Vitesse Energy: An Attractive Investment Opportunity? (NYSE: VTS) boasts a 7.5% dividend yield. Unlike many oil and gas firms, its business model does not solely depend on fluctuating oil and gas prices. While all stocks carry risk, Vitesse’s stability might be greater than the high yield suggests.

Why Investors Should Consider Vitesse Energy

High dividend yields often indicate that the market doubts the sustainability of those payments. If oil prices were to plummet, Vitesse would undoubtedly face challenges. However, it is important to consider that prices can fluctuate significantly, with the current rate sitting at around $70 per barrel and “collapse” levels closer to $30.

If you are concerned about a drastic drop in oil prices, then Vitesse may not be the right investment for you. On the other hand, if you believe oil prices will remain stable, Vitesse presents an excellent opportunity for income-focused investors. Here are two reasons for this conclusion:

• Vitesse reduces risk by diversifying its investments across a range of assets, allowing management to concentrate on finding productive opportunities.
• A strategic hedging approach helps safeguard against the unpredictable nature of oil prices.

Understanding Vitesse’s Business Model

Vitesse Energy takes a unique approach by not operating its own assets. Instead, the company uses its proprietary processes and the expertise of its management team to take minority working interests in wells run by top-tier oil and gas operators.

The company has a significant stake in the Bakken region, partnering with renowned operators like Chord Energy, Devon Energy (which recently acquired Grayson Mill Energy), and Continental Resources.

Image source: Getty Images.

Vitesse has a strong presence in the Bakken, with interests in 7,126 productive wells and an average working interest of 2.7%. Management likens its structure to an actively managed Bakken ETF, since it has historically been involved in 30%-55% of rigs drilling in the area.

This strategy not only provides valuable diversification but also mitigates risk—Vitesse’s operators handle the marketing, selling, and transport of their production, allowing Vitesse’s management to focus on maximizing shareholder value through investment opportunities.

The Importance of Hedging Strategy

No hedging strategy offers complete protection; investing in oil and gas companies always involves some level of risk related to price fluctuations. Nevertheless, Vitesse employs hedges to offset its oil production risk, reducing its vulnerability to market volatility. This approach enables management to concentrate on identifying profitable investment opportunities and increasing production.

For instance, in the third quarter, Vitesse hedged 63% of its oil production. The impact of this hedging on its realized prices illustrates its effectiveness: while it lowered the realized price in 2022, it improved it in 2023—and has continued that trend into 2024.

Data source: Vitesse Energy. Chart by author. YTD = year to date.

Although hedging is inherently uncertain, Vitesse takes a proactive stance to minimize exposure to price volatility. Looking ahead, the company has hedged 43% of its anticipated 2025 oil production at $73.21 per barrel, offering some protection against potential declines in oil prices.

Image source: Getty Images.

Evaluating Vitesse Energy as an Investment

While Vitesse Energy is not without risk, its diversified model and effective management reduce perceived threats. The company’s hedging strategy decreases reliance on energy price fluctuations, making its attractive 7.5% dividend yield appealing for investors who are comfortable with oil being priced within recent historical ranges.

Should You Consider Investing $1,000 in Vitesse Energy?

Before making a decision to invest in Vitesse Energy, it’s worth noting this:

The Motley Fool Stock Advisor team recently highlighted what they deem to be the 10 best stocks to buy right now—and Vitesse Energy was not among them. The chosen stocks have the potential for significant returns in the near future.

For comparison, consider Nvidia, which made this list on April 15, 2005. If you had invested $1,000 at that time, it would be valued at $869,885 today!*

Stock Advisor offers a clear framework for investment success, including guidance on portfolio development, regular analyst updates, and two new stock recommendations each month. Since 2002, the Stock Advisor service has more than quadrupled the return of the S&P 500.*

Explore the 10 stocks »

*Stock Advisor returns as of November 18, 2024

Lee Samaha does not own shares in any companies mentioned. The Motley Fool has positions in and recommends Vitesse Energy. The Motley Fool’s disclosure policy is available for review.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.