Vermilion Gets TSX Approval to Repurchase Shares – Buyback Wednesdays

Key Insights:

• Vermilion Energy (VET) is an oil & natural gas producer trading at a steep discount.
• The company has a diversified portfolio of assets, with international exposure that accounts for 44% of its total funds from operations (FFO).
• With natural gas prices down sharply from their highs last summer, Vermilion is well-positioned to benefit if the current bounce in natural gas prices continues.
• The company is focused on using its high FCF to fund strategic acquisitions and reduce its net debt level.

Founded in 1994, Vermilion Energy (VET) is a Canadian oil and gas exploration and production company. It focuses on the development and production of light oil, liquids-rich natural gas, and conventional natural gas and oil in North America, Europe, and Australia. The company gets its unique name from the Vermilion Lakes of Alberta, which are known for their reddish waters. The strong color of Vermilion, which is made up of red, orange, and yellow, symbolizes the company’s objective to be a vibrant energy company.

Source: Vermilion – Investor Presentation

On July 10, 2023, Vermilion announced that it had received Toronto Stock Exchange (TSX) approval to commence a Normal Course Issuer Bid (NCIB) to purchase up to 16.31 million common shares, equivalent to around 10% of its outstanding shares as of June 28, 2023, over the course of twelve months. Vermilion shares are down 11.4% YTD. This decline can be attributed to the decline in energy prices, European natural gas prices specifically, which have played a significant role in the company’s recent financial performance.

Acquisitions:

Vermilion has made several acquisitions to enhance its geographical footprint and strengthen its international portfolio.

• 2016: Vermilion completed the acquisition of operated and non-operated assets in Germany, providing Vermilion with its first operated asset in the country.
•  2018: Acquired Spartan Energy, a publicly traded southeast Saskatchewan light oil producer, for total consideration of $1.4 billion.
• 2023: Vermilion acquired Equinor’s 36.5% stake for $434 million, increasing its share of the gas field to 56.5%. The acquisition makes Vermilion the largest provider of domestic natural gas in Ireland.

Capital Allocation:

In July 2022, Vermilion received TSX approval to initiate a NCIB, allowing the company to purchase up to 16.07 million common shares, representing approximately 10% of its public float as of June 22, 2022, over a twelve-month period. In 2022, Vermilion declared $46 million in dividends and repurchased 2.3 million shares under the NCIB for a total of $72 million, representing 11% of FCF.

In the first quarter of 2023, the company repurchased 1.6 million common shares for $30 million and declared cash dividends of $16 million, totaling $46 million returned to shareholders in the quarter.

Based on its current pace of share repurchases and base dividend, the company anticipates returning between 25% to 30% of free cash flow to shareholders in 2023, depending on commodity prices.

The current dividend yield of 2.02% and a payout ratio of 6.22% may appear relatively low. However considering the significant volatility in energy prices during the last three years, focusing less on regular dividends and more on repurchases or special dividends makes more sense. As Vermilion Energy strives to decrease its net debt and enhance its funds from operations (FFO) in the coming years, it creates room for potential buybacks and higher dividend payments.

2022 & Q1 2023 Results:

Vermilion generated a record fund flow of $1.6 billion and a record free cash flow of $1.1 billion in 2022, representing a year-over-year increase of 78% and 99%, respectively. This free cash flow allowed the company to fund over $500 million of strategic acquisitions, reduce net debt by over $300 million and return over $100 million to shareholders through dividends and share buybacks. It reinstated the quarterly dividend in Q1 and commenced a share buyback program in Q3, returning a total of 11% of free cash flow during the year. The company ended the year with net debt of $1.3 billion.

Q1 2023 was a decent quarter for Vermilion, helping the company beat EPS estimates and raise its dividend.

• Vermilion reported $253 million of fund flows and $98 million of free cash flow. Cash flows are down compared to last year, given lower energy prices in 2023.
• Despite the challenging environment, the company delivered EPS of $0.41, beating analyst expectations by $0.22.
• Revenue of $405.66 million missed analyst estimates by $1.39 million and was down 34.71% year-over-year.
• Production from international operations averaged 22,408 BOE per day, which was down from the prior quarter primarily due to unplanned downtime in Australia.
• Vermilion has repurchased 1.6 million common shares for $30 million and declared cash dividends of $0.10 per share or $16 million for a total of $46 million in the quarter. The base dividend was increased by 25% in Q1 of this year and increased by 67% since Q1 of 2022.

Source: Vermilion – Investor Presentation

Vermilion had $73.9 million in cash and short-term investments at the end of the first quarter. Free cash generated from the quarter was $73.6 million.

Low Valuation:

Vermilion stands out as an exceptionally undervalued company compared to its peers. The company has a remarkably low forward Price/Earnings ratio of 3.9. Its forward EV/EBITDA of 2.61, is close to the lowest in the last 5 years. This undervaluation can likely be attributed to the market’s response to the cyclical nature of the business.

Deleveraging:

Vermilion has achieved notable success in substantially reducing its debt over the past few years. From a long-term debt level of $1.5 billion in September 2020, it has made significant strides and lowered it to $690.7 million as of March 2023. Given the management’s strong emphasis on debt reduction, their decision to pursue share repurchases is somewhat unexpected but makes sense in light of how cheap the stock is.

Source: Vermilion – Investor Presentation

Profitability & Growth:

Vermilion has demonstrated remarkable profitability in recent years, with an impressive gross margin surpassing 80% and a net margin of nearly 45%. These figures significantly outperform the median for the sector, highlighting Vermilion’s strong financial performance.

Source: Seeking Alpha

Over the years, Vermilion has experienced gradual growth, achieving a compound annual growth rate (CAGR) of 24.1% in revenue and an impressive 89.2% in earnings per share (EPS) over the past five years. However, there are some concerns regarding the company’s future prospects, as its projected revenue growth stands at only 5.8% and forward EBITDA growth shows a negative trend.

Bottom Line:

Natural gas is recognized as a transitional energy source as we work towards achieving a net-zero emissions goal by 2050. However, it is important to note that natural gas prices can be volatile.

Vermilion’s financial growth may be influenced by various factors such as fluctuations in commodity prices, foreign exchange rates, interest rates and production volumes, as well as regulatory and political risks. Therefore, effectively managing these risks is crucial for the company to ensure long-term sustainable growth and profitability.

The company’s international exposure provides it with resilience and the ability to capitalize on higher gas prices in different regions. Furthermore, reducing debt levels will enable Vermilion to return more capital to its shareholders in the future.

It is worth noting that Vermilion has surpassed revenue and EPS estimates in 7 and 5 out of the last 8 quarters.

Welcome to edition 67 Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

Buyback activity remained almost muted with 5 new buyback announcements last week compared to 6 in the prior week.

Top 5 Stock Buyback Announcements 

1. Mullen Automotive, Inc. (MULN): $0.18

On July 6, 2023, the Board of Directors of this electric vehicle manufacturer authorized a new $25 million share repurchase program, equal to around 65.87% of its market cap at announcement.

2. Vermilion Energy Inc. (VET): $13.58

 On July 7, 2023, the Board of Directors announced that it has received TSX approval to commence a normal course issuer bid (“NCIB”) which allows the company to purchase up to 16,308,587 common shares, representing approximately 10% of its shares outstanding.

3. HarborOne Bancorp, Inc.  (HONE): $9.08

 On July 5, 2023, the Board of Directors of this bank authorized a new 2.32 million share repurchase program, equal to around 5% of its market cap at announcement.

4. CF Bankshares Inc. (CFBK): $15.52

On July 5, 2023, the Board of Directors of this oil company authorized a new 250K share repurchase program of the company’s Class A common stock, representing around 3.8% of its market cap at announcement.

5. PriceSmart, Inc. (PSMT): $77.19

On July 10, 2023, the Board of Directors of this owner of U.S. style membership shopping warehouse clubs approved a new $75 million share repurchase program, equal to around 3.14% of its market cap at announcement.

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