Vermilion Energy Stock Is Trading Near Its 52-week Lows – Time to Invest?

VET stock has lost 48% since last August, notably lagging peers.

| More on:
Hand writing Time for Action concept with red marker on transparent wipe board.

Image source: Getty Images

The energy sector has been losing steam for the last few months, largely due to volatile oil prices. However, some top performers of 2022 have been losing value fast. One from the pack is Vermilion Energy (TSX:VET). The stock has lost 48% since last August and is currently trading close to its 52-week lows. VET broke below $20 apiece last week, and hit a 52-week low of $17 in January 2022.

What’s next for Vermilion Energy stock?

Same time last year, VET stock had strong momentum. From January to August, Vermilion shares jumped 130%, beating peers by a big leap. But this year could unfold differently for Vermilion due to windfall taxes in Europe.

Vermilion significantly differentiates itself from peers due to its diversified asset base. It derives nearly one-third of its consolidated revenues from European energy assets. While this exposure was mainly behind its outperformance last year, the same has weighed on it since August.

Also, natural gas prices have been on a decline for the last few weeks due to warmer weather. The drop has been even faster in Europe, which has weighed terribly on VET stock.

Vermilion and windfall taxes

Vermilion Energy paused its share buyback plan last year amid uncertainties that windfall taxes brought in. Last week, it released guidance for 2023 that announced an expected 25% dividend hike and restarted its share buyback plan.

However, the latest guidance could not uplift investor sentiment. This is because though it had some respite, the guidance came with some new issues. The production guidance for the year came in below expectations, which somewhat marred the sentiment. Thenoil and gas produced intends to produce around 89,000 barrels of oil per day in 2023; that’s much lower than analysts’ expectations.   

As per the guidance, Vermilion Energy expects windfall taxes to cost it around $250 million to $300 million for 2022 and 2023, respectively. That’s almost a quarter of its annual profits. But this impact seems to be already priced into the stock.

Financial growth and valuation

Vermilion Energy reported free cash flows of $507 million in the last 12 months, representing a handsome 54% growth compared to 2021. Interestingly, it utilized a large portion of this incremental free cash flow for debt repayments. As a result, long-term total debt fell from $2 billion in 2020 to $1.4 billion at the end of Q3 2022. This declining debt will lower its interest expense and ultimately improve profitability going into 2023.

Vermilion Energy stock looks tempting after its recent drop. On the valuation front, the stock is trading at a free cash flow yield of 21% compared to its peers’ average of around 16%. VET looks attractive trading at a price-to-earnings ratio of three times. So, this could be a prudent time to enter VET, given the discounted valuation.

Risk priced in

A higher windfall tax impact and lower gas prices form key risks for Vermilion. But both these risks look already baked into the stock price. So, if gas prices stabilize here, we might see limited downside in VET stock from its current levels.

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

More on Energy Stocks

Energy Stocks

Algonquin Power & Utilities Stock Just Hit 52-Week Lows: Is it a Good Stock to Buy? 

Algonquin Power & Utilities (TSX:AQN) is trading near its seven-year low after dividend and outlook cuts. Is it a buy…

Read more »

tsx today
Energy Stocks

TSX Today: Why Canadian Stocks Could Fall on Tuesday, January 31

Despite the expected weakness in stocks today, the TSX index is on track to end the first month of 2023…

Read more »

Oil pumps against sunset
Energy Stocks

5 Things to Know About ARC Resources Stock in January 2023

Should you buy ARX stock?

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

2 Energy Stocks That Could Hold Up if Oil Prices Turn

Suncor Energy (TSX:SU) and Cenovus Energy (TSX:CVE) are great energy stocks that could continue higher through 2023.

Read more »

oil tank at night
Energy Stocks

2 Sub-$3 TSX Energy Stocks I’d Buy in 2023

Here are two under-$3 TSX energy stocks you can buy in 2023 and hold for the long term.

Read more »

A bull and bear face off.
Energy Stocks

2 Top TSX Energy Stocks to Buy as Crude Oil Is Set to Soar Higher

TSX energy stocks might keep topping charts in 2023 as well.

Read more »

Oil pumps against sunset
Energy Stocks

Is the Oil Boom Over?

The energy boom is over but dividend stocks like ARC Resources (TSX:ARX) are still attractive.

Read more »

Road signs rerouting traffic
Energy Stocks

2 High-Yield Energy Stocks I’d Buy and 1 I’d Avoid

I would buy energy stocks like Enbridge Inc (TSX:ENB) this year.

Read more »