The oil and gas company Vitesse Energy(NYSE: VTS) is attracting a lot of attention from investors, not least because it is a Berkshire Hathaway holding. And despite a 35% rise in its stock price this year, it carries a dividend yield around 8.6%.
That said, there's usually a reason why a stock trades at such a high yield. Let's take a balanced look at the bull and bear cases for the stock.
The bulls' case for Vitesse Energy
The glass-half-full view on this energy stock emphasizes the attractiveness of Vitesse's business model, the sustainability of its dividend yield through the use of hedging exposure to the price of oil, and the track record of its management in finding attractive assets to invest in.
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Vitesse is not a traditional oil and gas company in that it's not an owner/operator of energy assets. Instead, its management team (headed by longtime oil and gas CEO Bob Gerrity) buys relatively small working interests in specific wells (operated by other companies) that it has analyzed and modeled for productivity.
For reference, it has interests in 6,475 productive wells "with an average working interest of just 2.7% per working interest well," according to its investor presentation.
The model means Vitesse is not burdened with drilling obligations (as is often the case with a traditional energy company), and the spread of well investments means it's not overly exposed to any single well. In addition, it allows management to focus on what it does best: identify productive well investments rather than operate the wells itself.
As ever with an oil and gas company, you have to consider risk, and the exposure to the price of oil and what that means for Vitesse's earnings and dividend. Management's risk strategy involves running a conservative balance sheet by aiming for a ratio of less than 1 for net-debt-to-earnings before interest, taxation, depreciation, and amortization (EBITDA).
In addition, I've previously discussed how Vitesse hedges its exposure to the price of oil, outlining how the company started 2023 with 31% of its expected oil production to 2024 hedged at $77.42 a barrel.
The bulls will point out that this commitment to hedging limited the upside to earnings in 2021 and 2022 as the price of oil rose, so you should feel comfortable that hedging will work to limit the downside when the price of oil falls. As such, the dividend (or at least something close to it) might prove sustainable across various market conditions.
The bears' case on Vitesse Energy
In response, the bears have three key arguments. First, they might point out that it's unclear whether Berkshire Hathaway actually bought any stock, or its entire position is due to an allocation from the spinoff from Jefferies Financial Group, a Berkshire Hathaway holding.
Second, while hedging is wonderful in theory, the reality is it's always an imperfect science. Vitesse doesn't hedge all its production at present, and while relatively modest movements in the price of oil will probably be fine, any swift and dramatic move is likely to challenge any hedging strategy. In other words, it could disappoint precisely when you need it the most.
Third, while management does have a good track record and has investments in many different wells, they are primarily in the Bakken oil field in North Dakota, and Vitesse might need help to replace reserves in the future. Furthermore, heavy exposure to one field creates risk in itself, for example, in transportation and processing connections.
How to think about Vitesse Energy
On balance, there's something to consider from both sides of the argument here. On the one hand, Vitesse's current $2 dividend might well not prove sustainable given a sharp fall in the price of oil and/or difficulty in replacing reserves.
That said, if the price of oil stays within a reasonable band and you trust its management to invest wisely, then Vitesse could well pay a hefty dividend for years to come.
Taking everything into consideration, it's probably not a stock to load up on in a concentrated portfolio, but it has a place in a diversified portfolio for passive income investors.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Jefferies Financial Group, and Vitesse Energy. The Motley Fool has a disclosure policy.
