Chevron’s Uncertainty and the Case for Vitesse EnergyChevron’s Uncertainty and the Case for Vitesse Energy Chevron (CVX) remains a solid company but faces uncertainty amid its planned acquisition of Hess. To mitigate stock-specific risk while maintaining oil exposure, investors may consider diversifying into other oil stocks. Enter Vitesse Energy (VTS) Vitesse Energy, a small-cap company with a $711 million market cap, offers an alternative investment opportunity. Its unique business model involves acquiring interests in wells operated by larger companies, including Chevron, ExxonMobil, and Hess. Vitesse’s Model Vitesse evaluates and invests in wells with high recovery potential, leaving operator responsibilities to well operators. This model provides flexibility and allows Vitesse to focus on asset analysis. Investment Rationale Despite benefiting from higher oil prices, Vitesse uses a hedging strategy to reduce price volatility exposure. Management’s proven track record and hedging strategy ensure the stability of its dividend payout of $0.525 per share. Benefits for Chevron Investors For Chevron investors concerned about the Hess acquisition, Vitesse provides an avenue to maintain oil exposure while diversifying away from stock-specific risk. Caution Hedging is an imperfect science, and the dividend could be at risk if oil prices fall significantly. Conclusion Vitesse Energy offers a compelling investment opportunity for those bullish on oil. Its diversified portfolio, hedging strategy, and management’s expertise make it a worthy consideration for investors seeking alternative oil stock investments, particularly those seeking diversification from Chevron.
The major oil company is facing uncertainty and it may be time to start investing in other oil stocks as well.
Chevron (CVX 0.21%) is a fine and worthy company, and it’s an excellent way to get exposure to a relatively high oil price. At the same time, there’s a significant amount of uncertainty hanging over the stock due to the planned $53 billion acquisition of Hess.
That’s why it makes sense for Chevron investors to think about diversification to avoid stock-specific risk, but keep oil exposure in their portfolio by buying a few other such companies. And one of those is the 8.7%-yielding small cap Vitesse Energy (VTS 0.16%). This is why.
Chevron’s uncertainty
First, a few words about Chevron and the ongoing dispute with ExxonMobil and the China National Offshore Oil Corporation (CNOOC) over Chevron’s proposed acquisition of Hess. The dispute centers on the Stabroek Block of drilling sites offshore Guyana.
ExxonMobil has a 45% stake in the block, with CNOOC holding a 25% stake and Hess holding a 30% stake.
In acquiring Hess, Chevron would receive its 30% stake in the block. However, ExxonMobil and CNOOC believe they have rights over the block (including the right of first refusal to acquire Hess’s interest in Stabroek) and have filed for arbitration over those rights.
Arbitration can take time and the panel may not decide the issue in Chevron’s favor. So the issue will probably hang over the stock for a while. That’s why it makes sense to look at other interesting oil stocks.
Enter Vitesse Energy
With a market cap of just $711 million, Vitesse is overshadowed by the likes of Chevron, but that doesn’t mean management can’t be nimble and invest in a wide variety of assets. That’s exactly what Vitesse does; this is no one-trick-pony oil and gas stock.
Vitesse’s business model involves acquiring interests in wells operated by more than 30 other major oil companies, primarily in the Bakken oil field in North Dakota. The larger publicly traded operators include chord energy, EOG sourcesExxonMobil, Marathon oiland Hess.
As of May, Vitesse had interests in 6,932 productive wells, with a net interest rate averaging 2.7% per working well. Well operators propose, originate and complete the wells, while Vitesse management evaluates each opportunity to invest in wells “expected to achieve a desired rate of return based on estimates of recoverable oil and natural gas reserves,” according to filings with the Securities and Exchange Commission.
The model gives Vitesse significant financial flexibility and does not burden the company with drilling obligations and other costs associated with the operator. It also allows management to focus on what it does best: using its own processes to analyze and model the assets in which it is considering investing.
Based on the 2024 news, management continues to identify potential assets. In the first quarter, $6.8 million was invested in the acquisition of oil and gas fields, followed by an agreement to acquire an additional $40 million in oil and gas interests in North Dakota.
The investment case for Vitesse Energy
The key is confidence in management’s ability to identify and invest in productive assets. While Vitesse will obviously benefit from higher oil prices, it also uses a hedging strategy to reduce its exposure to oil price volatility. That’s good when oil prices fall, but it also limits the company’s upside potential when oil prices rise.
Image source: Getty Images.
However, the hedging strategy (Vitesse hedged 50% of its oil production in the first quarter) also helps protect the company’s ability to pay its fixed quarterly dividend of $0.525 per share.
While capital expenditures in 2024 (to acquire productive assets) will reduce potential free cash flow (FCF) this year, Wall Street expects Vitesse to generate around $82 million in FCF in 2025, which would more than cover the current dividend payout of almost $60 million.
Image source: Getty Images.
A stock to buy
Management’s track record provides confidence in the business model, and the hedging strategy protects the dividend from a significant drop in oil prices. That said, hedging is an imprecise science at best, and investors should assume that the dividend will be at risk if oil prices fall significantly.
All in all, Vitesse offers an interesting option for investors who are bullish on oil and want to express that opinion by investing in oil stocks. It is also a good way for Chevron investors to invest some money in energy stocks while they wait for the Hess takeover issue to be resolved.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron, Chord Energy, EOG Resources and Vitesse Energy. The Motley Fool has a disclosure policy.
