Do you want a dividend stock in your TFSA that gives you exposure to the energy sector?
Do you want to have exposure to the upside strong oil and gas prices provide?
If you have answered yes to these questions, then you have probably struggled with finding the right energy stock.
While energy stocks in Canada have been reeling off of a very difficult oil and gas market, with a lack of infrastructure (pipelines) causing oil and gas to be trapped, driving down Canadian oil and natural gas prices, energy stocks that have exposure to international prices have been faring much better.
Stocks such as Vermilion Energy Inc. (TSX:VET)(NYSE:VET), which has an internationally diversified production base with production flowing from places such as Western Canada, France, Australia, and Germany, to name a few.
In effect, this has given Vermilion 2018 price realizations of $71.80 for its oil and natural gas liquids (ngl), and $5.46 for its natural gas.
To put this in perspective, Canadian natural gas prices were below $2.00 for much of 2018, and Western Canadian Select oil prices were well below $40 for most of 2018.
Back to Vermilion.
With a dividend yield of 8%, investors are surely nervous of a possible dividend cut.
In response, I would like to look at a few data points.
Yes, dividends exceed net income, and while they are covered by operating cash flow, when we include capital expenditures, the company is using money it doesn’t have for dividend payments.
As a result, the company has been issuing debt, and its debt to equity ratio is above 40%. Its net debt to trailing cash flow ratio is 2.1 times, however, which is very healthy.
But, the company is free cash flow negative due to its dividend, which makes this stock and its divided somewhat risky.
For comfort, we can point to the fact that Vermilion has never cut its dividend and has raised it four times since its inception, so we can see the commitment from management there.
The stock trades at a premium given its international diversification and its exposure to Brent pricing and higher European gas pricing. This is deserving of a premium so I do not see risk in valuation.
So I think the dividend is safe for now, but it is obviously a point of worry.
If oil and gas prices maintain their rally and/or rally further, Vermilion is a quality oil and gas stock for its reserve life of nine years and for its continued to replacement of its production at an impressive pace.
When you buy heavily cyclical stocks at low prices… and then hold the shares until the cycle reaches its peak… you can make a very healthy profit.
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Fool contributor Karen Thomas has no position in any of the stocks mentioned.