3 Top High-Yield Oil Stocks to Buy in September

There is a major fault line running through the US oil and gas sector, and I’m not talking about geology here. Simply put, Devon Energy (NYSE: DVN), Vitesse Energy (NYSE: VTS)And chord energy (NASDAQ: CHRD) are trading at low valuations and colossal dividend yields as investors price the Bakken oilfield assets at a discount to other assets, such as those in the Permian Basin. However, all three stocks are now trading at attractive valuations and are worth picking up.

The five largest oil producing regions in the US

Below are the top five oil producing regions in the U.S. to help you understand why investors prefer the Permian Basin over other assets.

Data: US Energy Information Administration.

Not only is the Permian region the most important in terms of production, but it has also increased production the most in recent years. This is in contrast to the moderate growth in production in the Bakken.

The maturing nature of the Bakken oil field is recognized in the 2023 North Dakota Energy Report: “The Bakken formation is now considered ‘mature’ by the industry. This means that many operators in the state are committed to producing their acreage at a consistent and steady pace, but that radical growth in production is less likely.

Devon Energy, Vitesse Energy and Chord Energy

It’s not hard to see how investors could take a glass-half-empty stance on these stocks. While Vitesse Energy is up 18% this year, it still trades on a dividend yield of 8.1%, and shares don’t trade on yields like that unless the market is concerned about something.

Likewise, Devon Energy and Chord Energy are also trading on attractive yields, and part of that reason likely comes down to significant deals both companies have made to add assets to the Bakken oil field. All three have announced deals in the Bakken this year. It’s part of a current trend in the industry where oil and gas companies are using the cash flows from relatively high oil prices to acquire assets at a time when the market continues to give energy companies cheap valuations.

It’s not hard to see what these three have in common this year.

Data source: Company presentations.

The story continues

All three stocks seem like good investments, and it seems the market is too pessimistic about this one.

Vitesse Energy

Vitesse Energy is an unusual oil and gas company that does not wholly own or operate assets. Instead, it uses its proprietary technology system and management experience to invest in interest in wells operated by larger companies, primarily in the Bakken. These include Chord Energy and Grayson Mill.

In addition, it uses hedging to protect against a decline in oil prices. The strategy offers diversification across 7,000 producing wells and Vitesse is almost an ETF on Bakken.

chord energy

Chord Energy now expects $1.2 billion in adjusted free cash flow (FCF) in 2024, and management believes it has a “10-year footprint of low breakeven locations delivering industry-leading oil-weighted production” in the Williston Basin. Given that the $1.2 billion in FCF represents more than 13% of its market cap, the stock appears capable of delivering its entire market cap and more in FCF within a decade.

Devon Energy

It’s a similar story at Devon Energy, where Wall Street expects the company to generate $10.9 billion in FCF over the next three years. Management expects the Grayson Mill deal to add 15% to FCF generation. With a current market cap of just $28 billion, it won’t be long before Devon generates a significant portion of its market cap in FCF as well.

All in all, these three high-yielding stocks look like excellent buys as long as the Bakken index matures and there’s no guarantee that oil prices will remain high.

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

3 Top High-Yield Oil Stocks to Buy in September was originally published by The Motley Fool