Vermilion Energy offers a geographically diverse production base, the ability to fund an 8.1% dividend yield and a forecast FY19 c C$530m capital programme, all achievable even at realised commodity prices c 3% below our base case (WTI US$56.1/bbl, Brent US$62.8/bbl). We adjust our FY19 and FY20 forecasts to reflect lower short-term commodity price expectations (based on the latest EIA forecasts of 12 March 2019). EIA’s FY19 WTI moves from US$64.9/bbl to US$56.1/bbl (-14%), driving down our forecast FY19 FFO from C$1,200m to C$982m (-18%), comfortably above the $954m we estimate is required to cover dividend, maintenance and growth capex. Our valuation falls from C$54.5/share to C$47.5/share, based on a blend of P/CF, EV/EBIDAX, DDM, and FCF (plus growth) multiples. The valuation remains highly sensitive to commodity price assumptions. We provide a sensitivity to these key inputs in this note.
Written by
Vermilion Energy |
Dividend and growth comfortably covered |
Forecast update |
Oil & gas |
19 March 2019 |
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 offers a geographically diverse production base, the ability to fund an 8.1% dividend yield and a forecast FY19 c C$530m capital programme, all achievable even at realised commodity prices c 3% below our base case (WTI US$56.1/bbl, Brent US$62.8/bbl). We adjust our FY19 and FY20 forecasts to reflect lower short-term commodity price expectations (based on the latest EIA forecasts of 12 March 2019). EIA’s FY19 WTI moves from US$64.9/bbl to US$56.1/bbl (-14%), driving down our forecast FY19 FFO from C$1,200m to C$982m (-18%), comfortably above the $954m we estimate is required to cover dividend, maintenance and growth capex. Our valuation falls from C$54.5/share to C$47.5/share, based on a blend of P/CF, EV/EBIDAX, DDM, and FCF (plus growth) multiples. The valuation remains highly sensitive to commodity price assumptions. We provide a sensitivity to these key inputs in this note.
Year-end |
Revenue (C$m) |
EBITDA* |
Operating |
Net (debt)/ |
Capex ex |
Yield |
12/17 |
1,024.4 |
673.5 |
593.9 |
(1,223.8) |
320.4 |
5.7 |
12/18 |
1,526.0 |
1,036.5 |
816.0 |
(1,768.9) |
518.2 |
8.0 |
12/19e |
1,730.4 |
1,045.4 |
945.2 |
(1,801.6) |
533.4 |
8.1 |
12/20e |
1,803.5 |
1,114.3 |
1,007.6 |
(1,803.5) |
564.1 |
8.1 |
Note: *Reported EBITDA includes hedging and FX gains/losses. **Net debt = long-term debt, plus short-term debt minus cash and equivalents.
Dividend and growth capex comfortably covered
Underlying oil and gas prices remain volatile. However, Vermilion’s diverse asset mix ensures that exposure is not over-concentrated in specific geographic regions or differentials. Canadian heavy crudes continue to trade at a material discount to WTI, whereas Vermilion’s average oil realisation in March 2019 stood at a US$1.25/bbl premium to WTI. Stress testing our price assumptions and assuming all commodities show a correlation of 1.0, we conclude that even at c 3% below our base case, the company’s FFO fully covers forecast dividend, maintenance and growth capex.
Three-year average recycle ratio of 3.8x
Organic capex is a key driver of reserves replacement, and with a three-year average recycle ratio of 3.8x, returns are robust. Exploration wells in early 2019 include the Burgmoor Z5 well in Germany targeting an undrained flank of the existing gas field (50bcf gross, Vermilion 45.8% interest). A discovery here could be easily tied into existing infrastructure. The Dombirotos-1 exploration well in Hungary is also planned to be drilled in Q119, targeting a fault-bounded 5bcf prospect close to the Mh-Ny-07 discovery, which was put into production in 2018.
Valuation: Blended valuation stands at C$47.5/share
Relative to peers, Vermilion trades at a premium of 5.4x FY19e P/CF vs a global peer group average of 3.8x, reflecting above average growth and a sustainable, top decile dividend yield. Our blended valuation (P/CF, EV/EBIDAX, DDM and FCF plus growth) is C47.5$/share, down from C$54.5/share previously.
Estimate changes
Vermilion’s FY18 results were broadly in line with our expectations, as highlighted in our results note published on 28 February 2019. We have reviewed our forecasts for FY19 and FY20. Key changes include:
1.
Lower commodity short-term price forecasts. These include a reduction in FY19 Brent to US$62.8/bbl (-14%) and WTI to US$56.1/bbl (-14%). Our FY19 and FY20 commodity price forecasts are based on EIA estimates (12 March 2019).
2.
We increase our production forecasts by c 1% for FY19 and forecast 1.2% growth in FY20. Our marginally improved FY19 production, at 103kboed, is within the company’s guidance range of 101–106kboed. For FY20, we forecast organic growth to 104.4kboed.
3.
We include slightly higher unit costs than previously forecast, at a group level of C$10.6/boe from C$10.5/boe for FY19.
4.
We update growth projects to reflect Vermilion’s latest disclosure of net wells to be drilled in 2019.
The net impact of these changes on FFO is largely driven by commodity price forecasts, with our forecast FFO for FY19 falling 18% to C$982m and FY20 down 12% to C$1,056m. These figures are highly leveraged to underlying commodity prices, as we discuss later in this note.
Exhibit 1: Edison changes to forecasts
Edison new |
Edison old |
Change |
|||||
2018 |
2019e |
2020e |
2019e |
2020e |
2019e |
2020e |
|
Production (kboed) |
86.9 |
103.2 |
104.4 |
101.1 |
101.0 |
2% |
3% |
Revenues (C$m) |
1,526.0 |
1,730.4 |
1,803.5 |
1,856.6 |
1,879.4 |
(7%) |
(4%) |
Adj EBITDA (C$m) |
1,065.2 |
1,139.0 |
1,207.9 |
1,261.9 |
1,285.0 |
(10%) |
(6%) |
EBIDAX (C$m) |
856.5 |
1,099.3 |
1,175.5 |
1,237.2 |
1,264.5 |
(11%) |
(7%) |
FFO (C$m) |
833.5 |
981.8 |
1,056.2 |
1,200.6 |
1,210.0 |
(18%) |
(13%) |
CFPS (C$/share) |
5.3 |
6.2 |
6.5 |
7.0 |
7.2 |
(12%) |
(9%) |
Capex ex acquisitions (C$m) |
518.2 |
533.4 |
564.1 |
527.6 |
560.4 |
1% |
1% |
Source: Edison Investment Research
Our FFO forecasts for FY19 are 1% ahead of consensus and 3% below for FY20.
Exhibit 2: Edison versus consensus
Edison |
Consensus |
Change |
|||||
2018 |
2019e |
2020e |
2019e |
2020e |
2019e |
2020e |
|
Production (kboed) |
86.9 |
103.2 |
104.4 |
102.8 |
105.9 |
0% |
(1%) |
Revenues (C$m) |
1,526.0 |
1,730.4 |
1,803.5 |
||||
Adj EBITDA (C$m) |
1,065.2 |
1,139.0 |
1,207.9 |
||||
EBIDAX (C$m) |
856.5 |
1,099.3 |
1,175.5 |
||||
FFO (C$m) |
833.5 |
981.8 |
1,056.2 |
971.8 |
1,090.0 |
1% |
(3%) |
CFPS (C$/share) |
5.3 |
6.2 |
6.5 |
||||
Capex ex acquisitions (C$m) |
518.2 |
533.4 |
564.1 |
514.0 |
565.0 |
4% |
0% |
Source: Edison Investment Research
Forecasting FY19e 18% y-o-y production growth to 103.2kboed
Our production forecasts by country and commodity are provided below. For FY19, we forecast output of 103.2kboed, which is within management’s guidance range of 101–106kboed. The key moving parts in our forecast include:
1.
Canada: we include production performance and decline rate from acquired Spartan assets, new well completions and the pace at which new wells (126.9 net wells planned for 2019 in southeast Saskatchewan and 17.7 net in Alberta) are brought on stream. Vermilion estimates that south-east Saskatchewan light oil will make up c 41% of its Canadian crude oil mix in 2019, with reference prices currently at a US$3.25/bbl discount to WTI.
2.
US: we include the benefit from the acquisition of assets in the Powder River Basin in Q318, and infill drilling at the Turner sandstone Hilight asset. Vermilion has had recent success with the use of rod pump artificial lift as an alternative to electronic submersible pumps (ESPs), with higher operational uptime and reduced sand flowback. Higher uptime and reduced ESP replacement costs should enable Vermilion to manage unit operating costs as base production declines and in-fill wells are drilled.
3.
Netherlands: production should benefit from the Eesveen-02 well that was brought on stream in Q318. Vermilion has c 21 wells at various stages of the planning process, which should help underpin FY19 production growth.
4.
Australia: should demonstrate strong y-o-y growth with the addition of two new producers in Q119.
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Exhibit 3: Edison production forecasts by country |
Exhibit 4: Edison production by commodity type |
|
|
|
Source: Edison Investment Research |
Source: Edison Investment Research |
|
Exhibit 3: Edison production forecasts by country |
|
|
Source: Edison Investment Research |
|
Exhibit 4: Edison production by commodity type |
|
|
Source: Edison Investment Research |
Dividend and growth cash flow coverage
The key sensitivity to our forecasts and valuation lies in the prices of key commodities. Our base case oil price forecasts for FY19 and FY20 are based on EIA forecasts. We calculate the sensitivity to these in Exhibit 5 below. If, for example, we were to assume all key commodities (WTI, Brent, NBP, AECO and TTF) are 10% below our base case forecasts, FFO would fall by c 10% post-hedge (after inclusion of the impact of realised hedges to FY19).
Exhibit 5: FY19 FFO sensitivity to commodity price
Brent /(US$/bbl) |
43.9 |
50.2 |
56.5 |
62.8* |
69.1 |
75.3 |
81.6 |
WTI/(US$/bbl) |
39.3 |
44.9 |
50.5 |
56.1 |
60.3 |
65.7 |
71.2 |
NBP (C$/mmbtu) |
7.0 |
8.0 |
9.0 |
10.0 |
11.0 |
12.0 |
13.0 |
AECO (C$/GJ) |
1.1 |
1.3 |
1.4 |
1.6 |
1.8 |
1.9 |
2.1 |
TTF (C$/GJ) |
7.0 |
8.0 |
9.0 |
10 |
11.0 |
12.0 |
13.0 |
Realisation vs base % |
-30% |
-20% |
-10% |
0% |
10% |
20% |
30% |
FY19 FFO C$m |
678.0 |
783.8 |
887.1 |
981.8 |
1078.8 |
1169.1 |
1259.0 |
Valuation C$/share |
33.3 |
38.2 |
43.1 |
47.5 |
52.1 |
56.4 |
60.6 |
Source: Edison Investment Research. Note: *Column represents Edison base case forecasts for FY19.
|
Exhibit 6: Base case FCF coverage of dividend (before and after growth capex) |
|
|
Source: Edison Investment Research |
In Exhibit 7 below, we show that even at c 3% below our base case price forecasts, capex and dividend are fully covered. Under lower commodity price scenarios, where cash outflow to fund dividend and capex is not fully covered, Vermilion retains numerous options. These include taking on debt, which can be achieved while maintaining gearing well below current covenant limits (consolidated total debt to consolidated EBITDA stood at 1.7x as of end FY18 relative to a covenant limit of 4.0 times). If a reduction in cash outflows is required, we expect management to prioritise the payment of dividends, followed by maintenance capex over growth capex.
|
Exhibit 7: c 3% below base case – FCF coverage of dividend (before & after growth capex) |
|
|
Source: Edison Investment Research |
Research: Energy & Resources
The Aoku Mizu FPSO is now on station and hooked up at Lancaster; we believe this keeps the EPS on schedule for first oil in H119. Hurricane will now focus on topside commissioning prior to start-up, which will be followed by a ramp-up period to a gross targeted plateau production rate of 20kbd (17kbod net of operating efficiency). In addition to progressing Lancaster, the company has a full programme of activity in its neighbouring Greater Warwick Area (GWA), with the three-well E&A programme in the GWA expected to kick off in early Q219 at Warwick Deep. Our risked valuation stands at 102.8p/share (see our last note).