The swing is far from over !
Vermilion Energy Inc.’s (
) expansion into British Columbia’s Montney Formation through its $477-million acquisition of
Leucrotta Exploration Inc. (
) should be seen as a positive move, according to ATB Capital Markets analyst Patrick O’Rourke.
Though he noted some investors who are focused on Vermilion’s diversified European commodity price exposure may be “hesitant” on the deal, he said it “adds significant high-quality inventory ... and a development plan that can be self funded within cash flow.”
“Further, throughout [Monday’s] management Call, VET reiterated that it will look to maintain/grow its European production weighting and strongly suggested the Company is looking at further acquisitions in Europe,” said Mr. O’Rourke. “We see this as a high-quality and opportunistic acquisition, while VET remains solidly focused on continuing to offer differentiated European commodity price exposure.”
Shares of Calgary-based Vermilion slid 6.9 per cent on Monday following the premarket announcement of the deal, which sees it also acquire a 12.5-per-cent equity stake of newly created ExploreCo for $14-million. It estimates the Leucrotta assets will produce approximately 13,000 barrels of oil equivalent per day in 2023, with anticipated capacity growing to 28,000 boe/d.
After increasing his revenue and cash flow projections for 2023, Mr. O’Rourke raised his target for Vermilion shares to $31 from $24, reiterating a “sector perform” rating. The average on the Street is $29.46.
“Commodity diversification, low declines and free cash flow generation are central to our thesis in Vermilion,” he said. “Investors are exposed to a bundle of commodities that are generally not otherwise available to the Canadian large cap producer investor, with a demonstrated track record of about half the volatility (and risk) in the revenue line per boe relative to its Canadian peers.”
Elsewhere, others making Vermilion target changes include:
* Stifel’s Cody Kwong to $33.50 from $34 with a “hold” rating.
“The initial market reaction has been underwhelming with perception of a generous purchase price, well license concerns on the Blueberry River First Nation land (in B.C), achievement of its net debt target pushed back, and 18 months of investment before meaningful FCF will be observed,” he said. “Vermilion is looking beyond these short term nuances and believe they have identified a 28,000 boe/d property with 20+ years of drilling inventory while generating FCF of over $200-million per year.”
* Raymond James’ Jeremy McCrea to $35 from $38 with an “outperform” rating.
“There are two types of companies in the E&P sector; those that are playing offense and those playing defense,” he said. “Both can be wining strategies but in the ‘buyers market’ that still exists today, operators who take advantage of the valuation disconnect may find themselves further ahead five years from now. The acquisition of Leucrotta Exploration Inc. (VET’s 2nd significant acquisition in as little of four months) shows that VET is redefining its long-term runway and establishing footholds in plays that will provide 20+ years of quality inventory. Although headline metrics are expensive, as the share price reaction on Monday suggested, a deeper assessment of the potential upside reveals more to this acquisition than the press release puts forward. More details on the acquisition are disclosed within.”
Concurrently, Mr. O’Rourke moved his recommendation for Leucrotta to “tender” from “sector perform” with a $2 target, up from $1.40 and above the $1.90 average.
“The market clearly viewed these announcements positively and appears to have largely priced in a successful closing of the acquisition, with LXE closing up 50.0 per cent in the following trading session at $1.92 per share,” he said. “Further, in our view, the proposed sale provides an acceleration of value for LXE shareholders, while the newly created ExploreCo will provide the opportunity for LXE shareholders to participate in further exploration upside on the prior LXE land base.”
Others making Leucrotta adjustments include:
* Stifel’s Robert Fitzmartyn to $2.10 from $1.50 with a “buy” rating.
“Liquidity in the stock is enticing a price in the market at a discount to the deemed value of the ExploreCo. We suggest investors accumulate stock at current levels and tender to the offer,” he said.
* Acumen Capital’s Trevor Reynolds to $2 from $1.65 with a “tender” rating (from “buy” previously).
“We view the deal as a win for both companies as VET is better capitalized to develop the Montney today, while $80-million in cash will allow the ExploreCo to delineate and develop a material land position at Two Rivers,” he said.
VERMILION ENERGY INC
27.20+17.92 (193.10%)
LEUCROTTA EXPLORATION INC
1.95+1.26 (182.61%)