Compounding Capital to Support Dividend Strategy
Vitesse’s strategy is to compound cash flow derived from its diverse portfolio of oil-prone assets in the Bakken/Three Forks play to fund capital returns to shareholders and reinvest in the underlying asset base. Management’s preferred method for returning cash is through a sustainable fixed dividend, currently $2.00/share annualized. The dividend is sacrosanct and lies at the heart of management’s capital allocation model. Capital is allocated to what management believes are the highest return opportunities to develop or acquire Bakken/Three Forks assets to sustain dividend visibility. Management was drawn to the Bakken/Three Forks play more than a decade ago based on its belief that evolving drilling and production technologies could lower costs and improve hydrocarbon over time in the oil-rich reservoirs. To execute the strategy, management has concentrated on acquiring non-operated working interests and mineral interests in acreage ahead of the drillbit. The acreage portfolio, consisting of ~48,000 acres as of December 31, 2023, exposes Vitesse to a diverse set of more than 30 operators in the play. The company has historically owned an interest in acreage under 30-50% of the rigs drilling in the Williston Basin. Management estimates the current asset base includes more than 200 net undeveloped drilling locations. Future development could generate incremental cash flow to sustain and grow the production base in support of the dividend. Vitesse created Luminis, a proprietary system to collect the massive amount of data generated by its ownership in more than 6,800 gross producing wells. The data repository facilitates economic assessments of incremental capital allocation choices across the basin and among operators to inform investment decisions and project their financial implications through the company’s corporate models. Our updated FY24/FY25 adjusted EBITDA estimates are $172/$195 million, respectively, based on average NYMEX oil prices of $79.19/$80 per barrel. Oil accounts for ~70% of estimated production and ~94% of revenue. Our estimates imply Vitesse can comfortably fund the dividend while maintaining a leverage ratio below 1.5x. Vitesse is currently trading at 4.5x and 3.9x our FY24/FY25 adjusted EBITDA estimates and an 8.4% dividend yield.
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