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.

Key highlights 

• Focusing on Liquidity along with debt reduction: The management has approved an E&D capital budget of CAD 300 million for 2021, representing a 17% reduction from 2020. The Company's primary focus for 2021 is to preserve liquidity and to reduce debt, while positioning itself for long-term sustainability. During the first quarter, the group would invest approximately 31% of the total capital budget. This cumulative capex is expected to deliver annual average production of 83,000 to 85,000 boe/d, which would help generating more than CAD 200 million of free cash flow.

Source: Company 

• Robust production: The company has a strong history of the robust output, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. Although the company reported average production of 97,656 boe/day for the nine months ended September 30, 2020, reflected a fall by 4% comparing the previous corresponding period due to the turmoiled economic scenario.

Source: Company

• Optimizing operational efficiencies: Over the years, the management has undertaken some prudent steps to minimize their operating costs. This ongoing focus on efficiency has resulted in significant per-unit cost reductions, helping the company to achieve healthy margins. 

Source: Company

Financial overview of Q3 2020 (In thousands of Canadian dollars)

Source: Company 

• In Q3 2020 the company reported consolidated revenues of CAD 274.7 million against CAD 391.8 million in the previous corresponding period. The decline in revenues was primarily due to a reduction in crude oil realized prices.

• The company reported a net loss of CAD 69.9 million in Q3 2020, compared to a net loss of CAD 10.2 million in Q3 2019. The decrease in net earnings was primarily driven by CAD 101.4 million of lower fund flows from operations due to lower realized prices, because of the impact of COVID-19 and the OPEC+ price war, and impairment charges of CAD 35.4 million. 

Risk associated with investments

The Company is in the exploration business of oil and gas; hence, its revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors that could impact the financial performance include low demand for oil and gas, and financial risk on behalf of their hedged positions.

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company expects its average production for FY 2021 to be in a range of 83,000 boe/day to 85,000 boe/day, with a primary focus of preserving liquidity and reduce debt. Approximately 31% of the FY 2021, capital budget of CAD 300 million, would be invested during the first quarter, which would further help in generating more than CAD200 million of free cash flow. Keeping in view that the gradual reopening of the economic and industrial activities, the commodities prices are likely to improve in the foreseeable future. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Buy” rating at the closing price of CAD 8.47 on February 24, 2021. We have considered Baytex Energy Corp, Crescent Point Energy Corp, Tamarack Valley Energy Ltd. etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Dream Unlimited Corp

Dream Unlimited Corp (TSX: DRM) is a leading developer of exceptional office and residential assets in Toronto, which owns stabilized income generating assets in both Canada and the U.S and has an established and successful asset management business.

Key Highlights 

• Expanding Asset Management Platform: The company is expanding its asset management platform through creating private equity firm “Dream Equity Partners” to pursue opportunities for investing capital on behalf of institutional and retail clients. The group also entered into a partnership with a global investment manager to create a multifamily platform in the US. In aggregate, they will be launching the US multifamily platform with 2000 units worth USD 300 million. 

• Healthy development pipeline: The company holds attractive development pipeline of 9,500 residential units and 4 million square feet of commercial/retail space in Toronto and Ottawa. Furthermore, over 7,400 units and 1,750 acres are expected to be approved in 2021, marking significant progress and increased value potential in the development pipeline. We believe this pipeline would open the gateways for the next fresh recurring revenue and cash flows, which would be a key positive. Below is the matrix of 2021 expected approvals.

Source: Company 

• Update on Brightwater: The company’s Brightwater development reached another key milestone with the successful sales launch of its first two condominium buildings in late 2020. As on December 31, 2020, all 311 units brought to market have been pre-sold, with occupancies commencing in 2023. 

• Ample Liquidity: With an emphasis on preserving liquidity and managing risk throughout the year, the company ended 2020 with CAD 426 million in liquidity, increased by CAD 103 million against the previous corresponding period, while the leverage ratio stood at 26.6%. Furthermore, the management believes that cash from operations and recurring income would continue to provide enough liquidity to fund operating expenses and debt service requirement, which is quite impressive. 

Source: Company 

Financial overview

Source: Company 

• In 2020 the company posted total revenue of CAD 347.6 million, against CAD 580 million in the previous corresponding period. The revenue declined primarily due to low performance from the recurring income segment due to ongoing capacity restrictions at many properties in Toronto due to the COVID-19 pandemic.
• Gross margin stood lower at CAD 105.1 million, against CAD 364.3 million in pcp, primarily due to lower revenues combined with higher direct expenses.
• The company posted an EBIT of CAD 197.6 million in 2020, against CAD 440.4 million in 2019.
• Earnings before income taxes for 2020 was CAD 119.9 million, down from CAD 553.9 million in the prior year after adjusting for fair value gains/losses on Dream Impact Trust units. The decrease was primarily due to reduced earnings and higher direct operating expenses.
• Earning for the year stood at CAD 159.6 million in 2020, against CAD 331.7 million in 2019. 

Risks associated with investment

Due to the ongoing pandemic, the group reported lower revenue, primarily due to low performance from recurring income. Any continuation of such trend would impact the company’s overall performance. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company ended 2020, with CAD 426 million in liquidity, increased by CAD 103 million, against 2019, implies the management's emphasis on preserving liquidity and managing risk amid the current economic slowdown. The group also holds a healthy product pipeline, and we believe this pipeline would open the gateways for the next fresh recurring revenues and cash flows in the foreseeable period. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 22.87 on February 24, 2021. We have considered Morguard Corp, Crombie Real Estate Investment Trust, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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.