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.
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.
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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:
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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.
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Management uses a hedging strategy to protect its exposure to the direction of the price of oil.
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.
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.
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.
