Vermilion Energy Inc. (TSX: VET) is an integrated oil and gas producing company and operates in full-cycle exploration and production programs, which includes acquisition, exploration, development, and optimization of assets. The Company derives its revenue from the production and sale of petroleum and natural gas. The group has operations across North America, Europe, and Australia.

Q1FY20 Financial Highlights: VET declared its quarterly results, wherein the Company reported total revenue of CAD 353.28 million, lower than CAD 467.24 million, a quarter ago. Average production stood at 97,154 boe/day during Q1FY20, reflecting a decline of 6% on y-o-y basis due to lower the timing of completions and tie-ins from Q12020 program and a minor impact from COVID-19, partially offset by increased production in the United States due to new wells brought in the recent past. The quarter witnessed a surge in purchased commodities, the inclusion of impairment costs amounting CAD 1,566.2 million and a higher transportation cost while lower depletion and depreciation charges and a gain on derivative instruments. The Company reported a net loss of CAD 1,318.50 million, as compared to a net profit of CAD 39.54 million in pcp. Cash and cash equivalent came in at CAD 16.63 million, while total assets stood at CAD 4,372.34 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Risks: The group’s financial performance is directly related to crude oil prices and demand. Extended lock-down scenario, coupled with lower industrial and manufacturing activities, could hurt the realization prices and the sales volume.

Stock Recommendation: The Stock of VET corrected ~72% so far this year, due to a stiff correction in the crude oil prices on account of a lower demand scenario coupled with a pile-up of inventory. To battle the existing economic cycle, the company issued USD 300 million of senior unsecured notes during the quarter, with a maturity date of March 15, 2025. The above funding would help to meet the near-term requirement. Furthermore, the company made the extension of its CAD 2.1 billion revolving credit facility to May 31, 2024. The stock soared ~59% in the last three months, due to a price appreciation in the international crude oil prices in the recent past. We expect the demand for crude oil to recover gradually as the states are easing the lockdown restrictions, and industrial and manufacturing activities are resuming. A gradual recovery in demand would help in stabilizing the crude oil prices. A stable oil price along with recovering demand bode well for the group. We have valued the stock using Price/CF based relative valuation approach and considered peers like Baytex Energy Corp, Canadian Natural Resources Ltd, Suncor Energy Inc etc., and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 5.97 as on June 29, 2020.

VET Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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