Vermilion Energy Inc.

Vermilion Energy Inc. (TSX: VET) is an integrated oil and gas producing company which operates in full-cycle exploration and production programs. Other activities of the Company include acquisition, exploration, development, and optimization of assets. The group is targeting growth in production primarily through the exploitation of light oil and liquids-rich natural gas conventional resource plays in Canada and the United States. The group is pursuing the exploration and development of natural gas opportunities in the Netherlands and Germany and conducting oil drilling and workover programs in France and Australia.

Q2FY20 Financial Highlights: VET announced its second quarter results, wherein revenue was reported at CAD 193.013 million as compared to CAD 428.043 million in the previous corresponding quarter. The drastic fall was due to a steep correction in the crude oil prices and realized price stood at CAD 34.90/bbl, as compared to CAD 79.46/bbl in the previous corresponding quarter. NGLs and Natural gas realization prices recorded at 8.94/bbl and 1.85/mcf as compared to 11.25/bbl and 3.09/mcf, respectively in the previous corresponding period. Amidst a drastic fall in the crude oil demand globally, the group reported a stable production of 100,366 boe/day against 103,003 boe/day in Q2FY20. The performance was aided by new well contributions from its active Q1FY20 drilling programs in Canada and the United States.  Fund flows from operations stood comparatively lower at CAD 81.852 compared to CAD 222.738 million in the previous corresponding period (pcp). The Company reported a net loss of CAD 71.290 million against a net income of 2.004 million in pcp. However, net loss narrowed down compared to the CAD 1,318.5 million in the previous quarter.

Q2FY20 Financial Highlights (Source: Company Reports)

Risk: The Company’s performance is directly linked to the demand and price of crude oil and natural gas. Any volatility in price and demand for oil and gas would dampen the operating performance.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The stock of VET corrected ~72% so far this year. The stock is trading near the lower band of its 52-weeks trading range of CAD 2.21 and CAD 24.47. The Business was impacted by a demand destruction scenario caused due to COVID 19 pandemic, resulted in an unprecedented fall in the oil prices for the WTI benchmark as global inventories swelled. Amidst the challenges, the company has shown effective utilization of its resources in order to control its costs, which is impressive. The company reported a ~3% q-o-q growth in its production volumes, underpinned by new drilling operations commenced during the first quarter of FY20 in its North American business units. We expect, the demand to improve in the coming days, which would result in an improvement of the crude oil prices resulting in top-line growth for the company. With the cost reductions that have made to-date, the group is free cash flow positive in the current commodity price environment. The group is focusing on debt reduction with the target of achieving a debt-to-cash flow ratio of less than 1.5x. Vermilion received a rating of "AA" on a scale of AAA (leader) to CCC (laggard) in the MSCI ESG Ratings assessment, which reflects exposure to industry-specific ESG risks and the ability to manage those risks. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Baytex Energy Corp, Enerplus Corp and ARC Resources etc. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 5.91 on August 6, 2020.

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

Whitecap Resources Inc

Whitecap Resources Inc. (TSX: WCP) is a Canada based company which operates in the exploration and production of oil and natural gas. The Group receives the majority of its revenue from crude oil segment, while a part of the revenue is being derived from NGLs and Natural gas.

The company declared a quarterly dividend of CAD 0.01425 per common share, payable on August 17, 2020.

Q2FY20 Financial Highlights: WCP announced its quarterly results, wherein the company reported petroleum and natural gas revenues of CAD 150.467 million as compared to CAD 374.73 million in the previous corresponding period (pcp). The decline in revenue was primarily attributable to a drastic fall in crude oil prices. Average realization prices stood at CAD 23.35/boe, significantly lower than CAD 58.32/boe in the previous corresponding quarter. However, the company reported an improved production for the quarter at 70,807 boe/day, as compared to 70,611 boe/day, a year ago driven by the continued strength of the first quarter drilling program coupled with a low decline rate of the base production. The company’s funds flow stood significantly lower at CAD 78.134 million against CAD 175.537 million in the previous corresponding quarter. Net loss was reported at CAD 78.285 million as compared to a net income of CAD 58.357 million in pcp.

Q2FY20 Operational Snapshot (Source: Company Reports)

Risks: The Company’s business is exposed to natural gas and crude oil prices, and the demand is directly correlated with the demand from the manufacturing and industrial sectors. The recent lockdown has dampened the realization prices and subsequently the top-line. Any setback to lockdown easing or further breakout of the novel virus would hamper the demand for oil and natural gas, which would further impact the operating performance of the Company.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The stock price corrected ~55% so far this year amid volatility in the global Equity market on account of COVID 19. The Company’s performance was impacted by volatility in the crude oil prices, which was driven by the recent price war between Russia and Saudi Arabia. The above incident created an oversupply of crude oil resulted in an unprecedented collapse in international crude oil prices and resulted in a steep price correction of crude oil and ultimately impacting the performance of the oil producers. Amidst a lower demand scenario, the Company has maintained its production volume, which is commendable. Meanwhile, with gradual improvement in oil prices, the Company is expected to deliver a better top-line, going forward. Despite a challenging quarter, the group declared a dividend amid a time when most of the businesses are cutting or suspending the dividend. This shows the financial flexibility of the business. At the last traded price, the was offering a dividend yield of 6.89%, which is lucrative considering the prevailing interest rate scenario. However, the yield is a bit inflated, considering the YTD price correction. Further, the group is in an enviable position with many competitive advantages including strong balance sheet, high funds flow netback assets, shallow production decline rate and depth and quality of inventory to support the fully-funded business model. The stock soared ~45% in the last three months and closed above its 20-days and 50-days simple moving average of CAD 2.29 and 2.30, respectively, indicating a bullish trend. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered Crescent Point Energy Corp, Seven Generations Energy Ltd and Parex Resources etc., as a peer group. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 2.48 on August 06, 2020.

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

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