In a July 29 research note, analyst Dave Popowich reported that CIBC reiterated its Outperformer rating on Vermilion Energy Corp. (VET:TSX) because it "consistently ranks among the highest netback producers in our coverage universe."
However, CIBC's "conviction has decreased somewhat following Q2/19 results," added Popowich, and accordingly, the bank revised its estimates on Vermilion. For one, it reduced its cash flow per share forecast for 2019 by 3% to $5.85 and for 2020, by 6% to $5.52. Also, it projects year-end 2019 net debt at 2.2 times.
Those and other changes led CIBC to decrease its target price on Vermilion to $32.50 per share from CA$35. In comparison, it is currently trading at around $23.62 per share.
Of concern to CIBC is that Vermilion's "rising financial leverage is increasingly becoming a key risk to the stock's valuation," Popowich pointed out, particularly since the company chose to spend capital rather than reduce debt in H2/19. Investors are questioning whether Vermilion will be able to sustain its capex requirements and its dividend.
Vermilion should be able to manage both, CIBC estimated based on its 2019 adjusted payout ratio calculation of 102%, recently up from 100%. However, "execution will be critical for Vermilion through year-end," Popowich commented. If the company can "produce near the high end of its annual guidance range, it will be much better equipped to address questions about the sustainability of its business model."