There are a number of other factors to be considered (how close to cap are you, are you anywhere near rune capping, buffs and procs, if you're near another white hit which may give a fresh KM, rune regen talents, etc), but at face value this can be expressed as the choice between:
1) KM Oblit + x% of a normal Frost Strike
2) KM Frost Strike and normal Oblit

Including the meta, physical vulnerability, boss armor, and the pantheon of buffs Oblit gets from talents (diseases and MotFW), a KM Oblit is worth (2 * 1.03) * (230% * 1.3 * 1.4 * 1.1) * 0.68 * 1.04 = 670.81% weapon damage
.
A Frost Strike gets the meta as well, but it's magic so there's a different vulnerability and no armor, and the crit isn't a guarantee (we'll assume the T14N amount of crit, eh?) making it worth 0.8255 * (105% * 1.1) * 1.05 * x + (2* 1.03 * 0.1745) * (105% * 1.1) * 1.05 * x = x*143.70%% weapon damage average, where x is what % of a Frost Strike you're wasting by going over cap. So if you're at 88 runic and making this choice, you're deciding whether to lose 0.5 Frost Strikes.

Total damage for this scenario is 1.437x+6.7081.

For scenario 2 we get a more stable number.
Assuming all we did before, the Oblit will be worth 0.8255 * (230% * 1.3 * 1.4 * 1.1) * 0.68 * 1.04 + (2 * 1.03 * 0.1745) * (230% * 1.3 * 1.4 * 1.1) * 0.68 * 1.04 = 502.93% weapon damage average
And the Frost Strike gets the KM, so (2* 1.03) * (105% * 1.1) * 1.05 = 249.83% weapon damage

Totaling: 7.5276 for scenario 2.

Now we get to solve for x!

1.437x+6.7081=7.5276
x=0.5703 of a Frost Strike is the breakpoint, or .4297 as the "wasted" amount.


Phrasing that in terms of Runic, 8.594 Runic as a breakpoint, obviously wasting less will tend towards scenario 1 and wasting more will favor Frost Striking with KM as in scenario 2. Oblit grants 22 Runic, so any amount you're already at above 78 is what's considered wasted.

So if you're at 86 or less runic, go ahead and Oblit. If you're at 87 or more, Frost Strike it.
Rune regen talents favor going for the full Frost Strike over a theoretical partial as well, as does the chance of an extra KM proc, so one could push this number even lower. On the whole, capping Runic by anything more than a couple points is just bad news, and KM procs are lovely but not worth losing out on entire other strikes.

What's 2H Frost's rotation with two targets? Just put pest on the other target or switch to howling blast spam?

I'm current seeing, as of 5.1 sim in 509 gear with no set bonus, SS hitting for 67250 damage (including shadow portion). Multiply this by 1.033, and you'll get what it should hit for in 5.2, 69267.5 damage per execution. Blood boil, on the other hand, has an average damage per execution of 44k, and isn't getting buffed in 5.2. This is with the 50% buff from having a disease present, meaning it's damage before that would of been around 29.3k Keep in mind that, while SS shadow portion cannot crit, the main portion critting increases the damage of the shadow portion, because it's a % of the main portion. So they can both be treated the same in regards to crit.

With these numbers, I'm drawing similar conclusions to you.
SS > BB with 1 target
BB > SS with 2+ targets, whether or not they have diseases on them (gap gets bigger with diseases, obviously)


However, festerblight basically plays the same as traditional unholy when it comes to AEing or cleaving. The major change for two targets would be the same as normal unholy, using death runes that would of otherwise been used on SS on BB instead.

As far as diseases spreading, that's an issue for both unholy specs, but only when they take rolling blood, which is optional. Not being able to blood boil without procs for fear weakening dots is a legitimate concern. If it re-spread it to the boss, it's too big a loss for festerblight, and that's easily fixed by not taking rolling blood. Even with traditional unholy, the super-diseases will likely do more damage then the gain of one weakened BB instead of a Pest at the start, which indicates that if you're gaming diseases damage on multiple targets in any way, rolling blood is not your friend. I'd be interested in seeing more math as to how much stronger diseases have to be, how long they'd have to last, and looking at cases with both a set of adds that stay up for a long time versus staggered adds. First impressions say that rolling blood would be best on heroic sha p2, while not-rolling blood would be best on wind lord.
With or without the disease damage, UB is a decent competitor to RB for AE.

That does seem to be true based on player testing. I'd still hesitate to predict which target the game will pick in the middle of an aoe burn while players and mobs may be moving. In particular, you never really know the actual position of your character from the perspective of the server (or other players), only from your own client view.

In a situation where the target chosen really matters, especially for a festerblight rotation with significantly different disease damage on your main target, I'd behave as though you don't know which target will be chosen, even if you're pretty confident you actually do know.