Forget Chevron and Buy These Great High-Yield Oil Stocks Instead

Chevron (CVX 0.21%) It’s a great, valuable company, and represents a great way to get exposure to relatively high oil prices. At the same time, there’s a lot of uncertainty about the stock related to the planned $53 billion acquisition. Hess.

That’s why it makes sense for Chevron investors to consider diversifying to avoid stock-specific risk, but also maintain oil exposure in their portfolio by buying a few other companies, one of which is a small-cap stock with an 8.7% yield. Vitesse Energy (VTS 0.16%). Here’s why:

Chevron’s uncertainty

First, let me say a few words about our ongoing dispute with Chevron. ExxonMobil And Chevron is fighting with China National Offshore Oil Corporation (CNOOC) over its intention to acquire Hess. The dispute centers around the Stabroek drilling block off the coast of Guyana.

ExxonMobil CNOOC holds a 25% stake and Hess holds a 30% stake, giving it a 45% stake in the block.

Chevron would acquire a 30% stake in the block by acquiring Hess. However, ExxonMobil and CNOOC believe they have rights to the block (including a preemptive right to acquire Hess’s stake in Stabroek) and have filed for arbitration over these rights.

The arbitration could take time, and the panel may not resolve the issue in Chevron’s favor. So this issue is likely to have an impact on the stock for some time. So it makes sense to look at other interesting oil stocks.

Enter Vitesse Energy

With a market cap of just $711 million, Vitesse is small compared to companies like Chevron, but that doesn’t mean its management can’t move nimbly and invest in a variety of assets. That’s what Vitesse does. This isn’t a one-off 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 oilfields of North Dakota. Among the major publicly traded operators are Code Energy, EOG ResourcesExxonMobil, Marathon OilAnd Hess.

As of May, Vitesse had interests in 6,932 productive wells, with an average net interest of 2.7% per operating well. While well operators propose, start and complete wells, Vitesse’s management evaluates each opportunity to invest in wells that are “expected to meet the desired rate of return based on estimates of recoverable oil and natural gas reserves,” according to an SEC filing.

This model provides Vitesse with significant financial flexibility, freeing the company from drilling obligations and other operator-related costs, and frees management to focus on what it does best: analyzing and modeling assets for investment using proprietary processes.

According to the 2024 news flow, management continues to identify potential assets, investing $6.8 million in the acquisition of oil and gas properties in the first quarter and subsequently signing a contract to acquire oil and gas interests in North Dakota for $40 million.

Investment Case for Vitesse Energy

The key is the confidence in management’s ability to identify and invest in productive assets. Vitesse will certainly benefit from higher oil prices, but it uses hedging strategies to reduce its exposure to oil price volatility. This is good when oil prices are falling, but limits the company’s upside potential when oil prices are rising.

Image credit: Getty Images.

But the hedging strategy (Vitesse hedged 50% of its oil production in the first quarter) also helps protect the company’s ability to pay its flat quarterly dividend of $0.525 per share.

While capital expenditures to acquire production assets in 2024 will reduce potential free cash flow (FCF) generation this year, Wall Street expects Vitesse to generate about $82 million in FCF in 2025, enough to cover its current dividend payout of about $60 million.

Image credit: Getty Images.

Stocks to buy

Management’s track record provides confidence in the business model, and the hedging strategy protects the dividend from significant declines in oil prices. That said, hedging is an imprecise science at best, and investors should assume that the dividend will be threatened if oil prices fall significantly.

Overall, Vitesse is bullish on oil and offers an interesting option for investors who want to express that view by investing in oil stocks. It is also a good way for Chevron investors to invest cash in energy stocks until the Hess acquisition issue is resolved.