It’s hard to ignore what is happening in the energy market through this summer. Oil and gas prices have been rising since late last fall and prices are expected to go higher this winter.

We’ve benefited in Triple Play Income from our natural gas producer ONEOK (OKE), where the company pays a hefty 6% annual yield and the stock price is up 48% since we entered that position in early 2021.

We have been looking at adding new energy positions to our portfolio from the oil fields to the natural gas marketplace. The energy sector is extremely volatile with stock price melt-ups and meltdowns of 10% to 20% and can happen within weeks and sometimes even days. 

However, the way energy companies are structured for long-term investments in exploration, extraction, and production, these stocks have always attracted investors by offering higher dividend yields alongside price appreciation.

We will be adding two new energy related positions this month that will eventually replace at least one of our food production stocks in the portfolio this fall.

Let’s get started with the first new position in energy.

New Position: Williams Companies (WMB): 34.13; 5% Yield

Willliams Companies (WMB) is one of the largest natural gas midstream companies in the US. 

The company that was started as a construction business in Fort Smith, Arkansas in 1908 by two brothers, Miller and David Williams. Within a few years, they began building cross-country pipelines. In this fledgling industry, the Williams brothers earned a reputation for doing a good job on time and on budget.

Williams now handles 30% of the natural gas in the United States that is used every day to heat homes, cook our food and generate electricity. The remaining business in oil involves typical midstream oil processing and transportation.

The combination of an impressive portfolio of oil and gas assets, Williams can extract a lot of financial value and continue to pay out a healthy dividend of 5%. The stock also trades weekly options.

The Market

The Energy Information Administration (EIA) is forecasting U.S. natural gas prices will continue to increase and remain high through the remainder of 2022 and well into 2023. A colder than normal winter across the Midwest and East could have a further significant impact on pricing.

Natural gas is an intensive growth market right now between demand in the US and Europe. Prices are rising and could skyrocket this winter, especially in Europe as Russia just closed and threatens to keep closed its Nord Stream gas pipeline … which fuels a lot of natural gas to EU countries. A number of European governments have already gone into scramble mode trying to figure out if and when they can promise lower energy costs for both consumers and businesses.

While Williams Companies must continue to execute its business plan, the market demand isn’t going away, and with natural gas a key component of the transition out of fossil fuels into clean energy, the company is well positioned.


Williams Advantage

Williams produces and transports gas across a wide section of the country from the Northwest well into the East. Liquid Natural Gas shipments are up in 2022 for the company and Williams is managing a pipeline stream that touches many key cities across the U.S.

While much of this production and transportation is in place for Williams, the company is spending an additional $2.25 billion of capital on further LNG production that will allow them to continue to expand their distribution reach here in the U.S.


Financials and Dividends

Net income in 2022 is forecasted for $1.9 billion with over $6 billion in adjusted EBITA which is an 8% year-over-year growth. Williams has consistently delivered higher-than-expected earnings and EPS reports over the last year and carries plenty of free cash flow to cover the dividends by more than 2:1 ratio. 

Company management has shown a commitment to increasing the dividend rate in the middle of a very explosive growth market which will be good for us as dividend and premium collectors.

The Stock

The stock is up 30% since the beginning of the year, although it will trade up and down alongside some of the big and volatile energy stocks. WMB may not be the most volatile of the energy sector stocks and that’s ok. That gives us a chance to collect a reasonable premium on our puts and calls in between and around the ex-dividend dates.

Trading the Options

WMB has weekly options and enough liquidity to support moving in and out of put and call positions as needed. 

Dividend Profile:
Annual Dividend:  $1.70
Effective Annual Yield:  5%
5 Year Dividend CAGR:  10.80%
Consecutive Years of Dividend Increase: 4
Earnings Payout Ratio:  85.63%
Cash Payout Ratio:  45.84%
Ex-Dividend Date:  9/8/22
Dividend Date of Record:  9/9/2022
Payout Date: 9/26/22

Payout: $0.425
Dividend Frequency:  Quarterly

Stock Profile:
Last Price:  $34.13
P/E Ratio:  21.15
EPS: 1.62
Market Cap: 41B
Earnings Report:  TBD

Sector:  Energy

The Trade:  

Trade Review:

  1. WMB goes ex-dividend next Thursday (9/8) and we want to own the stock ahead of time to earn the 0.42 dividend.
  2. We will purchase the stock today but hold off selling a covered call at this time. We were looking at selling a 35 call two weeks out but the stock could pop ahead of next Thursday and we would miss the dividend. 

Trade Recommendation:  Buy Williams stock at market at around $34.18. We will look to sell a covered call next Wednesday or Thursday at the latest.

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