DBRS Confirms Vermilion Energy Inc. at BB (low), Stable Trend

DBRS has confirmed the Issuer and Unsecured Notes ratings of Vermilion Energy Inc. (Vermilion or the Company) at BB (low), with a recovery rating of RR3, all with Stable trends. The confirmations are based on results and corporate developments in the six months ended June 30, 2012 (H1 2012).

Vermilion has benefited from favourable commodity pricing, despite a decline in crude prices in the second quarter of 2012. Although credit metrics weakened modestly during the period, they remain strong relative to the parameters of the rating category. Adjusted debt-to-capital increased to 26.9% (from 24.2% at YE2011). In addition, debt-to-cash flow increased to 0.90 times (x) for the twelve months ending June 30, 2012 (from 0.83x in 2011).

Operating cash flow for H1 2012 increased due to higher production; however, this was not sufficient to fund capital expenditure (capex) and dividends for the period. Given Vermilion’s increased 2012 capex guidance ($450 million) to fund its aggressive growth plans (50,000 boe/d gross by 2015) and dividends expected at approximately $220 million for the year, DBRS estimates a cash flow deficit of roughly $100 million to $200 million (based on H1 2012 results), which is expected to be funded through dividend re-investment plan (DRIP) proceeds and existing credit facilities. During the Company’s growth phase, DBRS expects free cash flow deficits to continue, at least until production from the Corrib operations in Ireland (9,000 boe/d net to Vermilion) comes on-stream in late 2014; however, the Company has previously managed similar free cash flow deficits and is expected to have sufficient flexibility to curtail capex to maintain credit metrics at the BB (low) level.

As DBRS expected, Vermilion increased its secured credit facility to $950 million from $800 million in May 2012 in order to fund its accelerated growth to 2015. DBRS incorporated the impact of the potential upsizing of the secured debt, which ranks ahead of the unsecured notes, on Vermilion’s ratings (refer to the DBRS report on Vermilion dated January 6, 2012).

The Company’s rating is limited by its relatively small scale of operations. Although situated in safe international markets, significant operational disruptions or sustained pricing declines could have detrimental consequences on the Company’s financial profile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Oil and Gas Companies and DBRS Criteria: Rating Leveraged Finance, which can be found on our website under Methodologies.