This FTSE 250 stock pays 17% dividends! Is Ithaca Energy my next big buy?

This FTSE 250 company is paying 17% dividends. It also has a large opportunity from a recent regulatory thumbs-up. So is it a buy or a pass for me?

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Shares in FTSE 250 oil and gas company Ithaca Energy (LSE:ITH) are down 30% in the last 12 months. I’m intrigued. I see potential here for one of the biggest oil and gas opportunities of the last two decades.

I’m going to investigate in detail and with a critical eye. So let’s get into it.

Laughing all the way to the Rosebank

First things first. Ithaca Energy went public in November 2022 to exploit its acquisition of a 20% stake in Rosebank. This is one of the UK’s largest untapped oil fields. It’s located in the North Sea, 80 miles off the coast of the Shetland Islands.

If the name rings a bell, there’s a good reason.

Rishi Sunak’s Tory government gave Rosebank the long-awaited green light in September 2023. This approval came with some pretty massive public and media attention.

Rosebank was discovered in 2004. It’s only now, almost 20 years later, that work can begin.

That’s the type of risk and reward inherent in oil and gas discoveries.

What comes next

Ithaca Energy has a 20% non-operated stake in the Rosebank oil field. Non-operated means the company won’t do any of the drilling here.

The firm doing the work will be Equinor, which owns the other 80% stake. That’s Norway’s state-owned multinational oil and gas company. It’s worth around £79bn and has been operating since 1972.

With that kind of hard-won track record, it’s reasonable to assume it will be a useful partner.

Phase 1 drilling is slated to begin in 2026-27. So it will be at least five years before Ithaca starts to see the value of Rosebank come good.

It’s tough to say how much Rosebank may be worth to Ithaca. But a 20% stake is undeniably more valuable now the field can be drilled.

And the average dividend yield for FTSE 250 companies is around 4.7%. So a company paying three times that level may seem like a no-brainer.

Risk and reward

It’s always worth paying extra attention to the risks of investing in smaller UK companies.

That’s especially true when considering home-grown commodities or oil and gas stocks.

British investors have certainly been burned in the past. Some of us may recall the whole Sirius Minerals debacle. That was a UK-based fertiliser company that promised the earth but ended up crashing out of the FTSE 250, taking investor cash with it.

The comparison isn’t entirely fair though. Ithaca isn’t solely reliant on a project that’s not yet built. But my capital isn’t unlimited, so I must cast a critical eye over every opportunity.

Buy or pass?

Ithaca pulled in sales from its operated oil fields of £2.1bn last year. And £143m in cash on the balance sheet calms my nerves somewhat. Also, the company has halved its debt pile in the last two years. That suggests prudent management.

The company’s free cash flow is 10 times what it was in 2018. This indicates there’s material growth here.

And while revenue is forecast to dip slightly, analysts expect profits to rise from £372m this year to £396m in 2024.

I’m considering taking a position here, with the share price stabilised at around 155p.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tom Rodgers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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