As I was just PMing, VET is enjoying a massive windfall the likes of which will prove transformational. I'm not changing my story and taking credit, who could have guessed that Euro-NG pricing would do what it is now doing?!?
Some who read my posts may recall I've been saying since early this year that $20-low $20s in 3-6 months from today was a reasonable target to lighten up overweight positions. I now see the shares at $20 is feasible in 3-6 weeks.
My old view was partly based upon the expectation that we would likely not see dividends in the short to medium term (say up to 18 months out) at more than $1/sh. while they continued to hack away at debt to well below the announced amount (my opinion was the last announced goal, 1.5x was always an interim step on the path to the real goal, sub-1x D:CF, the histrical gold standard of Canajun fiscal probity). The 1.5x target, which based on the 3rd Q cash flow estimate of "above $900m" suggested a debt target of approx. $1.3b.
But, the Euro-NG windfall has change my mind on the longer view. This change is coupled to my optimistic view of "slaying the dragon", as I've deemed it. Until recently, as intimated above, I assumed the long term target for VET debt was really $800m-1b, not $1.3b. With this unforeseen windfall, I now believe the team will adjust their short term goal to slam debt down below $500m by year end 2022. The long term goal may even become debt-free-dom, although I don't expect that this will delay significant increases in regular dividends over the short term (i.e.: again, the next 18 months). I think it an absolute slam dunk that we'll enjoy at least $1/sh. (a 6% yield) in the short term. Note, this means that with maintenance capex ($375-400m to cover inflation) plus the $1 (min.) dividend, we would require only 50% of 2021 cash flow to maintain the business. Further note, I simply refuse to employ 2022 or 2023 cash flow to calculate sustainability ratios, these years will prove uniquely providential (perhaps only 30% of available cash flow, +/-5%.). On this waterfall of cash flow, I can't see any other outcome other than a charge to debt free status.
But then, the question in the medium term (past, say, July 2023) becomes, "what next?" If capex on somewhat larger production is $400-450m (they will only M&A opportunistically (like Corrib, +8%/sh.) for fast growth, organic growth WILL be limited to +/- 5% in order to demonstrate conservatism emblamatic of a dividend payor plus fulfilling their commitments), their dividend is about $160m comprising a total of +/-$560-610m on a long term, mid-cycle cash flow rate of +/-$1-1.1b, therefore their debt is catering pell mell (guaranteed thanks to Euro-NG hedges) towards $0 . It would be silly to continue to accumulate $4-500m cash/yr. ($2.50-3/sh.)
There are only 2 realistic places to put the cash, dividends or share buybacks, M&A being triggered only when payback is rapid (although no one expected Corrib payback to be perhaps 6 months, they went in expecting 2 years). They'll probably do both due to Lorenzo Donadeo's (likely, as I would have been in his place) irritation with the 30% dilution caused by the Spartan purchase that caused the last 3 years' malaise and dividend cut/loss of credibility. And buying shares in steadily results in a lowered sustainability ratio vis a vis the prospectively rapidly rising dividend rate.
So, the punchline. With all the above being virtually guaranteed by Euro-NG hedging, I now see the shares reaching $30+ by year end 2022 to mid-2023 reinforced by a 3-3.5% divided rate (again, 6% on today's price) by mid-2023, heading up from there towards the historical $2.40/sh. dividend past mid-2023 (which would be a 15% rate on last Friday's price and an 8% dividend rate on a $30 share price).
As is appropriate for this time of year, visions of sugar plums are dancing in my head!! LOL
Regards,
Naamkat