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  • Yves Siegel

Market Commentary: It Takes Two to Tango



This past Mother’s Day, ONEOK, Inc. (NYSE: OKE) announced a definitive merger agreement—unanimously approved by both companies’ Boards: the acquisition of Magellan Midstream Partners, L.P. (NYSE: MMP) in a cash-and-stock transaction valued at approximately $18.8 billion, including the assumption of ~$5 billion of MMP debt. OKE is paying a 22% premium to MMP’s closing price on the day prior to the announcement. The deal is not being embraced by Wall Street as OKE’s stock subsequently declined about -8% vs. +2% for S&P 500 as of May 19, 2023.


  1. Accretive transaction. Earnings per share are expected to grow in 2024 and 3% to 7% accretion from 2025 through 2027, while free cash flow after dividends steps up to $1 billion annually from about $250 million with the status quo from 2024 through 2027.

  2. Diversification. It reduces OKE’s reliance on the Bakken region for growth and adds two fee-based new businesses, refined products and crude oil pipeline transportation.

  3. Balance sheet strengthened. Credit profile enhanced with the addition of stable fee-based businesses.

  4. Substantial tax benefit. OKE will be able to potentially defer ~$3 billion of cash taxes. This adds about $1.5 billion of net present value to the combined entity via a $15 billion step-up in the value of MMP’s assets.

  5. Focus on return on capital. Both MMP and OKE have delivered attractive returns relative to their peers.

  6. Strong balance sheet enables opportunistic acquisitions. Because OKE’s leverage ratio was modest, the company can take on an additional $10 billion of debt without threatening its investment grade credit rating. Notably, the credit rating agencies have reaffirmed OKE’s rating and have recognized the lower pro forma risk profile of OKE with the addition of MMP’s stable fee-based businesses.


OKE management has an excellent track record of under-promising and over-delivering. The company has grown through transformational transactions that have added new business lines, including the 2004 acquisition of Northern Border Partners, L.P. and the 2005 acquisition of natural gas liquids pipelines and processing plants from Koch Industries. Commercial synergies could be significant and well above management guidance of $200 to $400 million. OKE’s and MMP’s pipelines move liquids [e.g., natural gas liquids (NGLs), refined products, and crude oil] via batching, effectively separating the different commodities for transportation. Given the proximity of their pipeline systems, we believe that the combined company will find opportunities to utilize capacity more efficiently on both systems by interchanging commodities.

We do not believe that this will open the floodgates to further mega-consolidation. In our view, this was a unique situation in which one company that was challenged for growth was able to combine in a strategic transaction with a company with similar values and culture. Mergers are difficult to consummate and require two willing parties. Hostile takeovers rarely work. Social issues can be an impediment as management may be less than enthusiastic over the prospect of losing their jobs and the jobs of their employees. In addition, companies with significant market share in the same area, for example, the Permian Basin, will find it challenging to receive the blessing of the federal trade commission (FTC). Finally, given the revived health of the sector, better balance sheets and free cash flow generation, there is no pressing need to consolidate.



Clean energy stocks have underperformed the overall market this year, but not quite as badly as the broader energy sector. (Please see chart below). The weakness is in light of very supportive legislation from the EU and the U.S. According to Bloomberg, the EU currently spends more than €70 billion ($74 billion) in renewable energy subsidies each year. Earlier this year, the European Commission unveiled its Green Deal Industrial Plan, which earmarks more than $270 billion for clean energy investments. In the U.S., the Inflation Reduction Act (IRA) is directing $370 billion in net-zero investments.

Given the level of government support towards the energy transition, both financial and regulatory mandates, we remain bullish on the long-term prospects of clean energy. However, we believe that a cautious and selective approach to investments is advisable given high valuations predicated on rapid growth and higher margin expectations that may or may not be realized.

The sector’s current weakness could be attributed to 1) concerns regarding cost of capital and capital availability, 2) higher interest rates that reduce the present value of future cash flows, 3) rotation into defensive stocks (i.e., risk off trade), 4) supply chain issues, which may be temporary in nature, and 5) waning investor focus on environmental, social, and government (ESG) and climate issues.

YTD TOTAL RETURN (as of 5/19/23)

Source: S&P Global, EIA and Wells Fargo Securities, LLC

Specifically, hydrogen stocks have been disproportionately punished this year, declining by over 25% for a basket of stocks followed by Wells Fargo research versus just 6.6% decline for its broader clean energy coverage universe as of May 19. While the decline in hydrogen stocks seems overly punitive, we note that hydrogen companies are projected to generate negative or only slightly positive free cash flow through 2025 according to Wells Fargo estimates. This contrasts with wind and solar companies that are currently economic and expected to be profitable. However, the long-term growth prospects remain sanguine for hydrogen companies focused on electrolyzers, fuel cells, and carbon capture, utilization and storage (CCUS) technologies. Additionally, these companies should be beneficiaries of the United States’ $8 billion hydrogen hub program funded through President Biden’s Bipartisan Infrastructure Law.


Source: IRENA


In the global energy transition, hydrogen is universally viewed as a key substitute for fossil fuels and integral to achieving net zero. Depending on how hydrogen is produced, it can be a clean energy solution because when you burn hydrogen, you generate energy in the form of heat and the only by-product is water – no CO2 emissions. Clean (green) hydrogen is produced by splitting water into hydrogen and oxygen using renewable electricity. This process presents a sustainable and environmentally friendly energy solution, as hydrogen combustion only generates heat energy and water, with no CO2 emissions. Grey hydrogen is typically produced from natural gas/methane (CH4), by splitting the methane with steam, resulting in both CO2 and hydrogen (H2). Lastly, blue hydrogen is also produced from natural gas but incorporates CO2 capture and storage in the process, reducing the overall emissions.


Low-emission hydrogen represented less than 1% of total hydrogen production over the last three years, according to the International Energy Agency (IEA). Global hydrogen demand reached 94 million tonnes (Mt) in 2021, driven mainly by the recovery of activity in the chemical sector and refining. Nonetheless, most of this demand was sourced from fossil fuels and had damaging effects on the climate. In the IEA’s Net Zero Scenario, low-emission hydrogen production significantly ramps up and accounts for around 95 Mt, more than half of global hydrogen production (~180 Mt) by 2030—albeit more than one-third will still be sourced from fossil fuels without CCUS.

Accordingly, this implies that while hydrogen production is set to almost double by 2030, the absolute amount produced and resulting reduction in emissions are quite small relative to the potential of renewables. Though their impact in 2030 might be modest compared to other key mitigation measures like renewables, direct electrification, and behavioral change, their true potential lies in the long term. Hydrogen technologies are particularly crucial in sectors where emissions are notoriously hard to abate and traditional mitigation measures may not be viable or easy to put into practice.


Source: IEA (2022), Hydrogen, IEA, Paris, License: CC BY 4.0


  1. Energy Production: Hydrogen can be used to produce heat, generate electricity, and power vehicles. When hydrogen is combusted or reacts with oxygen in a fuel cell, it produces energy, emitting only water vapor as a byproduct, making it a clean alternative to fossil fuels.

  2. Transportation: Hydrogen fuel cell vehicles (FCVs) are a type of electric vehicle that use hydrogen to generate electricity and power the motor—they offer long driving ranges and quick refueling times, making them a promising zero-emission option for transportation.

  3. Energy Storage: Energy from renewable sources, such as solar or wind power, can be used to produce hydrogen through electrolysis. This hydrogen can then be stored and converted back into electricity when needed, helping to balance the intermittent nature of renewable energy sources.

  4. Industrial Processes: Hydrogen is widely used in the production of ammonia for fertilizers, petroleum refining processes, and in the manufacturing of steel, chemicals, and electronics. It can also act as a reducing agent to remove oxygen during metal production.

  5. Backup Power: Hydrogen fuel cells can be used as a backup power source for critical infrastructure (e.g., hospitals, emergency services, etc.) ensuring uninterrupted operation during power outages.

  6. Aerospace: High energy content and efficiency make hydrogen an ideal option for use as propellant in rockets and fuel for space.


The IEA estimates that if governments implement ambitious policies to meet their climate pledges, hydrogen could help avoid 14 bcm/yr of natural gas use by 2030. This is a small percentage relative to the IEA’s projected total natural gas demand of ~4,440 bcm under its Stated Policy Scenario and ~3,900 bcm under its Announced Pledges Scenario. Additionally, the IEA projects usage of 20 million tons of coal equivalent (Mtce)/yr of coal and 360 kbd of oil could be avoided by 2030 with hydrogen. Accordingly, while hydrogen will be a substitute over time, the projected increase in demand will not materially erode demand for fossil fuels, all else being equal. Additionally, there are several challenges in implementing large-scale hydrogen transport and storage infrastructure, including the availability of sufficient quantities of green hydrogen, cost-effectiveness, and compatibility with existing infrastructure. Hydrogen offers a versatile storage option, as it can be liquefied and transported through pipelines, trucks, or ships. However, due to its unique properties, hydrogen cannot simply replace natural gas in existing infrastructure on a one-for-one basis; it is highly reactive and flammable fuel, emits NOx, and is corrosive to metals.


In April, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 0.5% compared to 1.6% for the S&P 500 and 0.7% for its customized benchmark. SAM’s Energy Transition Portfolio generated a return (net) of -1.9% vs. -1.6% for its customized benchmark. Clean Energy and Utilities were the biggest under performers in April with a total return of -5.4% [as measured by the S&P Clean Energy Index (SPGTCLTR)] and 1.6%, respectively, [as measured by the Philadelphia Stock Exchange Utility Index (XUTY)]. The midstream sector generated a total return of 2.4%, as measured by the Alerian Midstream Energy Index (AMNAX). For April, the majority of sectors in the S&P 500 reported a positive performance led by Consumer Staples (i.e., 7 out of 11 sectors including a 3.3% total return for Energy).

SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 4.5% and 55.7% for the 1-year and since 11/10/20 inception periods, respectively. This compares to a total return of 1.9% and 53.7%, respectively, for its customized benchmark and 2.7% and 22.2%, respectively, for the S&P 500. SAM’s Energy Transition Portfolio generated a return (net of fees) of -1.1% and 8.4% for the 1-year and since 4/29/21 inception periods, respectively. This compares to a total return of 1.0% and 4.2%, respectively, for its customized benchmark and 2.7% and 2.2%, respectively, for the S&P 500 as of April month-end.

Sam Partners’ Infrastructure Income and Energy Transition Strategies seek to provide sustainable income and growth with capital preservation. This is accomplished by investing in a concentrated portfolio of high-quality clean energy companies, midstream energy companies and utilities that are well positioned to participate in the energy transition to a net zero carbon future. A diversified approach to investments across these sectors should optimize risk-adjusted returns, in our view. Our Infrastructure Income Strategy offers investors a current yield of ~5% and growth potential of ~5-6%; while the Energy Transition Strategy that is more heavily weighted with clean energy stocks and adheres to strict ESG criteria, offers investors a current yield of ~4%. In a world starved for yield, we believe these Strategies offer a compelling value proposition.

November, 2020

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