TD Buy Rating on Vermilion Energy
VET Our revised estimates incorporate last night's 2016 detailed budget announcement of $285 million ($65 million lower than the preliminary November 2015 estimate), and production guidance of 62.563.5 mBOE/d (marginally below original guidance of 63.065.0 mBOE/d from March 2014). The materially lower spending, coupled with the marginally lower production, supports the company's strong capital allocation optionality and is helped by the global asset diversification. On a year-over-year basis, the majority of the capital reduction is from its Canadian program, where Vermilion will largely focus on lease expiries and non operated wells. The France and Ireland budgets will also see substantially less capex, with the latter because of the achievement of first gas at Corrib. Looking ahead, we expect Vermilion will spend $5 million$10 million per year to maintain production volumes of 9.7 mBOE/d (at Corrib). At current strip prices, we believe that Vermilion is fully funded to execute its capital program, deliver 15% growth year-over-year, and maintain its cash dividend. If commodity prices strengthen, it is expected that the company will reduce debt levels rather than increase capital to post more growth. Furthermore, there is substantial operational flexibility which could result in a lower 2016 budget should commodity prices weaken again, this is core to our capital allocation thesis for the sector. We believe that Vermilion could spend as little as $250 million to maintain production levels.