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With Rivals Making Multibillion-Dollar Acquisitions, Do These High-Yield Dividend Stocks Need to Respond?

Motley Fool - Thu Aug 31, 2023

Pipeline giants Energy Transfer(NYSE: ET) and Oneok(NYSE: OKE) have made headline-grabbing multibillion-dollar acquisitions this year. Energy Transfer recently sealed a $7.1 billion deal to buy fellow master limited partnership (MLP) Crestwood Equity Partners, while Oneok is buying Magellan Midstream Partners for a whopping $18.8 billion.

These deals will enhance their already large-scale operations while growing their earnings. That should give them the fuel to continue increasing their high-yielding dividends.

With Oneok and Energy Transfer getting bigger, chief rivals Enterprise Products Partners(NYSE: EPD) and Kinder Morgan(NYSE: KMI) are facing the dilemma of whether they need to respond. Here's a look at whether they need to join the consolidation wave to fuel their growth.

Drilling down into the recent deals

Oneok jump-started the recent merger wave in the pipeline sector by agreeing to an $18.8 billion cash-and-stock deal for Magellan that will create a $60 billion midstream giant. The acquisition will significantly diversify its operations. Magellan primarily operates refined products and crude oil transportation assets, while Oneok focuses on natural gas and natural gas liquids (NGLs).

In addition to those diversification benefits, the merger will significantly enhance the combined company's earnings and free cash flow. Oneok expects the deal to be accretive to its earnings next year and by 3% to 7% annually from 2025 to 2027. Meanwhile, it sees the combo boosting its free cash flow per share by more than 20% annually through 2027 as it captures $200 million of annual merger synergies.

Energy Transfer's all-equity deal for Crestwood will bolster the MLP's position in the Williston and Delaware basins while expanding its operations to the Power River basin. The company anticipates it will be immediately accretive to its distributable cash flow per unit. It expects to capture $40 million of annual cost savings. It also sees potential for additional benefits as it refinances Crestwood's debt and pursues new commercial opportunities thanks to its enhanced scale.

Oneok and Energy Transfer expect their mergers will reduce costs and boost earnings. That will enhance their cash flows, increasing their ability to pay dividends.

Well-oiled machines

Enterprise Products Partners and Kinder Morgan are no strangers to mergers and acquisitions (M&A). Enterprise Products Partners closed its $3.3 billion acquisition of privately held Navitas Midstream last year to expand into the Midland basin. Meanwhile, Kinder Morgan spent $135 million to buy North American Natural Resources last year and purchased Kinetrex Energy for $310 million in 2021 to build out its renewable natural gas platform.

Currently, their primary focus is executing their expansion project backlogs. Enterprise Products Partners has placed $2.5 billion of expansion projects into service this year. It also recently added $500 million worth of new projects, giving it $4.1 billion remaining on its backlog, including new natural gas processing plants acquired as part of its Navitas deal.

These high-return capital projects should help supply it with incremental cash flow over the next few years. That should give it the fuel to continue growing its distribution, which currently yields 7.5%. The MLP has increased that payout for 25 straight years.

Meanwhile, Kinder Morgan recently completed about $500 million in projects. It has about $3.7 billion remaining in the backlog, including renewable natural gas (RNG) projects it has acquired over the past couple of years. That's flat over the past quarter as the company has added about $500 million of new projects to replenish its backlog.

These projects should supply incremental cash flow as they come online over the next few years. That should allow it to continue increasing its dividend yield of 6.5%, which it has done for six straight years.

Those expansion project backlogs give these companies ample fuel to continue growing over the next couple of years. Because of that, they don't need to complete a merger to jump-start their growth engines. Instead, they can remain patient and wait for the right opportunity to arise.

No need to respond

Oneok and Energy Transfer are making big M&A splashes to enhance their scale and growth profiles. However, these deals likely won't force Kinder Morgan or Enterprise Products Partners to respond. They have visible growth coming down the pipeline from their expansion project backlogs, giving them plenty of fuel to continue growing their high-yielding payouts. Thus, they can afford to be patient and wait for the right M&A opportunity to emerge.

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Matthew DiLallo has positions in Crestwood Equity Partners, Energy Transfer, Enterprise Products Partners, and Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners, Magellan Midstream Partners, and ONEOK. The Motley Fool has a disclosure policy.

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