Vermilion Energy Inc.

Vermilion Energy Inc. (TSX: VET) is an international oil and gas producing company that is engaged in full-cycle exploration and production programs that focus on the acquisition, exploration, development, and optimization programs across North America, Europe, and Australia. 

Key Updates:

• Improved Benchmark Commodity prices: The company is exposed to a range of commodity prices; wherein North American region crude oil is sold at benchmarks linked to WTI and natural gas is sold at the AECO index (in Canada) or the Henry Hub index (in the United States). The Benchmark commodity prices has witnessed improvement where realized prices for Crude oil and condensate rose 21% YoY from 58.66 CAD/barrel to 71.09 CAD/barrel. The prices for NGLs hiked around 230% YoY from 8.92 CAD/bbl to 29.39 CAD/bbl. The improved commodity prices would benefit the company’s operations.

• Stable Production profile: Despite the turmoil economic cycle, the company has maintained its production, which is a key positive. The group has a unique and defensive portfolio of internationally diversified assets, which also contributed to the strong profitability and free cash flow generation over the years. With the gradual reopening of the economy, we believe the demand for natural gas and oil would eventually improve, given the rising demand from the industrial and other segments.                 

Production Profile (Source: Company Presentation)

• Upcoming Exploration Opportunities: The company has new opportunities across the North America region which includes:

1. Exploration of Light oil and condensate-rich natural gas belt in West Central Alberta and light oil in SE Saskatchewan.
2. The group is also focusing 400,000 net acres in West Pembina targeting the Mannville and Cardium formations with shared surface infrastructure.
3. The group would target to search opportunities across 500,000 net acres of land across southeast Saskatchewan, which has development potential across several stacked high-return targets.
4. The company also targeting exploration opportunities within the light oil segment across the Powder River Basin in northeastern Wyoming.
   

• 50% hedging reduces downside risks: In order to arrest the volatility in the international commodity prices, the company manages to hedge almost 50% of the commodity price exposures, which provides stability to the company’s cash flows and is a key positive. Notably, the company hedged 67% of its European natural gas production, 44% of oil production, and 50% of North American natural gas volumes for H1FY21.

Q1FY21 Financial Highlights:

• VET announced its quarterly result, wherein the company posted Petroleum and natural gas revenue of CAD 375.455 million, surged from CAD 353.297 million in the previous corresponding period (pcp). The realized price of Crude oil and condensate stood at CAD 71.09/bbl, which reflects a 21% jump on y-o-y basis.
• The quarter witnessed a gain from impairment reversal expense amounting to CAD 662.866 million, as compared to an impairment expense of CAD 1,564.854 million in pcp. Moreover, the company reported a decline in purchased commodities (CAD 43.764 million v/s CAD 56.108 million in pcp), lower operating costs (CAD 96.241 million v/s CAD 121.138 million in pcp) and transportation cost (CAD 17.021 million v/s CAD 17.330 million in pcp).
• The company reported its net earnings of CAD 499.964 million, as compared to a net loss of CAD 1,318.504 million in pcp.

Source: Company Report

Risks:  The company’s revenue is directly correlated with crude oil and natural gas prices, and a volatility in price would affect the company’s revenue and cash flows.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

For FY21, the company expects production of 83,000 – 85,000 boe/day and expects its exploration & development capital expenditures roughly at CAD 300 million. The group expects its Oil / Condensate / NGL segment to constitute ~38% of the total production, while North American gas is expected at 29% and European gas at 17%. The rest of the production is expected from the oil (Brent) segment. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Crescent Point Energy Corp, Whitecap Resources Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 9.26 on August 11, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 11, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.