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.
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