Vermilion Q1 results – very strong cash flow funding smart M&A
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Vermilion Q1 results – very strong cash flow funding smart M&A

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Vermilion (VET) reported Q1 results after the close Wednesday, posting very strong free cash flow, progressing with acquisition plans, and guiding to lower Q2 production on maintenance:

  • Earnings – the company generated C$1.67 of net earnings per share during the quarter, against Street expectations for C$1.88.
  • Cash flow – free cash flow came in at C$305m or 7.8% of the company’s current market cap; adjusting for the impact of the yet-to-close Corrib acquisition, free cash flow was C$489.
  • Corrib – free cash flow generated by Corrib between January 1st and close will be netted out of the purchase price; the incremental 36.5% stake in Corrib generated C$184m in free cash flow during Q1 alone, compared to its $600m purchase price, the asset looks like a steal.
  • Capital allocation – the company maintained its 6c quarterly dividend (~1% yield) and reduced net debt by C$280m; recently announced acquisitions remain a major call on capital for the company.
  • Guide – Q2 production is expected within the 83-85kboe/d annual guidance range, though volumes are expected to fall sequentially from Q1 levels of 86kboe/d; based on current commodity prices, and adjusting for recently announced acquisitions, the company expects to generate C$1.8b in free cash flow during 2022 (46% of the current market cap).
  • Hedging – as of May 2, the company has hedged 63% of European natural gas production, 27% of oil production and 42% of North American natural gas production.

Vermilion (VET) is unique amongst peers for a few reasons. Management’s recent acquisition spree and the company’s exposure to European natural gas mean current year free cash flow is higher, but shareholder returns are lower in 2022. The net effect is that the Vermilion (VET) story becomes more levered to medium-term (2023+) commodity prices than peers. For those believing in “higher for longer” oil and European natural gas prices, Vermilion’s (VET) trades at a compelling valuation and appears to be delivering operationally.