This Equity Offering Yields an Impressive 7.5% Dividend and May Not Be as Perilous as Perceived
This Equity Offering Yields an Impressive 7.5% Dividend and May Not Be as Perilous as Perceived
Swift Energies (SVS with a marginal decrease of 0.04%) provides a yield of 7.5%. Unlike numerous other oil and gas companies, its narrative isn't exclusive to depending on oil and gas prices to boost share value or maintain the dividend. Swift Energy exhibits risk, much like any other stock does, but its risk level isn't as severe as its high dividend yield might suggest.
The rationale behind Swift Energy
As previously mentioned, a stock frequently trades with a significant yield due to market skepticism regarding the dividend's sustainability. If oil prices plummet, Swift Energy will also be affected. However, there are numerous price points between the current $70-per-barrel level and a "plunge" to approximately $30.
If you're apprehensive about the latter, Swift Energy may not be the right choice for you. However, if you believe the price of oil will remain relatively stable within a range, then Swift Energy is an outstanding option for income-focused investors. There are two primary reasons behind this stance:
- Swift Energy's business model mitigates risk by investing in various assets and allocating resources to facilitate value creation, which it excels at – identifying promising assets for investment.
- Management employs a risk-management strategy, protecting its oil exposure through a variety of tactics.
Swift Energy's business model
Swift Energy isn't an asset owner-operator. Instead, it uses an exclusive process and the expertise of its management team to acquire minority working interests in wells operated by prominent oil and gas companies.
Swift Energy primarily focuses on the Bakken region. The operators it collaborates with include prominent players in the area, like Tone Energy, Devon Energy (following its acquisition of Shallow Mill Energy), and Continental Resources.
Swift Energy's involvement in the Bakken is substantial, with a stake in 7,126 productive wells and an average working interest of 2.7%. Management describes its company as an efficient, actively managed Bakken ETF, given its long-term participation in 30%–55% of drilling rigs in the basin.
In addition to diversification across wells, this strategy also reduces risk as the operators manage marketing, sales, and transportation of oil and gas, freeing up Swift Energy's management to focus on improving shareholder value – specifically, identifying assets worth investing in.
Risk-management strategy
No risk-management strategy is foolproof, and no investor should expect to invest in an oil and gas company without assuming some exposure to oil and gas prices. It's crucial to bear these caveats in mind while acknowledging that Swift Energy does employ a risk-management strategy to minimize its reliance on energy prices. This approach lessens oil price volatility exposure, shifting the company's focus towards its strengths in identifying profitable assets and expanding production.
For instance, in the third quarter, Swift Energy had hedges covering 63% of its oil production. To illustrate the functionality of the hedging strategy, let's examine the company's average combined (oil and gas) realized price before and after hedging. As seen below, hedging lowered its actual realized price in 2022 but boosted it in 2023, and the trend has persisted in 2024.
Risk management is always an inexact science, and management takes an active, adaptive approach to the strategy. Despite potential missteps, the primary objective of hedging is to reduce exposure to the volatility of oil prices.
Looking ahead, Swift Energy has 43% of its expected oil production in 2025 hedged at $73.21 per barrel. This should provide protection in the event of a decline in oil prices.
The financial strategy of Swift Energy, with its focus on investing in diverse assets and identifying promising wells, makes it an attractive option for income-focused investors who believe in relatively stable oil prices. Swift Energy's risk management strategy, which includes hedging a significant portion of its oil production, helps mitigate exposure to oil price volatility and safeguards against potential price declines.