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Chevron (NYSE: CVX) is a fine and worthy company, and it represents an excellent way to get exposure to a relatively high price of oil. At the same time, there's a significant amount of uncertainty hanging over the stock in connection with its planned $53 billion acquisition of Hess.

That's why it makes sense for Chevron investors to think about diversifying to avoid stock-specific risk but retaining exposure to oil in their portfolio by buying a few other such companies. And one of them is the 8.7%-yielding small cap Vitesse Energy (NYSE: VTS). Here's why.

Chevron's uncertainty

First, a few words on Chevron and its ongoing dispute with ExxonMobil and the China National Offshore Oil Corporation (CNOOC) over Chevron's intended acquisition of Hess. The dispute centers around the Stabroek block of drilling sites in offshore Guyana.

ExxonMobil holds a 45% interest in the block, with CNOOC holding 25% and Hess holding a 30% interest.

In acquiring Hess, Chevron would obtain its 30% share in the block. However, ExxonMobil and CNOOC believe they have rights over the block (including the right of first refusal to acquire Hess' stake in Stabroek) and have filed for arbitration over those rights.

Arbitration can take time, and the panel might not resolve the matter in Chevron's favor. So the issue will likely hang over the stock for some time. As such, it makes sense to look at some other exciting oil stocks.

Enter Vitesse Energy

With a market cap of just $711 million, Vitesse is dwarfed by companies like Chevron, but that doesn't mean its management can't be nimble and invest in myriad different assets. That's precisely what Vitesse does; this is no one-trick-pony oil and gas stock.

Vitesse's business model involves acquiring interests in wells operated by more than 30 other larger oil companies, primarily in the Bakken oil field in North Dakota. Among the larger listed operators are Chord Energy, EOG Resources, ExxonMobil, Marathon Oil, and Hess.

As of May, Vitesse had interests in 6,932 productive wells, with its net interest averaging 2.7% per working well. The well operators propose, initiate, and complete the wells, while Vitesse's management assesses each opportunity on investing in wells "expected to meet a desired rate of return based upon estimates of recoverable oil and natural gas reserves," according to its Securities and Exchange Commission filings.

The model gives Vitesse significant financial flexibility and doesn't burden the company with drilling obligations and other operator-associated costs. It also allows management to focus on what it does best: using its proprietary processes to analyze and model the assets it's considering investing in.

On the evidence of the news flow in 2024, management is continuing to identify potential assets, with $6.8 million invested in acquiring oil and gas properties in the first quarter, followed by an agreement to acquire another $40 million in oil and gas interests in North Dakota.

The investment case for Vitesse Energy

The key is confidence in management's ability to identify and invest in productive assets. While Vitesse will obviously benefit from a higher oil price, it also uses a hedging strategy to reduce its risk exposure to oil price volatility. That's a good thing when the price of oil slumps, but it also restricts the company's upside potential when the price of oil soars.

However, the hedging strategy (Vitesse hedged 50% of its oil production in the first quarter) also helps protect the company's ability to pay its fixed quarterly dividend of $0.525 per share.

While the capital expenditures made in 2024 (to acquire productive assets) will reduce potential free-cash-flow (FCF) generation this year, Wall Street expects Vitesse to generate some $82 million in FCF in 2025, which would easily cover the current dividend payout of nearly $60 million.

A stock to buy

Management's track record gives confidence in its business model, and the hedging strategy protects the dividend from a significant slump in the price of oil. That said, hedging is an inexact science at best, and investors should assume the dividend will be under threat if the price of oil falls significantly.

All told, Vitesse presents an interesting option for investors who are bullish on oil and want to express that view by investing in oil stocks. It is also a good way for Chevron investors to put some cash to work in energy stocks while waiting for a resolution of the Hess acquisition issue.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron, Chord Energy, EOG Resources, and Vitesse Energy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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