We came across a bullish thesis on Vermilion Energy Inc. (NYSE:VET) on Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on VET. Vermilion Energy Inc. (NYSE:VET)’s share was trading at $9.12 as of Dec 24th. VET’s trailing and forward P/E were 2.54 and 13.32 respectively according to Yahoo Finance.
An industrial oil and gas plant, with stacks of pipes issuing steam into the sky.
Vermilion Energy (NYSE:VET) finds itself at an inflection point, presenting a nuanced investment case that blends potential with frustration. Since June, VET’s share price has declined by 19%, alongside a 5.5% reduction in outstanding shares. This contraction reflects broader trends in the Canadian energy sector, where peers focusing on aggressive share buybacks have fared better. However, Vermilion’s recent $1.075 billion CAD acquisition of Westbrick’s Deep Basin assets, comprising 50,000 boe/day of primarily natural gas production, could mark a turning point. The deal was struck at a favorable valuation and integrates well with Vermilion’s existing Deep Basin operations, signaling efficiency gains without overhyped synergies. Management’s conservative natural gas price projections suggest the acquisition will be cash flow accretive, further strengthening VET’s position.
Despite these positives, Vermilion’s approach has not escaped criticism. CEO Dion Hatcher’s unwavering focus on drilling programs, while yielding operational excellence, has led to elevated growth capex, suppressing net income and alienating quantitative strategies that prioritize profitability metrics. This aggressive capital allocation contrasts with market expectations for heightened shareholder returns, particularly during periods of weak natural gas prices. Over the past two years, VET retired $1 billion CAD in debt, only to re-leverage for this acquisition, highlighting its strategic oscillation between debt reduction and growth ambitions. Yet, share buybacks have accelerated, reducing the share count from 169 million to 155 million, with room for further reductions.
The acquisition also reshapes VET’s production profile, reducing international exposure from 37% to 23% while increasing domestic production potential. This shift dilutes the impact of European natural gas prices but enhances the per-share upside should a cold winter materialize. Moreover, with North American natural gas prices near breakeven levels, any recovery towards $4 per mmbtu represents a significant windfall, especially given the embedded profitability of liquids production.
Vermilion’s dual “lottery tickets” of European and North American natural gas markets remain compelling, particularly as the company positions itself for production growth from 84,000 boe/day in 2024 to 126,000 boe/day in 2025. At current valuations, VET offers an attractive yield—23% return to shareholders and a trailing twelve-month free cash flow yield of 33%. Management’s next moves, particularly around balancing growth capex with shareholder returns, will determine whether these metrics translate into sustained share price appreciation.
However, VET’s undervaluation also makes it a potential target for a hostile takeover. While its scattered asset base and debt load may deter suitors, the recent consolidation of Deep Basin acreage could make it more attractive. A buyout at a modest premium would cut short the opportunity to fully capitalize on VET’s long-term potential.
In summary, Vermilion Energy is a paradox: undervalued with substantial potential but hampered by management’s shareholder-unfriendly reputation. The company’s trajectory hinges on whether its recent strategic moves catalyze a shift in market perception. For patient investors, VET offers a tantalizing mix of yield, growth, and optionality, making it difficult to dismiss despite its flaws.
Vermilion Energy Inc. (NYSE:VET) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 13 hedge fund portfolios held VET at the end of the third quarter which was 16 in the previous quarter. While we acknowledge the risk and potential of VET as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VET but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.