This 9% yielding energy stock just raised its dividend payout

As the dust settles on talk of yen trades and market crashes, 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 to 2025, the case for oil is intact. Still, you don’t have to be a raging oil bull to like buying stocks with a 9% yield Vitesse Energy (NYSE: VTS). Here’s why.

Vitesse Energy dividends

After telling investors it would increase its quarterly dividend from $0.50 per share to $0.525 per share in its first-quarter results, Vitesse Energy investors were delighted to receive the improved dividend on June 28. 9.2% at the time of writing.

That’s an attractive yield, but history is littered with high-yielding stocks that ended up disappointing investors. So how sustainable is Vitesse Energy’s dividend?

A sustainable dividend

As you might guess from an oil and gas company, Vitesse is not a stock to buy if you’re worried about a crash in energy prices. Still, it’s an attractive stock to buy if you’re bullish on oil, comfortable with the price of oil where it is now, or even if you can tolerate some price decline.

The latter opinion is due to Vitesse’s policy of hedging its oil production. For reference, the company also produces gas, but does not insure it. To be clear, hedging is always an imperfect science and you rely somewhat on management’s discretion to judge market conditions and hedging needs.

That said, for those worried about the direction of oil prices, it’s worth noting that Vitesse has increased its open crude oil swaps (how it hedges oil prices) throughout the year. Swaps are derivative contracts to exchange an asset (in this case, oil) at a fixed price for a set period. It is not so important to go into the details of the exchanges as it is to appreciate that the exchanges mean that Vitesse will benefit financially if the price of oil falls below the agreed price.

At the end of 2023, Vitesse hedged 40% of its “estimated 2024 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, that figure had reached 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 in 2023 at 2.97 million barrels and 1.67 million in the first six months of 2024, it’s clear that Vitesse has increased its oil production coverage — something to reassure those worried about a potential drop in oil prices.

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Good operational progress

The idea of ​​hedging is to isolate risk (both upside and downside) from management’s core skills and how it adds value to shareholders. Namely, it is the ability to increase production by owning minority interests in wells as a non-operator, primarily in the Bakken oil field in North Dakota.

As such, 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 it is on track to do so 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 this target in 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. Those are excellent numbers, given that Vitesse bought additional oil assets in the second quarter, which “are expected to deliver significant increases in production and cash flows, primarily in late 2024 and late 2025,” according to the CFO James Henderson in early May.

A stock to buy

With oil production rising in the second half and the first half already at the low end of the annual rate, Vitesse is poised for good production growth. Moreover, increased hedging helps reduce downside risk (although it also decreases upside potential). All in all, Vitesse remains an excellent choice for income-seeking investors seeking exposure to oil prices at current prices.

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Lee Samaha has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Vitesse Energy. The Motley Fool has a disclosure policy.

This 9% Yielding Energy Stock Just Raised Its Dividend Payment was originally published by The Motley Fool