Vermilion Energy — Dividend and growth comfortably covered

Vermilion Energy — Dividend and growth comfortably covered

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.

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Vermilion Energy

Dividend and growth comfortably covered

Forecast update

Oil & gas

19 March 2019

Price

C$34.02

Market cap

C$5,195m

US$/C$1.31

Net debt (C$m) at 31 December 2018

1,769.4

Shares in issue

152.7m

Free float

94%

Code

VET

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

4.4

26.0

(15.6)

Rel (local)

1.8

11.7

(18.4)

52-week high/low

C$48.9

C$27.0

Business description

Vermilion Energy is an international E&P with assets in Europe, North America and Australia. Management expects FY19 production to average 101–106kboed after incorporating the acquisition of Spartan.

Next events

Q119 results

25 April 2019

Analysts

Sanjeev Bahl

+44 (0)20 3077 5742

Carlos Gomes

+44 (0)20 3077 5700

Vermilion Energy is a research client of Edison Investment Research Limited

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*
(C$m)

Operating
cash flow (C$m)

Net (debt)/
cash** (C$m)

Capex ex
acquisitions (C$m)

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.

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

Valuation: Blended C$47.5/share

We continue to use a blended approach when valuing Vermilion. This includes a combination of FY19e P/CF, EV/EBIDAX, DDM and FCF (plus growth projects). We arrive at a valuation range of C$41.0/share to C$47.5/share and, based on Vermilion’s peer-leading dividend yield, growth rate and low historical F&D costs, we believe that a valuation at the top end of this range is justified.

Exhibit 8: Edison valuation

Exhibit 9: Valuation sensitivity to commodity price assumptions relative to base case*

Source: Edison Investment Research

Source: Edison Investment Research. Note: *See Exhibit 5 for realisations.

Exhibit 8: Edison valuation

Source: Edison Investment Research

Exhibit 9: Valuation sensitivity to commodity price assumptions relative to base case*

Source: Edison Investment Research. Note: *See Exhibit 5 for realisations.

Relative to peers, as shown in Exhibit 11, Vermilion trades at 5.4x and 5.1x P/CF for FY19e and FY20e respectively. We believe Vermilion’s premium valuation on the basis of P/CF reflects materially higher growth and dividend yield than its peers.

Exhibit 10 shows Vermilion’s FY19e P/CF multiple and production growth rates versus global peers as well as Canadian. The valuation is more in line with our ‘rest of the world’ group average, which trades at 6.2x FY19e P/CF, while production growth is significantly higher at 18.4%. Production growth in FY19e relative to FY18 is largely inorganically driven, and growth for FY20e relative to FY19e is likely to be more in line with the peer group at c 1.2%.

Exhibit 10: Vermilion P/CF FY19e and production growth versus global peers

Source: Edison Investment Research, Refinitiv, Bloomberg. Note: Prices as at 19 March 2019.

Exhibit 11: Peer group valuation table

Source: Edison Investment Research, Thomson Reuters, Bloomberg. Note: Prices as at 19 March 2019.

Exhibit 12: Financial summary

 

 

C$m

2016

2017

2018

2019e

2020e

Dec

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

Revenue

 

 

829

1,024

1,526

1,730

1,803

Cost of Sales

 

(262)

(286)

(409)

(543)

(548)

Gross Profit

 

567

739

1,117

1,188

1,256

EBITDA

 

 

362

673

1,037

1,045

1,114

Operating Profit (before amort. and except.)

(166)

182

427

294

368

Intangible Amortisation

0

0

0

0

0

Exceptionals

 

0

0

0

0

0

Other

 

 

0

0

0

0

0

Operating Profit

 

(166)

182

427

294

368

Net Interest

 

 

(57)

(57)

(73)

(83)

(85)

Profit Before Tax (norm)

(223)

124

355

211

284

Profit Before Tax (FRS 3)

(223)

124

355

211

284

Tax

 

 

63

(62)

(83)

(21)

(28)

Profit After Tax (norm)

 

(243)

104

318

190

255

Profit After Tax (FRS 3)

 

(160)

62

272

190

255

Average Number of Shares Outstanding (m)

116

121

141

153

154

EPS - normalised (C$/share)

(2.1)

0.9

2.3

1.2

1.7

Dividend per share (C$/share)

2.6

2.6

2.7

2.8

2.8

Gross Margin (%)

 

68

72

73

69

70

EBITDA Margin (%)

 

44

66

68

60

62

Operating Margin (before GW and except.) (%)

(20)

18

28

17

20

BALANCE SHEET

 

 

 

 

 

 

Fixed Assets

 

3,861

3,713

5,841

5,622

5,440

Intangible Assets

 

275

293

303

344

364

Tangible Assets

 

3,433

3,338

5,317

5,058

4,856

Investments

 

153

82

221

221

221

Current Assets

 

226

262

430

398

396

Stocks

 

 

15

17

28

28

28

Debtors

 

 

132

166

260

260

260

Cash

 

 

63

47

27

(5)

(7)

Other

 

 

17

32

115

115

115

Current Liabilities

 

(291)

(363)

(563)

(563)

(563)

Creditors

 

 

(218)

(258)

(487)

(487)

(487)

Other short-term liabilities

(73)

(105)

(76)

(76)

(76)

Long Term Liabilities

 

(2,218)

(2,069)

(2,890)

(2,791)

(2,694)

Long term borrowings

 

(1,362)

(1,270)

(1,796)

(1,796)

(1,796)

Other long-term liabilities

(856)

(798)

(1,094)

(994)

(898)

Net Assets

 

 

1,578

1,543

2,817

2,666

2,579

CASH FLOW

 

 

 

 

 

 

Operating Cash Flow

 

510

594

816

945

1,008

Capex

 

 

(242)

(320)

(518)

(533)

(564)

Acquisitions/disposals

(99)

(28)

(276)

0

0

Financing

 

 

(17)

(4)

37

(43)

(43)

Dividends

 

 

(105)

(200)

(330)

(401)

(403)

Net Cash Flow

 

47

41

(272)

(32)

(2)

Opening net debt/(cash)

1,346

1,299

1,224

1,769

1,802

HP finance leases initiated

0

0

0

0

0

Other

 

 

0

34

(273)

0

0

Closing net debt/(cash)

 

1,299

1,224

1,769

1,802

1,804

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Vermilion Energy and prepared and issued by Edison, in consideration of a fee payable by Vermilion Energy. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Vermilion Energy and prepared and issued by Edison, in consideration of a fee payable by Vermilion Energy. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Energy & Resources

Hurricane Energy — Aoka Mizu hook-up at Lancaster

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).

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