Updated July 28, 2021 by Bob Ciura
Oil prices will rise in 2021 after a prolonged downturn in recent years. The coronavirus pandemic had a significant negative impact on oil prices in 2021.
Vermilion Energy (VET) struggled with many of its competitors. Stocks have lost more than three quarters of their value in the past five years. And the pandemic has caused the company to suspend its dividend in April 2020, and it has not yet been reinstated.
If Vermilion Energy reinstated its dividend, it would be a monthly dividend stock again.
You can download our full Excel spreadsheet of 50 monthly dividend stocks (along with key metrics like dividend yields and payout ratios) by clicking the link below:
Vermilion benefited from the recent oil price rally as the share price returned to above $ 7 per share after trading at its 52-week low just above $ 2 per share. This has produced a hefty return for investors willing to buy the stock near its lows last year.
However, with a battered business model and the lack of a dividend, Vermilion stock remains a risky bet on commodity prices.
Vermilion Energy is a Canadian oil and gas exploration company with a global operational presence. Note that Vermilion is traded in both Toronto and New York and that we will use the US listing for this article. Therefore, all financials are in US dollars unless otherwise noted.
Founded in 1994, Vermilion Energy is headquartered in Canada and has a market capitalization of $ 1.2 billion.
Further details on Vermilion Energy’s business model can be found below.
Source: Investor Presentation
After starting the company in 1994, Vermilion has seen truly exceptional growth. It went public in April 1994 with an adjusted opening price of $ 0.30 per share. Vermilion stock eventually peaked at over $ 70 per share in 2014.
However, the ongoing downturn in the oil and gas industry has resulted in Vermilion trading at a share price of just over $ 7, destroying the vast majority of the previous returns that had accrued to shareholders from the IPO.
It is thanks to us that the company has reinvented itself a number of times since its inception. In 2003 Vermilion Energy changed its corporate structure to that of a Canadian income trust and was converted back to a public company in 2010. In 2013, Vermilion Energy was listed on the New York Stock Exchange, adding it to a new group of US-based investors.
The company has struggled with a generally weak raw material price environment since 2016. This coincided with the coronavirus pandemic last year, which plunged demand for oil and gas.
Conditions finally began to improve this year as commodity prices rise as economies reopen and the pandemic is overcome. Vermilion Energy benefits from considerable geographic diversification. In addition to its core business in the United States, Vermilion Energy has a significant presence in Europe and Australia, giving it three core businesses.
Vermilion’s diversification is focused on stable parts of the world. The publicly traded parent company acts as the holding company for three operating subsidiaries in Vermilion’s key regions in Europe, North America and Australia.
We now take a detailed look at Vermilion Energy’s growth prospects.
The primary measure of business performance is Fund Flows from Operations (FFO), a non-GAAP financial measure that is calculated by adding non-cash expenses such as depreciation and amortization to net income.
After the collapse in oil prices in 2014, Vermilion and almost every other company it competes with suffered significant losses in profitability. FFO dropped from nearly $ 8 in 2014 to just over $ 4 in 2016. Vermilion was on the recovery path in 2019, but its progress stalled again due to the pandemic. In 2020, Vermilion’s FFO per share fell more than half.
Fortunately, the recent surge in oil and gas prices in recent months has improved Vermilion’s financial results. In April, Zinnober reports (04th/28/ 21) financial result for the F.first Quarter of fiscal year 2021. The enterprise‘S FFO came in pure $162 million, 20% more than in the previous quarter. Free cash flowafter investing $ 83 million in exploration and development Investments, came at $. in7th9 million.
revenue 12.1% increased to C.$368.14 million year–above–year. In the meantime, because of natural decline partially offset by higher production in Australia and Germany due to better operating hours, average production was standing at 86.276 Barrels of oil equivalents per day, 2% less than before Quarter.
Further growth depends largely on whether oil prices can recover in the short term or whether the downturn in the commodity markets worsens. In addition to higher expected future In commodity prices, Vermilion’s acquisition of Spartan is a huge increaseth catalyst. This was the largest acquisition in History of the company and gave Vermilion greater exposure to the high–Quality real estate from the southeast Saskatchewan.
Overall, Vermilion has a risky future outlook. Depending on what happens, Vermilion could be in much better – or worse – shape than it is today, given the volatility of oil and gas prices.
Competitive advantages & recession performance
As with many energy companies, Vermilion Energy’s competitive advantage comes from its asset base. The company also benefits from its geographical diversification. This exposes Vermilion Energy to additional oil-rich regions while isolating the company from regional economic downturns or natural disasters.
The company has competitive advantages, mainly its oil and gas industrys properties that have low prices of decline and significant amounts of reserves. This enabled the company to stop production by 1 to increase5% per year from 2013 to 2019.
The company’s proven reserves have skyrocketed in recent years and we see this as a major advantage for the company’s long-term stability compared to its competitors. Investors can appreciate the company’s diversification not only from a geographical point of view, but also in terms of the raw material mix.
Vermilion is very well diversified between oil products and gas. This is something that many pure oil or gas companies don’t own.
Of course, quality systems are of little consolation when oil and gas prices fall. From a debt point of view, the company is now adequately leveraged and largely corresponds to its competitors. Recessions generally go hand in hand with lower commodity prices, including oil, so profits would suffer further if the global economy slid into a deep recession.
It did so in 2020, and so investors shouldn’t expect the company to outperform in a recession that usually includes falling oil and gas prices.
As mentioned earlier, Vermilion suspended its dividend in April 2020 in response to the coronavirus and its economic impact. That in turn depressed the share price. The company has not yet reintroduced its dividend. When that will happen is unclear, although Vermilion has announced its intention to reinstate the dividend “when appropriate”.
Meanwhile, Vermilion’s top priority is improving its bottom line. The company is working to reduce its leverage ratio.
Source: Investor Presentation
We see Vermilion’s business model and dividend as sustainable during a temporary period of oil price weakness, but a lot depends on how oil prices behave from here. Obviously, due to the dividend suspension and sharp FFO decline in 2020, Zinnober is a very high risk, high yield stock.
Given the massive headwind who faced the enterprise descended last year from the oil Price war and the economic Interrupted by the coronavirus outbreak, we expect the company’s free cash flow recover strongly this year. We also think the dividend will recover in years to come, though takes a long time to recover to his pconcerning–pandemic Levels because management has to hold back a lot of money to prop up the balance sheet and catch up C.apex programs.
Vermilion Energy undoubtedly struggled in 2020, but the company is on the mend. The stock appears undervalued if commodity prices can sustain their recent surge and the economy continues to recover from the pandemic.
However, there is so much uncertainty surrounding Vermilion, not the least of which is the dividend suspension. As such, we encourage risk averse income investors like retirees to steer clear of the stock and wait for more clarity about its ability to weather the various challenges the oil industry faces.
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