Strong Fundamental Outlook & High Dividend Yield Are Attractive Reasons To Invest In Vermilion Energy Inc.

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Vermilion Energy Inc. (VET), based in Calgary, Alberta, is an international oil and gas producer with superior operational and financial metrics. At the current (July 26) market price of $33.39 (US), the stock has an attractive dividend yield of ~6.0% and if oil prices move up, there should also be decent capital appreciation. The Company’s reserves and production continues to grow via organic efforts and selective M&A. As, and when, crude prices start their next sustained up move, the operating and financials metrics of Vermilion Energy would improve significantly.

Vermilion shares have been trending lower over the past few months in sync with the falling oil prices:

WTI and Vermilion Energy share prices

Robust operating model

Vermilion Energy is an international E&P company that holds conventional/semi-conventional assets with high rates of return, low decline rates and strong capital efficiencies. The Company holds a diversified project inventory and currently has 10 major drilling projects across the U.S., Canada, and Europe with a net drilling inventory of nearly 1,200 as outlined below:

Key drilling projects of Vermilion

Operational efficiencies have been improving steadily over the past few years which, to an extent, was necessary for its survival in the 2014 oil price collapse. OPEX witnessed a 27% reduction over 2012-2016 while 2P F&D costs (capex) declined 84% over the period 2011-2016, reaching $5/BOE in 2016. Vermilion Energy boasts one of the best netbacks in the industry and ranks behind Raging River Exploration Inc. (TSX: RRX)(RRENF) ($40/BOE) with a $34/BOE.

Continued improvement in operational and capital efficiencies

Strong FFO and FCF aid regular dividend payouts

Owing to its operational efficiency and strong production growth, Vermilion Energy generates consistently high funds from operations (FFO) and free cash flows (FCF) that have aided it in rewarding shareholders with regular dividends. In 2016, Vermilion Energy generated more than $500 million (Canadian dollars) in FFO and nearly $300 million (Canadian dollars) in FCF.

The Company has paid a monthly dividend of ~$0.20 over the past three years. On July 17, 2017, Vermilion Energy announced a dividend of $0.215 (Canadian) per share, or $2.60 (Canadian) annualized, which translates into a forward dividend yield of 6.6%. This is higher than its peer average dividend yield of ~4%.

Potential for capital appreciation on a recovery in crude prices

In addition to the high dividend yield, an uptick in crude prices could also result in significant appreciation in its stock price. Both WTI and Brent prices have been on an upward trend since early 2016 and currently trade at US$46/barrel, up nearly 10% from the June 21 low of US$42.50. With production expected to ramp up ~10% in 2017, rising crude prices could result in significant revenue increases along with strong operating and net margins. A the same time, Vermilion Energy could also withstand any sharp fall in crude prices from current levels as the WTI breakeven for VET is only at ~US$15/barrel compared to the peer average of US$50/barrel.

Financial analysis

1Q17 performance beats consensus (all figures in Canadian dollars):

  • VET’s revenues beat the consensus estimate of $237 million and more than doubled to $245.4 million in 1Q17 from $163.4 million in the prior year quarter, due primarily to higher commodity prices which, on average, increased more than 50% YoY.
  • Fund flows from operations increased 53% YoY to $143.4 million for the quarter
  • while net income came in at $44.5 million, or $0.38 per share, (much higher than the Street’s $0.01) compared to a net loss of $85.8 million, or $0.76 per share, in 1Q16.

Source: Company filings

Outlook and guidance (in Canadian dollars)

Vermilion Energy forecasts:

  • a production increase of 10% in 2017 to 70,000 boe/d and 9% in 2018 to 76,000 boe/d, with capex of $295 million and $340 million...
  • FFO of roughly $600 million for 2017 and 2018 based on the WTI price of US$45.6 and Brent price of US$47.4 but if the prices were to go up to US$60 for WTI FFO would increase to ~$670 million.
  • FCF at ~290 million for 2017 and $270 million for 2018.

Given the above strong fundamental outlook & high dividend yield present an attractive entry point for investing into shares of Vermilion Energy Inc..

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