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Why Oneok Was Downgraded after Stellar 2016 Market Performance

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Jan. 18 2017, Published 12:21 p.m. ET

Oneok’s ratings update

Oneok (OKE), the midstream C corporation GP (general partner) of Oneok Partners (OKS), was downgraded by Jefferies from “hold” to “underperform.” That’s equivalent to a “sell.” OKE now has hold ratings from 73.0% of analysts surveyed by Reuters. About 20.0% of analysts rate OKE a “sell.” The remaining 7.0% rate it a “buy.”

OKS is one of the largest natural gas processors and NGL (natural gas liquids) producers in the United States.

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Performance of OKE stock

Oneok is among the highest gainers among midstream companies, but it has had a slow start to 2017. It rose 132.8% in 2016. In comparison, its peers Williams Companies (WMB), Spectra Energy (SE), and Enbridge (ENB) rose 21.2%, 71.6%, and 27.0%, respectively.

OKE is currently trading at an analyst estimated forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 12.5x. That’s higher than the peer median multiple of 10.0x.

OKE is also trading above its average target price of $52.10. Its high valuation could be one of the reasons for its downgrade.

OKE’s outlook

OKE’s major concern is the flat distribution for OKS and its high leverage. However, the partnership is expected to benefit from the slight recovery in drilling activity, its presence in prolific shale plays, and its expansion projects.

In the company’s 3Q16 earnings release, Terry K. Spencer, president and CEO (chief executive officer) of Oneok, noted, “The partnership’s competitive asset position in active shale plays, such as the STACK and SCOOP plays in Oklahoma, is expected to help drive NGL and natural gas volume growth into 2017 as producer drilling increases in these plays through the remainder of 2016.”

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