Energy stocks used to be one of the bulwarks of an income portfolio. But everything changed in 2014, when world oil prices began to tumble in the face of oversupply and an inability of OPEC to agree on production cuts, notes Gordon Pape, dividend expert and editor of The Income Investor.
Energy stocks no longer seem to be a significant part of most income portfolios. There are a few exceptions, however. One of them is Vermilion Energy (VET), which is raising its dividend by 7% to $0.23 a month ($2.76 per year), effective with the May 15 payment. That translates into a very attractive yield of 6.4%.
This is Vermilion's first dividend increase since 2014, but it's important to note that it was one of the few former energy income trusts not to reduce its payout after converting to a corporation. The company says, "Delivering a consistent and sustainable dividend is a key priority".
Vermilion is a rarity among mid-size Canadian oil producers in that about half of its production is from foreign assets in countries like France, Ireland, the Netherlands, and Germany. As a result, they are able to sell that part of their output at higher international prices.
First-quarter results weren't spectacular compared to the fourth quarter of 2016 due to lower production. This was a result of a planned shut-in of a well in the Netherlands, cold weather downtime in Canada and the U.S., and the temporary shut-in of gas at a German site for instrumentation installation.
Despite this, revenue jumped from $261.6 million in the first quarter of 2017 to $318.3 million this year. Funds from operations (FFO) were $157.5 million ($1.27 per share, fully diluted), up from $143.4 million ($1.19 per share) the year before.
The company is expanding its European operations, drilling its first natural gas well in Hungary, which it expects to bring into production this year. Vermilion plans to drill several more wells in that country over the next few years as well as in Slovakia and Croatia and says it is optimistic about the prospects in the region.
As well, the company is acquiring Spartan Energy, an oil producer in south-eastern Saskatchewan, for $1.4 billion, including debt. The purchase was a key factor in a significant increase in the company's production guidance for this year. It now projects output of 86,000 to 90,000 barrels of oil per day equivalent (boe/d), up from an estimate of 75,000 to 77,500 in January.
Given the state of the oil industry, this is not a stock for conservative investors, despite the company's diverse assets, strong dividend history, and positive outlook. But for those willing to assume a little more risk, the yield is very attractive, and the stock has held up much better than most other mid-size energy companies.
