Better Energy Stock: Vitesse Energy vs. Devon Energy

The two oil companies make for a fascinating comparison. High-yielding Vitesse Energy (NYSE: VTS) and Devon Energy (NYSE: DVN) are connected in that Vitesse has minority interests in Devon-operated wells in the Williston Basin of North Dakota and Montana (Bakken Formation). However, they have different business models, risk profiles, and capital allocation priorities. Here's a look at what each offers and which might be the better stock overall.

Vitesse Energy: A high-yield (8.8%) energy stock

The $725 million market cap stock has an unusual business model that takes full advantage of management's expertise and the company's flexibility as a small company. Vitesse focuses on owning interests in wells operated by other leading oil companies in the Bakken. It invests in wells run by more than 30 different operators, with only three companies responsible for more than 10% of its total working interests, namely Chord Energy (23%), Devon Energy (11%), and Continental Resources (10%).

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The strategy diversifies working and royalty interest across more than 7,000 working wells. However, its assets are overwhelmingly in the Bakken, and management argues that since Vitesse participates in 30%- 55% of drilling rigs in the Bakken, it's "effectively creating a Bakken ETF."

Management uses a proprietary process to identify potential investments, and since the operators market, transport, and sell oil and gas from the wells, Vitesse isn't directly exposed to operational risks from those activities. In addition, management reduces its exposure to the price of oil by hedging a substantive share of its oil production (for example, 43% of 2025 oil production at a price of $73.21).

In a nutshell, its strategy focuses on maximizing value for investors through management's skill in identifying assets from which it can generate cash flow, which is returned to investors in dividends.

Image source: Getty Images.

A new direction for Vitesse Energy

That said, investors will have to get used to a change of direction in the strategy due to the company's impending acquisition of Lucero Energy. The all-stock transaction will leave Vitesse shareholders owning 80% of the new company created out of the acquisition. As a result of the deal, management aims to increase the yearly dividend from $2.10 per share to $2.25 per share, implying a 9.4% dividend yield at the current price.

The strategic change is that Vitesse will now be an operator of assets and a non-operator, and the acquired Lucero assets are significant. Lucero's net production is 6.4 thousand barrels of oil equivalent per day (Mboe/d) compared to Vitesse's estimate of up to 14.5 Mboe/d in 2025.

There has been a significant shift in strategy, with CEO Bob Gerrity stating, "This opens the door to acquiring operated and non-operated packages that are accretive to our dividend."

While the deal makes sense, it also adds a new element of operational risk to the investment case. It also implies that Vitesse is finding it challenging to obtain attractive, non-operating working interests that align with its traditional business strategy.

Devon Energy

It's easy to compare Vitesse's potential 9.4% dividend yield to Devon's 2.8% (based on its current stock price and fixed dividend of $0.96 per share) and conclude that Vitesse is a better buy. However, there's more to investing than dividends. I think, on balance, Devon's mix of gushing free cash flow (FCF), its (so far) successful acquisition of Grayson Mill Energy in the Bakken, and its well productivity improvements in its core Permian Basin assets in 2024 make it a compelling stock for oil and gas investors.

Based on management's estimates, Devon will generate at least $3 billion in FCF in 2025, assuming an oil price of $70 per barrel.

It's equivalent to 13.7% of its current market cap. Management plans to use 30% of its FCF to pay down debt and has $800 million to $1.2 billion earmarked for share buybacks that will reduce its share count, increasing existing shareholders' claims on future FCF. Meanwhile, debt reduction will reduce future interest payments.

Image source: Getty Images.

That approach to capital allocation makes perfect sense if you consider that oil stocks are being discounted in fear of a future drop in the price of oil from increased production under the current presidential administration and a recent pledge by OPEC+ to increase production.

That said, there's no guarantee that the price of oil will fall, and that questionable assumption is being priced into stocks like Devon now. As such, buying back stock when it's undervalued makes more sense than paying a dividend right now. In addition, Devon is following its business model, while Vitesse's acquisition is a shift in direction that brings risk.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vitesse Energy. The Motley Fool has a disclosure policy.