubles ONEOK's processing capacity in the Midland Basin and strengthens its integrated Permian-to-Gulf Coast strategy.

Financing Structure

To fund the acquisition, Apollo and its affiliates will make a $9 billion minority equity investment in ONEOK through a Class B interest. ONEOK plans to use $5 billion of the proceeds to retire debt, reducing its leverage ratio to around 3.25 times next year. The Apollo investment carries a capped internal rate of return (IRR) of 7% for the first nine years, with any value created above the cap flowing to shareholders. This structure provides lower-cost capital than issuing common equity and includes an option for ONEOK to redeem the investment in the future. A similar arrangement was recently used by Realty Income with Apollo, providing a precedent for this financing method.

Impact on Growth and Dividend

ONEOK expects the acquisition to be immediately accretive to earnings and free cash flow per share. The company stated that the acquisition increases momentum toward the high end of its mid- to high-single-digit adjusted EBITDA growth target over the next five to seven years. The financing accelerates its deleveraging timeline and provides additional financial flexibility to support organic expansion projects, particularly in the Permian Basin. ONEOK also noted that these deals will enhance its flexibility to increase capital returns to shareholders, including potential dividend increases and share buybacks. The company had previously targeted 3% to 4% annual dividend growth, building on a history of more than 30 years of dividend stability and growth, with its payout nearly doubling since 2014.

What it means for income investors

The acquisition and financing arrangement position ONEOK to potentially accelerate dividend growth while maintaining a strong balance sheet. However, actual dividend increases depend on successful execution of the deals and expansion projects. Income investors may view this as a positive development for the sustainability and growth of the company's 4.5%-yielding dividend.

Reporting based on: The Motley Fool. Figures verified against market data where available.