DBRS Confirms Vermilion Energy Inc. at BB (low), Changes Trends to Positive

DBRS has today changed the trends on the Issuer and Unsecured Notes (the Notes) ratings of Vermilion Energy Inc. (Vermilion or the Company) to Positive from Stable, and confirmed both ratings at BB (low). The recovery rating of the Notes has also been changed to RR4 from RR3 due to the upsize of the Company’s credit facility. The recovery rating change does not have an impact on Vermilion’s ratings. The trend change reflects Vermilion’s proven track record in growing its geographically diversified production, while maintaining a relatively solid financial risk profile. Should key credit metrics remain relatively stable and production reach over 50,000 barrels of oil equivalent per day (boe/d) with the Corrib gas project (Corrib; first gas expected by mid-2015 with peak net production of 9,700 boe/d) commencing commercial operations as planned, Vermilion’s credit ratings could be upgraded by one notch.

Vermilion’s business risk profile is reflective of a BB rating, underpinned by its internationally diversified portfolio of assets and solid size for the current rating category. In 2013, Vermilion increased its gross production by approximately 8% to 40,005 boe/d and is on track to achieve nearly 50,000 boe/d (gross) in 2014 (46,667 boe/d (gross) in Q1 2014). Production growth is expected to be driven by its recent acquisitions, including Elkhorn Resources Inc. (Elkhorn Resources) in Southeast Saskatchewan and assets in Germany, as well as organic growth in Canada (primarily in the light oil Cardium play), France and the Netherlands. The recent acquisitions are expected to add approximately 6,050 boe/d (gross) of production in 2014, further providing the Company with considerable growth in scale (production was approximately 32,000 boe/d (gross) when ratings were first assigned in 2011).

Vermilion’s key credit metrics are strong for its current ratings, supported by reasonable debt levels and strong operating cash flows that largely benefit from high Brent crude oil and European gas prices. Despite weakening moderately in 2013 following an increase in debt levels to fund free cash flow deficits and acquisitions, key credit metrics remained solid for the current rating category. Going forward, incremental operating cash flows from the recent acquisitions, combined with an equity issuance of $205 million in April 2014, are expected to offset the negative funding pressures arising from higher planned capex and the Elkhorn Resources acquisition (total consideration of approximately $427 million). In addition, the completion of Corrib will likely further improve the Company’s financial risk profile over the medium term. However, if the commodity pricing environment weakens and significantly affects Vermilion’s operating cash flow, DBRS expects Vermilion to curtail its capex program and/or reduce dividends to preserve liquidity.

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

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Oil and Gas Industry (July 2013), which can be found on our website under Methodologies.