Why Vermilion Energy (TSX:VET) Stock Stands Tall in the Current Oil Rally

VET stock has gained 85% this year, while, TSX energy stocks have gained 50%.

| More on:

Besides higher oil and gas prices, energy producers have displayed terrific capital discipline, which has driven their rally in the last few years. And Vermilion Energy (TSX:VET) has been no exception. Despite its recent weakness, VET stock has gained 85% this year. In comparison, TSX energy stocks have returned 50% in the same period.

What sets VET stock apart from peers?

There are two strong reasons to be bullish on Vermilion stock in the current environment. It could continue to outperform its peers, at least for the next few quarters.

Vermilion has a diversified asset base with strong exposure to Europe. Nearly 30% of its earnings come from its Europe assets. As gas prices in Europe have substantially shot up this year, Vermilion’s earnings will likely see a notable surge.

To get a little perspective, Vermilion is forecast to get $75 per mmBtu (metric million British thermal unit) for its Euro gas next year, while its domestic assets fetch around $5/mmBtu. These high prices could remarkably boost its earnings and margins. No other Canadian energy producer is in such a sweet spot as Vermilion.

Note that Vermilion has seen solid financial growth this year already. It has allocated excess cash mainly for debt repayments in the last few quarters. This has substantially improved its balance sheet. So, the incremental cash will now likely be used for shareholder returns.

Improving balance sheet

Vermilion Energy currently has a net debt of $1.6 billion — a notable reduction from $2 billion levels last year. Note that, just a few years back, energy producers used to have large debt piles that scared investors. However, since the pandemic, their debt levels have fallen to manageable levels, and shareholders’ risk has dropped.

Vermilion’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio has dropped from seven in 2020 to 0.6 as of the second quarter (Q2) of 2022. This is a popular leverage ratio and indicates how many years a company would take to repay its debt using EBITDA. TSX energy stocks, on average, have seen this ratio dropping below one in the current bull market.

Vermilion re-established its dividend in the first quarter of this year and raised it further by 33% in the third quarter. So, it is expected to pay an annual dividend of $0.32 per share, implying a yield of 1%. In comparison, Canadian energy names offer a much juicier yield of around 5% at the moment.

However, Vermilion will likely allocate a higher portion of its free cash flows to dividends and buybacks. So, we can expect another dividend hike in the next few quarters. Note that despite relatively lower dividends, VET stock sits among some of the top value creators in the sector.

Valuation

Moreover, Vermilion stock looks strong on the valuation front as well. It is currently trading at a free cash flow yield of 38%, while the sector average is around 20%. Plus, it is trading seven times its earnings, which is much lower than its peers. So, this suggests that the growth factors are not yet baked into its stock yet and could drive a big move upwards.

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.

The Motley Fool recommends VERMILION ENERGY INC. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Energy Stocks

Pumpjack in Alberta Canada
Energy Stocks

Is Cenovus Energy Stock a Good Buy?

Cenovus Energy (TSX:CVE) stock is primed for capital gains and strong total returns in 2025, driven by strategic buybacks and…

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

2 High-Yield Dividend Stocks That are Screaming Buys Right Now

Natural gas stocks like Peyto Exploration and Development are yielding above 7% today and look undervalued as natural gas strengthens.

Read more »

chart reflected in eyeglass lenses
Energy Stocks

Best Stock to Buy Right Now: Canadian Natural Resources vs Cenovus?

Want to invest in Canadian energy? Canadian Natural Resources and Cenovus Energy are two of the largest, but which one…

Read more »

oil pump jack under night sky
Energy Stocks

Where Will Cenovus Stock Be in 1/3/5 Years? 

Let's dive into whether Cenovus (TSX:CVE) stock is worth buying right now and where this stock could be headed over…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Best Stock to Buy Right Now: Canadian Natural Resources vs Suncor?

These energy giants are returning significant cash to shareholders.

Read more »

how to save money
Energy Stocks

This 7.8% Dividend Stock Pays Cash Every Month

This monthly dividend stock is an ideal option, with a strong base, growing operations, and a strong future outlook.

Read more »

data analyze research
Energy Stocks

The Smartest Dividend Stocks to Buy With $2,000 Right Now

Dividend stocks like Canadian Natural Resources (TSX:CNQ) can amplify your wealth.

Read more »

oil pump jack under night sky
Energy Stocks

3 Must-Buy Energy Stocks for Canadians Before the Year Ends

There are a lot of energy stocks out there to consider, but these three have to be the best options…

Read more »