Vitesse Energy (VTS): A 10% Dividend Yield and Discount to “PV-10” Make this Spin-Off a Cheap Speculation on Oil
Vitesse Energy (VTS) is a recent spin-off from Jefferies (JEF). The stock was spun-off in January.
Vitesse is made up entirely of non-operating working interests (and a small amount of mineral rights which it may soon sell) in North Dakota and Montana.
Non-operating working interests are an economic interest in the production of oil and gas from a property without the obligation to pay production costs.
Operators – mainly Civitas (CIVI), PDC (PDCE), EOG (EOG), and Chevron (CVX) – propose specific wells. They are required to offer Vitesse proportionate participation in these wells. In theory, Vitesse is not required to participate in every well. However, Vitesse has historically participated in “the vast majority” of wells proposed by operators.
Production is a mix of about 60% oil and 40% gas. However, the likely discounted future cash flows for the company are weighted far more toward oil than gas (more like 80%+ oil). Vitesse usually hedges some – but not all – of its oil production out a year or two. It does not hedge any of its gas. The price Vitesse gets on its unhedged oil is related to the WTI crude prices you can look up daily. The gas price Vitesse receives doesn’t seem as reliably related to a benchmark gas price (which may be part of the reason Vitesse doesn’t hedge gas production).
Vitesse has a solid balance sheet. It has some cash. And it has a revolving credit agreement. Net debt is low (less than $1.50 per share). Management says it intends to keep things that way. The company targets a ratio of debt-to-EBITDA less than one. Right now, it is far below that.
Management mentions three priorities. The first is to pay a meaningful and growing dividend. Right now, it’s certainly meaningful at $2 a share (a 10% yield). The second is to keep leverage low. Like I said, it’s very low right now (EBITDA is several times higher than debt). And the third is to maintain the level of production.
While owned by Jefferies, Vitesse had higher cap-ex and actually grew its reserves over time. In the future, it looks like Vitesse will prioritize dividend payments over reserve growth. But, the company has suggested it will at least maintain reserves (and may try to grow them). Also, there is some wording in places that makes it sound like the company might consider issuing stock for a big, unplanned acquisition (but that equity is not used in normal, smaller deals). The deal size here is normally very small. And Vitesse probably has an annual budget for how much it hopes to spend in the year ahead.
VTS stock is cheap versus its “PV-10”.
PV-10 is a standardized reserve valuation measure the SEC requires oil and gas companies to include in their 10-K.
Basically, PV-10 is a discounted cash flow calculation using a 10% discount rate (it’s actually a 10% real rate, because there is no inflation escalator used). The only oil and gas …
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