Fundamentals are “quickly improving” for Vermilion Energy Inc. (
), said Raymond James analyst Jeremy McCrea following the releasing fourth-quarter 2020 financial results after the bell on Monday that fell in-line with production expectations and exceeded cash flow estimates. “Our thesis on VET has historically been one of profitability,” he said. “Much of this is due to their international diversification where ‘conventional’ style geology generally has better rates of return than shale/tight oil plays. This high return on capital allowed the company to have a much higher dividend payout, even while holding production and leverage levels steady over the last five years. The rapid decline in commodity prices in 2020 however quickly had Vermilion playing defence given the drop in cash flow. With pricing for both oil and gas now rebounding (including European gas), and the elimination of the dividend, the leverage outlook is quickly improving (i.e., 1.1 times 2022 debt-to-cash flow at strip.
“Although spending and production guidance was unchanged from January (when oil was $55), FCF is now expected at $350-million (at $60 WTI), implying an 11-per-cent FCF [free cash flow] yield. This doesn’t quite explain the full turnaround as declines are moving to 21 per cent (from 25 per cent) and with the increasing balance sheet flexibility, will allow Vermilion to redeploy capital back likely later this year (and reinstate a dividend in 2022). With torque to the share price given the company’s leverage, profitable projects but shareholder sentiment on the name still low, we believe VET could have plenty more upside to the name if commodity prices hold.”
Mr. McCrea maintained an “outperform” rating for Vermilion shares with an $11 target, rising from $8. The average target on the Street is $8.20.
Several equity analysts on the Street raised their target prices for its shares, including:
* Scotia’s Gavin Wylie to $9.25 from $8.50 with a “sector perform” rating.
* BMO Nesbitt Burns’ Ray Kwan to $11 from $7 with a “market perform” rating.
* RBC Dominion Securities’ Greg Pardy to $10 from $9 with a “sector perform” rating.
* CIBC World Markets’ David Popowich to $10 from $7 with a “neutral” rating. T