Vermilion Energy (VET) reported Q2 fund flows from operations (FFO) of C$193m, in line with consensus estimates and a 23% increase q-o-q. The acquisition of Spartan drove a 15% q-o-q increase in production to 80.6kboed, c 1% ahead of consensus, which includes volumes from Spartan after close of the C$1.4bn acquisition on 28 May 2018. We increase our expectations for FY18 FFO from C$887m to C$946m (+7%) and FY19 FFO from C$1,104m to C$1,208m (+9%), reflecting higher oil price expectations for H218 and 2019. We use EIA short-term WTI price projections of US$66/bbl in 2018 and US$62/bbl in 2019. Our valuation increases from C$53.8/share to C$57.9/share as a result.
Written by
Vermilion Energy |
Q2 FFO in line; oil price upgrade drives valuation |
Q2 results |
Oil & gas |
31 July 2018 |
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 (VET) reported Q2 fund flows from operations (FFO) of C$193m, in line with consensus estimates and a 23% increase q-o-q. The acquisition of Spartan drove a 15% q-o-q increase in production to 80.6kboed, c 1% ahead of consensus, which includes volumes from Spartan after close of the C$1.4bn acquisition on 28 May 2018. We increase our expectations for FY18 FFO from C$887m to C$946m (+7%) and FY19 FFO from C$1,104m to C$1,208m (+9%), reflecting higher oil price expectations for H218 and 2019. We use EIA short-term WTI price projections of US$66/bbl in 2018 and US$62/bbl in 2019. Our valuation increases from C$53.8/share to C$57.9/share as a result.
Year end |
Revenue |
EBITDA* |
Operating cash flow (C$m) |
Net (debt)/ |
Capex ex |
Yield |
12/16 |
828.5 |
361.7 |
509.5 |
(1,298.9) |
(242.4) |
5.8 |
12/17 |
1,024.4 |
673.0 |
593.9 |
(1,223.8) |
(320.4) |
5.8 |
12/18e |
1,558.0 |
812.6 |
850.6 |
(1,484.0) |
(502.3) |
6.0 |
12/19e |
1,920.3 |
1,174.6 |
1,150.7 |
(1,205.5) |
(563.2) |
6.3 |
Note: *Reported EBITDA includes hedging and FX gains/losses. **Net debt = long-term debt, short-term debt minus cash and equivalents.
Capex and dividend funded from FFO
Vermilion’s FY18 production guidance OF 86-90kboed range (Edison 88.4kboed) remains unchanged. Capex guidance has increased from C$430m to C$500m, driven by the acceleration of drilling in Australia, taking advantage of rig availability, and to a lesser extent foreign exchange rates. VET’s dividend and capex programme remain fully funded for FY18 and FY19 based on our forecasts. With total debt to EBITDA of 1.7x and more than C$370m in unutilised debt capacity, liquidity is not a concern.
Spartan synergies to be realised over time
Management expects Spartan synergies to evolve over time, driving down unit opex at Vermilion’s largest producing business unit, Canada. Operating costs rose 7% to C$9.04/boe in Q218 (including a one-month contribution from Spartan), but management expects to see immediate synergies from items such as marketing, insurance and G&A, with a more material reduction of C$2-3/boe to be realised over time.
Blended valuation: 8% increase driven by oil price
Our valuation methodology is outlined in further detail in our recent initiation note and uses a combination of P/CF, EV/EBIDAX, Gordon’s growth model and SOTP based on sustainable FCF and drilling inventory NPV10. The key driver of an increase in our valuation to C$57.9/share is our revised FY19 WTI price assumption, which rises by 6% from US$58.7/bbl to US$62/bbl. The valuation remains highly sensitive to underlying commodity price assumptions despite hedging.
Operational highlights
At group level, production grew 20% y-o-y, largely driven by the acquisition of Spartan, offsetting declines in Germany, Ireland, Australia and the US. Production declines in these regions were driven by natural decline, but also by operational outages and delays. Management remains confident in full year guidance of 86-90kboed, which remains unchanged and targets an exit run rate of 100kboed.
Capex forecasts for FY18 have risen from C$430m to C$500m, reflecting the acceleration (from 2019 into Q418) of drilling in Australia where management is looking to take advantage of available rig slots, and to a lesser extent foreign exchange rate fluctuations.
Exhibit 1: Operational performance review
Country |
Production |
Growth y-o-y |
Growth q-o-q |
Context |
Canada |
43.8 |
53% |
37% |
Acquisition of Spartan and benefited from drilling activity in Q118. |
France |
11.7 |
3% |
6% |
Production additions from the Neocomian and Champotran drilling programme, as well as reduced downtime. |
Netherlands |
7.3 |
37% |
-3% |
Shut-in of Eesveen-02 well following production test. Well expected back on stream in August 2018 after permitting. |
Germany |
3.4 |
-21% |
-9% |
Downtime at non-op sour gas plant. Two-thirds of volumes not expected back online until late in Q3. |
Ireland |
9.4 |
-11% |
-7% |
Natural declines and minor plant downtime. |
Australia |
4.1 |
-32% |
-17% |
Higher than normal downtime to perform workovers. |
US |
0.8 |
-13% |
27% |
Natural declines and production delays led to a y-o-y decline. Net wells and resumption of gas sales following restart of third-party gas facility drove growth q-o-q. |
Total |
80.6 |
20% |
15% |
Source: Vermilion Energy, Edison Investment Research
Valuation benefits from higher realisations
Below we provide an update of our blended valuation for Vermilion based on higher short-term crude realisations. Our FY18 and FY19 oil price assumptions are based on EIA projections, which currently stand at US$66/bbl in 2018 and US$62/bbl in 2019.
We would expect Vermilion to trade towards the top end of our C$44.3/share to C$57.9/share valuation range based on its track record of reserves and production growth, peer-leading dividend yield, low F&D costs, and commitment to emission disclosure and reduction. We note that valuation sensitivity to underlying commodity price assumptions remains high, despite hedge protection, as shown in Exhibit 3 below.
|
Exhibit 2: Valuation range C$44.3-57.9/share |
Exhibit 3: Valuation sensitivity to commodity price FY19e |
|
|
|
Source: Edison Investment Research. Note: Ke = required rate of return. |
Source: Edison Investment Research |
|
Exhibit 2: Valuation range C$44.3-57.9/share |
|
|
Source: Edison Investment Research. Note: Ke = required rate of return. |
|
Exhibit 3: Valuation sensitivity to commodity price FY19e |
|
|
Source: Edison Investment Research |
Commodity price leverage and valuation
Benchmark commodity prices for FY19 are a key sensitivity to our group valuation. Exhibit 4 below indicates this sensitivity by flexing our commodity price inputs for 2019 by ±30%. Our valuation varies from C$36.7/share to C$79.4/share over this range, with the market-implied discount to our commodity price deck for 2019 at c -12%.
Exhibit 4: Midpoint valuation sensitivity to commodity price input for FY19 (base case in bold)
Brent/(US$/bbl) |
48.1 |
55.0 |
61.9 |
68.7 |
75.6 |
82.5 |
89.4 |
WTI/(US$/bbl) |
43.4 |
49.6 |
55.8 |
62.0 |
68.2 |
74.4 |
80.7 |
NBP (C$/mmbtu) |
4.9 |
5.6 |
6.3 |
7.0 |
7.7 |
8.4 |
9.1 |
AECO (C$/GJ) |
1.2 |
1.4 |
1.5 |
1.7 |
1.9 |
2.0 |
2.2 |
TTF (C$/GJ) |
4.9 |
5.6 |
6.3 |
7 |
7.7 |
8.4 |
9.1 |
Price change versus base |
-30% |
-20% |
-10% |
0% |
10% |
20% |
30% |
C$/share |
36.7 |
43.6 |
50.6 |
57.9 |
65.4 |
72.5 |
79.4 |
Source: Edison Investment Research
Financials
Edison versus consensus
Our updated forecasts relative to company and Bloomberg consensus are shown in the table below. Key variations include our production expectations for FY19, which are 7% ahead of consensus, reflecting a full year contribution from Spartan and increase in equity at Corrib (Ireland) post the transition of operatorship to Vermilion, an increase in production from the Netherlands on the resolution of permitting issues and the positive impact of two new wells in Australia offsetting production declines. We expect to revisit our production forecasts towards the end of FY18 when we have more information on production from the acquired Spartan asset base.
Exhibit 5: Edison forecast versus Bloomberg consensus
C$m |
Edison |
Consensus |
Delta |
|||
2018e |
2019e |
2018e |
2019e |
2018e |
2019e |
|
Production |
88.4 |
108 |
86.8 |
100.9 |
2% |
7% |
Revenues |
1,558 |
1,920 |
1,578 |
1,881 |
-1% |
2% |
Adj EBITDA* |
843 |
1,206 |
983 |
1,202 |
-14% |
0% |
EBIDAX |
805 |
1,148 |
N/A |
N/A |
|
|
FFO |
946 |
1,208 |
940** |
N/A |
1% |
|
CFPS |
5.5 |
7.3 |
6.5 |
7.7 |
-15% |
-5% |
Capex ex acquisitions |
502 |
563 |
500*** |
518 |
0% |
9% |
Source: Edison Investment Research, Bloomberg. Note: *Adjusted for non-cash items. **Company consensus. ***Company guidance.
Exhibit 6: Financial summary
|
|
C$m |
2016 |
2017 |
2018e |
2019e |
2020e |
|
Dec |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
|
|
|
|
|
|
||
Revenue |
|
|
829 |
1,024 |
1,558 |
1,920 |
2,064 |
|
Cost of Sales |
|
(262) |
(286) |
(454) |
(594) |
(625) |
||
Gross Profit |
|
567 |
739 |
1,104 |
1,327 |
1,439 |
||
EBITDA |
|
|
362 |
673 |
813 |
1,175 |
1,287 |
|
Operating Profit (before amort. and except.) |
(166) |
182 |
166 |
364 |
457 |
|||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
|||
Exceptionals |
|
0 |
0 |
0 |
0 |
0 |
||
Other |
|
|
0 |
0 |
0 |
0 |
0 |
|
Operating Profit |
|
(166) |
182 |
166 |
364 |
457 |
||
Net Interest |
|
|
(57) |
(57) |
(62) |
(58) |
(44) |
|
Profit Before Tax (norm) |
(223) |
124 |
103 |
306 |
413 |
|||
Profit Before Tax (FRS 3) |
(223) |
124 |
103 |
306 |
413 |
|||
Tax |
|
|
63 |
(62) |
(39) |
(58) |
(65) |
|
Profit After Tax (norm) |
|
(243) |
104 |
80 |
248 |
348 |
||
Profit After Tax (FRS 3) |
|
(160) |
62 |
65 |
248 |
348 |
||
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
116 |
121 |
141 |
156 |
158 |
|||
EPS - normalised (C$/share) |
(2.1) |
0.9 |
0.6 |
1.6 |
2.2 |
|||
Dividend per share (C$/share) |
2.6 |
2.6 |
2.7 |
2.8 |
2.8 |
|||
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
68 |
72 |
71 |
69 |
70 |
||
EBITDA Margin (%) |
|
44 |
66 |
52 |
61 |
62 |
||
Operating Margin (before GW and except.) (%) |
(20) |
18 |
11 |
19 |
22 |
|||
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
||
Fixed Assets |
|
3,861 |
3,713 |
5,271 |
5,024 |
4,733 |
||
Intangible Assets |
|
275 |
293 |
297 |
323 |
323 |
||
Tangible Assets |
|
3,433 |
3,338 |
4,733 |
4,460 |
4,169 |
||
Investments |
|
153 |
82 |
241 |
241 |
241 |
||
Current Assets |
|
226 |
262 |
380 |
412 |
442 |
||
Stocks |
|
|
15 |
17 |
22 |
22 |
22 |
|
Debtors |
|
|
132 |
166 |
230 |
230 |
230 |
|
Cash |
|
|
63 |
47 |
99 |
132 |
161 |
|
Other |
|
|
17 |
32 |
29 |
29 |
29 |
|
Current Liabilities |
|
(291) |
(363) |
(502) |
(502) |
(502) |
||
Creditors |
|
|
(218) |
(258) |
(333) |
(333) |
(333) |
|
Other short term liabilities |
(73) |
(105) |
(169) |
(169) |
(169) |
|||
Long Term Liabilities |
|
(2,218) |
(2,069) |
(2,519) |
(2,301) |
(1,941) |
||
Long term borrowings |
|
(1,362) |
(1,270) |
(1,583) |
(1,338) |
(950) |
||
Other long term liabilities |
(856) |
(798) |
(937) |
(963) |
(991) |
|||
Net Assets |
|
|
1,578 |
1,543 |
2,630 |
2,634 |
2,732 |
|
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
||
Operating Cash Flow |
|
510 |
594 |
851 |
1,151 |
1,271 |
||
Capex |
|
|
(242) |
(320) |
(502) |
(563) |
(539) |
|
Acquisitions/disposals |
(99) |
(28) |
(114)* |
0 |
0 |
|||
Financing |
|
|
(17) |
(4) |
(5) |
(6) |
(6) |
|
Dividends |
|
|
(105) |
(200) |
(279) |
(303) |
(309) |
|
Net Cash Flow |
|
47 |
41 |
(49) |
278 |
417 |
||
Opening net debt/(cash) |
1,346 |
1,299 |
1,224 |
1,484 |
1,205 |
|||
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
|||
Other |
|
|
0 |
34 |
(211) |
0 |
0 |
|
Closing net debt/(cash) |
|
1,299 |
1,224 |
1,484 |
1,205 |
789 |
||
Source: Company accounts, Edison Investment Research. Note: *Spartan acquisition consideration consisted of 27.9m VET shares valued at C$1.2bn. Edison calculates net debt as long-term debt, plus short-term debt minus cash and cash equivalents.
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