As the dust settles after talk of yen carry trades and market crashes, oil prices are still above $75 a barrel. Meanwhile, market interest rates are trending lower in anticipation of a Federal Reserve rate cut. With OPEC+ extending its production cuts through 2025, the bull case for oil is intact. Still, you don’t have to be a rabid oil bull to buy shares of 9% yielding companies. Vitesse Energy (NYSE: VTS)Here’s why.
The dividend of Vitesse Energy
After the company announced to investors an increase in its quarterly dividend from $0.50 to $0.525 per share as part of its first-quarter results, Vitesse Energy investors were pleased to receive the increased dividend on June 28. With an annualized dividend of $2.10, Vitesse generates a dividend yield of 9.2% at the time of writing.
That’s an impressive yield, but history is full of stocks with high yields that have ultimately disappointed investors. So how sustainable is Vitesse Energy’s dividend?
A sustainable dividend
As you would expect from an oil and gas company, Vitesse is not a stock to buy if you fear a crash in energy prices. However, it is an attractive stock if you are optimistic about oil, are happy with the current oil price or can even stomach some price decline.
The latter opinion is due to Vitesse’s policy of hedging its oil production. For information, the company also produces gas but does not hedge it. To be clear, hedging is always an imperfect science and relies to some extent on management discretion to assess market conditions and hedging needs.
For those concerned about the direction of the oil price, it is still worth noting that Vitesse has increased its open crude oil swap contracts (how it hedges the price of oil) during the year. Swaps are derivative contracts to exchange an asset (in this case oil) at a fixed price for a set period of time. It is not so important to delve into the details of the swaps, but to understand that the swaps mean that Vitesse benefits financially if the price of oil falls below the agreed price.
Image source: Getty Images.
At the end of 2023, Vitesse hedged 40% of its “expected 2024 oil production at an average price of $78.95” per barrel. At year-end, that was 1.68 million barrels of oil over the next six quarters. By the end of the first quarter, that figure rose to 2.45 million barrels over the next seven quarters. By the end of the second quarter, that figure was 2.18 million barrels over the next six quarters.
With oil production expected to reach 2.97 million barrels in 2023 and 1.67 million in the first six months of 2024, it is clear that Vitesse has increased its oil production hedges – to reassure those worried about a potential oil price collapse.
Image source: Getty Images.
Good operational progress
The idea of hedging is to isolate risk (both upside and downside) in management’s core competency and the way it creates value for shareholders – the ability to increase production by holding minority interests in oil wells as non-operators, most notably the Bakken oil field in North Dakota.
Therefore, it is important for the company to demonstrate that it can successfully acquire assets and increase production and cash flow accordingly. The good news from the recent second-quarter earnings report is that the company is on track to achieve this in 2024.
Management is targeting an increase in oil and natural gas production from 11,889 barrels of oil equivalent per day (Boe/d) to a level in the range of 13,000 Boe/d to 14,000 Boe/d in 2024. Management reiterated this target in the earnings presentation and also reported a rate of 13,504 Boe/d in the second quarter and 13,030 Boe/d in the first half of the year. These are excellent numbers considering that Vitesse purchased additional oil assets in the second quarter, which “should lead to significant production and cash flow increases, especially in late 2024 and late 2025,” said CFO James Henderson in early May.
A stock to buy
With oil production increasing in the second half of the year and already at the lower end of the annual rate in the first half, Vitesse is poised for good production growth. In addition, the increase in hedging helps reduce downside risk (although it also reduces upside potential). All in all, Vitesse remains an excellent choice for income-oriented investors looking to gain exposure to the current oil price.
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Lee Samaha does not own any stocks mentioned. The Motley Fool owns and recommends Vitesse Energy. The Motley Fool has a disclosure policy.
