Published:
January 30, 2008
Vermilion Energy Trust (OTC:
VETMF; TSX: VET-UN.TO, $34.72)
is a Canadian oil and gas energy
trust that operates in Canada and
internationally.
The company has paid a dividend of
$0.17 monthly per share since its
inception in early 2003. Starting
with the January distribution, this
payout has been increased to $0.19
per share, or $2.28 per annum. Based
on current prices, that translates
into a yield of 6.5%. The company
also has a dividend reinvestment
plan.
Vermilion is the only Canadian-based
oil and gas energy trust with
international (outside of the U.S.
and Canada) production.
Approximately 40% of its cash flow
comes from Canada, 46% from France
and the Netherlands, with the
balance of 14% from Australia. The
basis of Vermilion's overseas
strategy is to purchase existing
fields at attractive prices, below
those they would have to pay for
equivalent production in Western
Canada. Vermilion then attempts to
increase production with low-risk
drilling.
Vermilion's efforts have seen
increasing production. For the third
quarter, the firm produced over
32,172 boe (barrels of oil
equivalent) daily, a +4% increase
over the second quarter and
substantially ahead of the same
period for 2006.
The company is weighted toward light
oil. It estimates that 60% of 2008
production will come from light oil,
while gas will account for only 22%,
and the remainder will come from
oil-based gas and natural gas
liquids. With oil hovering near
record prices but gas in oversupply,
the company's oil-gas mix is clearly
tipped in Vermilion's favor.
The company also owns a 46% stake in
international explorer Verenex (TSX:
VNX.TO), a Toronto Stock Exchange
listed company with a 50% interest
in a 1.5 million acre permit located
in Libya. VNX drilled seven wells in
2007 and plans another 12 to 14 by
early 2009. Exploration success by
Verenex would likely translate
favorably to Vermillion's share
price.
Vermilion is operated very
conservatively. Its 2007 estimated
year-end debt to 2008 estimated cash
flow was 1.2 times, compared to the
approximately 2.2 times of its
energy trust peer group.
It also has maintained a very low
payout ratio. In the third quarter
of 2007, funds flow from operations
was $1.36 per unit compared to
distributions of $0.51, a payout
ratio of less than 40%. This low
payout provided the basis for the
increase in the distribution to
$0.19 a month in 2008. It also gives
Vermillion flexibility to respond to
the changes in royalty trust
taxation when they occur in 2011.
Clearly the situation is not without
risk. Oil and gas prices are nothing
if not volatile. The Canadian dollar
is at parity with its U.S.
counterpart, a level it last enjoyed
in the 1970s. A decline from that
lofty perch, as a recent piece in
Barron's predicted, would decrease
the value of the distributions for
U.S. holders.
Vermilion is a conservatively
managed oil and gas trust which
combines safety and a reasonable
dividend; it is suitable for
investors willing to accept the
inevitable commodity price and
currency risk.Good investing!
Carla Pasternak
Editor
High-Yield
Investing
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