Attractive valuation, but with late cycle multiple compression risks. Midstream stocks offer low double digit total return (dividend + growth), which is attractive at this point in the cycle especially for a relatively low risk business. Relative EV/EBITDA multiples are slightly below the SPX and UTY, and P/E is now in line with the market. We saw a 10-20% compression of EBITDA and cash flow multiples in 2018. The risk is market multiple compression in 2019, which has an amplified effect on equity values for a levered sector.
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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.