Vermillion Energy Q1 2026 Update: 59% of EU Gas Hedged...

Hinzugefügt: 2026-05-11

[00:00:00]Good day investors. Today we are taking a look at Vermulan's energy first quarter operational numbers, financial numbers, and finally update the valuation for the business. That said, if you want to dive deeper, check out my YouTube membership where I post every week how my portfolio changed, what's on my watch list, plus with the boardroom tier, you can get access to my Discord channel for direct discussions and live calls. Now looking at Vermillan, it's up 38% year to date. The company trading around 2 and a half billion Canadian above 3% dividend. Now looking at their production mix, uh majority of the production is still in Canada, close to 80% with 21% international of course Europe, mainly Europe. Gas is the majority of the mix, 71% with some NGL's only from Canada and oil and condensates. Now price realization was pretty bad in the first quarter compared to 2025 first quarter. So you can see 62 versus 45 driven lower by NGL and natural gas prices. Now from the gas part of the business, gas production is dominated by Canada 82% and then you can also of of course that leads to echo pricing or hedged eco pricing. You have some alliance and some European gas exposure.

[00:01:08]Of course 80% of the production is European gas. Now that's what the company like to bring up that they have peers and the spears I suspect to be Canadian given their price realization.

[00:01:21]you can and they like to brag about having pretty good price realization.

[00:01:25]But of course, if you have prices in Europe and you basically group everything together, you will have much nicer price realization compared to companies who are mainly dominant uh main players in Canada. Now production by product as said 70 30 mix. So 70 gas 30 liquids. Revenue by product liquids Canadian gas and natural gas. So let me just jump back. So look at this 31% plus 46% what is this 77%.

[00:01:55]That's basically your Canadian gas pricing. But if you look here that's 77% is only 16% while 29% is European gas which is only 18%. So that said what it means is the company and and just look at liquids. liquids is 30% of production but 55% of revenue and 70% of gas is basically this would be like I don't know 60% uh basically is uh is is Canadian gas but that is only responsible for 16% of revenue so the company is liquids and natural gas from Europe and of course because the Canadian gas price is horrible I mean not horrible if you are a consumer it's great but it's it's it's really low relative to the other prices in barrels of oil equivalent terms Now historical and forward pricing of European gas. So this is where uh you want to start crying. Hedged Euro gas 59% in 2026 with an average floor of 14 and then 28% with an average floor of 13. Guys, we are sitting at like 45 uh TTF gas which is if you do the translation it's like 20 25 or above 20 for sure. The company basically kept their upside to a large extent. And then if you look at their income statement, you can find the 300 one and a half million loss on derivatives. The company basically just overhed to downside and then you had much better energy prices.

[00:03:24]So that's why the company posted a loss.

[00:03:28]uh when I'm calculating my interest coverage ratio, I'm going to uh adjust for this 300 million loss on the pay on paper because it's not operational. When it becomes operational is when they are going to sell their gas instead of selling it for 45 uh euros per uh megawatt hours, they're going to sell it for I don't know like 30. So that's when they realize they don't realize a loss, right? Because that opportunity cost is not there.

[00:03:57]they produce something for let's say 10, they sell it for 20 instead of they could they could have sold it for 30. So that's the story. It's kind of sad. Now looking at their depth and balance sheet, depth went up 61% depth to equity and almost 1.3 billion Canadian dollars of depth. Uh let's look here. So return equity, return investment using free cash flow as a base annualized for Q1 looks pretty solid. 17% return equity, 6% return investment. You wonder how much their profitability would be if they didn't overh look at 2022 right now depose interest coverage is horrifically weak three times even after adjusting for the losses on the income statement current ratio is also low. So given the situation that we have pretty tight credit spreads but there is a fear or you can you can sense it in the system you can look at spreads you can look at other things there is some um tightening in the Euro dollar system you would see you would want to stay away from weak balance sheet players and this is not a strong balance sheet player not a horrific balance sheet by any means but not really strong now looking at some other data reserves so the production was decently up so operations were nice up from let's say 120 to 126. So that's a decent growth. Uh the guidance is I think 120 overall for for the year. But we'll look at the forward looking guidance. That's 8 years worth of reserve life. Now looking at other numbers, free cash flow annualized, it's going to be just below 400 million dividend 3%ish kind of shares outstanding are flat over the period. So 2019 through 2025. they diluted and then they bought it back and they are where they're they are where they started.

[00:05:43]That doesn't really tell us the whole story. The whole story is per share production. So you can see that from 2019 through let's say 2024 may maybe 2020 you had declining per share production.

[00:05:57]Now then 2022 through 24 they were kind of slightly getting better and then since 24 25 you had much better and now you also have slightly improving numbers. So the company is getting better per share metrics operations look fine although not like super robust or anything but it's just fine. Now of course this is the Canadian part. Uh they entered the monthly in 2022, grew production from really low like 4,000 barrels of oil equivalent to 16,000 currently. Uh plans to reach 28,000 target production by 2028 and then that's that's the story. You can see them in the green and I think this area is also like 40% owned. They have a working interest in that. Now this is the Europe story. So this is where the money is made. Of course the money is made in liquids which Europe is more liquid heavy than than the Canadian asset and of course the gas which they which they produce in Europe they can also sell at a higher price. So proven track record of development of like 30 plus exploration of valves at 70% success rate over the 20 years significant undeveloped land you can see in Germany from 2015 farming agreements 3D seismic coverage throughout. So their 2P is is relatively larger against their 1P. The outlook is to build out German infrastructure and developing material gas discovery exploration upside from long run of runway of prospect. So they have 2p reserves to to develop. Now the gas production is roughly 50/50. So 53 Germany I think and 47 the Netherlands.

[00:07:30]Uh you can see this. But if you operate in Europe of course you get much gas much nicer gas prices but you also have to deal with regulatory stuff. And if you operate in Canada, you already have that. So Europe from that perspective is not a great area unless you are like in Norway where they kind of leave you alone. You pay a high tax uh but uh after that you you the rules are set.

[00:07:52]They are kind of strict. You have a high tax rate but they let you to play. They let you play after that. Now this is the sensitivities. You can see the 2026 uh second half of 26 sensitivities. DTF gas, North American gas, hedged, unhedged. You can see the diff the delta between these two. Uh that's the hedging part and then you can see the basically of course the majority of the impact is coming from how North American gas prices behave and how European gas prices behave. This is a gas heavy player. Uh of course Canadian gas uh AON never moves what you need for Ako to move his infrastructure LNG and pipelines to the US. Now looking at the outlooks for 2026 is looking at this. So like 120k uh which I just said the company now did like 125. So they they above guidance for the first quarter and this is their fiveyear outlook. So using these numbers for capex for production growth. Uh I'm going to do two valuations. So valuation one I use the capex and I use the production guidance and this is going to be my free cash flow number here and the free cash flow discounted value here. So 10% discount rate. So let's say that's 25 per share.

[00:09:06]If I use the company's this number 1.7 billion free cash flow, I adjust it for the growth. So it it slowly grows, then I get a discounted free cash flow value based on company projections of like 22.

[00:09:19]So that's how you should think about this. Much of this will depend on oil and gas prices especially in North American gas and European gas. How how they can uh hedge going forward or or don't hedge and then capture the upside.

[00:09:32]If there is upside we we don't know if the Middle East situation resolves. I'm betting that it will not resolve fast.

[00:09:39]But that's that prices uh balance sheet of course I said they have rather high depth 61% and their interest coverage ratio is not great. uh Canada EU regulatory stuff and of course the big item is always management has to execute on all of these projections to make my numbers anything reasonable so everything is dependent on that to summarize increased production so great maintain guidance great but the pricing was kind of weak uh against Q1 2025 financials I don't like it depth up coverage ratio is weak 59% of your 26 second Half of EU gas is hedged. So you're making money in EU gas and liquids and you overhedge. Do you know what you want to hedge like POT? POT hedged their Canadian AO to the downside and they're going to be really doing fine. They are hedging EU gas man.

[00:10:35]That's uh that's something right and then they have a 100 300 million hedge loss on the income statement. They had they have really decent free cash flow.

[00:10:43]So that's a thumbs up. and then their profitability based on that free cash flow is also pretty good times up valuation. So let's say 22 to 25 and then currently the stock is trading at 16. So there is a case to be made that it's cheap enough to play uh 14% free cash flow yield just annualizing Q1 although capex was weaker to one by weaker I mean below guidance if you just average out the guidance for like divided by four so every quarter should be X based on that capex was weaker so 14% free cash flow might be a bit more maybe it's 10 12 uh dividend 3.3% price to book 1.2 too. So, it's kind of cheap.

[00:11:23]But that said, you need edges to work out in the future better. You need execution from management. You need still decent gas prices in and North America and Europe to for valuation to work. And you need the balance sheet to not kill the business.

[00:11:40]Maybe I'm overestimating a bit. 61% equity is not horrible. Um, if you think about free cash flow of 400 million, right? or 350 million or something. If you have a depth of 1.2, that's like three times, four times your free cash flow. So, not horrible, not a horrible balance sheet, but I'm just getting more cautious as I see the credit cycle could turn on uh everybody. And then you don't want to be the guy with the levered balance sheet. Now, looking at the company, you see it here with the decent upside 53%. So there might that might be enough margin of safety, decent free cash loil, but as said uh looks relatively cheap. There are some concerns, so maybe it's on the watch list more than than anything else. Uh for me at least. So thanks everybody for watching and I'll see you in the next one. Take care.