Morgan Stanley's Midstream Pair Trade: Plains All American Upgraded, ONEOK Downgraded

Plains All American Pipeline, L.P. PAA has dominant market share, underutilized capacity and a reasonable valuation, while the near-term risk-reward for ONEOK, Inc. OKE appears less attractive following the stock’s recent run-up, Morgan Stanley’s Tom Abrams said in a report.

Plains All American

Analyst Abrams upgrading the rating on Plains All American from Equal-weight to Overweight, while raising the price target from $33 to $37. He also raised the price target for Plains GP Holdings LP PAGP from $12.50 to $14, while maintaining the Equal-weight rating.

Plains All American seems attractive, “given its Permian basin positioning, with dominant gathering market share and underutilized assets that will benefit from increasing Permian crude production,” Abrams wrote. He expects that by 2019 the company would generate twice the EBITDA growth from additional capacity utilization than what is reflected by the current consensus estimates.

The Equal-weight rating for Plains GP Holdings reflect that the units are currently trading at a premium to Plains All American based on the conversion ratio “and therefore present less attractive upside.”

ONEOK

The analyst downgraded the rating on the company from Overweight to Equal-weight, while raising the price target from $48 to $50. Shares have outperformed in 2016 relative to the MS coverage average.

“The fundamentals of the firm remain healthy, and we are optimistic about the coming NGL cycle in 2018-20 for ONEOK. However, while we have pushed valuation slightly higher, valuation on nearer-term cash flows limits upside,” Abrams stated.

The analyst further commented that the company’s margin trajectory may come under pressure in 2017 from increasing headwinds in the Bakken, while the NGL cycle may be impacted by inventories and export headwinds.

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