ONEOK Inc. (NYSE: OKE) has agreed to purchase 21.5 million common units representing limited partner interests, for a total purchase price of $650 million, in a private placement from ONEOK Partners LP (NYSE: OKS), of which it is the parent company of ONEOK Partners GP LLC, the sole general partner of ONEOK Partners.
ONEOK Partners also has agreed to sell 3.3 million of its common units for a total purchase price of $100 million to funds managed by Kayne Anderson Capital Advisors LP pursuant to an effective registration statement on file with the US Securities and Exchange Commission. The common units will be offered by ONEOK Partners in a registered direct offering.
Additionally, ONEOK will contribute approximately $15.3 million to maintain its 2% general partner interest in ONEOK Partners. ONEOK plans to use cash on hand and the general partner proceeds from its concurrently announced $500 million notes offering to fund the purchase and contribution.
ONEOK Inc. began its offering to sell $500 million of senior notes on Aug. 12. Following the common unit purchases, ONEOK, which is the sole general partner of ONEOK Partners, will increase its ownership percentage to 41.2% from 36.8%. The sole book-running manager for the offering is Citigroup.
ONEOK has obtained committed debt financing from Citigroup Global Markets Inc. in an amount, combined with existing liquidity, sufficient to fund the purchase price of the private placement of common units from ONEOK Partners. This financing would only be used if the notes offering is not completed.
Commenting on the $750 million private placement, Deutsche Bank analysts said, “We estimate this will take proforma OKE and Kayne Anderson’s ownership in OKS to 41.2% (from 36.8%) and 4.2% (from 3.3%), respectively. Given the large raise, we no longer think OKS will need to tap the equity markets in 2015 and for most of 2016.”
Regarding the $500 million senior notes offering, Deutsche Bank analysts added, “We estimate this takes consolidated leverage north of 5.0x over the next 12-18 months based on the rating agencies criteria (OKE standalone +2.0x; OKS stand-alone 4.25-4.5x).”
Analysts from Standard & Poor's also commented on the news, saying, “While there are several negatives: 1) the dilutive equity raise at OKS, 2) the higher consolidated leverage, and 3) the negative credit outlook, we view this deal as an incremental positive given management’s ability to 1) raise such a large amount [$750 million] and 2) offer the units at only an 8% discount in this current challenging equity market. The equity raise was higher than our estimate of $300 million for 2H15, but it should not come as a surprise given management’s biased toward equity vs. long-term debt funding in order to manage its LT leverage. While the press release mentioned that OKS is now positioned to improve its distribution coverage >1.0x in 2016, there is no mention if this will require flat distributions or potential cuts. We maintain our Sell ratings and, for the time being, think ONEOK will continue to face headwinds until the commodity environment improves, leverage pulls down, and distribution growth resumes.”