RE:TDFull report:
THE TD COWEN INSIGHT Veren's recent underperformance has resulted in an improved entry point. Veren offers high impact assets, organic volume growth, improving FCF generation, robust (and potentially increasing) RoC via the dividend/NCIB, and is approaching its near-term debt target. Despite these attributes, the company trades at an attractive 2025E FCF yieldof 14% based on strip pricing. Summary Of Our Thesis: We believe the recent underperformance could be driven by the perception Veren's recently acquired assets are not performing as originally expected (a view we believe is unjustified) and weaker than originally anticipated Q3 volumes (in part due to third-party outages) - both factors should ebb with time. What Is Underappreciated Or Misunderstood? Veren has been methodically carrying out its LT plan to optimize asset performance in its new high-impact plays and reduce financial leverage. However, we believe the market continues to underappreciate the potential FCF growth, value of asset optimization, and how much the overall business has improved since 2018. Catalysts & Milestones To Watch:
New data highlighting optimization efforts in the Montney and Duvernay. While we believe the company has achieved strong results on these assets, the market appears to be underappreciating upside potential.
Potential increases to the current return of capital strategy, which currently stands at 60% of FCF back to SHs through the base dividend/NCIB. Even without an increase to this framework, we estimate the company has a competitive dividend yield of 6%, while repurchasing 5% of its shares per year. This excludes the expected y/y volume growth of 6%. Price Target & How We Value The Stock: Our target price of C$15.00 combines 1.0x our 2PNAV at a 25% weighting with the other 75% based on a multiple of4.5x 2025E EV/DACF. Our target EV/DACF multiple is based on a premium to the trailing 3-year average for Veren (2.8x) given its completely revamped asset base, which is now 75% concentrated in highimpact plays (Montney/Duvernay), long-term growth, inventory depth, return of capital, and modest financial leverage. What Is The Bear Case & The Risks To Our Call? Higher-than-expected declines and inability to execute asset optimization in the Montney/Duvernay are key risks that would put upward pressure on capital spending and reduce FCF growth. The company is also moreexposed to downside risk in oil prices than peers.