a little dated & brief mention of AVRWas looking at something related to VRM and noticed mention made of AVR
=-=-=-=Calgary, AB, July 4 /SHfn/ -- CEO Jeff Boyce had a whale of a story to tell to an industry audience when he mounted the stage recently. To begin with, the National Post's business ranking of 500 organizations listed his company, Vermilion Resources Ltd. [T.VRM], as number one in five-year profit growth. VRM's profit was up 74,000 per cent, for average annual growth of 482 per cent. In second place was Gay Lea Foods, a co-operative, whose profits were up a much more modest 8,200 per cent.
Vermilion's profit growth number is impressive, but it is worth remembering that young oil companies use cash flow rather than profits as their measure of success. In the end, a company that begins with low or zero profit but good cash flow can be a very promising stock to own.
A more tangible place to look for success is in production. Here Vermilion does not disappoint. The company has grown from daily production of a very modest 1,307 barrels of oil equivalent in 1996 to 15,000 barrels today.
Big Sky Takeover: Of course, that was before the company's recent announcement that it would buy out a privately held Alberta-based gas company, Big Sky Resources. Following this acquisition, the company forecasts, Vermilion's average production will end this year with daily production of 18,000 barrels oil equivalent.
The cash-and-share Big Sky transaction is worth about $33 million, and includes the assumption of $8.4 million of debt. For Vermilion, however, the acquisition is at least as much about potential as production. Thirty-three million dollars is a hefty price for Big Sky's daily production of 1,020 barrels of oil equivalent.
With this purchase, Vermilion says it has acquired a new core property in the Mastin Lake area, north of Edmonton. Along with this gas-prone, high working interest property, VRM acquired a large seismic database and 68,000 net undeveloped acres of land. In addition, VRM acquired +extensive facilities and infrastructure including three 100 percent working interest operated gas plants and one 27 percent working interest non-operated gas plant. The project area has year round access and will provide exposure to gas at shallow depths in multiple zones. There are currently 35 natural gas locations ready to be drilled at Mastin Lake.+
The acquisition will also extend Vermilion's existing core property, Utikuma - a heavy oil play in northern Alberta. Adds the company, +the deal adds 26,000 net undeveloped acres of land at Gift Lake along with nine well-developed oil prospects and extensive 3D seismic data.+
Dundee Securities analyst Victor Vallance believes the takeover is a good one. +We believe the price paid for Big Sky is fair value and in line with current acquisitions in the industry. Furthermore, the deal adds more reserves to Vermilion and provides the company with additional natural gas to its production mix.+ He gives the company a +strong buy+ rating and has a price target of $10.50.
Background: Despite year after year of year-over-year growth in production, asset base and experience, Vermilion is still trading below a high ($9.50 per share) it established in 1997. Yet during that period the company has grown to a market capitalization of about $375 million. According to numbers the company presented to the CAPP investment symposium, Vermilion's year 2000 cash flow will be $1.79 per share this year, and $2.15 in 2001. Thus, the company is now trading at four times this year's cash flow.
The company also estimated that its profits will total $0.70 per share this year and $0.86 next year. Based on $7.30 for a fully diluted share, that would mean price to earnings (PE) ratios this year and next of 10.5 and 8.5 respectively.
Such low ratios are highly abnormal. PE ratios for oil companies during periods of normal stock evaluation are frequently 30 and higher. This is because of the importance of cash flow in the oil and gas business.
Vermilion has three core areas of operation within Alberta, and will be adding Mastin Lake with the Big Sky purchase. Like other small Canadian producers, the company has used its Canadian production and experience to finance overseas acquisitions. Vermilion's foreign expansion has been to buy property in French, British and Danish production areas. The French and British lands are on land, while the Danish property reaches from a land base into a shallow portion of sea. The French properties are more advanced than the British and Danish prospects, which are essentially exploration prospects. Vermilion is already producing 6,800 barrels of oil equivalent per day in France.
VRM also invested $6.2 million to acquire a 39 per cent interest in the Aventura Energy [V.AVR] Transaction. That business arrangement was set up to find oil and gas opportunities in Trinidad and Venezuela.
Strengths: According to one analyst, who asked not to be identified, +They've been pretty good at meeting our expectations. They had a pretty tough time like everyone else when oil prices collapsed, but they pulled through it pretty well.+
Certainly, the company's litany of assets supports this assertion. One way to measure a share's value is to calculate what it's worth in terms of oil and gas reserves. In VRM's case, company management estimated that 1.6 barrels of oil equivalent backed up each share of stock.
A more traditional way to measure the stock's value is through its net asset value. To calculate these values, last April the company used what today seem like laughable assumptions of US$20.50 oil and $2.50 natural gas oil; today, most firms use numbers that are 25 per cent or more higher than this. By Vermilion's own conservatively estimated numbers, its shares are worth $7.80 per share. In normal times, oil stocks tend to cost much more than their underlying asset value, but these are not normal times.
Weaknesses: Vermilion is more oil-weighted than gas weighted. Most of its Canadian oil production comes from its Utikuma property in northern Alberta, while it also produces oil in France. Skepticism about the outlook for oil prices is one reason people are paying lower price to cash flow multiples for oily stocks than for gas-weighted stocks.
The company receives Brent pricing for its French crude, which means it is lower than West Texas Intermediate, the North American standard. However, the favourable royalty structure in France more than compensates for the lower price during periods of high oil prices.
Analyst Forecasts: Nine investment firms follow Vermilion, and they have all recommended the firm as a +buy.+ Their average 12-month price target is $10.32. Those numbers will likely be revised, based on continuing high commodity prices and the impact of the Big Sky purchase.