Warren Buffett's Berkshire Hathaway purchased just over 51,000 shares in oil and gas company Vitesse Energy (VTS -0.04%) in the first quarter. It's not a significant position for Berkshire -- the current value is just over $1.1 million. However, it is intriguing for retail investors who want to follow the oracle of Omaha into a stock currently yielding 9.5%. So let's look at Vitesse and why it might attract income-seeking investors.
A classic Warren Buffett stock
The stock has all the hallmarks of a Buffett value stock purchase. The key to this argument is as follows:
- It's an investment decision that relies on Berkshire's confidence in an experienced management team. I'll return to this point in detail in a moment.
- It's a shareholder-friendly company with management aiming to grow dividends over time and expecting to initially "pay quarterly cash dividends and dividend equivalents totaling approximately $66.0 million per fiscal year" -- equivalent to $2 per share.
- Management diversifies risk in its business model, ensuring free-cash-flow generation is returned to investors in the form of buybacks and dividends.
- It's a classic "value" investment because the downside is limited, while the upside is significant.
Image source: The Motley Fool.
Introducing Vitesse Energy
The company is unusual in the oil and gas sector because it's not an owner/operator of assets. Instead, its management team, led by industry veteran Bob Gerrity as CEO, acquires interests in oil and gas assets (primarily in the Bakken oil field in North Dakota) operated by leading oil companies. Some of its better-known listed partners include Chord Energy, Civitas Resources, Hess, and to a lesser extent, Marathon Oiland ExxonMobil.
The company's risk management extends to diversifying its interests. As of March 2023, the company had interests in 6,475 productive wells "with an average working interest of 2.7% per working interest well," according to company presentations. In addition, management aims for a ratio of net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA)of less than 1. Also, it uses hedging to reduce its exposure to the volatility of oil and gas prices.
The conservatively run balance sheet and hedging reduce the upside potential from higher oil and gas prices. Still, it also helps ensure a steady cash flow stream to support dividends. In addition, it means Vitesse can be in relatively better shape to deal with a downturn -- a significant plus because management can then go and use its cash flow to pick up working interests in oil and gas assets when prices are low.
Another advantage of not being an owner/operator of assets is that Vitesse is"burdened with various contractual arrangements with respect to minimum drilling obligations, and [the company] can avoid exploratory, upfront leasing and infrastructure costs customarily incurred by operators" according to its SEC filings.
Why the management team matters
Given the business model, it's clear that investing in Vitesse Energy means trusting in the management team to allocate capital wisely, manage risk accordingly, and have the skill to identify productive investments. It's relatively less of what could be crudely described as the typical oil-price-led investment in oil and gas assets. Hedging commodity price volatility is always going to be an imperfect science. For example, Vitesse doesn't hedge its natural gas (only responsible for 13% of revenue in the first quarter) production and has no plans to do so, and only 31% of its oil production is hedged to 2024.
That said, management retains the flexibility to hedge higher percentages of its oil production, which helps lower risk. That came through in the first-quarter results with average realized prices before hedging of $72.95 a barrel, compared to $74.02 after hedging.
Image source: Getty Images.
It's clear that management's role is crucial, and it's worth looking into the key figure at Vitesse, namely Gerrity. He is the founder of Gerrity Oil & Gas Corporation, which merged with Snyder Oil assets to create Patina Oil in 1996, a company then acquired by Noble Energy in 2008. Gerrity would go on to found Vitesse Energy in 2014.
Gerrity and his management team have a demonstrable track record of success, and there's no doubt that Berkshire feels comfortable with the company's business model.
A stock to buy?
If you are looking for oil and gas exposure and a high-yield stock, and you trust what Berkshire sees in Vitesse's management, the stock offers an excellent option for investors. The fossil fuel sector isn't short of high-yield candidates, but Vitesse is one of the relatively lower-risk plays in the sector. As such, the stock is attractive for income-seeking investors.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Vitesse Energy. The Motley Fool has a disclosure policy.
