Jefferies Downgrades ONEOK On Valuation, But Says It's A Favorite US Midstream Pick

Given the fundamental improvements in energy stocks in the second quarter, Jefferies has made ratings changes to master limited partnerships in its coverage universe based on updated models and recent stock price moves.

The Analyst

Analyst Christopher Sighinolfi downgraded shares of both ONEOK, Inc. OKE and Magellan Midstream Partners, L.P. MMP from Buy to Hold. The price target for ONEOK was increased from $67 to $77 and Magellan's was hiked from $68 to $70.

The analyst upgraded shares of MPLX LP MPLX from Hold to Buy and increased the price target from $36 to $38. Sunoco LP SUN was upgraded from Underperform to Hold with a $22 price target.

Energy Fundamentals Improving

Daily field production from U.S. energy companies as well as domestic demand set new records, while WTI crude oil and Mt. Belviev NGLs prices rose over 8 percent quarter-over-quarter, Sighinolfi said in a Wednesday note. (See the analyst's track record here.) 

Midstream companies announced several expansion projects and simplification transactions, the analyst said. Refining activity was robust as U.S. refiners strived to take advantage of wide pricing spreads and focused on the International Maritime Organization's 2020 rule, he said. 

M&A and trade tensions have increased the attractiveness of domestic, investment grade-rated regulated utilities, Sighinolfi said. 

With ONEOK stock outperforming the S&P 500 Index by about 24 percent since March, Jefferies said it has replaced it with Williams Companies Inc WMB as its franchise pick. 

ONEOK Less Attractive On Valuation

The 27-percent rally in the shares of ONEOK over the past four months has rendered a multiple of 15.3 times its estimated EV/EBITDA for 2020, according to Jefferies. 

The total return for the stock relative to the new price target falls short of the threshold for a Buy recommendation, Sighinolfi said. 

The analyst said he favors the company's simple structure and is looking for a meaningful Q2 beat. Jefferies named ONEOK as one of its favorite PM picks in the U.S. midstream sector. 

The Price Action

Shares of ONEOK have risen about 35 percent year-to-date.

Related Links:

Barclays Downgrades Targa, DCP Midstream On Decelerating Permian Volumes; Enable Midstream Upgraded

Wells Fargo Downgrades Sempra Energy After Monday's Spike On Activist Involvement