Black Gold: Q4 2021 - Vermilion Energy

Ticker Symbol: VET-T

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VERMILION ENERGY

FINANCIAL HIGHLIGHTS

Black Gold: Q4 2021 - Vermilion Energy

VET Q4/21 RESULTS & ANALYSIS

  • Vermilion has become a darling for investors as it is one of the few companies that is benefiting from the sharp spike in European natural gas prices, up recently to over US$120/mcf versus US$4.60/mcf in the US. This is due to the shortage of the product and the invasion of Ukraine by Russia, which provides over 40% of Europe’s natural gas consumption. The fear is that Russia might curtail contracted volumes as the sanctions imposed by the US and NATO crash the Russian economy. To harm Europe Russia might curtail volumes during high demand periods (winter and summer) and with no short-term solution to access significantly more LNG, prices could even go higher. The start up of Nord Stream 2 was supposed to alleviate the shortfall in demand in Europe. The US is sending all LNG it has available and other countries with long-term contracts are shipping the cargos to Europe if they can. How long this extreme price level continues depends on when the conflict will be over.
  • VET produced 85,408 boe/d (33% from Europe) in 2021 (22% of volumes European natural gas) and had funds flow of $919.9M (56% from Europe) up from $502.1M in 2020. In Q4/21 they produced 84,417 boe/d down 4% from 87,848 boe/d in Q4/20. Funds flow in Q4/21 was $322M or $1.99 per share versus $135M or $0.85 in Q4/20. In 2021 they paid down $365M of debt.
  • Late last year, before the natural gas price spike, they announced the timely purchase of an additional 36.5% of the Corrib natural gas field from Equinor for $556M. This will add 7,700 boe/d and over $360M of additional cash flow when the deal closes in 2H/22, which is retroactive to January 1st. We have modeled in the incremental volumes starting in Q3/22 for now. With the elevated war premium, natural gas and crude prices are expected to remain elevated into Q2/22. We forecast average volumes for VET in 2022 at 87,500 boe/d and funds flow of $1.28B. Ongoing capex may be $450M so they should be able to knock down their net debt materially this year (net debt $1.64B at year-end 2021). With the improved financial capacity VET re-instated a dividend of six cents per quarter. Going forward after debt is paid down below $1.2B they plan to use excess cash flow to return more to shareholders (increase the base dividend, pay extras or have an active NCIB) or make additional acquisitions in their core areas.
  • Under our quality scoring classification we have increased our rating for VET to an ‘A’, a Successful entity as they paid down debt.

SER Quality Score

Black Gold: Q4 2021 - Vermilion Energy

Quarterly Results

Black Gold: Q4 2021 - Vermilion Energy

Source: Corporate Reports & SER Forecasts

European Gas Advantage

Black Gold: Q4 2021 - Vermilion Energy

Source: Vermilion March 2022 Investor Presentation

Commodity Hedge Position

Black Gold: Q4 2021 - Vermilion Energy

Source: Vermilion March 2022 Investor Presentation

Debt Reduction and Future FCF Allocation

Black Gold: Q4 2021 - Vermilion Energy

Source: Vermilion March 2022 Investor Presentation

Net Asset Value / Share 2021 Reserve Report

Black Gold: Q4 2021 - Vermilion Energy

Source: Corporate Reports & SER Assumptions

Vermilion Energy: Weekly

Black Gold: Q4 2021 - Vermilion Energy

Source: stockcharts.com March 11, 2021

Vermilion Energy: Monthly

Black Gold: Q4 2021 - Vermilion Energy

Source: stockcharts.com March 11, 2021

Valuation Comparison

Black Gold: Q4 2021 - Vermilion Energy

Source: Corporate Reports & SER Forecasts

Conclusion: BUY on weakness

  • Vermilion is the poster child for benefiting from the parabolic rise in European natural gas prices. The stock has risen from $7 per share last August to over $30 recently. The stock would be attractive again at below $16.00 per share (range $12.00-$16.00 per share) once the war premium dissipates. Patience is required for now. VET is an attractive long-term story and we have a $50 per share Bull Market Peak target in the 2024-2025 period. The stock is near our one-year target of $32 per share so there is no need to chase it.
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