Vermilion: Solid Growth in Light Oil

06/26/2014 7:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Our latest featured recommendation is a Canadian-based energy company with international operations in Australia, France, Ireland, the Netherlands, and Germany as well as in Western Canada, explains Gordon Pape, editor of Internet Wealth Builder.

Vermilion Energy (VET) focuses on conventional light oil (it is not a player in the oil sands) and on natural gas. It is targeting production of approximately 51,000-53,000 boe/d (barrels of oil equivalent per day) in 2015, which would represent growth of 25% to 30% over 2013 levels.

This puts Vermilion in the category of mid-size producers. It is much smaller than some of our current picks, but it has achieved the critical mass needed to make it a serious player.

There are many things to like about this company. For starters, the international scope of its operations means that it is not as vulnerable as other Canadian producers to the pipeline bottlenecks. The foreign business units accounted for 58% of total production in the first quarter of this year.

Vermilion pays a monthly dividend of $0.215 per share ($2.58 per year) to yield 3.4% at the current price. The payout was increased by 7.5% at the beginning of this year. Net earnings, which were $1 per share in both the final quarter of 2013 and the first quarter of this year, more than covered that.

First-quarter results were excellent. The company reported sales of $381.2 million, an increase of 23% over the same period in 2013. Fund flows from operations were up 25% to $205.4 million while net income increased by 97% to $102.8 million. The decline of the Canadian dollar had a positive impact on the results.

Vermilion isn’t resting on its laurels. In late April, it announced the completion of the acquisition of privately owned Elkhorn Resources for $427 million. The Elkhorn assets consist of high netback, light oil producing operations in the Northgate region of Saskatchewan.

Finally, this is a company with a remarkable growth record. This year marks its 20th anniversary as a publicly traded firm. As of April 30, shareholders who bought in at the time of the IPO and held their positions since had enjoyed an average annual compound rate of return of 36.6%, including dividends.

Of course, past results are no guarantee of future returns; but Vermilion appears well positioned to continue to outperform for the foreseeable future.

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