Global O&G producer Vermilion Energy (NYSE:VET) released strong Q4 results today and a 7% increase in the monthly dividend to C$0.23/share ($2.76 annually). In keeping with the general theme of weak energy stocks, a down market (the DJIA is currently down 350+ points), and weak oil prices, the stock (as traded on the NYSE) is down about a point today - pushing the forward yield up to 6.7%.
Source: Yahoo Finance
As bad as the broad energy sector has been over the past year (the broad Spider Energy ETF (XLE) is down ~10%), VET is down more than twice that (see graphic above). At the same time, VET yields more than 2x the XLE (2.9%).
Vermilion seems to be suffering from the fact that it is a "Canadian" oil and gas producer. As I have been reporting (see Woe Canada! and Cenovus: Rule #1 - When You're In A Hole, Stop Digging!), Canadian producers are suffering from a lack of pipeline exit capacity that has very negatively affected both WCS oil and AECO natural gas prices. WCS is currently trading at a $28/bbl discount to WTI.
But the facts are:
- Vermilion is not an oil sands producer and not exposed to WCS.
- The company spends the majority of capex outside of Canada.
- The majority of production is outside of Canada.
- And it has excellent exposure to the price of Brent (through oil production in France and Australia) and the Euro-gas market (through gas production in Ireland and the Netherlands).
But the market doesn't seem to care. That despite the fact that in 2018, Vermilion expects to generate $350 million+ in free cash flow and just raised its monthly dividend 7%.
Q4 And FY17 Results
Source: 2017 MD&A
As shown in the graphic above, full-year net income was $0.51/share as compared to losses of $1.38 and $1.96 for the prior two years. Despite a 39% jump in FFO as compared to the prior quarter, net income for Q4 of only $0.07/share was mainly due to an $80 million unrealized hedging loss and despite a $40 million foreign exchange gain (likely due to the strength of the euro versus the Canadian Loonie).
While it would scare some investors that a company that pays out $2.58 in dividends during the year earned only $0.51/share in net income, note that VET reduced long-term debt by $92 million (6.7%) to $1.27 billion during the year. That equates to 2.3x trailing 12-month FFO of $603 million (and only 1.9x annualized Q4 FFO). Note full-year FFO of $603 million equates to roughly $5/share.
Production
Per share production in 2017 came in on the low-end of expectations (up 3% at 68,021 boe/d) due mainly to nearly a month of unplanned downtime at Corrib. The company said the unplanned downtime at Corrib affected average daily production by ~900 boe for the full year.
However, Q4 production of 72,821 boe/d was a record high and was up 8% from the prior quarter due to Corrib coming back online and excellent production growth in the Netherlands (up 59% qoq). Meantime, the company also reported very strong results from the Eesveen-2 well (60% working interest and drilled in Q3) in the Netherlands which was limited to ~10 MMcf/d net during the test period.
Going forward, the company plans to grow production by 12% in 2018 (8% on a per share basis) by spending $325 million (flat with 2017) leading to a very low capital intensity as compared to years past (mostly attributable to high capital expenses related to Corrib):
Source: March Presentation
Reserves
Disappointment in the stock's response to the Q4 EPS report may have been due to a relatively weak 2017 reserves report. Proved reserves grew only 0.5% in 2017 to 176.6 MMboe. That compares to total estimated 2017 production of 24.8 MMboe - or a reserve life of 7.1 years. Based on Q4's average daily production of 72,821 boe/d, proved reserves equate to a reserve life of 6.6 years.
The company performed better on "2P" (proved plus probable) reserves growth - which increased 3% to 298.5 MMboe.
Reserves were nicely diversified across the company's global asset base:
Strong Euro-Gas Market
Note my last Seeking Alpha article on VET wondered Is Hedging A Zero-Sum Game?
Hedging results once again negatively affected bottom-line results in Q4, and investors are actually looking at energy companies' bottom line these days. Yet VET's management reported that 43% of 2018's expected production is currently hedged, and an even greater amount of the company's expected Euro-Gas production (54%). That is because the Euro-Gas market has been relatively strong this year.
Oil & Gas 360 reports that another arctic cold-snap is hitting Europe and causing another surge in natural gas prices as measured by the UK NBP index, although they have backed off a bit in the last few days:
Source: ICE
So, the Euro-gas market remains a source of strength for VET. Also, note that management said "At present, our philosophy is to maintain greater torque to longer-term oil prices, with only 1% of our expected oil production hedged for 2019." That's nice to hear considering the hedging losses VET has reported over the recent past.
Summary And Conclusion
The 7% increase in the company's monthly dividend makes good on management's promise to return money to shareholders after a big rise in capex due to the Corrib project. That project is now online and delivery excellent FFO while capex had dropped more than 50% since 2014 (2014 E&D capex was $688 million versus an expected $325 million this year). At the current strip, free cash flow (defined as FFO - capital expenditures) for this year is expected to be north of $350 million. With 123,450,000 million fully diluted shares at the end of 2017, that equates to an estimated $2.83+/share. From that perspective, the $2.76/share annual dividend doesn't seem so large after all. VET and its 6.7% yield is very attractive here. But I have been saying that for a long time now, and the stock remains weak. Even weaker than the XLE. And that's saying something.
