Vermilion Energy Inc

Vermilion Energy Inc. (TSX: VET), is a Canada-based international energy company, which focuses on conventional and semi-conventional exploration and development projects. The group is primarily interested in light oil and liquids-rich natural gas. 

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread. This could create a volatility in the price and demand of the crude oil.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 0.50x compared to the industry median of 0.82x, while the current ratio stood at 0.55x against respected median of 0.99x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 0.99x, higher than the industry median of 0.71x. Additionally, its % LT Debt to Total Capital stood at 49.7% against the industry median of 29.5%. These factors imply higher balance sheet risks.
• Long cash cycle days: The company is consistently increasing its Cash Cycle (Days) compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. Currently, its Cash Cycle is at 70.0 days against 65.3 days in Q1 2021.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~82.19 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The continued strength in commodity prices helped the company in second quarter to report strong operating result. The group clocked free cash flow of CAD 94 million, after investing CAD 79 million in exploration and development activities. However, the resurgence in delta variant cases, on the other hand, is creating a lot of uncertainty, and it might have an impact on the company's operations and cash flows. Furthermore, the company's liquidity ratios are on lower side, and its cash cycle days are increasing on sequential basis, indicating a weak liquidity profile. Additionally, the company holds heavy debt of CAD 2.0 billion at the end of Q2 2021, which implies risk to the balance sheet. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 12.72 on September 29, 2021.

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

Disclaimer

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