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Oil & Gas Firm's Q2/19 Results Drive Lower Target Price, Same Rating
Research Report

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The rationale and an explanation of the downgrade are discussed in a CIBC report.

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."


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Disclosures from CIBC, Vermilion Energy Inc., July 29, 2019

Analyst Certification:
Each CIBC World Markets Corp./Inc. research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

Analysts employed outside the U.S. are not registered as research analysts with FINRA. These analysts may not be associated persons of CIBC World Markets Corp. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Potential Conflicts of Interest:
Equity research analysts employed by CIBC World Markets Corp./Inc. are compensated from revenues generated by various CIBC World Markets Corp./Inc. businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets Corp./Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets Corp./Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.

In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets Corp./Inc. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon.

Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

Important Disclosure Footnotes for Vermilion Energy Inc. (VET)

CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Vermilion Energy Inc. in the next 3 months.

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