Vermilion Energy

Suite 3500, 520 – 3th Avenue SW Calgary, AB T2P 0R3
Phone 403.269.4884  •  Website: www.vermilionenergy.com
Content updated periodically  •  Last update August 24, 2018

Ticker Symbol: VET-T

View All Posts Tagged VET-T

FINANCIAL HIGHLIGHTS

Large Cap – Energy Producer

Book Value (30/06/18) – $17.39

Shares Outstanding

152.4M

Current Price (24/08/18)

$41.82

Market Capitalization

$6.4B

Attractive Purchase

<$42.00

Q2/18 Actual Production

(50% Liquids)

80,625 boe/d
Table Pounding BUY

<$39.00

Enterprise Value

(Debt $1.6B)

$8.0B

Enterprise Value/boe

$99,225

Dividend

($0.23/month)

$2.76

Yield

6.6%

12 Month Target

$50.00

Bull Market Peak

$70.00

BACKGROUND

Vermilion was launched as an Alberta based exploration and production company in April 1994 when it IPO’d at $0.30 per share. From that humble start it expanded domestically and then entered France in 1997. It converted to a trust in 2003 and then started to pay a monthly dividend which started out at $0.17 per month. In 2004 it entered the Netherlands, in 2005 Australia and in 2009 into Ireland. With the end of the Trusts in 2010 it converted to a corporate structure and continued to pay a monthly dividend. It has never missed a dividend payment and has raised the monthly dividend four times since inaugurating its dividend in 2003 to its current rate of $0.23 per month or $2.76 per year which provides a current yield of 6% (Chart #1).

VET entered Germany, the US and Hungary in 2014 and in 2016 it entered Eastern and Central Europe (CEE) with concessions in Croatia and Slovakia.

Vermilion likes these international markets as they get higher pricing especially for natural gas (Chart #2).

VET’s approach is to invest in areas (Chart #3) that they see generating significant free cash flow over time so that they can use the excess funds for new growth areas, pay the overhead and interest costs and fund a rising dividend. It is a model that some domestic companies are now trying to emulate.

The stock does not follow normal valuation methods such as price to cash flow, price to book value or price to NAV, as these metrics do not fit for this company which is a growing dividend payer. For VET we are using a dividend yield range. The normal high in yield when the stock is depressed is near the 7% yield range (except when stock markets and oil prices crash (like in 2008 and 2016 when yields reached 10% for a very short period of time), and the low in yield when the stock is buoyant appears to be below 4%.

This year they made their largest investment so far with the acquisition for $1.4B of Spartan Energy in a share exchange that added 27.9M shares. This added around 23,000 boe/d of mostly light oil in Saskatchewan.

Chart #1

Vermilion Presents a Defensive Issue in a Volatile Market

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #2

Estimated 2018 Decline Rate

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #3

Southeast Saskatchewan – Long Life, Low Decline Assets

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Vermilion runs a decentralized business unit structure with three regions. The largest is North America (based in Calgary), Europe (based in the Netherlands) and Australia (based in Perth).

They pursued Spartan Energy in Q2 2018. Production post the Spartan deal is 60% from North America, 35% from Europe and 5% from Australia. Free cash flow is generated 53% from Europe, 44% from North America and 3% from Australia (Chart #4).

Each business unit has integrated technical teams, who develop capital proposals and compete for capital with the Calgary head office managing the process (Chart #5).

In 2018, $500M will be spent on activity (excluding the acquisition cost of Spartan) of which over half will be in Canada and meaningful amounts spent in France and Australia (Chart #6).

Chart #4

Core Operating Areas

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #5

Organizational Model

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #6

Expenditures & Development Capital Budget

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Vermilion runs a self-funded growth and income model which generates high margins, lots of free cash flow, has strong capital efficiencies and low decline rates (Chart #7).

Vermilion’s effective corporate decline rate is low versus other companies of its size, which are typically in the 30% range. Its focused acquisition approach has created an overall production portfolio with a 16% decline rate with the highest declines in the US and Canada at 28% and 23% respectively (Chart #8).

Chart #7

Elements of Sustainable Model

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #8

Base Production Decline Rates

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

INVESTMENT PARAMETERS: PEOPLE

In December 2017, before the Spartan Energy acquisition, Vermilion had 505 full time employees worldwide of which 172 were in the Calgary head office, 55 in its Canadian field offices, 59 employees in the Netherlands office, 31 in Australia, nine in the US, 24 in Germany, five in Hungary and one in Croatia.

VET has a significant institutional ownership base (70%+) but no Institutional investors owns over 5%.

TitleManagementShares Owned
CEO & PresidentAnthony Marino276K
ChairmanLorenzo Donadeo2.89M
EVP People & CultureMona Jasinski31K
TitleManagementShares Owned
EVP & COOMichael Kaluza69K
VP & CFOLars Glemser6K

Source: www.sedi.ca August 2018

INVESTMENT PARAMETERS: PROJECTS

Production in Q2/18 (with one month of Spartan included) came in at 80,625 boe/d. Canada produced 55% of the total, 14% came from France, 12% from Ireland and 9% from the Netherlands. Crude oil and liquids were 50% of the total at 40,225 b/d and natural gas production for its 50% was 242.4Mmcf/d of gas.

Capex in Q2/18 of $193M out of the $500M yearly budget was spent in the larger areas: Canada spent of $90M, France $62M and Ireland $41M.

In Canada the focus is on SE Saskatchewan and in West Central Alberta (Chart #9). Production in Q2/18 was 44,600 boe/d of which liquids were 52% of the total. The growth rate is moderate and VET is working to lower costs, increase recoveries and move the business to a greater free cash flow generating one. Spartan added 23,000 boe/d at a flowing boe cost of $60,900 per barrel. 2P reserve additions were 113.5Mb of which 92% were liquids (Chart #10).

Chart #9

North America

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #10

Acquisition of Spartan Energy Corp.

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #11

European Core Area

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

In Europe they have a concentrated area with profitable businesses in both liquids and natural gas (Chart #11). Long term the two areas with the largest volume upside is in Germany where VET holds 26% of licensed land in the north German basin (two 500 Bcf targets) and where they have developed some high impact prospects to be drilled starting next year (Chart #12). In the CEE (Central & Eastern Europe area) it is early in the technical work but they have large land spreads and initial success in Hungary (Chart #13) with the first well to come on stream this quarter. Land holdings in Hungary are 653K net acres, 92K net in Slovakia and 2.35M in Croatia.

VET at year end 2017 had exposure to 1,143 gross oil wells (of which 639 were in Canada) and 605 natural gas wells (523 were in Canada). Total net acreage for VET worldwide is 6.6M.

Chart #12

German Land Position

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #13

Central and Eastern Europe (CEE)

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

INVESTMENT PARAMETERS: FINANCIAL CAPACITY

  • VET produced 80,625 boe/d in Q2/18 up 20% from Q2/17 and 15% from Q1/18 due to the acquisition of Spartan which was included for just over one month of the quarter. Cash flow was $193M up from $157M in Q1/18 and $147M in Q2/18. CFPS came in at $1.43 per share versus $1.22 in Q2/17.
  • In the quarter VET drilled 18 gross wells up from two last year, but below the Q1/18 level of 29 gross wells.
  • The highest operating netback area was France at $66.71/boe, followed by Australia at $57.54, then Ireland at $49.30, followed by the US at $47.71 and then by Netherlands at $41.59, while Canada with its low natural gas and egress problems came in at $23.13 per boe (Chart #14).
  • VET has 2,800 wells in its drilling inventory (Chart #15) which is a nearly 16 year drilling inventory at our 2019 forecast of 170 wells.
  • With strong cash flow, a healthy balance sheet with $2.65B of equity and $1.6B of debt (60.5% debt/equity ratio) and low declines, VET was able to increase the dividend in Q2/18 to $0.23 per month in the quarter from $0.215 per month (Chart #16).
Chart #14

Netbacks

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #15

Drilling Projects

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

Chart #16

Reliable and Growing Dividends

Vermilion Energy

Source: Vermilion Energy Inc. Corporate Presentation August 2018

  • Vermilion expects to exit 2018 with over 100,000 boe/d of production.
  • The purchase of Spartan was done with shares at a total cost of $1.2B and the assumption of $150M of debt. The stock price at the time was $44.30 per share.

Quarterly Results

Vermilion Energy

Valuation Comparisons

Vermilion Energy

Source: Corporate results and SER forecasts

  • VET has traded at quite a high price to book value and price to cash flow versus its peers. It looks to us that the best value metric for the shares is yield.
  • The range for yield has been as low as 3.3% in 2014 when he stock reached its high of $78.24 per share and the high yield in weak market times has been near 7%.
  • Our 12 Month Target of $50.00 implies total return of >20% when one includes the high dividend. The stock would be a very Attractive Purchase below $42.00 per share, and a Table Pounding BUY under $39.00. Our 3-5 year Bull Market Target into 2023 is $70.00 per share.
  • We expect to add VET to our Action Alert BUY list in the coming months on any further weakness. If crude oil declines below US$60/b as we believe, then the stock could decline below $40 and provide a 7% yield. It would be a wonderful purchase at that yield.

Annual Financials

Vermilion Energy

Source: Corporate results and SER forecasts

Balance of Evidence

POSITIVES

  • VET has a successful business that generates significant free cash flow so that it can pay a high and growing dividend.
  • The upside in volumes in Europe is likely in Germany and the CEE in upcoming years.
  • Their next acquisition is likely to be offshore to rebalance the asset mix away from the dominant Canadian position.
  • Vermilion provides a rich and rising dividend with moderate capital gain potential. For conservative investors this is a great vehicle to involve oneself in the energy industry and get a healthy payday as the new energy cycle unfolds.

ISSUES OF CONCERN

  • France and the Netherlands has made growth more difficult due to its environmental approach; France due to Macron’s anti-fossil fuel industry and the Netherlands due to earthquakes in the eastern part of the country. We expect the Netherlands to approve further development but with a watchful eye.
  • The US business is quite small and needs to bulk up or be sold.
  • The stock has been weak due to concern about volumes not as high as some had forecast. The Netherlands is one of the areas pointed to.
  • Our normal valuations parameters do not work with this company because of their unique structure. However, our yield approach should help in determining when the stock is ‘cheap’ and when ‘dear’.

VERMILION ENERGY (VET-T)

Vermilion Energy

Source: stockcharts.com August 24, 2018

Back to August SER
Back to Coverage List