Vermillion Energy Analysis – September 2023

Vermillion Energy (TSX : VET) is a publicly-listed oil & gas exploration and production company. It is headquartered in Calgary, Alberta. Vermillion used to have a high-paying dividend until the co-vid pandemic forced the company to cut it. It has spent recent years paying off its debt and is set to re-establish its dividend after it reduces its net debt to $1bn (prices in $CAD), currently at $1.3bn, which should hopefully happen in the next few quarters.

-Net debt was $2.009bn in Q4 2020 and is $1.321bn in Q2 2023.
-Debt repayments totalled $1.121bn in 2022, partially offset by an acquisition.
-Net income was down to $127m in the most recent quarter, down from an average of $352m over the four previous quarters.

-Production of 83,152 boe/day (barrel of oil equivalent) in Q2 2023, roughly flat compared to a year ago.
-61.74$/boe in Q2 2023, down from 111.55$/boe in Q2 2022. Driven down mainly by natural gas and natural gas liquids which makeup a large portion of sales.
-Average realized price of natural gas was 7.37$/mcf (thousand cubic feet) down from 16.50$/mcf in Q2 2022. Higher gas prices in Europe could soon arrive if storage facilities run out due to colder weather or to after-effects of Russia’s supply and its invasion of Ukraine.
-Average realized price for NGLs was 28.11 $/bbl this quarter down from 51.86 $/bbl in Q2 2022.
-Average realized price for Crude oil and condensate was 96.64$/bbl down from 138.55$/bbl in Q2 2022. OPEC remains commited to higher petroleum prices as its members such as Saudi Arabia are dependent on it.
-Its North American (US and Canada) segment brought in 69% of production with the other 31% coming from its International segment (Europe, Australia). In NA, it is getting 45.12$/boe while international was getting 91.89$/boe. Perhaps an expansion outside NA would be wise?
-Windfall taxes from European Union temporary solidarity contribution were 4.56$/boe on total segments in Q2 2023 but may soon disappear.

Guidance from an investor presentation:
-25% to 30% of Free Cash Flow allocated to shareholder returns, primarily base dividend and share buybacks (25% would be $207m for last twelve months up from the actual number of $178m, representing dividend and share buybacks for ttm)
-Majority of 2023 Free Cash Flow will be allocated to debt reduction; next net debt target of $1 billion
-Plan to further increase return of capital once we achieve next net debt target of $1 billion

Other facts about Vermillion:
Trailing P/E: 2.84 (Whitecap Resources: 6.58, MEG: 14.72, Crescent Point Energy: 14.86,  ARC Resources: 5.65)
Price/book: 0.85 (WCP: 1.33, MEG: 1.69, CPG: 0.91, ARX: 1.86)
Price/sales: 1.09 (WCP: 1.70, MEG: 1.31, CPG: 1.78, ARX: 1.68)
Dividend: 2.01% with payout ratio of 3.82% (WCP: 4.91% with 28.81% payout, MEG: N/A, CPG: 3.54% with 47.37% payout, ARX: 3.14% with 15.32% payout)
Return on Equity: 36.12% (WCP: 21.71%, MEG: 12.12%, CPG: 5.90%: ARX: 37.72%)
Profit Margin: 41.79% (WCP: 31.05%, MEG: 9.19%, CPG: 11.24%, ARX: 34.31%)

Vermillion is undervalued and generally stronger compared to peers and with a good quarter could re-establish its sought-after dividend. And it could be soon, according to the Globe & Mail: “Vermilion Energy says it expects third-quarter production at upper-end of forecast”.

Disclaimer: I own and recommend shares of Vermillion