While the consensus thinking is that MLP’s may have difficulty accessing capital to fund future growth projects, I believe the valuation adequately discounts these risks, and in general, MLP’s are an attractive investment vehicle for the following reasons:

-Historically very low correlation to traditional equity and fixed income asset classes, and surprisingly low correlation to price of oil (co-variances of 10-30% to equity and fixed income) making them a great portfolio diversifier during times of uncertainty

-Attractive source of relatively stable income (yields ranging from 7-10%), particularly during periods of declining interest rates and volatile equity markets. With 10 year treasury yielding 3.9% nominally, and much less in real inflation adjusted terms, the value proposition of an 8% dividend is compelling

-Annuity like cash flows, similar to utility or infrastructure plays, due to inelasticity of demand provide dividend visibility. Whether the price of oil/gas falls, it still needs to be transported to the end user. A majority of an MLP’s cash flow is fee based on the volume of oil/gas that is distributed.

My analysis suggests that Oneok is one of the most well positioned MLP’s, trading at a reasonable valuation, and is therefore poised to outperform its peer group (Alerian MLP index is most comprehensive) over the next several years

On a relative basis, Oneok generates a greater % of its EBITDA through the storage and refining of natural gas, vs. other pure play pipeline/distribution business models. Just as Valero (a refinery company that we owned in 2006-2007) earns excess returns by running complex refining system capable of converting abundant & inexpensive heavy-sour crudes in to higher value grades of distillates and gasoline, Oneok benefits from similar dynamics as it converts domestically produced natural gas into LNG (liquid natural gas) used in many commercial applications, and increasing as an alternative to gasoline and diesel. The energy content ratio of 6X, is largely “out of whack”with the $6:$70 NYMEX (Nat. Gas) vs. WTI (Light Sweet Crude Oil) relationship. This increases the value proposition of the conversion & refining process, and leads to higher margins for Oneok (about 40% of cash flow) (40% pipeline, 40% refining, 20% storage). In simple terms, there is a wide price differential between raw inputs & prices paid by the consumer.

Well positioned infrastructure near high growth gas areas like the Barnett Shale, the Anadarko Basin, and Fayetteville Shale in Oklahoma. High levels of asset turnover(revenue growth/asset growth) are indicative of highly productive and improving asset base. Management has exercised capital discipline in acquiring these assets. One new area of investment has been the Woodford Shale, a resource we are very familiar with given our investment in Newfield Energy. As the chart below indicates, you can see the secular growth in production that these unconventional, mid-continental shales are experiencing.

The company has a relatively high ratio of unregulated “intra-state” pipelines, vs. “inter-state” pipelines, which are regulated by FERC who typically allows no more than a CPI-linked price increases, and generate regulated utility-like ROE’s of about 10-12%. Essentially this is a volume story, not a pricing story, but the prolific nature of the mid-continental shales (Barnett & Woodford) with their low decline rates and the application of more sophisticated technology like horizontal drilling techniques are increasing the daily output from these areas.

Most importantly, the company looks healthy than most of its peers from a financial perspective:

-Strong balance sheet – The company has industry leading interest coverage ratio, low debt/EBITDA, and has relatively minimal capital needs to fund near term growth

-Distribution coverage ratio – cash flow generation ability vs. expected dividend payouts. The company is believed to have one of the most secure dividends because of its strong cash flow coverage and consistent growth in payouts.

-Capital Spending budget analysis– We believe that OKS has lower risk of missing its growth targets over the next 2-3 years because the bulk of its capital investments have been made in 2007 & 2008, and on a relative basis, should be much less reliant on re-accessing the capital markets to fund its growth promises and maintain its dividend growth rate.

Investment Risks

We remain bullish on the MLP investment thesis presented last week but will continue to be vigilant of the following risks

1. potential conflicts between limited and general partners – to date, this has not been an issue, but voting control does lie in the more leveraged and less profitable GP structure

2. Access to capital markets & post 2009 capital budget needs – in late 1970’s there was a boom in MLP development, followed by a huge bust in the mid-1980’s as energy prices collapsed & access to credit became more difficult. While we have extensively reviewed the companies capital needs over the next 2-3 years, should the company need to greater than expected amounts of capital that it has communicated to investors, and credit conditions remain tight, this could hamper growth.

3. Regulation risk - any changes to their laissez-faire approach regulation during times of consumer and economic contraction. Does new democratic administration have any tax law changes that would jeopordize MLP’s tax status?

4. Natural disasters – While the company does have insurance for these types of events a major hurricane outage could put near term revenues at risk until pipelines are replaced

Given the volatility and poor returns in the market lately, investors should continue to look for new alternative sources of growth in their portfolios, and I believe that MLP’s offer investors a great opportunity at these prices