Earlier this week, I searched the FTSE 350 index for high-yield stocks. The highest yielder, according to my data provider, was Ithaca Energy (LSE: ITH) with a yield of a whopping 16.3%
So what’s the story with this stock? And should investors consider buying it for income?
An introduction to Ithaca Energy
Ithaca Energy’s a £1.3bn market-cap oil and gas business that operates in the North Sea.
Should you invest £1,000 in Ithaca Energy right now?
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Founded in 2004, it’s one of the largest independent oil and gas companies in the United Kingdom Continental Shelf (UKCS) today, ranking second by resources and third by production.
Ithaca Energy came to the market in 2022 via an Initial Public Offering (IPO). However, since then, it hasn’t been a great investment as its share price has fallen from 250p to 124p.
A closer look at the 16.5% yield
The yield figure I’ve quoted here is based on the consensus dividend forecast for 2024. That’s currently 25.9 cents per share.
This forecast should not be relied upon though. One issue to be aware of is that earnings per share this year are only expected to be 14p per share. In other words, earnings won’t cover the projected payout.
Another issue is that the company may be set to issue a ton of shares as part of a deal to buy oil and gas assets from Eni in the near future. This could dramatically reduce the payout per share (and also send the share price down significantly).
It’s also worth pointing out that while the company plans to pay out $500m in dividends for 2024, it has said that all dividends are subject to operational performance and commodity prices as well as combined group refinancing and availability of distributable profits.
So overall, there’s a fair bit of uncertainty in relation to the dividend with this stock.
Political risk
And that’s not the only uncertainty here. Another factor that makes the investment case a little opaque is the political environment.
If Labour wins the general election, the party not being a big fan of the oil and gas industry could be an issue.
For example, in its manifesto it said that it will halt new oil and gas exploration licences and increase a windfall tax on oil and gas companies by three percentage points.
It’s worth noting that Norwegian energy giant Equinor recently suspended the sale of a stake in the Rosebank oil development in the UK North Sea due to fiscal uncertainty ahead of the election. But attitudes might also change when in government.
My view
Now, I don’t want to sound too bearish on Ithaca Energy shares. The Eni deal certainly looks interesting. As a result of this deal, the company believes it has the potential to grow production to 150,000 barrels of oil per day by the early 2030s versus around 70,000 in 2023.
But I’d approach this stock with caution. With share dilution on the cards and a new government potentially coming in, it’s hard to know what the share price will do.
Personally, I think there are better (and safer) stocks to buy for income.
