CIBC SO
What's The Event Vermilion reported Q1/15 results on Friday which were in line on production and ahead on cash flow due to a one-time item. Actual Q1 production of 50,386 Boe/d was 2% below our estimate of 51,250 Boe/d and within 1% of consensus of 50,962 Boe/d, while cash flow of $1.12/share was ~23% above our estimate of $0.91 and ~20% above consensus of $0.93/share. The variance to our estimates was primarily due to a one-time $31MM recovery of costs associated with an oil spill in France (the funds will be received in Q2, but were accounted for in Q1), as well as lower operating costs (Q1 op costs of $10.56/Boe were down 15% from $12.48/Boe in the previous quarter). Excluding the one-time $31MM cost recovery, we estimate cash flow would have been $0.84/share, 8% below our estimate of $0.91 due to inventory builds during the quarter (primarily in Australia). We note that lost sales due to inventory builds will be recovered later in the year as inventories are drawn down. Guidance remains unchanged with average 2015 production of 55,000-57,000 Boe/d on an unchanged $415MM budget. Vermilion spent ~$174MM in Q1 to drill 29 (20.04 net) wells. In Ireland, the company spent $13MM on its Corrib project in Q1. We highlight that the project is on track, and VET continues to estimate start-up by "mid-year", with production expected to increase over the first few months to peak levels of ~58 MMcf/d (~9,700 Boe/d), net to Vermilion. Implications We are maintaining our Sector Outperformer rating on Vermilion with an unchanged price target of $69.00/share. We believe that Vermilion remains a solid defensive pick for investors with a more conservative oil outlook owing to the company's operational execution, its strong mid- and long-term growth profile, and its favorable exposure to stronger international oil and gas prices. The company currently trades at a 2015E EV/DACF multiple of 12.7x, a 2016E EV/DACF multiple of 8.9x, and a P/Risked NAV of 96% (versus the group averages of 8.9x, 7.3x, and 88%, respectively), while providing investors with a cash yield of 4.5% (versus the group average of 5.2%).