In terms of dividend yield, Ithaca Power (LSE:ITH) has a lot of the FTSE 350 crushed. The oil & gasoline producer’s been on a downward trajectory since going public in 2022. Nonetheless, the shares at the moment are buying and selling at an unusually low-cost valuation.

In actual fact, on a trailing 12-month foundation, the corporate’s sitting at a price-to-earnings ratio of simply 7.3. By comparability, the business common is nearer to 11.5. So from a relative valuation perspective, the inventory may rise by as a lot as 57% if it strikes again according to its friends.

Evidently, a excessive dividend yield and large progress potential sounds fantastic. So fantastic it appears too good to be true. What’s happening right here?

Why is Ithaca’s yield so excessive?

Following the completion of its huge £750m acquisition of Eni’s UK oil and gasoline fields, Ithaca has reworked itself into a considerable producer of fossil fuels. Complete manufacturing hit a excessive of 120,000 barrels of oil equivalents per day (boepd) within the newest quarter. And this determine’s anticipated to rise even greater subsequent yr to 150,000.

That’s virtually 3 times 2023’s manufacturing stage. And even with weaker oil costs, the leap in manufacturing quantity’s sending Ithaca’s working money move era into overdrive. As such, administration intends to return $500m price of dividends to shareholders this yr, $300m of which has already been introduced. And this ginormous output’s anticipated to be repeated in 2025.

In different phrases, the dividend yield, even at 17.7%, really seems inexpensive for this enterprise. But when that’s the case, why are shares priced so cheaply? And why aren’t extra buyers leaping on board this chance?

The elephant within the room

Sadly, this explosive revenue and progress alternative hasn’t gone unnoticed. But it appears most institutional buyers are steering clear. Why? As a result of the attitudes of regulators relating to the North Sea fossil gas business have gotten more and more hostile.

Earlier this yr, the Supreme Courtroom discovered that authorities should think about each operational and end-use emissions when deciding on granting growth permissions to grease & gasoline enterprises. Whereas that’s nice information for the atmosphere, it’s fairly problematic for Ithaca. Two of its main initiatives are within the North Sea – Rosebank (of which it owns 20%) and Cambo (100% owned).

Rosebank’s growth’s already pretty superior, so the challenge is much less of a priority. However the destiny of Cambo’s much more unsure. Shell really bailed on this area final yr. And analysts from Stifel have estimated solely a 25% probability that Cambo will really get a greenlight for growth, with Rosebank sitting at 50%. In different phrases, these initiatives are surrounded by political and authorized dangers.

What does this imply for Ithaca? Effectively, if these initiatives fail, analysts’ projections without spending a dime money move era counsel a gentle decline to $300m by 2029 after which zero by 2033. On condition that free money move is finally what funds shareholder payouts, the inventory’s dividend yield might solely be sticking round for a few years earlier than probably disappearing.

So whereas a shopping for alternative may exist right here, it comes with some substantial dangers that buyers have to contemplate rigorously.