Vermilion $VET Moram
Results of companies

Vermilion Energy 3Q22 Results

Introduction to Vermilion Energy 3Q22 Results – $VET

Vermillion Energy is an oil and natural gas producer with assets in North America, Australia and Europe. Currently, it produces 84500 boepd (47% natural gas, 37% Light & Medium oil and 15% NGL condensates). Canada represents more than half of its production. However, it is key to highlight that although its exposition to European gas accounts for only 20% of the group, due to high prices, it represents around 50% of the total revenue.

We published the thesis of Vermilion Energy last 18th September which included the financial model.

Vermilion Energy 3Q22 results

Vermilion Energy 3Q22 Results $VET

FFO was higher than Q2 due to European natural gas prices. The delays in Q2 drillings plus the planned ones made the investment figure for Q3 rise to C$184MM (C$550MM FY22 CAPEX). Furthermore, C$84MM of deferred taxes impacted the bottom line, making EPS C$1.65.

Production in the 3Q22 was 84,237 boepd (-1% QoQ). The main reasons were problems with third parties in Canada and the fire problem in French assets. Both issues are expected not to impact in 4Q22 figure. Vermilion expect to produce around 89’000 boepd in 4Q22 as a result of the 6 Canadian wells (Montney) coming online in mid-November, French issues solved and Australian wells that came online in mid-Q3 accounting for the entire quarter. The two Australian wells in Wandoo (offshore) sell their oil at a premium to Brent (currently at $14).

Net debt was reduced C$200MM to C$1.4Bn as the majority of Q3 2022 free cash was allocated to debt reduction. Although due to the impact of the Windfall taxes, they guided for an increase in Q4 until C$1.6bn YE22 (Maybe an excessively conservative figure)

Hedges heavily impacted the results (as happened in previous quarters this year. The total loss due to hedging has been C$138MM in this quarter. This situation improves in 4Q22 and changes dramatically in 2023. The main impact is linked to NBP (Ireland) and TTF (Europe) hedges which were settled in high volumes at low prices. In a nutshell,  volumes in 4Q22 compared to 3Q22 diminished by 500 bbls/d(Brent),1500 bbls/d (WTI), and 23000 mcf/d (HH). Moreover, TTF hedges do not diminish in volume but the price increase from 37.8 to 46.1 €/mmBtu

Operations were also impacted by inflation. They noted a 20% increment in E&P prices in the North America region and around 10% in Europe.

Vermilion guides for C$2bn FFO in 2022 and C$1.5bn FCF. Data is proforma (including Corrib acquisition which independently when is closed, accounts for Vermilion since 1-Jan-2022)

Corporate

Vermilion anticipated C$ 250-350MM impact from Windfall Taxes in Europe for 2022 and between C$600-700 for 2023. These figures include the Corrib acquisition. But they are only estimations and $VET has not provisioned any amount yet. That means that if WFT is finally approved and it is retroactive for 2022 (as expected), they will have to incur the impact in 4Q22 and it would impact directly the EPS. As the European Union is deciding how to implement this WFT since the beginning of September, each country may be pursuing a different way to apply it. Vermilion has stopped buybacks in 4Q22. At the moment, it is working with the Irish, Dutch and German governments to understand how they are going to apply it. And consequently, decide whether continue investing in the three countries in the future. So far, they indicate that maybe in Germany they proceed with new investment in natural gas. But in the other two countries, it seems improbable right now. Also, by the way, they are communicating plus the fact of suspending share buybacks, it seems like they can get some concessions from governments (tax reduction, etc..)

Vermilion only bought back 2.6MM shares in 3Q22 results out of the 16MM approved. They also comment that the close of Corrib is postponed to 1Q23 due to administrative delays from the Irish government.

The plan to release the 2023 budget in early January, it should be around C$550MM as this year.

Out thoughts about the future of Vermilion Energy

The potential impact of the Windfall taxes and the subsequent decision to suspend the share buybacks program have conditioned the Vermilion 3Q22 results presentation. The feeling is that $VET is losing an entire quarter of earnings because of the WTF. However, the WFT figure includes the recently acquired 36.5% of Corrib, which is not included in the earnings because the transaction is not closed yet. Consequently, the impact is around 60% of 4Q22 earnings.

Looking ahead, we expect $VET to produce around 89kboepd in 4Q22 and around 95kboepd (Corrib + C$550MM Capex) in 2023. Moreover, the volume hedged is diminishing and the prices hedged are improving in 4Q22 and chiefly in 2023. Vermilion allocate several slides on their last PPTs to explain the supply problems of natural gas that Europe will have in 2023. We wrote about that last week and it seems our thoughts are quite aligned.

As a consequence, we expect much better earnings in 2023 at similar spot prices. Furthermore, we believe that the repurchase program will continue in 1Q23. And the Return on Capital Allocation Program has the potential to make $VET share price appreciate considerably in the coming months.

$VET return allocation program

Note: after the Golar LNG and OneWater Marine results this week, we will update the Vermilion model as well as the ones of other companies in the portfolio.

Note2: Every week, we publish several articles about the companies in our portfolio (analysis of quarterly results, the impact of events,…),  macroeconomy, new investment thesis and quarterly letters about the evolution of the portfolio. You can subscribe for free to receive these emails on Sunday & Follow us on Twitter. Moreover, we would appreciate it a lot if you help us by sharing the content of Moram

Follow us on Twitter!