Globe & Mail Vermilion Energy Inc.’s (
) “blockbuster” fourth-quarter 2021 financial results should be “viewed as a wake-up for some investors that have abandoned the story in recent years for a host of reasons, including a disparate asset base,” said Desjardins Securities analyst Chris MacCulloch.
Shares of the Calgary-based company soared 12.9 per cent on Monday following the premarket release of better-than-anticipated earnings, including cash flow, driven in part to a “strong” contribution from the European natural gas assets.
The report led Mr. MacCulloch to emphasize “diversity is beautiful.”
“Don’t put all of your eggs in one basket. It is age-old wisdom from the Book of Proverbs which could be viewed as one of the earliest endorsements of diversifying risk exposure,” he said. “With respect to oil & gas producers, some of the most common challenges include managing exposure to different asset play types, commodity price benchmarks and regulatory systems. However, VET offers investors a portfolio approach to managing risk, including commodity price exposure, as once again demonstrated by the 4Q21 financial results. And this portfolio approach provides a certain degree of cash flow stability to support a sustainable dividend, parcularly when debt levels are properly managed.
“Going forward, we believe that VET is well-positioned to significantly accelerate capital returns aer it hits its $1.2-billion corporate net debt target, most likely at some point in 2Q22. Using the net debt target as a balance sheet anchor, the company would have $1.3-billion of discretionary FCF to allocate to increased baseline dividends, share buybacks and/or special dividends through the balance of the year—and another $1.7-billion to boot in 2023. It is a staggering quantum of FCF for a company with a $4.5-billion market capital capitalization.”
Mr. MacCulloch thinks the key question for Vermilion moving forward is how it will start deploying its free cash flow “windfall” to shareholders, suggesting: “Share buybacks appear to be at the top of the pecking order, which is not surprising given the depressed valuation, with the stock now trading well below 2.0 times strip DACF [debt-adjusted cash flow. Needless to say, $3-billion of dry powder could go a long way to address the valuation discount.”
Maintaining a “buy” recommendation for its shares, he raised his target to $32.50 from $27.50. The average is currently $24.07.
“Our revised target implies 3.6 times EV/DACF (2023 estimates), which is significantly below the stock’s historical consensus multiple of 6.0 times,” he said.
Others making adjustments include:
* TD Securities’ Menno Hulshof to $29 from $23 with a “buy” rating.
* RBC’s Greg Pardy to $26 from $25 with a “sector perform” rating.