When it comes to London’s biggest dividend-yielding stocks, Ithaca Energy (LSE:ITH) has held the crown for a while. Among its FTSE 350 peers, the oil & gas producer currently offers investors a whopping 13.2% payout!
Usually, seeing a yield this high is a giant red flag to stay away since it’s an indicator of an incoming dividend cut. Yet, after over a year of offering a high payout, that hasn’t materialised. In fact, management recently reiterated its plans to return $500m to shareholders through dividends alone. And digging deeper, the group’s free cash flow generation seems to more than support this.
So is this time to be greedy when others are fearful? Let’s take a closer look.
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Supercharging portfolio income
Ithaca owns and operates oil & gas production assets across the North Sea. And following its recent acquisition of Eni’s oil & gas fields, its portfolio and cash flows are ramping up rapidly. In fact, in its February trading update, production came in firmly ahead of expectations, delivering an average of 80,200 barrels of oil equivalents (boepd) in 2024. That landed towards the higher end of guidance and is a 14% increase from the 70,239 boepd achieved in 2023.
However, moving into 2025, production could be even more impressive. In the last quarter of 2024, production hit a peak of 138,000 boepd, with this momentum continuing into January 2025. And while oil prices have slumped in recent months, the increase in volume appears sufficient to propel revenue and earnings higher in 2025.
Needless to say, this is all rather positive. So why did analysts at Barclays recently cut their 12-month price target, from 155p to 100p?
Uncertainty remains
Barclays isn’t new to the price target-cutting party. Previously, Stifel had cut its expectations from 157p to 140p. And some analysts are projecting shares could fall to as low as 99p by this time next year.
The problem appears to lie within the political and legal landscape. Development of new North Sea oil & gas assets is unsurprisingly drumming up environmental concerns among activists. And a recent Scottish court ruling found that the approval of the development of Equinor and Ithaca’s Rosebank joint venture was unlawful.
This adds yet another hurdle for the company to overcome to maintain its growth trajectory in the coming years. And with the group’s fully-owned Cambo project still not receiving the green light for development from regulators, Ithaca’s lucrative dividend may not be around for much longer.
The bottom line
Based on the current consensus, should the group’s new North Sea projects get blocked, then Ithaca’s free cash flow generation could crumble to zero by 2033, at least when based on its current pipeline of projects. And without any excess cash being generated, dividends aren’t likely to stick around for much longer either.
Of course, this is the worst-case scenario. And so far, Ithaca’s managed to beat expectations. Personally, I think the uncertainty is a bit too much for my tastes. But for investors comfortable taking on the risk, Ithaca’s chunky dividend yield could prove to be a massive bargain, making it worthy of a closer look.
