The FTSE 250’s Ithaca Energy (LSE: ITH) frequently appears in my stock screener as a potential passive income stock buy. Passive income is money made with minimal effort by the investor, as with dividends paid by shares.
Currently, the North Sea energy giant has a dividend yield of 19%! This compares to the current average FTSE 250 yield of 3.4%.
That said, it is important to note that a stock’s yield changes as its share price and annual dividend alter.
Should you invest £1,000 in Ithaca Energy right now?
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In Ithaca’s case, consensus analysts’ forecasts are that its dividend will fall to 20.2p in 2025, 20.5p in 2026, and 17.3p in 2027.
Based on the £1.36 share price at the time of writing, these would give yields of 14.7%, 15.1%, and 12.7%.
So, should I finally buy it?
Key selection criteria
It also ticks my second box that requires a significant undervaluation in the share price. This reduces the chance of me making a loss if I sell it.
The next thing I want is a significant undervaluation present in the share price. This reduces the chance of my making a loss if I sell it.
A discounted cash flow valuation shows the oil firm is is 60% undervalued at its current £1.36 price. So the fair value of the stock is £3.40, is 60% undervalued at its current £1.36 price. So the fair value of the stock is £3.40, although market forces could move it lower or higher.
And the final element I expect to see is strong earnings growth. It is this that drives a stock’s dividend and price higher over the long term.
However, analysts forecast its earnings will grow by just 0.2% a year to the end of 2027.
Earnings growth
Ithaca’s 2024 results showed earnings before interest, taxes, depreciation, amortisation and exploration expenses declining 18.4% year on year to $1.405bn (£1.06bn). This was due to lower average oil and gas prices compared to 2023 and to lower production volumes.
In turn, its profit dropped 48% over the year to $153.3m. This was exacerbated by $351m paid in taxes, the majority of which was the Energy Profits Levy.
However, Ithaca expects its 2025 operating cost to stay in the low $20 per barrel of oil equivalent (boe) area. And it forecasts its oil and gas production will rise to a maximum 115,000 boe per day (kboe/d) from 105.5 kboe/d.
This is expected to come from its October $975.8m acquisition of Italian oil and gas giant Eni’s UK assets. A risk here for the firm is a failure to manage the transition of these assets optimally, which could push costs higher.
Will I buy the stock?
Overall, I would buy the stock today if I were even 10 years younger, just for the yield alone. It also looks very undervalued to me, so I might make a good profit on that too.
However, I am at the later stage of my investment cycle now, aged over 50. This means I avoid any stocks I think have a higher-than-average risk attached to them. And I think this is one of those.
