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BMO, Scotiabank slash price targets for Vermilion Energy stock

The Calgary-based company estimates it will pay $250 million in European fossil fuel windfall taxes for 2022

Calgary-based Vermilion’s portfolio of energy assets spans three Canadian provinces, as well as Europe and Australia. (GETTY)
Calgary-based Vermilion’s portfolio of energy assets spans three Canadian provinces, as well as Europe and Australia. (GETTY)

A pair of analysts have slashed their price targets for shares of Vermilion Energy (VET.TO)(VET), calling for European windfall taxes on fossil fuels, weaker production, and higher spending to weigh on the international oil and gas producer in 2023.

Calgary-based Vermilion's portfolio of energy assets spans three Canadian provinces, as well as Europe and Australia.

Since Russia's invasion of Ukraine, lawmakers across Europe have looked to the energy industry for funds to shield consumers from hefty bills. In Ireland, where Vermilion has offshore gas operations, profits 20 per cent above a set baseline are set to be taxed at 75 per cent.

Last Friday, Vermilion released its 2023 budget and guidance, estimating it will be on the hook for $250 million in windfall taxes for fiscal 2022, and $300 million for 2023.

Speaking on a conference call on Friday, chief financial officer Lars Glemser says Vermilion firmly opposes windfall tax policies, adding they "encourage the inverse" of bringing Europe's gas supply in line with demand.

At the same time, a warmer-than-expected start to winter in large parts of the world has knocked down natural gas futures. Storage levels across Europe remain comfortably above the five-year seasonal norm.

In a note to clients on Monday, Scotiabank Global Equity Research analyst Jason Bouvier cut his price target on Toronto-listed Vermilion shares to $32 from $40, while maintaining a "sector perform" rating.

His revision follows Mike Murphy at BMO Capital Markets, who slashed his expectations to $25 from $32 on Friday, citing softer gas prices and tax headwinds. Murphy maintains a "market perform" rating on the stock.

Vermilion shares added 1.08 per cent to $20.51 as at 12:56 p.m. ET on Monday in Toronto, down from their recent peak near $40 in late-August.

Vermilion's update on Friday included production guidance of 87,000 to 91,000 barrels of oil equivalent per day in 2023, below analyst estimates. Its forecast for $800 million of free cash flow this year was a far cry from the $1.8 billion estimate issued by the company in August.

Vermilion also says it intends to spend $570 million in its 2023 capital budget, a seven per cent increase as it eyes long-term natural gas opportunities in Europe, despite the current tax challenges.

Friday's update was not all tough news for shareholders. It included a 25 per cent increase to Vermilion's quarterly dividend to $0.10 per share, implying an annualized yield of 1.9 per cent. The company adds that it's resuming its share buyback program, which it paused in the fourth quarter as the company assessed the impact of windfall taxes in Europe.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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