All posts by : Edosa Obaseki

The midstream sector consists of operators that process and transport hydrocarbons from producers to end customers. The core services in this space fall into three broad categories: gathering, processing, and transportation. Midstream companies generate revenue primarily through fee-based contracts, which shield them from direct exposure to energy price volatility. Additionally, their service agreements are typically long-term, aligning with the capital-intensive infrastructure they operate. In essence, the midstream sector is an asset-heavy industry with predictable long-term revenue streams. I like to think of it as the B2B SaaS play of the energy world, just without the sky-high valuations of tech startups.

A recent acquisition in this rapidly consolidating sector caught my attention, and I wanted to share some insights on the deal.

Deal:

Acquirer: ONEOK (NYSE: OKE), a Tulsa-based midstream company, was founded in 1906. The firm specializes in the transportation and processing of natural gas and natural gas liquids (NGLs) through its extensive pipeline network.

Target: EnLink Midstream (NYSE: ENLC), headquartered in Dallas, was formed in 2013 through the merger of Crosstex Energy and Devon Energy’s U.S. midstream assets. The company provides gathering, processing, and transportation services for natural gas, NGLs, crude oil, and, more recently, carbon dioxide (CO2) for carbon capture and sequestration (CCS).

Deal Summary:

Q3 2024: ONEOK acquired 44% of EnLink in an all-cash transaction valued at approximately $3.3 billion.

November 2024: ONEOK acquired the remaining outstanding shares of EnLink in an all-stock transaction, exchanging each EnLink share for 0.1412 shares of ONEOK, valuing the deal at approximately $4.3 billion.

Rationale:

Market Positioning: This acquisition strengthens ONEOK’s footprint in key energy-producing regions, notably the Permian Basin, Mid-Continent, North Texas, and Louisiana. EnLink’s integrated infrastructure complements ONEOK’s existing ~60,000-mile pipeline network, enhancing its ability to serve major production basins and end markets. With EnLink’s assets, ONEOK’s pipeline network expands to nearly 70,000 miles, putting it in direct competition with Kinder Morgan (~70,000 miles) and Energy Transfer (~114,000 miles). Additionally, the deal deepens ONEOK’s exposure to crude oil transportation, a segment it expanded into with its 2023 acquisition of Magellan Midstream Partners.

Synergies and Accretion: Fully integrating EnLink allows ONEOK to streamline midstream operations from gathering and processing to transportation and storage. This improved integration enhances efficiency, reduces administrative redundancies, and strengthens service offerings. A key synergy comes from EnLink’s North Texas assets, which tie directly into ONEOK’s downstream NGL markets. The elimination of duplicate administrative functions is expected to drive cost savings.

The deal is expected to be accretive to ONEOK shareholders, meaning it should increase earnings per share (EPS) and free cash flow. The combination of the $3.3 billion cash purchase (for the 44% stake) and the $4.3 billion all-stock transaction leverages ONEOK’s financial strength to deliver long-term value.

Diversification and New Opportunities: EnLink’s assets include CO2 transportation for CCS, adding a forward-looking element to ONEOK’s portfolio. As carbon management gains traction, this diversification could unlock new revenue streams and enhance the company’s long-term sustainability initiatives.

Financial Overview:

Financing Structure: The first transaction (44% stake) was an all-cash deal, likely structured to accommodate Global Infrastructure Partners, the exiting investor. ONEOK financed this through its $7 billion senior unsecured note program in 2024. The second transaction (remaining 56%) was a stock-for-stock deal, minimizing additional debt and conserving cash. ONEOK issued over 36 million new shares, taking advantage of its elevated stock price ($112.39 per share, close to its 52-week high).

Balance Sheet Impact: ONEOK assumed EnLink’s existing debt, consolidating financials to improve leverage metrics and creditworthiness. As of Q3 2024, ONEOK had approximately $5.9 billion in cash earmarked for acquisitions, including the first EnLink purchase. Following the transaction, this cash was deployed, increasing net debt and raising the combined company’s enterprise value.

Share Price Considerations: ONEOK’s stock price at the end of March 2025 ($98.48) is lower than the reference price used in the acquisition ($112.39). As a result, despite the increased number of outstanding shares, the company’s total equity value declined.

From my analysis, the combined entity is projected to generate an additional $49 million in annual EBITDA from general and administrative cost savings (about 40% of EnLink’s 2023 G&A expenses).

Leverage Impact: EnLink had a higher gearing ratio compared to ONEOK. Combined with the decline in share price, the post-acquisition entity experienced an increase in leverage. However, the deal was structured efficiently, adding significant assets and revenue without materially increasing leverage, aside from the inherited debt.

Understanding the Multiples:

There multiples were calculated (Enterprise Value (EV) to Revenue, EV/EBITDA, and EV/Net Income) to provide different lenses on the companies’ valuations.

The EV/Revenue suggests ONEOK trades at a higher revenue multiple, implying the market assigns a premium to its revenue stream, likely due to its larger scale, diversified operations, and stronger market position. EnLink’s lower multiple could reflect lower growth expectations.

EnLink’s significantly higher EV/EBITDA multiple indicates it’s less profitable per dollar of EBITDA compared to ONEOK. This could stem from higher operating costs and lower margins. ONEOK’s lower multiple suggests better operational efficiency and a more stable cash flow profile.

The higher EV/Net Income for EnLink implies it’s less efficient at converting revenue into net profit, possibly due to higher relative debt interest expenses. ONEOK’s lower multiple reflects a stronger bottom-line profitability relative to its enterprise value.

ONEOK’s higher EV/Revenue (4.24x vs. 1.89x) but lower EV/EBITDA (12.3x vs. 21.5x) and EV/Net Income (22.21x vs. 31.48x) suggest it’s a more mature, efficient operator with a premium placed on its revenue stability and scale. Its S&P 500 status and its current ~$62 billion market cap reinforce this perception. EnLink’s lower EV/Revenue but higher EV/EBITDA and EV/Net Income suggest it’s undervalued on a revenue basis but overvalued (or less attractive) on profitability metrics. This could indicate a business with solid assets and revenue potential but burdened by higher costs, debt, or operational inefficiencies.

For sector context, it’s important to note that midstream companies typically trade at EV/EBITDA multiples of 10-15x, with EV/Revenue varying widely (1-5x) based on asset quality and growth prospects. ONEOK’s multiples align with a high-quality operator, while EnLink’s suggest it’s a fixer-upper with potential but current weaknesses.

Deal Valuation:

Using ONEOK’s multiples as a reference, the implied per-share valuations for EnLink are:

The wide range ($3.5 to $50/share) arises because each multiple emphasizes a different aspect of financial performance:

EV/Revenue ($50/share): This high valuation assumes EnLink’s revenue potential could be valued similarly to ONEOK’s, perhaps if synergies from the acquisition boost EnLink’s topline efficiency or market access. It’s optimistic and assumes significant revenue upside post-integration.

EV/EBITDA ($3.5/share): This low figure reflects EnLink’s current operational inefficiency (high EV/EBITDA multiple). It suggests that without substantial cost reductions or EBITDA growth, EnLink’s value is constrained by its weaker profitability.

EV/Net Income ($10.9/share): This middle-ground valuation accounts for EnLink’s net earnings potential, tempered by its higher debt load and lower margins compared to ONEOK.

The disparity highlights that EnLink’s value depends heavily on which metric ONEOK prioritizes when considering the acquisition. Revenue-based valuations are forward-looking and synergy-driven, while EBITDA and net income reflect current operational realities. The $50/share EV/Revenue implied value might reflect ONEOK’s long-term vision, $3.5/share (EV/EBITDA) mirrors its pre-acquisition reality, while $10.9/share is more middle ground. This tracks with the effective, blended purchase price of $15.44/share.

Final Thoughts:

ONEOK’s acquisition of EnLink is a strategic move to shore up its market position, expands its pipeline network, and introduces a future-oriented CO2 transportation segment. ONEOK likely saw EnLink as an undervalued asset on a revenue basis (EV/Revenue of 1.89x vs. ONEOK’s 4.24x), that it believes can be enhanced through synergies. The high EV/EBITDA (21.5x) and EV/Net Income (31.48x) suggest EnLink’s profitability was lagging. ONEOK, with its operational expertise and scale, might aim to streamline costs, integrate assets, and boost EBITDA and net income, narrowing the gap with its own multiples.

The wide price range from my analysis underscores the risk ONEOK took. Paying a premium for potential that depends on execution. If ONEOK can’t improve EnLink’s profitability, the deal might not justify the cost and could drag ONEOK’s margins. Conversely, if synergies lift EnLink’s performance, the acquisition could significantly enhance ONEOK’s overall value.

The wide range isn’t unusual in acquisitions, it’s a bet on transformation, with revenue multiple as the ceiling and current profitability multiples as the floor. For EnLink as a target, it says it was attractive not for what it was, but for what ONEOK could make it, which is the main point of strategic acquisitions. Strong energy demand and favorable regulatory posture towards production and pipeline construction are timely tailwinds to propel ONEOK forward and makes me optimistic about the acquisition. It will be interesting to watch how midstream consolidation unfolds and shapes the evolving energy landscape.

The views expressed in this article are solely those of the author and do not represent the opinions of any affiliated organizations or entities.

Liquefied Natural Gas (LNG) is a cleaner-burning fuel primarily used for power generation, heating, and fueling. It plays a key role in electricity production, especially in countries transitioning away from coal, making it a vital component of the global energy transition.

When sanctions were imposed on Russia by several countries in 2022, major natural gas consumers, mostly in Europe, were left scrambling. Many could no longer buy sufficient LNG from Russia, creating an urgent need for alternative supplies to fill the gap.

As a result, the LNG spot market became highly active. Typically, LNG buyers and sellers operate under long-term sales and purchase agreements, where the seller commits to supplying a specified volume over 10–20 years, and the buyer commits to purchasing it – often under a take-or-pay pact. These contracts offer stability with fixed or indexed pricing mechanisms, protecting buyers from the volatility of the spot market. However, in times of supply shocks, such as the Russian invasion of Ukraine, activity in the spot market surges as buyers urgently seek new suppliers.

One company that rose to recognition during this period was Venture Global. Allegedly, the company prioritized spot market buyers over customers with long-term contracts, favoring those willing to pay higher prices. Venture Global, for its part, argued that its obligation to deliver LNG to long-term customers only begins when its facility reaches commercial operation, a milestone it had not yet officially reached. While technically within the terms of their agreements, this move angered long-term customers, who are now seeking damages.

A similar supply shock occurred in October 2022, when Nigerian Liquefied Natural Gas (NLNG), a reputable, major global LNG producer responsible for 3.8% of monthly global LNG supply, declared force majeure at its Bonny Island production facilities. Severe flooding disrupted the supply of feedstock gas, preventing NLNG from fulfilling its contractual obligations. From the perspective of a buyer, this was a devastating blow, especially in a year when global LNG supply was already tight due to the Russia-Ukraine crisis. A long-term contract should provide security, yet external forces rendered it meaningless, forcing buyers to join the frantic global search for replacement supply, often at much higher prices. While force majeure clauses exist for precisely these unforeseen events, and NLNG cannot be blamed for a natural disaster, the experience still left buyers in a difficult and frustrating position.

In the LNG terminal business, customer commitment is everything. LNG terminals are massive, long-term infrastructure projects that take 3–7 years to build. To secure financing, project developers must prove they have committed customers, as this reduces investment risk and guarantees stable, long-term revenue. This means that even before construction begins, when the terminal is still just an idea on paper, developers must convince buyers to sign binding contracts to purchase LNG. That’s a big ask. It requires trust, relationships, and a strong track record.

This is why customer satisfaction is critical. When LNG terminals seek to expand capacity and attract new buyers, their past actions will determine their success. In any business, but especially in energy, long-term relationships are built on trust. Those who honor their commitments and prioritize customer needs will secure future growth, while those who don’t may struggle when the market inevitably shifts.

The information provided in this article is for general informational purposes only and should not be construed as investment advice. The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of any organization. You should consult with a qualified financial advisor or conduct your own research before making any investment decisions. The author and the website are not responsible for any financial decisions made based on the content provided.

Last week, I read an article by KUT News, Austin’s NPR station, about the growing adoption of microgrids by Texas businesses. It caught my attention and led me to explore another report mentioned in the piece. Both sparked a lot of ideas and inspired me to write this post, reflecting on the role of microgrids and the critical part natural gas plays in their success.

First off, some context on microgrids – they are localized energy systems that integrate generation capacity, control systems, and often battery storage. At their core, microgrids address two critical goals: resilience and reliability. While traditional power grids offer cost-effective electricity over vast networks of generators, substations, and transmission lines, they are vulnerable to disruptions caused by extreme weather, natural disasters, and load shedding. Microgrids fill this gap, providing uninterrupted electricity to critical operations where reliability is non-negotiable.

As climate change increases the frequency and severity of extreme weather events, the demand for resilient energy systems like microgrids continues to grow. Among various energy sources, natural gas stands out as a practical and scalable solution for ensuring energy resilience.

Resilience: Tackling Weather Vulnerabilities

In finance, resilience can be likened to risk factor diversification – limiting exposure to a single risk factor to ensure stability. Similarly, microgrids mitigate the risk of power outages by avoiding reliance on vulnerable centralized systems. Traditional grids depend on transmission lines, which are particularly susceptible to adverse weather. A microgrid’s value lies in its ability to operate independently of these systems, but its energy source must also be resilient to weather disruptions.

Compared to diesel, solar, and wind, natural gas is less affected by adverse weather conditions. However, it is not entirely immune – severe weather can impact natural gas production and transportation. Efforts to enhance natural gas resilience, such as weatherization, are critical. For instance, the Railroad Commission of Texas introduced a weatherization rule in 2022, requiring critical gas facilities to upgrade infrastructure and correct vulnerabilities to sustain operations during extreme weather. These initiatives strengthen natural gas’ position as the optimal fuel for microgrids.

Reliability: Aligning with Microgrid Goals

Reliability is another pillar of microgrid success, ensuring smooth operation even under normal conditions. Natural gas outperforms diesel and renewables in this regard:

• Diesel: Refueling logistics and storage create operational risks that can disrupt supply.
• Renewables: Solar and wind depend on sunlight and wind availability respectively, which are inherently intermittent. Energy storage systems can address this intermittency but are costly and often impractical for standalone microgrids.

Natural gas offers a steady, continuous energy supply, enabling high uptime.

Conclusion

Natural gas microgrids are leading the charge in providing resilient and reliable energy solutions. Their ability to withstand extreme weather, coupled with consistent uptime, makes them indispensable in a world increasingly impacted by climate change and grid instability. While challenges like weather-related vulnerabilities exist, initiatives like weatherization and infrastructure upgrades are making natural gas microgrids even more robust.

By bridging the gap between traditional grids and renewable systems, natural gas microgrids are shaping a future where energy security and resilience go hand in hand. They stand as a testament to how innovation can leverage existing resources to meet the growing demand for reliable and sustainable power.

The information provided in this article is for general informational purposes only and should not be construed as investment advice. The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of any organization. The author and the website are not responsible for any financial decisions made based on the content provided.