Vermilion Energy is Canadian-based, but it is actually an international company with operations in Australia, France, Ireland, the Netherlands, and Germany as well as in Western Canada. The company’s focus is on conventional light oil (it is not a player in the Oil Sands) and on natural gas.
The company is targeting production of approximately 51,000 - 53,000 boe/d (barrels of oil equivalent per day) in 2015, which would represent growth of 25% - 30% over 2013 levels. It expects to achieve this through the exploitation of both conventional and unconventional resource plays in Western Canada, including Cardium light oil and Duvernay liquids rich natural gas. Other growth factors include the exploration and development of high impact natural gas opportunities in the Netherlands and drilling and workover programs in France and Australia.
This puts Vermilion in the category of mid-size producers. It is much smaller than some of our current picks like Suncor and Cenovus but it has achieved the critical mass needed to make it a serious player.
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There are many things to like about this company. For starters, the international scope of its operations means that it is not as vulnerable as other Canadian producers to the pipeline bottlenecks. The foreign business units accounted for 58% of total production in the first quarter of this year. Average realized prices per barrel of oil equivalent were much higher from the Australian and French operations than from those in Canada.
Vermilion pays a monthly dividend of $0.215 per share ($2.58 per year) to yield 3.4% at the current price (the stock closed on Friday at C$75.79, US$69.68). The payout was increased by 7.5% at the beginning of this year. Net earnings, which were $1 per share in both the final quarter of 2013 and the first quarter of this year, more than covered that.
First-quarter results were excellent. The company reported sales of $381.2 million, an increase of 23% over the same period in 2013. Fund flows from operations (FFO) were up 25% to $205.4 million ($1.97 per share, fully diluted) while net income increased by 97% to $102.8 million ($1 per share, basic). The decline of the Canadian dollar had a positive impact on the results.
Average production was 46,677 boe/d, an increase of 14% from the prior quarter and 21% compared to the first quarter of 2013. Based on the strength of the first quarter, the company increased its full-year 2014 production guidance from the previous range of 47,500-48,500 boe/d to 48,000-49,000 boe/d.
Vermilion isn’t resting on its laurels. In late April, it announced the completion of the acquisition of privately owned Elkhorn Resources for a total cost of $427 million, including $42 million in assumed debt. The deal was partially financed by the issuing of 2.8 million new shares valued at $205 million. The Elkhorn assets consist of high netback, light oil producing operations in the Northgate region of southeast Saskatchewan and include approximately 57,000 net acres of land (approximately 80% undeveloped), seven oil batteries, and preferential access to 50% or greater capacity at a solution gas facility that is currently under construction. Production from the Elkhorn assets is projected to average approximately 3,750 boe/d (97% crude oil) during 2014.
Finally, this is a company with a remarkable growth record. This year marks its 20th anniversary as a publicly traded firm. As of April 30, shareholders who bought in at the time of the IPO and held their positions since had enjoyed an average annual compound rate of return of 36.6%, including dividends.
Of course, past results are no guarantee of future returns but Vermilion appears well positioned to continue to outperform for the foreseeable future.
Action now: Buy.