mrmomo wrote: We could be witnessing the total collapse of a major Canadian producer here. It was my initial belief that they were fairly valued at ~$4.50/share at a reasonable 25k-30k per flowing barrel, but it seems that maybe it may NOT be the case. I'm not exactly sure what kind of issues they're having, be it production problems, risk management or some other type of operational difficulty but the share price should really NOT be trading at these levels UNLESS there's some unkown factor causing for it to be. As i've already factored in the usual suspects like current WTI/Brent oil pricing & their obvious debtload, they should have been "manageable" under even the most strenuous circumstances. Maybe in this instance with this company, i've undersestimated the seriousness of these issues. I fully understand that with CURRENT oil pricing, many oil operations across the globe are not exactly profitable, Vermillion's operations included. But as a long standing company with vast experience both on & off the field including a diverse portfolio of properites, they should have been more resourceful & resistant to this current downward, economic cycle. Especially in comparison to other producers in a more difficult situation and a lesser balance sheet.
I've always suspected that their heavy debt load in this environment COULD have been an achilles heel to their whole operation, but i guess i just didn't know to what extent and didn't not fully calculate the huge paradigm shift in fossil fuels perceptions. The latter issue being of upmost importance now and probably not taken too seriously by almost anyone, whether the company, creditors or lenders and definety not the shareholers. As this is unchartered territory for investors when it comes to evaluating an investment, it becomes very difficult if not impossible to factor in an event like that. Is it a temporary phenonmenon or a vitrual, complete and permanent shift by the masses? I personally think it's the latter, but who's to say i'm right? One thing is certain though, it's a crucial element that CANNOT be disregarded or denied when one has to make a reasonable, calculated decision with their investment. Be it a country or politician who set policy, a banker or creditor who lends, a company who needs to be profitable, an investment house which manages or just the simple individual who wants to grow his investments.
Just to be clear here, i'm not a shareholder in Vermilion and have abolsutely no interest in them at this point in time, whether they succeed or not is irrelevent for me. But what investors should CLEARLY note here, s/h or not, is what's currently happening to the company in this inhospitable environment. Seeing a well, established, long standing (there goes that word again!), solid energy producer disintergrate in this fashion is indeed worrisome, for the whole sector. Specifically for anyone with a vested interest in this sector and the after effects on heavily wighted oil producing nations like Canada & the USA, among many others. This energy "paradigm shift" that's currently in the process of evolving & progressing will not only turn the whole industry upside down in the short-med term but will also make MANY LONG STANDING companies like Vermilion disappear in the coming years. This was inevitable with the full 360 degree turn on global perceptions regarding fossil fuels, the rise of an enviromentally focused & sensitive population and the advent of battery powered automobiles being competitive with ICE. Could there still be a place for guys like Vermillion in this new era? Yes, there will still be an industry to cater to like petroleum based products like plastics but it will not resemble the industry we know today or the scope of it.
Only the strong survive. A statement frequently used across many diverse situations in times of difficulty and very appropriately applied here. I don't know for certain IF Vermilion will make it and be one of those survivors but i do know one thing for sure, it will not be in current form. Looking at Vermilion today, i see three possible futures for them all with the same probability of occurring. As current energy pricing is not sustainable for someone like Vermilion, as this is quite evident, then certain drastic changes will have to be made soon just for pure survival. With a debt load of $2B+ & unprofitable assets, management of this debt will become increasingly difficult to pratically impossible. If they aren't already at the latter, i pretty certain they are coming very close to it now, especially with skitish & nervous lenders adding to the mix. The liquidity crunch facing these ep's and the fact that long standing lenders who usually provided the neccessary capital for these companies to function & flourish, have turned their backs on the sector.....completely. Taking all these factors into consideration, there is no "reasonable" or "satifactory" way out for them and neither for Vermilion. So the 3 scenarios below is what will be possible for Vermilion going forward.
The first, the easiest and most obvious one....sell some assets & shrink. If they plan to stick around, they need to reduce debt by at least half and therefore sell some major assets. What Vermilion needs to decide here is whether they want to be an Canadian ONLY producer OR just focus on international core assets leave Canda behind. I do not think they can realistically hang on to both as they need certain synergies & cost savings to come into play for this to work at its maximum. With this option, i cannot say which asset play is better but one thing is clear though they will need to make sure they hold onto assets in jurisdictions where producing oil isnt considered a sin. The second option would be to hang up the gloves and completely sellout. As this probably cannot be done quickly or in one transaction because of the divers nature of their portfolio, it would require not only a lot of time but much negotiations with several parties. This will not be an easy task for management in any regard. In this scenario, if done in 2 or 3 transactions, i believe the company to be worth around $5-$8 when all the asstes are monetized. The last and least probable (by a bit) but still a possibility would be to declare insolvency/bankrupty. Now before anyone here flames for this, please understand that we DO NOT KNOW for sure in what financial shape the company is in & what their situation with their creditors is.....we can only speculate. If everything was rosy, their stock price would most definetly NOT be trading at these levels, but it is because there are some serious issues the company must face & deal with. This is not conjecture but fact. For a little insight on this issue, i suggest folks look at what's been happening in the American producer space for the last 12 months, it will give you a good idea on the seriousness of this problem. Better & bigger companies, with better balance sheets than Vermilion still going under is a sign and a need for worry for Vermilion shareholders. Somthing that cannot be denied and must be considered.
In the end, i don't know which path Vermilion mgmt will choose. I'm sure with banks & lenders exposed and at risk in this company, mgmt will not be the only ones to decide the fate of the company. One thing is certain though, if managment fail to act or failt to act in time, as it was in MANY cases before them, the creditors will either take control of situation and force mgmt into a certain path or they will force the company into bk and it will be dealth with there. A scenario equity shareholders most definetly want to avoid, as not only any possible settlement could last for years but the outcome is usually severely disadvantageous for them and an utter financial disaster. Hopefully the folks over at Vermilion, have the foresight & the brains to avoid such a situation and are transparent enough for s/h to have enough confidence in them to come up with a amiable & mutual beneficial solution.
Good luck to all