Vermilion Energy has recently reported record annual production of 100.3kboed and fund flows from operations (FFO) of C$908m for FY19. Key drivers to increased production include a full-year contribution from the Spartan assets acquired in May 2018. However, following recent macroeconomic headwinds such as the impact of the coronavirus and the Russia/Saudi Arabia price war, Vermilion updated its capex guidance and production estimates for the year. These significantly affect results; hence management additionally announced a dividend cut to C$0.02/share per month. In light of these recent events, in addition to short-term commodity prices expectations, our updated valuation decreases to C$9.7/share from C$38.3/share (down 75%).
Written by
Vermilion Energy |
Macroeconomic headwinds dictate dividend cuts |
FY19 results |
Oil & gas |
18 March 2020 |
Share price performance
Business description
Next events
Analysts
Vermilion Energy is a research client of Edison Investment Research Limited |
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Vermilion Energy has recently reported record annual production of 100.3kboed and fund flows from operations (FFO) of C$908m for FY19. Key drivers to increased production include a full-year contribution from the Spartan assets acquired in May 2018. However, following recent macroeconomic headwinds such as the impact of the coronavirus and the Russia/Saudi Arabia price war, Vermilion updated its capex guidance and production estimates for the year. These significantly affect results; hence management additionally announced a dividend cut to C$0.02/share per month. In light of these recent events, in addition to short-term commodity prices expectations, our updated valuation decreases to C$9.7/share from C$38.3/share (down 75%).
Year-end |
Revenue (C$m) |
EBITDA* |
Operating cash flow (C$m) |
Net debt** |
Capex*** |
Dividend yield (%) |
12/18 |
1,526 |
1,037 |
816 |
1,769 |
518 |
73 |
12/19 |
1,747 |
898 |
823 |
1,896 |
523 |
74 |
12/20e |
1,162 |
574 |
475 |
1,992 |
360 |
20 |
12/21e |
1,286 |
712 |
612 |
1,861 |
421 |
11 |
Note: *Reported EBITDA includes hedging and FX gains/losses. **Net debt = long-term debt, plus short-term debt minus cash and equivalents. ***Excluding acquisitions
Record production in FY19
In FY19 Vermilion achieved a consolidated average production of 100.3kboed, representing a c 15% increase from FY18. This was achieved due to growth in Canada, the US, Australia and the Netherlands. In Canada and the US, production increased as a result of acquisitions and continued organic growth. Despite achieving record production, in the current environment management was forced to cut its dividend twice within one of the worst weeks for the oil and gas industry.
Current oil supply and demand volatility
2020 is proving to be a challenging year for the oil and gas industry. In January, geopolitical events around Iran resulted in market instability, later followed by the coronavirus outbreak and the Russia/Saudi Arabia oil price war. These disruptions to the supply/demand balance are already having an impact on results in Q120, with the EIA estimating oil demand in Q120 to be 0.9mmbod lower than in Q119. As a consequence, management decreased the estimated capex for the year to c C$360m versus previous estimates of C$450m, and updated FY20 production guidance from 100–103kboed to 94–98kboed.
Valuation: Blended valuation at C$9.7/share
Oil and gas equities, and Canadian E&Ps in particular, have experienced a continuous decline in value since early 2019, and more accentuated since January 2020. Vermilion’s fundamentals remain strong; however, as a reflection of the current market situation, the company currently trades at 1.2x FY20e P/CF vs Canadian large E&Ps on 1.5x. Our blended valuation (P/CF, EV/EBIDAX, DDM and FCF plus growth) is C$9.7/share, down from C$38.3/share previously.
Estimate changes
In 2019, Vermilion achieved record annual production of c 100.3kboed, an increase of 15% compared to 2018. Production in Canada reached record levels of an annual average of c 60kboed following a full-year contribution from the Spartan assets acquired in May 2018. Production also achieved record annual average levels in the Netherlands and in the United States. Vermilion’s FY19 full year results were broadly in line with our expectations. However, following recent macroeconomic headwinds such as the impact of the coronavirus (Covid-19) on global energy needs and the Russia/Saudi Arabia price war, we have reviewed our forecasts for FY20. Key changes include:
1.
Lower short-term commodity price forecasts. These include a reduction in FY20 Brent to US$43.3/bbl (-28%) and WTI to US$38.19/bbl (-32%). Our FY20 and FY21 commodity price forecasts are based on EIA estimates as at 11 March 2020.
2.
We decrease our production forecasts by c 6% for FY20 to 96.3kboed, following the company’s recently updated guidance range of 94–98kboed. Initial guidance for the year stood at 100–103kboed; however, the recent decrease in oil demand and global oil prices led to a revision of capital allocation for the year and consequent production.
3.
We update 2020 capex to C$360m versus C$450m from our previous note, also following new management guidance of c C$350–370m for the year.
4.
And lastly, we account for a monthly dividend reduction by 50% to C$0.115 per share effective for the March dividend payable on 15 April 2020 and to C$0.02 per share per month for the remainder of the year.
The net impact of these changes on FFO is largely driven by commodity price forecasts (Brent 28%) and decreased production estimates (-6%), with our forecast FFO for FY20 falling 44% to C$504m and FY21 to C$641m.
Exhibit 1: Edison changes to forecasts
Actuals |
Edison new |
Edison old |
Change |
||||
2019 |
2020e |
2021e |
2019e |
2020e |
2019e |
2020e |
|
Production (kboed) |
100.3 |
96.3 |
93.5 |
100.8 |
102.4 |
-1% |
-6% |
Revenues (C$m) |
1,747.5 |
1,162.1 |
1,285.9 |
1,746.8 |
1,570.7 |
0% |
-26% |
Adj EBITDA (C$m) |
961.6 |
605.6 |
743.0 |
1,037.9 |
1,002.8 |
-7% |
-40% |
EBIDAX (C$m) |
914.1 |
588.2 |
741.9 |
924.0 |
942.3 |
-1% |
-38% |
FFO (C$m) |
908.1 |
504.2 |
641.5 |
946.5 |
900.9 |
-4% |
-44% |
CF/share (C$/share) |
5.2 |
3.0 |
3.9 |
5.4 |
5.7 |
-4% |
-47% |
Capex ex acquisitions (C$m) |
523.2 |
360.0 |
420.7 |
518.6 |
449.8 |
1% |
-20% |
Brent (US$/bbl) |
64.36 |
43.30 |
55.36 |
63.4 |
59.9 |
2% |
-28% |
Source: Vermilion Energy, Edison Investment Research
Our production forecasts by country and commodity are provided below. For FY20, we forecast output of 96.3kboed, within management’s guidance range of 94–98kboed and 6% below our previous note.
|
Exhibit 2: Edison production forecasts by country |
Exhibit 3: Edison production by commodity type |
|
|
|
Source: Vermilion Energy, Edison Investment Research |
Source: Vermilion Energy, Edison Investment Research |
|
Exhibit 2: Edison production forecasts by country |
|
|
Source: Vermilion Energy, Edison Investment Research |
|
Exhibit 3: Edison production by commodity type |
|
|
Source: Vermilion Energy, Edison Investment Research |
Financials
Vermilion recently reduced its monthly dividend by 50% to C$0.115 per share for the month of March, on 6 March 2020, as an initial response to weakness in commodity prices and reduced global economic prospects following the outbreak of the coronavirus. However, following the Russia/Saudi Arabia oil price war and the prospects of lower global demand for oil for FY20, the company proceeded to further reduce its monthly dividend to C$0.02 per share on 16 March 2020. This results in a cash dividend of c C$137m for the year. For 2020 we forecast operating cash flow of C$475m and funds from operations (FFO) of C$504m (which excludes changes in working capital and asset retirement obligations), sufficient to cover the combined cash outflows for capex and cash dividends of C$497m and with other small outflows we expect year end net debt of c C$2.0bn.
In Exhibit 9 below its possible to observe that at a 10% discount to our current commodity price assumption, growth and maintenance capex is still covered by FFO. However, if cash dividends were not to be fully covered, management would have to take further measures.
|
Exhibit 9: Vermilion FY20e dividend sustainability |
|
|
Source: Edison Investment Research. Note: *Discount/premium on commodity prices. |
Measures could include taking on more debt, although Vermilion needs to maintain gearing below current covenant limits (consolidated total debt to consolidated EBITDA covenant limit of 4.0x). We have stress tested our low case of a commodity price at a 10% discount to the base case and observe that, in this scenario, Vermilion would need to raise c C$60m cash to cover current maintenance and growth capex and dividends. This would result in a net debt to EBITDA ratio in FY20 of 4.2x. The average net debt/EBITDA for Canadian E&Ps in FY19 was 2.3x.
In Exhibit 10 we model the stress test for Vermilion at a 10% discount to our base case commodity price scenario. This analysis shows that, even after the recent capex and dividend reduction, Vermilion’s balance sheet is highly sensitive to the cash its assets generate, and at low commodity prices its balance sheet might be at risk, with gearing multiples exceeding the total debt to EBITDA covenant.
|
Exhibit 10: Base case CFO coverage of dividend (before and after growth capex) |
|
|
Source: Edison Investment Research. Note: *Impact of incremental net debt required in low case scenario (10% commodity prices) preserving existing dividend. |
Exhibit 11: Financial summary
|
C$m |
2017 |
2018 |
2019 |
2020e |
2021e |
Year-end: 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
|
|
|
|
|
|
Revenue |
1,024 |
1,526 |
1,747 |
1,162 |
1,286 |
|
Cost of Sales |
(286) |
(409) |
(513) |
(496) |
(482) |
|
Gross Profit |
739 |
1,117 |
1,235 |
666 |
804 |
|
EBITDA |
673 |
1,037 |
898 |
574 |
712 |
|
Operating Profit (before amort. and except.) |
182 |
427 |
223 |
(91) |
71 |
|
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
|
Exceptionals |
0 |
0 |
0 |
0 |
0 |
|
Other |
41 |
46 |
(81) |
0 |
0 |
|
Operating Profit |
223 |
474 |
141 |
(91) |
71 |
|
Net Interest |
(57) |
(73) |
(81) |
(84) |
(82) |
|
Profit Before Tax (norm) |
124 |
355 |
141 |
(175) |
(11) |
|
Profit Before Tax (FRS 3) |
166 |
401 |
60 |
(175) |
(11) |
|
Tax |
(62) |
(83) |
(108) |
17 |
1 |
|
Profit After Tax (norm) |
104 |
318 |
(48) |
(157) |
(9) |
|
Profit After Tax (FRS 3) |
104 |
318 |
(48) |
(157) |
(9) |
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
121 |
141 |
154 |
156 |
156 |
|
EPS - normalised (c) |
86 |
226 |
(31) |
(101) |
(6) |
|
Dividend per share (C$/share) |
2.6 |
2.7 |
2.8 |
0.8 |
0.4 |
|
|
|
|
|
|
|
|
Gross Margin (%) |
72 |
73 |
71 |
57 |
62 |
|
EBITDA Margin (%) |
66 |
68 |
51 |
49 |
55 |
|
Operating Margin (before GW and except.) (%) |
18 |
28 |
13 |
(8) |
6 |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
Fixed Assets |
3,713 |
5,841 |
5,518 |
5,213 |
4,994 |
|
Intangible Assets |
293 |
303 |
286 |
297 |
308 |
|
Tangible Assets |
3,338 |
5,317 |
5,016 |
4,699 |
4,469 |
|
Investments |
82 |
221 |
217 |
217 |
217 |
|
Current Assets |
262 |
430 |
348 |
251 |
382 |
|
Stocks |
17 |
28 |
29 |
29 |
29 |
|
Debtors |
166 |
260 |
211 |
211 |
211 |
|
Cash |
47 |
27 |
29 |
(67) |
64 |
|
Other |
32 |
115 |
78 |
78 |
78 |
|
Current Liabilities |
(363) |
(563) |
(416) |
(416) |
(416) |
|
Creditors |
(258) |
(487) |
(318) |
(318) |
(318) |
|
Other short term liabilities |
(105) |
(76) |
(98) |
(98) |
(98) |
|
Long Term Liabilities |
(2,069) |
(2,890) |
(2,997) |
(2,940) |
(2,898) |
|
Long term borrowings |
(1,270) |
(1,796) |
(1,925) |
(1,925) |
(1,925) |
|
Other long term liabilities |
(798) |
(1,094) |
(1,072) |
(1,015) |
(973) |
|
Net Assets |
1,543 |
2,817 |
2,453 |
2,108 |
2,062 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
Operating Cash Flow |
594 |
816 |
823 |
475 |
612 |
|
Capex |
(320) |
(518) |
(523) |
(360) |
(421) |
|
Acquisitions/disposals |
(28) |
(276) |
(38) |
0 |
0 |
|
Financing |
(4) |
37 |
(83) |
(23) |
(23) |
|
Dividends |
(200) |
(330) |
(392) |
(137) |
(37) |
|
Net Cash Flow |
41 |
(272) |
(213) |
(46) |
131 |
|
Opening net debt/(cash) |
1,299 |
1,224 |
1,769 |
1,896 |
1,992 |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
|
Other |
34 |
(273) |
87 |
(51) |
0 |
|
Closing net debt/(cash) |
1,224 |
1,769 |
1,896 |
1,992 |
1,861 |
Source: Vermilion Energy accounts, Edison Investment Research
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|
Research: TMT
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