ONEOK, Inc. (NYSE:OKE) has agreed to acquire Brazos Midstream’s Permian Midland Basin natural-gas gathering and processing assets for $4.425 billion in cash. The deal is being paired with a $9 billion nonvoting minority equity investment from Apollo, of which ONEOK plans to use about $5 billion to reduce existing debt. ONEOK expects the acquisition to be immediately accretive to earnings and free cash flow per share.

The transaction would more than double ONEOK, Inc. (NYSE:OKE)’s Midland Basin processing capacity to approximately 2.3 Bcf/d, including plants already under construction. The acquired platform includes roughly 700 miles of gathering infrastructure, 1.2 Bcf/d of processing capacity after the Cassidy II plant is completed, and approximately 600,000 dedicated acres backed by fixed-fee contracts with more than 12 years of weighted-average remaining term.

Bull Case

The biggest attraction is the quality and location of the assets. The Permian remains one of the most economically important oil and gas-producing regions in the U.S., and the Brazos system gives ONEOK, Inc. (NYSE:OKE) additional exposure to associated natural-gas volumes generated by oil production. The acquired assets are supported by 14 active drilling rigs operated by producers including ExxonMobil, Diamondback Energy, and Double Eagle. The long-term contracts provide ONEOK with considerable visibility into future volumes and cash flows. That makes this more than a simple capacity expansion. ONEOK is effectively adding infrastructure that can grow alongside production on the dedicated acreage.

The assets fit closely with ONEOK’s existing gathering, processing, NGL transportation and crude infrastructure. That creates an opportunity to extract more value from the same barrels and molecules as they move through ONEOK’s network.

The company expects to connect the Brazos system with downstream assets such as its West Texas NGL Pipeline and the Medford NGL fractionation facility. This broader integration could produce commercial and operational efficiencies that an independent owner of the assets might not be able to capture. ONEOK estimates about $80 million of full-year synergies in its 2027 EBITDA calculation and expects additional commercial and capital efficiencies as the systems are integrated.

This is an important positive for OKE shareholders. ONEOK, Inc. (NYSE:OKE) expects the transaction to immediately increase both earnings and free cash flow per share rather than requiring several years of investment before producing meaningful returns.

The valuation also becomes more attractive if the expected growth materializes. ONEOK puts the purchase price at roughly 7.5x estimated 2027 EBITDA, including expected synergies, falling to about 6.0x estimated 2028 EBITDA. If those EBITDA projections are achieved, the effective acquisition multiple should decline relatively quickly. A major concern with a $4.4 billion acquisition would normally be additional leverage or issuing shares at the parent company. Instead, Apollo is investing $9 billion for a nonvoting minority interest. ONEOK intends to use approximately $5 billion of that capital to extinguish debt, which is expected to reduce pro forma 2027 leverage to around 3.25x debt-to-EBITDA.

That gives ONEOK an unusual combination: it can make a sizable acquisition while simultaneously reducing leverage and avoiding common-share issuance. ONEOK says the transaction moves it closer to the high end of its mid- to high-single-digit adjusted EBITDA growth target over the next five to seven years. The additional Permian infrastructure also gives the company a larger platform from which to pursue organic projects. That could ultimately support higher dividends or buybacks once the balance sheet improves.

Bear Case

The most important risk is that investors could initially view the Apollo structure as more complicated than conventional debt financing. Apollo is investing $9 billion in exchange for a Class B interest that is expected to receive 15% of quarterly operating-company cash flow. Its return is capped at 7% for the first nine years, but the structure still creates a claim on cash flows that otherwise would belong to ONEOK shareholders.ONEOK avoids issuing common shares, which is positive, but shareholders are still giving up part of the company’s future cash generation to Apollo.

The structure becomes particularly important if ONEOK, Inc. (NYSE:OKE)’s cash flows grow rapidly: the more cash generated, the more distributions can flow toward the Class B interest before that capital account is fully paid down. The acquisition strengthens ONEOK’s position in the basin, but it also increases its dependence on Permian production growth.

Midstream infrastructure benefits from relatively stable fee-based contracts, but gathering and processing assets ultimately depend on producers continuing to drill and volumes continuing to grow. If Permian activity slows materially because of weaker oil prices, lower producer returns, or capital-discipline decisions, the expected growth trajectory could weaken.

The long-term contracts reduce this risk, but they do not eliminate the underlying exposure to producer activity. ONEOK, Inc. (NYSE:OKE) is combining another large network into an already extensive infrastructure system. The expected synergies and capital efficiencies are central to the investment case, but they are not guaranteed.

The company needs to integrate the assets, optimize capacity, complete the Cassidy II plant, and capture the expected commercial benefits. Delays or cost overruns could push back the point at which the transaction reaches its targeted returns. At roughly 7.5x 2027 EBITDA, the purchase price is not obviously excessive for a high-quality, contracted midstream platform. But the investment case relies on substantial future growth: the implied multiple falls to about 6x 2028 EBITDA because ONEOK expects EBITDA to increase materially.

That means part of the deal’s attractiveness depends on management’s ability to deliver the projected volume growth and synergies. This is especially relevant given the broader surge in gas-related dealmaking. Bloomberg Law reported that the transaction comes amid increased investor interest in U.S. natural-gas infrastructure, while the Financial Times noted that competition for gas assets has pushed valuations higher. Although ONEOK expects the deal to be accretive, the Apollo structure introduces a noncontrolling interest that reduces net income attributable to common shareholders.

ONEOK, Inc. (NYSE:OKE) expects approximately 7% of Apollo’s remaining capital balance to be deducted from net income attributable to the company’s shareholders. The balance should decline over time as distributions are made, but this creates an additional layer investors need to consider when assessing per-share earnings and cash flow.

Conclusion

ONEOK, Inc. (NYSE:OKE)’s $4.43 billion Brazos acquisition looks strategically positive. The deal expands its Permian footprint, boosts processing capacity, adds long-term contracted cash flows, and is expected to be immediately accretive. Apollo’s investment also helps ONEOK reduce leverage without issuing common shares.

The main risks are integration, Permian concentration, and Apollo’s claim on future cash flows. Overall, the deal strengthens ONEOK’s long-term growth outlook, with the upside likely outweighing the risks if management achieves its projected volume growth and synergies.

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Disclosure: None. This article is originally published at Insider Monkey.