Varcoe: Vermilion shakes budget, moves forward after 2020 cuts

“It’s nice to see companies not having to focus only on basic survival and… being able to be more strategic,” said Patrick O’Rourke, analyst at ATB Capital Markets.

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Days before a global pandemic was officially declared last year – just as an oil price war erupted – Vermilion Energy began to pull back.


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As the Calgary-based company’s stock price plunged nearly 19% one day in early March 2020, then-CEO Tony Marino warned that the virus had “significantly changed the behavior of individuals, companies and government… and the prices of raw materials ”.

By May, Marino left Vermilion, the company suspended its dividend and reduced its capital spending. Former CFO Curtis Hicks returned as chairman, with a particular focus on debt repayment.

On Monday, the midsize producer signaled that he was looking beyond the downturn, announcing a $ 556 million deal to increase its stake in the Corrib natural gas project, located about 80 kilometers off the coast. north west of Ireland.

It will acquire the participation of the Norwegian Equinor ASA in a cash transaction.

Vermilion also announced it would reinstate a quarterly dividend of six cents per share in the first quarter of 2022, and unveiled a capital budget of $ 425 million for next year, up 13% from levels from 2021.

“I returned shortly after the dividend was suspended. I know it was hard – hard on the board, it was hard on the staff. The future was a little bleak when you looked at the amount of our debt, ”Hicks said in an interview Monday.

“It was a challenge. We developed a new strategic plan and the main objective was debt reduction… We have been fortunate in the last 18 months that commodity prices have reacted favorably and we have positioned ourselves to take advantage of it.

Investors welcomed Monday’s announcement as Vermilion shares jumped 10 percent to close at $ 12.65 on the Toronto Stock Exchange. Benchmark US oil prices rallied after falling $ 10 a barrel on Friday, closing at US $ 69.95 on Monday.


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The Vermilion acquisition, along with several other oil moves over the past few weeks, highlights an industry that is now moving forward, paying off debt and looking for opportunities, even as commodity prices turn wildly.

“It’s nice to see companies not having to focus only on basic survival and… being able to be more strategic,” said Patrick O’Rourke, analyst at ATB Capital Markets.

“This is what you need to do to build a good, long-term business that maintains a dividend. “

Vermilion, which saw its net debt surpass $ 2.1 billion in the first quarter of 2020, plans to end the year around $ 1.65 billion and reduce it to less than $ 1.3 billion by the end of 2022.

“We’re happy with the progress from where we were 12 to 18 months ago, but (debt repayment) remains a priority,” Hicks said.

“But also, we’ll be opportunistic if the right opportunities present themselves, and this was definitely one of those opportunities that we couldn’t pass up.”

With the Corrib deal, Vermilion increases its stake to 56.5% from 20% in a project it operates. The gas field started producing in 2015.

“We made the decision to sell the asset to concentrate our portfolio… and to free up capital that we can reinvest elsewhere,” an Equinor official said in a statement.

The deal will increase Vermilion’s exposure to European natural gas markets and it comes at an opportune time. Gas prices in Europe have skyrocketed this year, with futures for 2022 trading at around $ 23 per mmBTU.


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Hicks, who is retiring and will be replaced by Vice President Dion Hatcher on Jan. 1, said that once the company hits its debt targets, “then we can start to consider reallocating some of those free cash flow and return capital to shareholders “.

Vermilion has a diverse asset base, with operations in Canada and the United States, as well as Europe and Australia. The agreement increases its geographic diversity, with international assets expected to represent around 39% of global production.

Raymond James analyst Jeremy McCrea said Vermilion was able to acquire the asset at an attractive price as large European producers like Equinor look to sell their oil and gas properties.

For Vermilion, next year’s dividend yield is a relatively modest expense, which is expected to cost the company around $ 40 million.

However, investors say it is a necessary move for oil and gas producers as other rivals have increased their dividends in recent months as commodity prices rise.

“It’s a supreme downside not to have a dividend,” said Eric Nuttall, senior portfolio manager at Ninepoint Partners.

“It’s a 100% must… It puts you on the dividend fund radar screen, it makes you a lot more palatable to the retail community. “

Monday’s announcement is another sign of improving financial strength for Canadian oil producers.

For example, Cenovus Energy recently announced that it will double its dividend in the fourth quarter; it also reduced net debt by $ 2 billion in the first nine months of 2021.


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Likewise, Suncor Energy announced last month that it would double its quarterly dividend and noted that the company’s debt levels had declined by $ 3.1 billion in the first three quarters.

On Monday, MEG Energy unveiled a capital budget of $ 375 million for next year, up slightly from $ 335 million in 2021.

With current oil prices, “MEG intends to begin allocating a portion of the free cash flow generated to shareholder returns in 2022 while continuing to prioritize continued debt reduction,” said the company in a press release.

“These are not the companies that we know of since pre-COVID here,” McCrea added.

“There has been a lot of restructuring forced on them in COVID and these companies have come out much stronger. “

Chris Varcoe is a columnist for the Calgary Herald.

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