Vermilion Energy Inc T.VET

RBC Dominion Securities Inc. RESEARCH

[cohoe]

RESEARCH
RBC Dominion Securities Inc.
Greg Pardy, CFA (Co-Head
Global Energy Research)
[phone]
[e-mail]
Carson Tong, CFA (Associate
Analyst)
[phone]
[e-mail]
Dillon Culhane, CFA, CA
(Associate)
[phone]
[e-mail]
Sector Perform
TSX: VET; CAD 58.34
Price Target CAD 64.00
WHAT'S INSIDE
Rating/Risk Change Price Target Change
In-Depth Report Est. Change
Preview News Analysis
Scenario Analysis*
Downside
Scenario
53.00
5%
Current
Price
58.34
Price
Target
64.00
14%
Upside
Scenario
69.00
23%
*Implied Total Returns
Key Statistics
Shares O/S (MM): 101.8
Dividend: 2.58
NAVPS: 36.60
Market Cap (MM): 5,939
Yield: 4.4%
P/NAVPS: 1.6x
Dividend reflects an annualized rate.
RBC Estimates
FY Dec 2012A 2013E 2014E 2015E
CFPS - FD 5.46 6.46 6.60 6.94
Prev. 6.58 6.31 7.10
P/CFPS 10.7x 9.0x 8.8x 8.4x
Oil (bbl/d) 25,300 27,500 28,900 30,100
Prev. 27,000 28,600
Gas (mmcf/d) 75.2 81.0 99.6 124.7
Prev. 79.9 75.2 110.8
Prod. (mboe/d) 38 41 46 51
Prev. 40 41 49
All values in CAD unless otherwise noted.
November 8, 2013
Vermilion Energy Inc.
Adding More Euro Flair
Our View: Vermilion Energy’s (VET) in-line third-quarter results reflected
5% higher production rates offset by moderately higher current taxes. The
company boosted its common share dividend by 7.5% to $2.58 per share
(4.4% yield) and signaled that it will come in at the high end of its 2013
production range at 41,000 boe/d.
Key Points:
Owing to a weaker Canadian dollar and 2012 Australian drilling program
that moved into this year, VET raised its 2013 capital program by 9% to
$530 million.
Corrib – Mid-2015 Start-Up. The only wrinkle in VET’s third-quarter results
was that its Corrib (18.5% wi) gas project offshore Ireland is now expected
to come on-stream in mid-2015 (3–6 months later), ramping up to peak
rates of 58 mmcf/d. This timing shift reflects a delay in tunneling activities
(which restarted November 3), following a suspension related to a fatality
on September 8.
2014 Budget. VET’s 2014 budget pointed toward a $555 million capital
spending program (excluding its recent $170 million asset acquisition in
Germany) or $725 million including the acquisition, with a production
range of 45,000–46,000 boe/d. Our revised 2014 production outlook now
sits at 45,500 boe/d.
High Yield Growth Model. In our view, Vermilion has proven itself
adept at driving production and reserve growth organically, as well as
unearthing niche acquisition opportunities, including its recent deals in
the Netherlands and Germany. Supported by its two-thirds oil weighting
and 60% exposure to Brent-linked pricing, Vermilion remains well
positioned to execute a high yield growth model with a dividend stream
that should grow in the future.
Dividend Outlook. Our (annual) dividend outlook for Vermilion is now
$2.58 per share in 2014 (4.4% yield) and $2.60 per share (4.5% yield) in
2015, which equate to simple payout ratios of 39% and 37%, respectively.
Relative Valuation. At current levels, Vermilion is trading at a debtadjusted
cash flow multiple of 9.8x (vs. our high dividend yield peer group
average of 7.8x) in 2013 and 9.9x (vs. peers at 7.8x) in 2014, and at a P/
NAV ratio of 1.59x (vs. peers at 0.97x).
Recommendation. We maintain our Sector Perform rating on Vermilion
Energy and our one-year price target of $64 per share. Our price target
reflects a 25% weighting toward a multiple of 1.1x our revised Base NAV
of $36.60 (vs. $35.27) per share and a 75% weighting toward a 2016 midcycle
debt-adjusted cash flow multiple of 9.8x. Although we look upon
Vermilion as fairly valued at current levels, we can see ourselves becoming
more bullish as Corrib moves into sharper focus.