Vermilion Energy (VET)

Oil & Gas company that will earn ~40% of its value in 2022. #COM 🇨🇦

Foreword

Vermilion Energy, trading in Toronto and New York, is a Canadian Oil & Gas company established in 1994. The company has gone through a number of ups and downs, even once converting into a trust and then converting out of it!

This stock has made and lost a lot of money for investors. In fact it was steadily dropping from 2014 until bottoming in mid-2020 at ~$3.*

*Lest we get confused, all dollar amounts stated herein will be Canadian unless otherwise specified. 🇨🇦💲

What happened? 📉

Brent Crude Oil was hovering above US$100 per barrel from mid-2011 to mid-2014. All that was great for oil producers but in 2014 something changed. Prices started to crash violently for a year until they bottomed at $30. All this volatility cost energy producers, resulting in highly reduced profits.

But it cost shareholders too. The stock peaked at $78 and and moved down to $20 pre-Covid, at which point (i.e. Covid appears) the bottom fell out and it moved down to $3.*

*Remember: during 2020 spot crude oil hit negative pricing.

Then the pivot

Oil & Gas hit a hard bottom in 2020 and has been rallying ever since. The economy reopening and insatiable demand for fossil fuels has supported the prices of these two energy commodities. Prices not only recovered and surpassed the pre-Covid peaks but rallied even further 🚀

This whole ESG theme together with the current U.S government (Democrats!) fighting producers is keeping investment in the sector low and hence production low - while demand is insatiable.

Biden suspends oil & gas drilling, January 2021.

Climate change proponents may have a point, but I see no viable alternative solution to our energy needs. Alternative sources of energy are still not a significant component of total energy production - and I have no seen no massive wave of nuclear energy adoption. Electric vehicles still consume electricity, they don’t run on air, yet … 🚗💨

The process of independence from fossil fuels and decarbonisation will not only take decades, but will require heavy investment into infrastructure, technology adoption and adequate mining of the required metals. The transition will not be easy - in my opinion politicians in both the US and EU are dreaming when they think this will be easy.

⚡️ My tweet thread on the EU’s REPowerEU plan and its non-viability. 😢

Oil & Gas is our only viable solution

These fundamentals pushed energy prices higher and higher, helping energy producers make a killing. But there was another development happening backstage: 👇

In March and April 2021, Russian Armed Forces began massing thousands of personnel and military equipment near Russia’s border with Ukraine and in Crimea, representing the largest mobilisation since the annexation of Crimea in 2014. This precipitated an international crisis due to concerns over a potential invasion. Satellite imagery showed movements of armour, missiles, and heavy weaponry. The troops were partially withdrawn by June 2021, though the infrastructure was left in place. A second build-up began in October 2021, this time with more soldiers and with deployments on new fronts; by December over 100,000 Russian troops were massed around Ukraine on three sides. Despite the Russian military build-ups, Russian officials from November 2021 to 20 February 2022 repeatedly denied that Russia had plans to invade Ukraine.

This geopolitical goings on supported energy prices until the eventual official Russian invasion into Ukraine on February 24th, which caused them to explode even higher. 🧨🚀

To illustrate, Dutch TTF (European Gas) was trading at $34/MMBtu pre-invasion and now sits at $75/MMBtu (2.2X higher).

Pre-Covid it was only at $5-6/MMBtu.. That’s pure margin for Vermilion. 💰

So what does Vermilion’s portfolio look like?