London, UK, 14 September 2020

Edison issues outlook on Vermilion Energy (VET)

Vermilion Energy's geographically diverse portfolio spreads geopolitical and pricing risk across different economies. The company has grown both organically and inorganically, and has delivered on environmental, social and corporate governance (ESG) objectives, being highly rated across multiple ESG rating platforms. Notwithstanding this, Vermilion has been affected by COVID-19 and has had to reassess its strategy on cash returns to shareholders. The board suspended the dividend, appointed Lorenzo Donadeo and Curtis Hicks as executive chairman and president of the company respectively, and created an executive committee. The committee's mission is to reinstate Vermilion's core business principles and restore investor confidence in this diverse, flexible operating company. We have updated our valuation using FY21e metrics, resulting in a blended valuation of C$9.6/share. However, the valuation remains highly sensitive to commodity price assumptions.

Our valuation of Vermilion is now based on a blend of FY21e P/CF and EV/EBITDA multiples, and FY21e FCF + growth. Its peer group currently trades at a c 52% discount to end-2019 values, still reflecting the impact of COVID-19 on commodity prices. However, Vermilion is trading at a c 80% discount compared to end 2019. We believe this reflects its high leverage and FY20e net debt to EBITDA level of c 3.7x compared to its peers. Our blended valuation stands at C$9.6/share, up 9% due to higher forecast price realisations in FY21.

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