US oil pipeline boss ties future to natural gas in pursuit of Oneok merger

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The head of one of the biggest US oil pipeline companies said there were better growth prospects in shipping natural gas as he steps up a campaign to convince investors to back a $19bn merger with a gas-focused peer. 

Aaron Milford, chief executive of Magellan Midstream Partners, said that the “opportunity to invest and grow” as a company focused on crude oil and refined products, such as petrol and jet fuel, had become increasingly “challenging” after a construction boom over the past decade ran its course.

But by hitching the company to Oneok, a fellow Oklahoma-based pipeline company that primarily ships natural gas and natural gas liquids, it would create a “more powerful growth engine” with more room to expand as an energy transition drives demand for gas at power plants and other sectors. 

“When you look at just the fundamentals of NGLs and natural gas, the growth in demand for those is very high,” Milford told the Financial Times in an interview.

“There’s just more growth in those particular commodities . . . than there is in refined products and crude oil — which [will be] very stable, we think for a very long time.”

The proposed deal comes against a backdrop of accelerating natural gas demand in the US and abroad as economies shift away from coal to cleaner-burning gas in electricity generation. Oil demand, while hitting new records globally, is increasingly expected to peak as motorists switch away from petrol-powered cars to electric vehicles.

The US Energy Information Administration forecasts that domestic gas production will reach a new high of 104bn cubic feet a day next year, while its long-term projections call for continued growth.

The US added 897mn cu ft/d of interstate gas pipeline capacity last year, the least amount of new annual capacity in this century, according to the EIA.

After a decade of prolific pipeline building across the US, the necessary oil infrastructure was now largely in place, Milford said, providing fewer opportunities to build new lines.

“It’s really much more of a market that is mature and maturing in this moment and doesn’t have the same growth rate,” said Milford. “The infrastructure that’s been built is plenty — so to speak.”

TC Energy, the pipeline operator behind the aborted plan to build the controversial Keystone XL crude pipeline, said last month it was spinning off its oil transportation business to focus on shipping gas. It said the shift would leave it “uniquely positioned to meet growing industry and consumer demand for reliable, lower-carbon energy”.

But Magellan’s plans for an $18.8bn merger with Oneok have come under fire from some investors, leaving Milford working to win unit holders’ support before a vote on September 21.

Energy Income Partners, the fourth-biggest unit holder in the group with a 3 per cent stake, has blasted the combination as a recipe for “diworsification”, arguing the deal undervalues Magellan’s “industry-leading” returns and that any premium is outweighed by the tax drag it would trigger.

Milford said EIP’s argument dismissed the cost savings of $200mn-$400mn a year that the deal would create as the combined group could ship oil such as crude and refined products and natural gas liquids like propane on the same pipeline systems. Any tax payment would come due regardless, he said.

“It’s not ‘diworsification’. It’s diversification with growth,” he said. “There’s a higher growth profile for this company going forward than we have standalone.”

He added: “You combine that high cash flow generating business that we have with a faster-growing potential of NGLs and natural gas, and you obviously create a much more powerful growth engine over the next few decades.”