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

DBRS has today 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 reflect DBRS’s view that Vermillion is on track in its production growth strategy while maintaining a solid financial profile.

Vermilion produced approximately 36,156 barrels of oil equivalent per day (boe/d) or a 7% increase over 2011, and is on track to achieve 50,000 boe/d in 2015. The 2012 production growth largely reflected a strong growth in crude oil and NGL production in Canada (all organic) and crude oil and natural gas production in France (both organic and acquisitions). Production in 2013 is expected to reach between 39,000 and 40,500 boe/d, supported by increasing development activities in the Cardium light oil plays, the December 2012 acquisition of a 100% working interest in crude oil production in France (850 boe/d) and higher drilling activities in the Netherlands. Should Vermillion achieve its expected production levels in 2013 while maintaining a stable balance sheet, a positive rating action could occur.

Vermillion’s financial profile remained solid and was well within the current rating range, supported by strong cash flow, which largely benefited from high Brent crude oil and European gas prices (43% of production is tied to Brent pricing and 17% is tied to European gas pricing). High cash flow helped to reduce free cash flow deficits in the year, despite high capex. In 2012, Vermillion completed two major acquisitions of natural gas and crude oil assets in France, for a total of approximately $181 million. The cash flow deficits and the acquisitions were largely financed with borrowings from the bank facility, which resulted in a notable increase in leverage (from 24% to 34%) and debt-to-cash flow ratio (from 0.83 times (x) to 1.21x). Despite this increase, these credit metrics were still solid for the current rating. However, should commodity prices decline sharply for a sustained period, Vermillion’s credit metrics could be severely affected, which could impact its current rating. Under this scenario, DBRS expects the Company to either curtail its capex and/or dividends to preserve its liquidity. In this regard, DBRS believes that Vermillion has a lower degree of capex flexibility with its operations in Europe than in Canada, due to a much longer regulatory process in obtaining permits and licenses.

Other key challenges facing Vermillion include higher risks associated with its offshore operations (approximately 20% of production) and high reserve replacement costs compared to its peers.

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

The applicable methodologies are Rating Oil and Gas Companies and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.