As the dust settles on talk of yen carry trades and market crashes, the price of oil is still above $75 a barrel. Meanwhile, market interest rates are trending lower in anticipation of a Federal Reserve rate cut. With OPEC+ extending production cuts in 2025, the bull case for oil is intact. Still, you don't necessarily need to be a raging oil bull to like buying stock in 9%-yielding Vitesse Energy(NYSE: VTS). Here's why.
Vitesse Energy's dividend
Having told investors it would raise its quarterly dividend from $0.50 per share to $0.525 per share in the first-quarter results, Vitesse Energy investors were delighted to receive the upgraded dividend on June 28. The annualized dividend of $2.10 puts Vitesse on a dividend yield of 9.2% at the time of writing.
It's an eye-catching yield, but history is littered with high-yield stocks that ended up disappointing investors. So, how sustainable is Vitesse Energy's dividend?
A sustainable dividend
As you might assume about an oil and gas company, Vitesse is not a stock to buy if you are worried about a crash in energy prices. However, it's an attractive stock to buy if you are bullish on oil, comfortable with the price of oil at where it is now, or can even tolerate some decline in the price.
The latter opinion is due to Vitesse's policy of hedging its oil production. For reference, the company also produces gas but doesn't hedge it. To be clear, hedging is always an imperfect science, and you are somewhat relying on management's discretionary ability to judge market conditions and hedging needs.
That said, for those worried about the direction of the price of oil, it's worth noting that Vitesse has increased its open crude oil swap contracts (how it hedges the price of oil) throughout the year. Swaps are derivative contracts to exchange an asset (in this case, oil) at a fixed price for a set period. It's not so important to get into the minutiae of swaps as it is to appreciate that the swaps mean Vitesse will benefit financially if the price of oil drops below the agreed price.
Image source: Getty Images.
At the end of 2023, Vitesse hedged 40% of its "2024 expected oil production hedged at an average price of $78.95" per barrel. At the end of the year, this totaled 1.68 million barrels of oil over the next six quarters. By the end of the first quarter, this figure was up to 2.45 million barrels over the next seven quarters. By the end of the second quarter, this figure was 2.18 million barrels over the next six quarters.
Given that oil production in 2023 was 2.97 million barrels and 1.67 million in the first six months of 2024, it's clear that Vitesse has increased its hedging of oil production -- something to assuage those worried about a potential drop in the price of oil.
Image source: Getty Images.
Good operational progress
The idea of hedging is to isolate the risk (both upside and downside) in management's core skill and how it adds value for shareholders. Namely, it's the ability to grow production by owning minority interests in wells as a non-operator, primarily in the Bakken oil field in North Dakota.
As such, it's important for the company to demonstrate that it can acquire assets successfully and grow production and cash flow accordingly. The good news from the recent second-quarter earnings report is that it's on track to do that 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 figure in the range of 13,000 Boe/d to 14,000 Boe/d in 2024. Management reiterated that 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. They are excellent figures, considering that Vitesse bought additional oil assets in the second quarter that are "expected to provide material increases to production and cash flows, primarily late 2024 and end of 2025," according to CFO James Henderson in early May.
A stock to buy
With oil production increasing in the second half and the first half already at the low end of the yearly rate, Vitesse is set up for good production growth. Moreover, the increase in hedging helps reduce the downside risk (although it also decreases the upside potential). All told, Vitesse remains an excellent choice for income-seeking investors looking for exposure to the price of oil at the current price.
Should you invest $1,000 in Vitesse Energy right now?
Before you buy stock in Vitesse Energy, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vitesse Energy wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $641,864!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 6, 2024
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vitesse Energy. The Motley Fool has a disclosure policy.
