Updated on July 28th, 2021 by Bob Ciura
Oil prices are on the rise in 2021, after a prolonged downturn for the past few years. The coronavirus pandemic had a significant negative impact on oil prices in 2021.
Vermilion Energy (VET), along with many of its competitors, struggled because of this. Shares have lost more than three-quarters of their value in the past five years. And, the pandemic caused the company to suspend its dividend in April 2020, and it has not been reinstated yet.
If Vermilion Energy reinstates its dividend, it would once again be a monthly dividend stock.
You can download our full Excel spreadsheet of 50 monthly dividend stocks (along with metrics that matter like dividend yields and payout ratios) by clicking on the link below:
Vermilion has benefited from the recent rally in oil prices, as its share price is back above $7 per share after trading just above $2 per share at its 52-week low. This has provided a hefty return to investors willing to buy the stock near the lows of the past year.
However, with a distressed business model and lack of a dividend, Vermilion stock remains a risky bet on commodity prices.
Vermilion Energy is a Canadian oil and gas production company with a global operational footprint. Note that Vermilion trades in both Toronto and New York, and that we will use the US listing in this article. Thus, all financials are in US dollars, unless otherwise noted.
Founded in 1994, Vermilion Energy is headquartered in Canada and has a market capitalization of $1.2 billion.
More details about Vermilion Energy’s business model can be seen below.
Source: Investor Presentation
After the company’s founding in 1994, Vermilion experienced a truly exceptional rate of growth. It executed its initial public offering in April 1994 with an adjusted opening stock price of $0.30 per share. Vermilion stock eventually peaked above $70 per share in 2014.
However, the prolonged downturn in the oil and gas industry has Vermilion trading at a stock price just above $7, destroying the vast majority of prior returns that had accrued to shareholders from the IPO.
To its credit, the company has reinvented itself a few times since its corporate inception. In 2003, Vermilion Energy changed its corporate structure to that of a Canadian income trust, then converted back to a corporation in 2010. In 2013, Vermilion Energy was listed on the New York Stock Exchange, giving it exposure to a new group of United States-based investors.
Since 2016, the company has had to deal with a generally weak commodity price environment. This coincided with the coronavirus pandemic last year, which caused demand for oil and gas to collapse.
Conditions finally started to improve this year, as commodity prices are on the rise as economies reopen and emerge from the pandemic. Vermilion Energy benefits from a considerable amount of geographic diversification. Along with its core operations in the United States, Vermilion Energy has a meaningful presence in Europe and Australia, giving it exposure to three core operating geographies.
Vermilion’s diversification is focused on stable parts of the world. The publicly-traded parent company acts as a holding company for three operating subsidiaries in Vermilion’s main geographies of Europe, North America, and Australia.
We’ll now take a look at Vermilion Energy’s growth prospects in detail.
The company’s main yardstick by which it measures performance is fund flows from operations (FFO), a non-GAAP financial measure calculated by adding back non-cash charges like depreciation and amortization to net income.
After the collapse in oil prices in 2014, Vermilion, and just about any other company it competes with, suffered sizable earnings capacity declines. FFO fell from nearly $8 in 2014 to just over $4 in 2016. Vermilion was on the road to recovery through 2019, but its progress once again came to a halt due to the pandemic. In 2020, Vermilion’s FFO-per-share fell by more than half.
Fortunately, the recent rise in oil and gas prices over the past several months has lifted Vermilion’s financial results. In April, Vermilion reported (04/28/21) financial results for the first quarter of fiscal 2021. The company’s FFO came in at $162 million, up 20% from the prior quarter. Free cash flow, after investing $83 million in exploration and development capital expenditures, came in at $79 million.
Revenue increased 12.1% to C$368.14 million year–over–year. Meanwhile, due to natural decline partially offset by higher production in Australia and Germany as a result of better operational uptime, average production stood at 86,276 barrels of oil equivalents per day, down by 2% from the prior quarter.
Continued growth depends largely on whether oil prices can recover in the near term, or whether the downturn in the commodity markets gets even worse. In addition to higher expected future commodity prices, Vermilion’s acquisition of Spartan is a major growth catalyst. This was the largest acquisition in the history of the company and gave Vermilion greater exposure to the high–quality properties of southeast Saskatchewan.
Overall, Vermilion has a risky future outlook. Depending upon what happens, Vermilion could be in much better – or worse – shape than it is today, given the volatility of oil and gas prices.
Competitive Advantages & Recession Performance
Like many energy companies, Vermilion Energy’s competitive advantage comes from its asset base. The company also benefits from its geographic diversification. This exposes Vermilion Energy to additional oil-rich regions while simultaneously isolating the company from any regional economic downturns or natural disasters.
The company does have competitive advantages, mainly its oil and gas properties, which have low rates of decline and significant amounts of reserves. This allowed the company to grow production by 15% per year from 2013 to 2019.
The company’s proven reserves have skyrocketed in recent years and we see this as a major advantage for the company’s long-term stability against its competitors. Investors can also appreciate the company’s diversification not only from a geographical perspective, but in its commodity mix as well.
Vermilion is extremely well diversified between oil products and gas. This is something that many pure-play oil or gas companies do not possess.
Of course, quality assets are of little consolation when oil and gas prices plunge. From a debt perspective, the company is reasonably leveraged today, and largely in line with its peers. Recessions generally come with lower commodity prices – oil included – so earnings would suffer further if the global economy slips into a deep recession.
This is what happened in 2020, and as a result investors should not expect the company to outperform in a recession, which usually includes declining oil and gas prices.
As previously mentioned, Vermilion suspended its dividend in April 2020 in response to the coronavirus and its economic impacts. That drove down the share price in turn. The company has yet to reinstate its dividend. When that will happen is unclear, although Vermilion has stated its intention to reinstate the dividend “when appropriate”.
In the meantime, improving the balance sheet is a priority for Vermilion. The company is working to reduce its leverage ratios.
Source: Investor Presentation
We see Vermilion’s business model and dividend as sustainable through a transitory period of oil price weakness, but much depends upon how oil prices behave from here. Vermilion is obviously a very high-risk, high-reward stock at this point due to the dividend suspension and steep FFO decline in 2020.
Given the massive headwinds which faced the company last year stemming from the oil price war and the economic disruption from the coronavirus outbreak, we expect the company’s free cash flow to recover sharply this year. We also think that the dividend will recover in the years to come, though it will take a long time to recover to its pre–pandemic levels as management will need to retain a lot of cash to shore up the balance sheet and catch up on capex programs.
Vermilion Energy undoubtedly struggled in 2020, but the company is on the mend. The stock appears to be undervalued, if commodity prices can sustain their recent increase, and the economy continues to recover from the pandemic.
However, there is so much uncertainty surrounding Vermilion, not the least of which is the dividend suspension. As a result, we recommend risk-averse income investors such as retirees avoid the stock and wait for more clarity on its ability to survive the various challenges facing the oil industry.