This FTSE 250 stock’s reaping an enormous dividend yield, thanks to its depressed share price. Energean‘s (LSE:ENOG) currently rewarding shareholders with a chunky 10% payout that’s been rising since 2022. Yet, over the same period, the stock price has fallen by over 30%. And as a result, its forward price-to-earnings ratio sits at a dirt cheap-looking 5.6.
Is this a screaming Buy opportunity to consider? Or is there something else going on?
Digging into the details
As a quick reminder, Energean’s an oil & gas producer. It’s currently on track to hit average daily production of 150-155 thousand barrels of oil equivalents (kboe/d) by the end of 2024. That pales in comparison to industry titans like Shell or BP. But it’s a significant increase compared to the average 123 kboe/d produced in 2023.
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Pairing this increased volume with rising natural gas prices has put the firm on a rising trajectory. In fact, looking at its latest third-quarter earnings report, Energean’s already delivered 35% revenue growth along with a 44% jump in underlying earnings. And this momentum’s expected to continue throughout the rest of the year.
Normally, this sort of performance would spark a positive reaction from investors. Even more so, given growth doesn’t appear to be slowing any time soon. So why is the share price falling?
Geopolitical risk
There’s no denying that Energean’s operations are currently firing on all cylinders. However, what seems to be holding the stock back is the location of these operations. Almost all of its extraction activities are off the coast of Israel. And that’s a warzone.
Since the conflict began, the company hasn’t suffered any disruption to daily operations. That’s despite its flagship floating production storage & offloading (FPSO) vessel being targeted by a suspected Hezbollah drone shot down by the Israeli Navy earlier this year.
Management has safety procedures in place to evacuate staff should the worst come to pass. However, should a prolonged disruption to operations occur, earnings will likely take a significant hit, along with dividends.
In other words, there’s a chance of a potential earnings collapse that’s almost entirely out of management’s control. With that in mind, it’s not surprising to see the share price struggle. After all, investors hate uncertainty.
A buying opportunity?
Investing in a commodity-driven business at a significant discount is a pretty rare opportunity, especially for a firm as established as Energean. And should the conflict come to an end, the stock’s likely to surge as the uncertainty of disruption evaporates.
In other words, investors could permanently lock in a double-digit dividend yield along with chunky capital gains. And when combined with a relatively healthy balance sheet, this certainly starts to sound like a buying opportunity in my mind.
However, this ultimately comes down to a question of risk versus reward. For my portfolio, I already have sufficient exposure to the energy sector. However, for investors comfortable with taking on some extra risk, Energean’s impressive dividend yield may be worth considering.
