Vermilion Energy (VET) has taken measures to stem its cash burn, including suspending its dividend and cutting capex. It appears to be able to deliver positive cash flow (including hedges) in 2021 based on strip prices, and has a estimated breakeven point of close to $40 USD WTI oil (with no dividend). One of the worries around Vermilion before involved its lack of 2021 oil hedges, but 2021 strip is now at a more favorable level.
Vermilion does still need oil to move higher for a small dividend to become a possibility again. If oil returns to the mid-$40s longer-term, it may be able to restore a monthly dividend of around $0.06 CAD ($0.043 USD) per share, while its share price would be worth an estimated $6 USD. At $50 WTI oil, Vermilion is likely worth closer to $9 USD.
Updated 2020 Outlook
Vermilion currently expects to produce an average of 94,000 to 98,000 BOEPD in 2020. At current strip of roughly $38 to $39 WTI oil and $1.50 USD AECO and $2.50 USD TTF/NBP in 2020, Vermilion would be expected to deliver $828million USD in revenue net of hedges.
AECO natural gas prices have generally shown improvement, which helps offset the weakness in European natural gas prices. Around 40% of Vermilion's natural gas production comes from Europe (compared to 57% from Canada).
| | Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million |
| Crude Oil & Condensate (Barrels) | 16,819,200 | $37.00 | $622 |
| NGLs (Barrels) | 2,803,200 | $6.00 | $17 |
| Natural Gas [MCF] | 92,505,600 | $1.90 | $139 |
| Hedge Value | | | $50 |
| Total Revenue | | | $828 |
Vermilion suspended its dividend and has been working on cutting its costs further. It also expects capex to end up near the lower end of its guidance range. This results in a projection of $908 million USD in cash expenditures for Vermilion in 2020.
| Expenses | $ Million |
| Royalties | $78 |
| Transportation | $50 |
| Operating Expense | $330 |
| G&A | $35 |
| PRRT | $13 |
| Corporate Income Tax | $13 |
| Interest | $50 |
| Capex | $255 |
| Net Dividends | $84 |
| Total Expenditures | $908 |
Thus Vermilion may have $80 million USD in cash burn in 2020, and would be at roughly neutral cash flow before its 2020 dividends.
Potential 2021 Outlook
At current strip prices for 2021 (roughly $42 WTI oil and $1.75 USD AECO and $4.25 USD TTF/NBP), Vermilion may end up delivering $989 million USD after hedges if it maintains 96,000 BOEPD in average production.
Vermilion's oil hedges are essentially non-existent for 2021, as it has 1,000 barrels of Brent oil hedges per day with a $28 floor ($18 subfloor) and a $32.50 ceiling. It still has a fairly substantial amount of natural gas hedges though.
| | Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million |
| Crude Oil & Condensate (Barrels) | 16,819,200 | $41.00 | $690 |
| NGLs (Barrels) | 2,803,200 | $8.00 | $22 |
| Natural Gas [MCF] | 92,505,600 | $2.75 | $254 |
| Hedge Value | | | $23 |
| Total Revenue | | | $989 |
I've assumed that Vermilion can hold production at 96,000 BOEPD with a $330 million USD capital expenditure budget (30% above 2020 levels). This would result in it having $932 million USD in cash expenditures if it continued to suspend its dividend.
| Expenses | $ Million |
| Royalties | $97 |
| Transportation | $50 |
| Operating Expense | $330 |
| G&A | $35 |
| PRRT | $20 |
| Corporate Income Tax | $20 |
| Interest | $50 |
| Capex | $330 |
| Net Dividends | $0 |
| Total Expenditures | $932 |
Vermilion would thus generate around $57 million USD in positive cash flow in 2021 with a maintenance capex budget and current strip.
Dividend And Valuation
Vermilion can reach breakeven cash flow (while maintaining production) at close to $40 WTI oil and $4 USD European natural gas without hedges. This also assumes that it continues to suspend its dividend.
It can potentially reinstate a monthly dividend of around $0.06 CAD ($0.043 USD) per share if WTI oil reaches and stabilizes the mid-$40s. At that oil price it would be able to cover that dividend, maintain production levels and have a modest amount of positive cash flow remaining.
Mid-$40s USD WTI oil would also point to Vermilion's stock being worth a bit over $6 USD per share. This would result in a 8% to 9% yield and a roughly 5.0x EV/EBITDA valuation. Vermilion has historically traded more in the 6.0x to 7.0x EV/EBITDA range, but may have a lower multiple going forward due to the new lower range for European natural gas prices.
WTI oil at around $50 in the long-run would make Vermilion's stock worth close to $9 USD.
Conclusion
Vermilion Energy appears to be in an okay financial position at current strip prices. After suspending its dividend and cutting costs, it can achieve breakeven cash flow at around $40 WTI oil. Vermilion's credit facility is not subject to borrowing base re-determinations, so it does not have that uncertainty to deal with. It still needs to manage its credit facility carefully though since it has utilized around 75% of its credit facility capacity.
I view Vermilion as having some remaining upside for $45 to $50 longer-term oil. At those prices, Vermilion could be worth around $6 to $9 USD per share. While current strip is still lower than that, it is at a level that should allow Vermilion to trim its debt slightly and manage things until oil prices rebound further.