If oil prices rise in 2025, this stock will provide passive income

After a difficult year for oil prices sleeve And B.P look like interesting passive income opportunities. But I look outside of that FTSE 100 when it comes to energy stocks.

Chord energy(NASDAQ:CHRD) is the largest independent oil producer in the Williston Basin. And it takes a different approach than the big oil companies.

Investor returns

Based on an oil price of $70, the company expects to return $13 per share to investors in 2024 through dividends and share buybacks. With a current share price of $119, that represents a return of almost 11%.

However, investors should be aware of some risks. A similar outcome in 2025 is absolutely not guaranteed – lower taxes in the US could well increase oil supply and this could lead to lower prices.

Additionally, Chord does not disclose the break-even price of its assets in its investor materials. This makes it difficult for investors to assess what impact lower oil prices might have.

That makes it a riskier investment than I normally make. But I think the opportunity could be unique and I’m willing to take that risk as part of a diversified portfolio.

What makes Chord different?

What makes Chord unique – potentially – is that it doesn’t invest much in exploration projects. In contrast to those like ExxonMobil And ChevronThe focus is on distributing profits to shareholders.

The obvious limitation to this strategy is that oil wells don’t last forever. And when they run out, the company must find ways to replace them or profits will dry up.

Rather than financing speculative projects, Chord prefers to do so by acquiring other companies with established assets. The most recent example is the $4 billion purchase of Enerplus in May.

Such growth can jeopardize the company’s balance sheet. But the company is actually in a very strong position, with a leverage ratio that’s about a third of its peers’ levels and a fifth of that S&P 500 Average.

British oil

Both Shell (4.5%) and BP (6.1%) currently have attractive dividend yields. And as a UK investor I have to pay a 15% withholding tax on distributions I receive from Chord.

Furthermore, I strongly suspect that both UK oil companies have lower production costs. And that gives them a clear advantage over the company whose shares I bought.

Still, I think the higher windfall taxes that BP and Shell will face next year – and beyond – will likely offset this. These have become sturdier in the budget and look pretty durable to me.

In contrast, Chord’s (along with other US companies) will likely face lower taxes in 2025. And that should mean that production costs – whatever they may be – are falling.

I buy

I consider Chord to be one of the riskiest investments in my Stocks and Shares ISA, but I’m still buying little by little. What happens if oil prices fall is unclear.

However, from a passive income perspective, I think the potential reward means the risk is worth it. If oil prices stay just above $70, this investment could prove extremely successful for me.