Varcoe: Vermilion Energy moves forward after last year’s retrenchment with $556M deal

Days before a global pandemic was officially declared last year — just as an oil-price war was erupting — Vermilion Energy began to retrench.

As the Calgary-based company’s share price plunged almost 19 per cent one day in early March 2020, then-CEO Tony Marino cautioned that the virus had “dramatically altered individual, business and government behaviour … and commodity prices.”

By that May, Marino had left Vermilion, the company had suspended its dividend and lowered its capital spending. Former CFO Curtis Hicks returned as president, with a sharp focus on paying down debt.

On Monday, the mid-sized producer signalled it’s looking beyond retrenchment, announcing a $556-million deal to increase its stake in the Corrib natural gas project, located about 80 kilometres off the northwest coast of Ireland.

It will acquire the interest from Norway’s Equinor ASA in a cash transaction.

Vermilion also said it will reinstate a quarterly dividend at six cents per share in the first quarter of 2022, and it unveiled a $425-million capital budget for next year, up 13 per cent from 2021 levels.

“I came back shortly after the dividend was suspended. I know it was tough — tough for the board, it was tough for staff. The future was a little bit bleak when you looked at the amount of debt we had,” Hicks said in an interview Monday.

“It was a challenge. We developed a new strategic plan and the primary focus was debt-reduction … We’ve been fortunate, the last 18 months, that commodity prices have responded favourably and we positioned ourselves to take advantage of that.”

Investors welcomed Monday’s announcement as Vermilion’s shares jumped 10 per cent to close at $12.65 on the Toronto Stock Exchange. Benchmark U.S. oil prices recovered some ground from a $10-a-barrel drop on Friday, closing at US$69.95 on Monday.

Vermilion’s acquisition, along with several other oilpatch moves in recent weeks, highlights an industry that’s now moving forward, paying down debt and looking for opportunities, even as commodity prices gyrate wildly.

“It’s nice to see companies not have to be focused on just basic survival and … be able to be more strategic,” said Patrick O’Rourke, an analyst with ATB Capital Markets.

“This is what you have to do to build a good long-term business that sustains a dividend.”

Vermilion, which saw its net debt top $2.1 billion in the first quarter of 2020, expects to exit the year around $1.65 billion, and reduce it to less than $1.3 billion by the end of 2022.

“We feel good about the progress compared to where we were 12 to 18 months ago, but (debt repayment) is still a focus,” Hicks said.

“But also, we will be opportunistic if the right opportunities come along, and this was certainly one of those opportunities we couldn’t pass up.”

With the Corrib deal, Vermilion is increasing its interest to 56.5 per cent from 20 per cent in a project it operates. The gas field began producing in 2015.

“We have taken the decision to sell the asset to focus our portfolio … and to free up capital that we can re-invest elsewhere,” an Equinor official said in a news release.

The agreement will increase Vermilion’s exposure to European natural gas markets and it comes at an opportune time. Gas prices in Europe have soared this year, with futures contracts for 2022 trading around $23 per mmBTU.

Hicks, who is retiring and will be replaced by vice-president Dion Hatcher on Jan. 1, said once the company achieves its debt targets, “then we can start looking at reallocating some of that free cash flow and return capital to shareholders.”

Vermilion has a diverse asset base, with operations in Canada and the United States, as well as Europe and Australia. The deal increases its geographic diversity, with international assets set to make up about 39 per cent of overall production.

Analyst Jeremy McCrea with Raymond James said Vermilion was able to acquire the asset at an attractive price as large European producers like Equinor are looking to sell off oil and gas properties.

For Vermilion, the dividend return next year is a relatively modest expense, expected to cost the company about $40 million.

However, investors say it’s a necessary move for oil and gas producers as others rivals have bumped up their dividends in recent months with the upswing in commodity prices.

“It’s a supreme disadvantage to not have a dividend,” said Eric Nuttall, a senior portfolio manager with Ninepoint Partners.

“It’s a 100-per-cent must … It puts you on the radar screen for dividends funds, it makes you much more palatable to the retail community.”

Monday’s announcement is another sign of the improving financial strength of Canadian petroleum producers.

For example, Cenovus Energy announced recently it will double its dividend in the fourth quarter; it’s also reduced net debt by $2 billion during the first nine months of 2021.

Similarly, Suncor Energy said last month it would double its quarterly dividend and noted company debt levels have fallen by $3.1 billion through the first three quarters.

On Monday, MEG Energy unveiled a $375-million capital budget for next year, up slightly from $335 million in 2021.

With current oil prices, “MEG intends to begin allocating a portion of free cash flow generated to shareholder returns in 2022 while continuing to prioritize ongoing debt reduction,” the company said in a statement.

“These aren’t the businesses that we know from pre-COVID here,” McCrea added.

“There’s been a lot of restructuring forced upon them in COVID and these companies have come out much stronger.”

Chris Varcoe is a Calgary Herald columnist.

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