Investors maybe staying away from energy stocks right now, especially the smaller ones. Who can blame them? Many have cut their dividends, including these mid-cap energy stocks: Bonavista Energy Corp (TSX:BNP), Enerplus Corp (TSX:ERF)(NYSE:ERF), and Baytex Energy Corp (TSX:BTE)(NYSE:BTE). In fact, Baytex announced in August that it was eliminating its dividend for the time being. Well, among these companies, there’s one that’s still maintaining its dividend thus far.
Vermilion Energy Inc (TSX:VET)(NYSE:VET) has never cut a dividend since 2003. If you’re looking for an opportunity for an oil price comeback, Vermilion Energy maybe a safer energy stock compared to its peers above.
Vermilion Energy remains a stable investment in the mid-core energy realm with its global asset diversification. Vermilion Energy’s global asset portfolio, in Europe, North America, and Australia, provides commodity diversification and premium pricing compared to asset portfolios solely located in North America. For example, Vermilion’s European Gas portfolio is projected to contribute 26% of its FFO, and European gas prices are 3 times higher than in North America.
Vermilion Energy’s Dividend Sustainability
At $43 per share, Vermilion Energy yields 6%. Can the international oil and gas producer sustain its dividend? Its trailing twelve months (TTM) operating cash flow was $621M. In the last 12 months, it paid out $281.2M of dividends. So, that equates to a payout ratio of 45.3%. Using the stricter metric of free cash flow (FCF), Vermilion’s payout ratio would be 50.8%.
Add in the fact that the company evidently reduced capital spending (capex) recently, making the dividend safer. 2014’s capital spending was 48.3% less than 2013’s. And the TTM capex was 76.9% less than 2014’s.
Going forward, if Vermilion Energy maintains its monthly dividend of 21.5 cents per share, it’ll be paying out $284M for the next 12 months. Based on its TTM FCF, we get a payout ratio of 51.3%. So, there’s some margin of safety in case the oil price falls further.
If you’re looking for a low-risk, mid-cap energy stock for an oil price comeback, Vermilion Energy maybe your company. You will get some capital appreciation from Vermilion when the oil price goes higher, but if you’re looking for an energy comeback story targeting for outsized capital appreciation, you might consider other mid-cap companies whose prices have fallen further. They’re however higher risk companies.
Keep in mind that the oil price hasn’t bounced back yet and doesn’t seem to be bouncing back soon, so there’s no rush to buying any energy companies. If anything, maybe a small nibble is warranted on dips.
This article focuses on Vermilion Energy. For the original article that compares the debt and profitability of Vermilion Energy with its competitors: Bonavista Energy, Enerplus, and Baytex Energy, visit this Seeking Alpha article.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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