Stockwatch Energy courtesy of loonietunes "Canadian energy stocks largely rose with prices. A prominent exception was Vermilion Energy Inc. (VET), which tumbled $2.36 to $27.25 on 13.3 million shares, after releasing its third quarter financials. Although these showed production of 84,200 barrels a day and cash flow of $2.95 a share -- consistent with analysts' predictions -- those numbers were overshadowed by a looming windfall tax in Europe and a suspension of Vermilion's share buyback program.
The windfall tax began making headlines in September, when the European Union proposed it as a "crisis contribution" or "solidarity contribution." The preferred term in other circles was tax raid. Under the proposal, oil and gas producers in Europe would have to pay a 33-per-cent tax on "surplus" profits in 2022 and perhaps 2023, with "surplus" defined as being 20 per cent higher than a company's average taxable profits from 2019 through 2021 (even though this period includes two pandemic profits where profits were scarce at best). Despite heavy criticism from industry executives and observers, the EU passed the proposal on Sept. 30.
Vermilion, which gets about one-third of its production from Europe (soon to rise to one-half when it closes a much-hyped Irish acquisition -- more on that in a moment), is among the producers affected by the tax. The question for weeks now has been how badly. In today's financials, Vermilion said the EU is still sorting out the details, but based on the preliminary information available, the extra tax hit this year "could be in the range of $250-million to $350-million."
This estimate is higher than many analysts were expecting. "We estimated the windfall tax at approximately $100-million," wrote the surprised Scotia analyst Jason Bouvier in a new research note. He had been assuming that companies would be able to reduce taxable income through non-capital losses. Apparently the EU has no such lenient intentions. The EU is also slapping on the tax faster than Desjardins analyst Chris MacCulloch thought; his estimate was $250-million, but his timeline for payment was 2023 rather than 2022. "[This] takes wind out of the sails," he sighed. National Bank's Travis Wood had a more cynical bent, grumbling, "Funny what the consequence is following one year of financial success after managing through a challenging decade with no government support...."
To investors' further disappointment, the tax had several spillover effects. Most notably, Vermilion has suspended its buyback program for at least the rest of the year, seeking to shore up its balance sheet for the tax hit. It has also delayed its near-term debt targets and the release of its 2023 guidance. Adding a bit of extra insult to injury (though this is unrelated to the tax) Vermilion's above-referenced acquisition of part of the Corrib gas field in Ireland will not close this year after all. The company blamed "administrative delays" and said it now hopes to close the deal in early 2023."
It is disappointing news for sure but VET has struggled with much larger problems ober the last 5 years and will deal with this one just as well. It sounded to me like they are already ramping up production in unaffected areas ie Australia and North America. Even with a 1/3 haircut (if it turns out to be that much) Europe is still a major profit center.
GLTA longs