Vermilion Energy Inc. (NYSE: VET) has agreed to acquire Canada-based Leucrotta Exploration Inc. for $477 million. The closure of the transaction, expected in May 2022, is subject to fulfillment of customary closing conditions and receipt of regulatory approvals.
Along with the buyout news, Vermilion also communicated its revised projections for 2022 and talked about its strategic objectives.
Shares of Vermilion lost 7.3% to close at $21.73 on Monday.
Vermilion is an oil and natural gas exploration and production company. It is headquartered in Calgary, Canada.
Details of Leucrotta Buyout
Leucrotta, an oil and natural gas exploration and development company, has 77,000 net acres of land base in Northwest Alberta and Northeast British Columbia (in the Mica area). Its Montney mineral rights can provide more than 20 years of drilling inventory.
The Leucrotta assets are likely to produce 13,000 barrels of oil equivalents per day (boe/d) in 2023. Production capacity (plateau production base) is likely to grow to 28,000 boe/d in the years ahead. Annual fund flows from operations from these assets are expected to be $135 million and free cash flow to be $25 million in 2023.
Regarding the financial aspect of the transaction, each share of Leucrotta will be acquired by Vermilion for $1.73 per share.
Per the terms agreed, Vermilion will obtain a 12.5% stake in ExploreCo in a $14 million transaction. On the other hand, Leucrotta shareholders will get one ExploreCo share and 0.1917 share purchase warrant of ExploreCo in exchange for every Leucrotta share held by them.
ExploreCo will be a new company formed from $43.5 million cash and a certain portion of the land base of Leucrotta. This company will be managed by Leucrotta’s team.
Projections for 2022
With the closure of the Leucrotta buyout expected in May, Vermilion has revised 2022 projections, which include the impacts of the buyout.
The company increased its capital budget to $500 million for exploration and development activities. Likewise, it hiked the production guidance (annual) to 86,000-88,000 boe/d.
Exiting the year, the company predicts its corporate production to be 95,000-100,000 boe/d.
Strategic Objectives
Laid down in 2021, the company’s VETVision for 2030 aims at achieving debt reduction to the tune of $600 million by 2023 (compared with 2020 levels) and by $1 billion by 2025; undertaking buyout activities for strengthening its foothold in the gas market of Europe and boosting the existing portfolio; and undertaking actions to expand Tier 1 inventory, helping increase return on capital in the long term.
Official Comments
With the Leucrotta transaction announced, Vermilion communicated that it has conducted more than $1.2 billion worth of buyouts in North America and internationally in 2021 and 2022. These buyouts have been funded entirely through free cash flow, with no equity issuances announced.
Stock Rating
Four days ago, Jeremy Mccrea, an analyst at Raymond James, reiterated a Buy rating on Vermilion with a price target of $30.4 (39.92% upside potential).
Vermilion has a Moderate Buy consensus rating based on four Buys and five Holds. Vermilion’s average price target of $24.94 suggests 14.77% upside potential from current levels. Over the past year, shares of Vermilion have surged 194.8%.
News Sentiment
Per the TipRanks tool, News Sentiment for Vermilion is currently Neutral based on 10 articles over the past seven days. 100% of the articles are Bullish on VET, compared to the sector average of 64%.
Conclusion
The Leucrotta acquisition is in sync with Vermilion’s strategic objectives. With this buyout, Vermilion’s footprint in North America will strengthen, especially in the Montney area.
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