We are initiating coverage of ONEOK with an Outperform rating and a $66 target price. OKE has established itself as one of the key integrated natural gas liquids plays in the sector. It has a dominant NGL position in the Bakken and Mid-Con which has facilitated a $6B growth program that will realize 4x-6x EBITDA multiples. The projects have significant upside as they fill up further. We see double-digit cash flow and EBITDA growth and a sub-4x leverage balance sheet with minimal equity needs. We believe the recent pullback of OKE is an opportunity to buy one of the highest quality stocks at a relative low.
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We think that Enbridge did a good job at the analyst day highlighting a low-risk, self-funded model with visibility on growth in out years. After the excitement over the last few years on digesting Spectra and addressing the balance sheet, the focus can now be on execution on a better-scaled growth plan and a simpler structure. We remain Peer Perform as the stock trades at a (warranted) premium to the midstream peers but we believe ENB’s defensive nature has more appeal in this environment.
We are moving to "No Rating" on EQGP from "Outperform" due to the announcement that ETRN will acquire or call in the remaining 8% of EQGP that it does not own for $20/unit.
On Friday (11/30/18), Equitrans announced the simplification of its MLPs. It will acquire EQGP for $20 (a 17.5% premium from the 11/29 close) and has proposed to swap its EQM IDRs for 95M LP units. This will leave EQM as the surviving MLP, surprising consensus (and us), which believed that an EQM rollup into EQGP was more likely. EQM fell 5.5% on the day, given the expectation that it would be rolled up and on the potential dilution from the IDR swap. ETRN, which is a net beneficiary of the transaction, fell 3%, and EQGP rose 17.5% to reflect the takeout value. Bottom line, we still believe the overall complex is attractive.
Overall, there was a confident tone around the financial flexibility and health of the company. Interestingly, the collapse in oil prices was not a big topic given a much stronger balance sheet and with narrower Permian differentials since Q3 partially offsetting WTI’s fall.
Moving to neutral view on PAA as the Capline opportunity, improved valuation, and lower leverage offset our concerns on fee-based growth. We are upgrading PAA and PAGP to Peer Perform from Underperform as we now see risk-reward as balanced. We still see PAA’s crude business as highly competitive and the 2019 fee-based EBITDA outlook as too optimistic. However, PAA now only trades at a small premium on our below consensus 2020 EBITDA estimate and the Capline reversal is a unique upside opportunity that’s not in our numbers and could provide a meaningful boost in 2021. While WTI oil collapsing to $50 is unhelpful, we think investor perceptions of PAA as a higher risk stock could evolve over the next year. PAA’s volume exposure is heavily tied to the Permian which should see sustained growth even if oil stays weak. Meanwhile, the balance sheet is completely fixed with 2019 leverage of 3.7x almost a full turn below peers and the 3rd lowest in our coverage among large caps.
We are upgrading EQM Midstream to Outperform from Peer Perform with a $66 target price. The MLP has underperformed the AMZ by 29% YTD on two main factors: the complications of the EQT spin of ETRN, and the delays and cost increases of Mountain Valley Pipeline. With the spin of ETRN complete there can be a focus on structural streamlining, growth in the underlying business, and completion of MVP. EQM now trades at a turn discount to the midstream group despite significant growth, below average leverage, and strategically appealing assets. We also initiated on ETRN at Outperform – see our detailed initiation here.
Equitrans Midstream was spun out of EQT on 11/13. It is a C-corp that solely owns interests in EQM Midstream (EQM; OP, $66 TP) and EQGP (OP, $20 TP). Via these interests, ETRN has stakes in high-growth transmission and G&P assets in the Appalachian basin that are highly contracted. At the midpoint of 2019 dividend guidance, ETRN has an 8.8% yield with visibility on 8%-10% dividend growth through 2021. Our $25 TP is based on our targets for EQM and EQGP discounted 5% for tax risk and spin flowback.