CA - Vermillion Energy: Cheap Energy Cheap Company

2023-05-16 03:58:39 ET

Summary

• VET just reported a resounding earnings and revenue beat.
• This is a well diversified gas/oil producer trading at a steep discount.
• Both VET and natural gas prices should appreciate in the near future.

Thesis Summary

Vermillion Energy ( VET ) just reported its Q1 results, beating on both EPS and revenue and raising its dividend. From a fundamental perspective, this is a cash-flow machine with a solid plan to deliver value to its shareholders in the long run.

Furthermore, with Natural gas prices near multi-year lows, and given the outlook for energy and de-carbonation, this seems like a great time to gain exposure to natural gas.

Technically, the chart also looks good, though we could get more of a pull-back in the short term.

Q1 2023 Results

Vermillion Energy recently announced its latest results, beating robustly on EPS and revenue estimates. This is at a time when gas and overall energy prices have fallen significantly.

Let’s begin by looking at the financial summary for the quarter:

As we can see, the company delivered FCF of $98 million for the quarter, down 14% from the previous quarter but well above expectations. Production in North America was up, but international Barrels Of Oil Equivalent Per Day (boe/d) came down due to downtime in Australia.

Despite the challenging environment, the company delivered an EPS of $2.34, beating analyst expectations by $1.97. Moving forward, this was the company’s guidance for the rest of the year:

Both in terms of production and capital expenditures, 2022 should look similar to 2023. However, as the company accumulates more cash and gas prices improve, the company is going to look better than ever in 3-5 years.

Why I like VET

VET offers exposure to oil and gas, but there are a lot of companies that do this. What makes VET unique?

One of the things I like about VET is that it has a reasonably diversified portfolio of assets, giving it international exposure:

VET produces 27% of its boe/d abroad, which should be even more once we add the newly acquired Corrib asset. Moreover, international FFO represents 44% of the company’s total.

International exposure makes VET more resilient and allows it to take advantage of higher gas prices in different regions.

VET is also one of the most undervalued companies of its peers, which seems somewhat unjustified:

VET has underperformed its peers, and I think the stock now offers more excellent value:

The company trades at under 1 P/S and a measly P/E of 2. You’d be hard-pressed to find a company more undervalued in the market than VET.

Lastly, the company has a solid plan to unlock more shareholder value by focusing on debt reduction:

This is the kind of trend you want to see. In addition, since 2020, net debt has been falling while FFO has been increasing. So by 2024, VET will be in much better financial health. At that point, expect more buybacks and higher dividends.

The Case For Gas

Natural gas is a low-carbon alternative to oil and will be an essential part of Europe’s strategy towards reducing carbon emissions. Furthermore, Asian countries are expected to ramp up their demand for natural gas.

Globally, the firm expected LNG demand to grow by 200 million tonnes per annum (mmtpa) or 50%, over the next 10 years with Asia accounting for two-thirds of the demand. Much of the demand in Asia would come from China and India, while LNG imports to mature Asian gas markets such as Japan and South Korea are expected to fall as their energy mix shifts toward renewables and nuclear.

Source: capital.com

VET has exposure to European and Asian markets, and these two economies will be fighting each other for gas supply in the coming years.

Looking at the gas chart, we are nearing what I think could be a secular bottom:

Though we have not quite reached the LT bottom target, we are getting very close. Of course, gas does have a lot of volatility, and it's not an accessible market to navigate, but I think we are primed for at least some sort of relief rally.

Technical Analysis

Looking at the VET technical chart, there is also reason to be bullish:

It looks like we have formed an impulse from the 2020 lows. Wave iii perfectly hit the 1.618 fib extension, meaning our wave v could target the 2 ext at $55.22.

More immediately, we could see VET fall a bit lower.

We have just tapped the 31.8% retracement, which is just at the top of my target box. If we break below this recent low, $8.10 is support.

Risks

Though I see long-term potential in natural gas, there is always the risk that the price of this resource could go lower. Furthermore, as we saw in the last quarter, VET’s operations could be disrupted in the future, which is something outside our control.

Nonetheless, I still view VET as a solid investment; even if gas prices remain low, VET produces cash and delivers a dividend, providing us with a good safety net.

Takeaway

In conclusion, I’m adding VET as part of my energy exposure since I like natural gas's role in the energy space as a less polluting yet affordable energy source. In addition, VET is cheaply valued and on its way to becoming even more financially healthy.

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