Vitesse Energy (NYSE: VTS) offers a 7.5% yield. Unlike many other oil and gas companies, its story isn’t solely about relying on oil and gas prices to drive the share price or sustain the dividend. Vitesse has risk, as all stocks do, but it’s not quite as risky as its dividend yield implies.
The investment case for Vitesse Energy
As noted above, a stock often trades with a high yield because the market doubts that the dividend is sustainable. If oil prices collapse, then Vitesse will suffer, too. However, there are many prices between the current $70 a barrel level and a “collapse” to around $30.
If you’re worried about the latter, Vitesse isn’t for you. However, if you think the price of oil will be relatively range-bound, then Vitesse is an excellent buy for income-seeking investors. There are two key reasons behind this assertion:
- Vitesse’s business model diversifies risk by spreading investment across multiple assets and focuses value creation on what its management does best — identify productive assets to invest in.
- Management uses a hedging strategy to protect its exposure to the direction of the price of oil.
Vitesse’s business model
The company isn’t an owner/operator of assets. Instead, it uses a proprietary process and the experience of its management team to take minority working interests in wells that are operated by other leading oil and gas companies.
Vitesse’s focus is on the Bakken region. The list of operators it invests with include leading players in the region such as Chord Energy, Devon Energy (following its acquisition of Grayson Mill Energy) and Continental Resources.
Image source: Getty Images.
Vitesse’s involvement in the Bakken is substantial, with an interest in 7,126 productive wells and an average working interest of 2.7%. Management describes its company as an effective, actively managed Bakken ETF, given its historic participation in 30%-55% of rigs drilling in the basin.
Aside from the diversification across wells, the strategy also reduces risk because the operators, not Vitesse, market, sell, and transport oil and gas. This frees up Vitesse’s management’s time and energy to focus on the best way to add value for shareholders — namely, identifying assets to invest in.
Hedging strategy
No hedging strategy is perfect, and no one should expect to invest in an oil and gas company without taking on some exposure to the price of oil and gas. While investors should keep these caveats in mind, it’s also important to note that Vitesse does hedge its oil production, which reduces its exposure to the volatility of the price of oil. Furthermore, it is essential to highlight that this strategy shifts the company’s focus on creating value towards management’s skill in investing in profitable assets and expanding production.
For example, in the third quarter, Vitesse had hedges covering 63% of its oil production. To illustrate how the hedging strategy works, here’s a look at the company’s average combined (oil and gas) realized price before and after hedging. As you can see below, the hedging lowered its actual realized price in 2022 but increased it in 2023, and so far, it’s increased again in 2024.
Data source: Vitesse Energy. Chart by author. YTD = year to date.
Hedging is always an imperfect science, and management takes an actively managed approach to matters, meaning it could get things wrong. Still, the point of the hedging is to reduce exposure to the volatility of the price of oil.
Looking ahead, Vitesse has 43% of its expected oil production in 2025, hedged at $73.21 per barrel. That should provide downside protection in the event of a fall in the price of oil.
Image source: Getty Images.
Is Vitesse Energy a buy?
My point isn’t that Vitesse is without risk. It does have risk, but it’s less than you might think by taking a superficial view. The business model diversifies risk and focuses management on its core strength, and the hedging strategy reduces its reliance on energy prices. Meanwhile, its 7.5% dividend yield is attractive for income-seeking investors comfortable with the price of oil within the range it has been over the last few years.
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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.