Could anyone in western Canada have pulled off a transaction like this short of perhaps Suncor? Probably not, it takes a level of sophistication that good companies otherwise locked (by habit or comfort) in North America could not achieve.
Corrib is a known asset. VET already was the operator despite owning only 22%. Now they have 58%. It is generating gobs, literally gobs, of cash. By hedging out almost all the risk over the next 2 years (I can't wait for the complaints 12 to 18 months from now about VET's excessive Euro-NG hedging lol), they pay net $0 formthe asset and more importantly, GUARANTEE hitting not their fake-o debt target of 1.5x but their real target, the one they were faithful to for almost 20 years, sub-1.0x. This in Canada is the gold standard of fiscal sobriety, the one you have to respect over the cycle to be an A+ management team.
And it took exactly 0 shares to do it. This is wildly accretive. I wonder what possessed Equinor? It may be that their recent Norwegian oil finds have a heavy investment cycle in front of them so they pruned mature assets in anticipation. Or perhaps they got out of an asset where they weren't the operator, always a good plan. The result may just have been a case of win, win. Either that or onset of momentary insanity.
But regardless, this acquisition accomplishes several things. One, debt stress is in the rear view mirror, today. And correspondingly much less stress within 12 months despite the $500m acquisition ($300 net of expected cash flow to mid-2022 closing). Two, it increases exposure to Euro-NG at a time when they can hedge (I.e.: virtually no risk) at $130/b NG pricing (insanely good). And three, it allows a down payment (the language couldn't be more plain other than to provide the % yield) on the real income rate a that will emerge in a stepwise fashion.
I'm pleased they resisted the temptation to listen to people who expected more. I'd much rather start modestly and continue to paydown debt below 1:1 than start too high and have to backtrack later if (more like when) a black swan hits. Besides, coming out now with a 5%er out of the blocks would have been negatively perceived by the markets as being imprudent. And shooting your bolt all at once takes away the benefit of multiple announcements over the next 18-24 months with better and better income levels.
Historically, VET (pre-Marino) subscribed to a hybrid model of modest growth for cap. gains and modest income (4-5%, mid-cycle) for the coupon clippers. I expect we'll ease towards that every 6 months or so (unless they make additional masterful M&As) over the next 18-24 months. I don't mean the next raise is 18-24 months away, I mean that I expect then to hit the 4-5% range in that time period with baby steps. But by then, my expectation is that they be paying a sustainable $1.25/sh. on a $25 share price. We'll win twice, once by virtue of hitting 4+% and secondly because the iterative increases will push the divisor (the share price) higher. By then, I back-of-the-envelope (I'll be more accurate at some point way down the road when it matters) calculate they'll need 1/6 to 1/7 of the cash flow and only 20-25% FCF to pay their ultimate dividend. On top of the 20% of cash flow needed for capex to maintain the business. Which leads one to ask....WHAT THE HECK WILL THEY NEED THE OTHER 64% OF CASH FLOW FOR????? (A: SHARE BUYBACKS AND SPECIAL DIVS.)
No, things are proceeding just nicely with Vermilion. Thank heavens Loenzo Donadeo gave Anthony Marino the boot.