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Why Shares of Vermilion Energy Fell More Than 20% in August

John Bromels, The Motley Fool

What happened

Shares of Canadian oil and gas producer Vermilion Energy (NYSE: VET) fell 20.6% in August, according to data provided by S&P Global Market Intelligence. While many U.S. oil and gas companies also saw double-digit share price declines in August, Vermilion's drop was one of the worst in the sector.

So what

Oil prices fell in August, by around 5%. When oil prices fall, production companies are often the first and the hardest to be hit. But Vermilion's 20.6% drop was much steeper than the drop in oil.

A row of oil pumps in a desert landscape

Vermilion Energy hopes it can continue to outperform while funding both growth projects and its dividend. Image source: Getty Images.

Vermilion has aggressive capital spending plans, and a high dividend payout -- with a 13.2% current yield. It will take some serious cash flow to sustain both. Management seems to think it can do both as long as oil prices stay above $55 a barrel. My Motley Fool colleague Reuben Gregg Brewer has crunched the numbers and thinks this scenario might be a bit rosy, but let's assume for a moment that management is right.

On Aug. 7, Brent crude prices fell to $55.03, while WTI crude prices hit an alarming $51.14. They've recovered somewhat since, but there's no guarantee they couldn't slide back to those levels...or even lower. If management can't fund both its growth plans and the dividend, something's gotta give. It looks like investors may have been worried that what will give will be the dividend, prompting them to exit the stock.

Now what

With oil prices on the wane, most independent oil and gas exploration and production companies have seen their share prices tumble. Nobody knows whether those prices will fall further, stabilize, or even rise in the near future, let alone the long term. If prices don't rise, though, or if they fall further, Vermilion's management is going to have to make some painful choices about what and where to cut. Investors may not want to buy in before those decisions are made. 

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John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com