Vermilion Energy Stock Skyrocketed in 2022: Can It Recover From the Sluggish Start in 2023?

Vermilion Energy stock doubled in the first half of 2022 but has lost 25% so far in 2023.

| More on:
bulb idea thinking

Image source: Getty Images

This time last year, Vermilion Energy (TSX:VET) stock was the talk of the town due to its huge market-beating surge. The Canadian mid-cap energy producer is again in the news in 2023 but for being a consistent laggard.

What’s next for Vermilion Energy stock?

It doubled last year till August 2022 but has been on a constant decline since then. It has lost 25% so far, way underperforming TSX energy stocks’ 6% dip this year. Mainly the gas price correction in European markets and a windfall tax burden have weighed on it.

Vermilion Energy is a $2.6 billion energy upstream company that has operations in North America, Europe, and Australia. Almost 67% of its production comes from North America, while the rest is international. Its huge gas operations in Europe drove the financial growth last year, thanks to the gas price surge after the Russia-Ukraine war.

Vermilion produced 82.4 thousand barrels of oil equivalent per day in Q1 2023, marking a 4% drop year over year. The decline came due to an unexpected downtime in Australia. Free cash flows halved during the quarter due to lower production and windfall taxes.

Windfall taxes and Vermilion

Oil and gas prices shot up after the Russia-Ukraine war last year. Energy production companies were some of the biggest beneficiaries of this. Interestingly, they saw a significant earnings boost in the last few years, despite keeping production somewhat constant. This did not go well with regulators.

As a result, European authorities levied windfall taxes, called Solidarity Contribution, of at least 33% on energy producers. While Vermilion’s international reserve has been its key competitive edge over Canadian peers, the same has weighed on its growth in 2023.

Vermilion has attained its best financial position ever with rapid debt repayments. At the end of Q1 2023, it had net debt of $1.4 billion and a leverage ratio of 0.6 times. Almost all energy producers have seen balance sheet improvements as they focused on debt reductions. The industry-average leverage ratio was around 3 times before the pandemic, which has now improved to 0.5 times.

As many have already achieved their debt target, they distribute around 50% of their free cash flows to shareholder returns in 2023. In Vermilion’s case, it intends to distribute 25%–30% of its free cash flows via dividends and buybacks. Some of the bigwigs will move to distribute 100% of their excess cash to shareholder returns later this year.

Investor takeaway

So, Vermilion’s weakness has been evident to some extent. However, the same has made it some of the cheapest stocks in the sector. For example, it is trading 3.5 times its 2023 free cash flows, while the sector average is around 7 times. If the gas prices recover, we could see a massive surge in VET stock, driven by its depressed valuation and earnings growth potential.

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

Pumpjack in Alberta Canada
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Imperial Oil stock is in a precarious position, so what should investors consider as we head nearer to 2025?

Read more »

construction workers talk on the job site
Energy Stocks

Is Suncor Stock a Buy, Sell, or Hold for 2025?

Suncor Energy stock is trading at its decade-high on uncertainty in the oil market. Should you buy, sell, or hold…

Read more »

four people hold happy emoji masks
Energy Stocks

If You Like Exxon Mobil, Then You’ll Love These High-Yield Oil Stocks 

Here are three high-yield oil stocks with the potential to outperform over the medium to long-term.

Read more »

bulb idea thinking
Energy Stocks

2 No-Brainer Utility Stocks to Buy Now for Under $1,000

Canadian Utilities (TSX:CU) is a utility stock that may be worth a look in late 2024.

Read more »

dividend growth for passive income
Energy Stocks

Enbridge Stock: Buy, Sell, or Hold?

With a dividend yield of 6.4% and strong long-term growth profile, let's take a look at the investment case for…

Read more »

construction workers talk on the job site
Energy Stocks

Mattr Stock: Why Now Is the Time to Buy This Undervalued Gem

A top but undervalued growth stock is a buying opportunity today.

Read more »

sources of renewable energy
Dividend Stocks

Want Passive Income? This 5.4% Dividend Stock Pays Cash Every Month

This dividend stock doesn't just have a strong monthly dividend -- it also has an excellent future outlook.

Read more »

oil pump jack under night sky
Energy Stocks

Is Baytex Energy Stock a Good Buy?

Baytex Energy is a beaten-down TSX Energy stock that trades at a reasonable valuation in October 2024.

Read more »