Bargain Stock on Sale for +7% Yield and +50% Upside

Vermilion Energy Inc. (TSX:VET)(NYSE:VET) has limited downside and lots of upside potential from current levels.

| More on:
The Motley Fool

Vermilion Energy (TSX:VET)(NYSE:VET) stock fell to its 52-week low after reporting its third-quarter results and the oil and gas producer’s yield was pushed to as high as 8%! The market realized that the sell-off was overdone, as the stock has bounced about 4% higher since then.

Let’s review Vermilion’s actual results.

Q3 results

Vermilion generated $261 million of fund flows from operations, which was 34% higher than in Q2 2018 and 99% higher than in Q3 2017. The higher cash flow generation was due to greater production volumes and higher commodity prices.

Specifically, production grew 19% to 96,222 barrels of oil equivalent per day (boe/d) compared to Q2. The increase was primarily due to the full quarter contribution from the Spartan acquisition and new production added from this year’s drilling program.

Vermilion generates strong free cash flow from its Corrib gas operations in Ireland. Notably, it generated 9% less production to 51 million cubic feet per day or 8,563 boe/d from Corrib for the quarter due primarily to a planned plant turnaround (that impacted 53% of the reduction) and partly to natural declines (that impacted 47% of the reduction).

Outlook

Management plans to spend up to $530 million for exploration and development next year, which is estimated to lead to the production of 101,000-106,000 boe/d. The midpoint of the range implies production growth of 18% in 2019 compared to 2018 or 7% growth on a per-share basis.

Valuation

At $35.64 per share as of writing, Vermilion trades at about 5.9 times cash flow and at levels that are near its multi-year lows. The analyst consensus from Thomson Reuters has a 12-month target of $54.30 per share on the stock, which indicates the stock is undervalued by +30% on a forward basis or has a near-term upside of +50%.

VET Dividend Yield (TTM) Chart

VET Dividend Yield (TTM) data by YCharts. Vermilion’s 10-year dividend yield range.

A nearly 8% dividend yield

Vermilion currently offers a delectable 7.74% dividend yield based on its monthly dividend of $0.23 per share or $2.76 annualized. The dividends declared in the first three quarters of the year equated to 46% of Vermilion’s fund flows from operations.

Investor takeaway

The net debt to annualized fund flows from operations in the first three quarters of the year was 2.48, which was comparable to 2.44 in the same period of 2017. It’s a positive that the ratio was reduced greatly to 1.95 in Q3 2018 compared to 2.62 in Q3 2017.

With stable production growth and higher commodity prices (i.e., oil price that’s stabilized above US$60 per barrel), there should be limited downside risk on Vermilion stock from current levels. Vermilion is attractive, offers a juicy 7.7% yield, and has near-term upside potential of +50%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of VERMILION ENERGY INC.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »