This Energy Play Should Turn Out A-'OKE'

You might not be pumped about gas prices over the July 4 weekend, so here's an energy play to make up for the lighter wallet as you fill your tank. This weekend's trade idea centers on a midstream energy company that has pulled back along with the entire energy sector in June: Oneok, Inc. . Let's explore how OKE could make a nice, solid single in an uncertain market, given a nice dividend payout, as well as solid and liquid options. Headquartered in Tulsa, Oneok is a midstream service provider to producers, processors, and consumers of natural gas and natural gas liquids. It also deals in gathering, processing, fractionation, storage, and transportation assets in the Rocky Mountain, Permian, and Mid-Continent regions. The company owns around 40,000 miles of natural gas and NGL pipelines with about 10% of all domestic natural gas production reliant on its infrastructure. The company has a large presence in the Williston Basin of the Rocky Mountain region as both its primary NGL takeaway provider and primary natural gas processor. The stock currently trades around $57 a share and sports an approximate market capitalization of $25.5 billion. The shares have fallen just under 20% since the June 8 explosion at the Freeport NGL export facility in Texas. This drop is somewhat in line with natural gas prices, which have reversed some 30% since the news; however, nearly 90% of Oneok's business is insulated from swings in commodity prices. Approximately five weeks before the Freeport LNG news altered the domestic natural gas market, the company reported first-quarter results on May 3, showing unadjusted earnings of $0.87 a share vs. $0.86 a share the prior year period. It also revealed adjusted earnings before interest, taxes, depreciation, and amortization of $863.9 vs. $866.4 million in the prior year period. The flattish results were a function of an abnormal first quarter 2021 hit by winter storm Uri. Its NGL and NGGP segments realized higher volumes in first quarter of this year, while NGL enjoyed higher average fee rates and wider commodity price differentials. President & CEO Pierce Norton has used the recent pullback as a buying opportunity, acquiring around a half million dollars worth of OKE at $55.54 per share. The stock currently yields 6.75%, which should put a nice floor under the shares. With most of its business contractual and insulated from price impacts, as well as plenty of excess capacity in place to benefit from any increased production activity, the company's high yield and 14.5-times forward price-to-earnings coupled with investment-grade debt, plenty of liquidity, and a recent surge in option premiums, makes the mid-$50 area an attractive entry point for a covered write as described below. Option Strategy: This is how one can execute a covered call position in OKE. Using the October $57.50 call strikes, fashion a covered call order with a net debit in the $52.90 to $53.10 range (net stock price - option premium). Options are liquid. This strategy provides downside protection of 8% and 10% of potential upside over the three-and-a-half-month option duration including dividends. This is a stock that I hope becomes range bound in the mid $50s so I can roll the trade several times before eventually expiring in the month.

This Energy Play Should Turn Out A-'OKE'

Let's learn how to make an enhanced yield trade in Oneok.

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