Cowen positive on VRN

[cmm3rd]

Excerpts of Cowen report pasted below. Charts and graphs (useful) did not copy. Analysts used WTI 2024E US $75, 2025E $72.50; and HH 2024E US $2.60, 2025E $3.60.

VRN - Underperformance unjustified, strong entry point -TD Cowen

Veren's recent underperformance has resulted in an improved entry point. Veren offers high impact assets, organic volume growth, improving FCF generation, robust (and potentially increasing) RoC via the dividend/NCIB, and is approaching its near-term debt target. Despite these attributes, the company trades at an attractive 2025E FCF yield of 14% based on strip pricing.

Summary Of Our Thesis: We believe the recent underperformance could be driven by the perception Veren's recently acquired assets are not performing as originally expected (a view we believe is unjustified) and weaker than originally anticipated Q3 volumes (in part due to third-party outages) - both factors should ebb with time.

What Is Underappreciated Or Misunderstood?

Veren has been methodically carrying out its LT plan to optimize asset performance in its new high-impact plays and reduce financial leverage. However, we believe the market continues to underappreciate the potential FCF growth, value of asset optimization, and how much the overall business has improved since 2018

Catalysts & Milestones To Watch:

■ New data highlighting optimization efforts in the Montney and Duvernay. While we believe the company has achieved strong results on these assets, the market appears to be underappreciating upside potential.

■ Potential increases to the current return of capital strategy, which currently stands at 60% of FCF back to SHs through the base dividend/NCIB. Even without an increase to this framework, we estimate the company has a competitive dividend yield of 6%, while repurchasing 5% of its shares per year. This excludes the expected y/y volume growth of 6%.

Price Target & How We Value The Stock: Our target price of C$15.00 combines 1.0x our 2PNAV at a 25% weighting with the other 75% based on a multiple of 4.5x 2025E EV/DACF. Our target EV/DACF multiple is based on a premium to the trailing 3-year average for Veren (2.8x) given its completely revamped asset base, which is now 75% concentrated in highimpact plays (Montney/Duvernay), long-term growth, inventory depth, return of capital, and modest financial leverage.

What Is The Bear Case & The Risks To Our Call? Higher-than-expected declines and inability to execute asset optimization in the Montney/Duvernay are key risks that would put upward pressure on capital spending and reduce FCF growth. The company is also more exposed to downside risk in oil prices than peers.

Our Investment Thesis
Veren has successfully transitioned to a Montney/Duvernay high-impact producer, with
growth supported by a low-decline legacy asset base in Saskatchewan. The company now
has ample quality inventory to support 20 years of strong organic volume growth, and more
importantly, FCF per share growth.

Forthcoming Catalysts
Cost and/or productivity improvements in the Montney and Duvernay; Enhancements to return of capital strategy once debt targets are achieved

Base Case Assumptions
US$75/bbl WTI for 2024E (US$65/bbl longterm), US$2.60/mcf HH for 2024E (US $3.50/mcf long-term); In-line production and capex; Status quo regulatory and/or fiscal framework

Upside Scenario
US$90/bbl WTI, US$4.00/mcf HH represents a 34% increase to our 2025E CFPS and a more attractive FCF yield of 31%; Potentially higher-than-forecast
production and lower capex; Positive changes to regulatory and/or fiscal framework

Downside Scenario
US$40/bbl WTI, US$2.00/mcf HH represents a 67% decrease to our 2025E CFPS and a less attractive FCF yield of -4%; Potentially lower-than-forecast production and higher capex; Negative changes to regulatory and/or fiscal framework

Valuation Versus Closest Peers and Oil-Weighted Basket Has Widened
Between 2022 and early 2024, VRN's valuation closed the gap with its closest peer (WCP) and relative to a basket of other oil-weighted peers. However, over the last ~9 months, the valuation gap versus WCP has once again widened to ~1.0x forward EV/DACF (Consensus) and >2.0x versus the oil-weighted peer average. In our view, the relative valuation discount is unjustified given improvements in the underlying business and similarities with peers.

Company Description
Veren Inc. is a conventional oil & gas company with assets strategically focused in properties
comprising high-quality, long-life, operated, light oil and natural-gas reserves in western
Canada (including Duvernay/Montney).

Fundamental Metrics Improving While Valuation Remains Compressed
Since Craig Bryksa took over the role of President and CEO in 2018, VRN has made significant improvements to the business, including entering high-impact Montney/Duvernay plays and reducing financial leverage metrics. The acquisitions that were made in recent years did add some temporary incremental debt and equity dilution; however, we forecast key per share metrics in 2025E to be well above historical levels and are enhanced through the current return of capital framework and use of the NCIB. We expect the company to return a total of 11% of the current market cap in 2025E through the current base dividend (6%) and the NCIB (5%), which is above its closest peer WCP (9% total cash return). We estimate the company is currently trading at a 2025E EV/DACF of 2.7x, which is well below pre-pandemic levels and below its closest peer average (BTE/WCP) of 3.0x.

Early Montney Results Tracking Well
VRN recently added new details to their corporate presentation highlighting productivity improvements from the company's first handful of VRN-drilled and designed pads. While these Montney wells take some time to show true productivity given the normal ramp-up delay, we believe rates are largely as expected and an improvement from legacy results. In Gold Creek West, after six months, the company's recent 06-07 pad continues to produce at rates near its initial IP30 (~1,800 BOE/d) with a liquids contribution in excess of 70%. The company's other recent pad at Gold Creek (10-14) did show lower initial rates, but has been climbing with productivity now >1,000 BOE/d. For context, the company's type curve here is an IP30 of 1,250 BOE/d (65% liquids). At Karr West, recent pads have shown solid early results with the 02-13 pad continuing to produce at >1,000 BOE/d (~50% liquids) after four months. The most recent pad a Karr West (05-23 pad) has been producing at a lower rate; however, this is a shorter lateral well with a
length-normalized rate of ~1,000 BOE/d after ~30 days. VRN's type curve in Karr West is an IP30 of 1,330 BOE/d (65% liquids).

Achieving Debt Target Would Trigger Increased Return of Capital to Shareholders
The company currently pays out 60% of FCF through a combination of the dividend (6% yield) and share buybacks. We believe this is likely to increase once the near-term net debt target of <$2.2 bln is achieved and estimate this could occur by Q3/25E under strip pricing. We forecast this could be increased to 70-80% of FCF once leverage is reduced below the target threshold.

In our view, such an increase to the current framework could include a modest increase to the current base dividend alongside accelerated share buybacks - further compounding per share growth metrics. Below we show our estimated return of capital in 2025E under various commodity prices and ranges for % of FCF being returned to shareholders.

VRN trades at a 2025E EV/DACF multiple of 2.7x, which is below the average of its closest peers (BTE/WCP) of 3.0x. This translates to an attractive unlevered FCF yield of 16%. Although this EV/DACF valuation is in line with the Bloomberg consensus 3-year average of 2.8x, the company has undergone a material transition over this period and is now positioned to benefit from the significant asset repositioning. Given the combination of per share growth (2025E 12% y/y), significant FCF (and share buybacks 5% of mkt cap. in 2025E), well-funded yield (11% dividend payout ratio in 2025E),
exposure to liquids-rich, quality Montney and Duvernay resource, we believe the company deserves to trade at a premium.

Justification of Target Price
Our target price combines 1.0x our 2PNAV at a 25% weighting. The other 75% is based on an EV/DACF multiple of 4.5x VRN's 2025E DACF. Our target EV/DACF multiple is based on a premium to the trailing 3-year average for VRN (2.8x) given its completely revamped asset base which is now strongly tilted towards high-impact Montney and Duvernay, transition to strong return of capital, and modest financial leverage.

Analyst Top Picks
Ticker Price ( 09/27/2024) Price Target Rating
Veren Inc. VRN-T C$8.31 C$15.00 Buy
ARC Resources Ltd. ARX-T C$22.54 C$31.00 Buy
Kelt Exploration Ltd. KEL-T C$6.19 C$8.50 Buy

[dan_s]

My current valuation of VRN is $11.00US, which is just a few cents below $15.00Cdn.

My valuation is just 4X annualized operating cash flow per share, which is conservative for a company of this size and quality.

TipRanks:
> RBC Capital analyst Michael Harvey maintained a Buy rating on Veren (VRN) on September 23 and set a price target of C$12.00.
> Jefferies also maintained a Buy rating on the stock with a C$11.00 price target.
> Currently, the analyst consensus on Veren is a Strong Buy with an average price target of $9.09US < Cowen's updated price target is not yet included in TipRanks' consensus price target.