Investors looking to build a second income stream are likely to be attracted towards the substantial dividend yields currently on offer from smaller energy players. Businesses like Ithaca Energy (LSE:ITH) and Harbour Energy (LSE:HBR) have impressive payouts this month, sitting at 12.3% and 11.2% respectively. And should these firms prove capable of maintaining or even growing their dividend in the long run, buying shares today could be immensely lucrative.
So what are the chances of that happening? And should investors be considering these under-the-radar stocks for their income portfolios?
Key players in the North Sea
Around 60% of Harbour Energy’s oil & gas production comes from the North Sea, while Ithaca operates entirely within this region. And in terms of production volume, Harbour has the upper hand, averaging 258,000 barrels of oil equivalents per day (Kboepd) versus Ithaca’s 80,200. Yet both firms are projecting these quantities to increase by the end of 2025.
If everything goes according to plan, Harbour’s output will almost double to between 450,000 and 475,000. At the same time, Ithaca is on track to hit 105,000-115,000. In both cases, this growth’s being driven by new assets that have recently been acquired. During September 2024, Harbour completed its $11.2bn deal to acquire Wintershall Dea, which is now set to contribute a full year of production. Then, a month later, Ithaca Energy executed its own £754m buyout of Eni UK’s oil & gas assets within the North Sea.
Obviously, the incoming surge of production volumes bodes well for cash flows and, in turn, dividends. But if that’s the case, why haven’t more investors been capitalising on the double-digit yields?
Digging deeper
Despite these businesses seemingly making solid operational progress, some key concerns are dampening investor sentiment. One of the biggest headwinds is the location of their operations. With the UK North Sea making up most, if not all, of their production output, profits are subject to the UK’s energy profits levy. And currently, that means these businesses are facing an estimated 78% effective tax rate on earnings – one of the highest in the world.
So even though production is on the rise, the benefit for shareholders is expected to be quite limited. Even more so, if oil prices take a tumble. The companies have already had to endure oil prices sliding from around $80 per barrel to $60 over the last 12 months. And should economic conditions worsen in the US, Goldman Sachs has predicted prices could fall further to $50 by December 2026 or even under $40 in the worst-case scenario.
Needless to say, market conditions are far from ideal for being a concentrated energy business right now. And with such high levels of external uncertainty, investors are understandably cautious about these businesses, myself included.
Both Harbour Energy and Ithaca Energy offer an exciting yield for investors building a second income stream through dividends. But whether that yield can be maintained in the coming years as regulatory and economic pressure mounts looks dubious in my eyes. Therefore, I think income investors may want to look elsewhere for winning opportunities.
