1 Discounted Canadian Dividend Stock Down 21% That’s Worth Buying Now

Vermilion Energy (TSX:VET) is one of the most overlooked energy stocks in Canada right now.

The dividend stock is down about 21% from its recent highs, and the market has yet to price in the company’s recent transformation efforts. I think the sell-off is overdone and that long-term investors are positioned to generate outsized returns while enjoying a 3.5% dividend yield.

The bull case of investing in this Canadian dividend stock

Over the past three years, Vermilion has done the unglamorous work of reshaping its portfolio.

According to Vermilion President and CEO Dion Hatcher at the company’s May 2026 Annual General Meeting:

• Production per share has increased by approximately 45%.
• Unit costs, when combined with general and administrative expenses, are down more than 30%.
• Capital intensity has also improved by over 30%.

The transition toward becoming a global natural gas producer has been the key driver. Vermilion now holds assets in the Deep Basin and the Montney in Canada, plus a growing deep gas exploration program in Germany, with additional production in Ireland, the Netherlands, France, and Australia.

Reserve growth is one of the most important signals of long-term value in the energy sector. And here, Vermilion delivered in a big way. Proved plus probable reserves increased 36% year over year to 592 million barrels of oil equivalent.

The 2P recycle ratio came in at 3.5 times, meaning the company is generating $3.50 in reserve value for every dollar it spends on finding and developing oil and gas.

Internally, management estimates roughly 1,700 drilling locations across its Deep Basin and Montney land positions, yet only about 23% of those locations are currently reflected in the company’s book reserves.

European exploration prospects are similarly under-represented. In plain terms, the published reserve numbers likely understate the true depth of this business.

A focus on long-term growth

Vermilion has three core development assets that management calls the backbone of its long-term plan.

In the Deep Basin, the company holds approximately 1.2 million net acres of continuous land, and existing infrastructure means new wells can be brought on stream with minimal additional capital. Higher liquid weightings relative to peers enhance profitability and give Vermilion flexibility as commodity prices shift.

At the Montney’s Mica asset, the story is about patience paying off.

• Production has grown from 4,000 barrels of oil equivalent per day (BOE/d) in 2022 to roughly 16,000 BOE/d today.
• By 2028, Hatcher expects Mica to reach approximately 28,000 BOE/d, at which point the asset crosses into meaningful excess free cash flow territory.
• The required infrastructure investment is largely done, and per-well costs have fallen enough to reduce future capital requirements by over $250 million.

In Germany, results from the deep gas exploration program have been strong. The Wisselshorst well, described by management as the largest discovery in Vermilion’s European history, is expected to come online by mid-2026.

Up to six additional drilling locations have been identified on the same license, and two more wells are targeted for early 2027.

The dividend stock has a strong balance sheet

A year ago, debt was the main concern for VET stock investors. In 2025, Vermilion completed the largest cash acquisition in its history, which increased net debt.

Over the past year, the company reduced net debt by approximately $750 million via a combination of organic free cash flow generation and strategic asset sales, including the divestment of United States and Saskatchewan assets.

Management has a clear target to bring net debt down to $1 billion and has stated it will continue to prioritize debt reduction using excess cash flow.

A cleaner balance sheet means greater capacity to grow the dividend and buy back shares, both of which management has committed to.

Using what Hatcher described as conservative pricing assumptions of US$70 West Texas Intermediate crude, US$13 per MMBtu for European natural gas, and $3.50 per GJ for AECO, Vermilion expects to generate approximately $1.7 billion in excess free cash flow over the next five years.

Vermilion is a company generating growing free cash flow, buying back shares, reducing debt, and sitting on decades of drilling inventory.

The post 1 Discounted Canadian Dividend Stock Down 21% That’s Worth Buying Now appeared first on The Motley Fool Canada.

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Vermilion Energy. The Motley Fool has a disclosure policy.