Q3 2019 Earnings Call
This time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one in your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Mr., Anthony Marino, President and Chief Executive Officer Vermillion. Thank you. Please go ahead Sir.
Good morning, ladies and gentlemen, thank you for joining us I'm, Tony Marino, President and CEO of Vermilion energy with me today, or my collusion executive Vice President and COO, Lars lamps, Serb Vice President and CFO .
Oh, Preston Vice President of Investor Relations and other members of our management team who may be called on during the Q1 exception.
We'll be ready, we'll be referring to a powerpoint presentation to discuss our third quarter 2019 financial and operating results 2020 capital budget.
Presentation can be found on our website under investor with us and events and presentations slides two and three in the presentation refer to our advisory on forward looking statements. These advisories described the forward looking information non-GAAP measures and oil and gas terms Riverkeeper day and outline the risk factor.
As an assumption for all of them to this discussion.
I'll start off with an overview of our Q3 results followed by a discussion about EUR 2020 budget business model.
Slide four Q3 2019 review.
Our third quarter operational results were impacted by plant turnaround activity unplanned downtime weather related delays at a moderate carryover impact from the refinery outage in France that began in second quarter.
Our Q3, Boston decreased by approximately 5800 deal easy for a 6% from the prior quarter to 97200 be a we de the bulk of this variance about 4300 via we'd be was due to a very high level of unplanned downtime and weather delays, although we budget for typically.
The levels of unplanned downtime and weather conditions. These factors affected our Q3 results to a much greater degree than we had expected.
Despite the lower production and commodity prices, we generated F., Oh 260 million in the third quarter, which was down 3% from the prior quarter, our quarterly AFFO benefited from hedging gains slower gionee expense and lower taxes.
We have reduced or 29 team capital investment guidance by $10 million to $520 million as a reflection of lower gross of a lower growth strategy, which I will discuss shortly.
We've also revised our 2019 annual production guidance range to 100200, 1000 BOE D. from 101000 to 106000 BOE D. to account for the unplanned downtime weather delays and our lower capital program, we expect to deliver at the midpoint of this revised production guidance range still reflecting strong.
Year over year production per share growth of 5%.
Now I'll get into some of the country specific updates starting with or or with our international regions Slide five your Q3 highlights Q3 production in France increased 6% from the prior quarter to an average of 10300 via we'd be primarily due to the restarted the grant we refinery in early August .
But it impact from the refinery outage reduced for Q3 2019 production volumes by approximately 400 Boe D.
Almost all of our wells in the parents Basin has now returned to pre shopping on production levels.
In the Netherlands, Q3 production averaged 7400 via we'd be a decrease of 17% from the prior quarter. The decrease was primarily due to a planned turnaround and subsequent unexpected downtime to repair a gas compressor, which extended the length of the turnaround the combined impact was a reduction in Netherlands.
Production of approximately 1200 deal we the from the prior quarter or facilities have returned to service and production's been restored. We're currently in the process of drilling the west Sterling work, well, Oh 0.5, net and we expect drilling to be completed before the end of the year assuming success at West Wells.
Well certainly work we plan to bring this well on production during the first half of 2020 <unk>.
In Ireland production averaged 7200 BOE D. in Q3, a decrease of 12% from the prior quarter, primarily due to planned and unplanned downtime at Cora.
Our planned turnaround was successfully completed over a four day period in mid September . However, later in the month you identified the need for repairs and one of the plant syllabary systems, which we acquired shutting the plant bound for approximately 10 days spanning the quarter end.
The combined impact of the planned and unplanned downtime was approximately 800 feel we'd be in the third quarter and.
In Germany production averaged 3300 BOE D. in Q3, a decrease of 6% from the prior quarter, primarily due to unplanned downtime on several operated and Nonoperated assets. Following the successful drilling of the bird worth more C. Five well, 46% working interest completed early in the third quarter two.
Many 19, we continue to evaluate tie in alternatives and expect to bring the well on production in late 2020.
Slide six central and Eastern Europe , and Australia, Q3 highlights in central and Eastern Europe , we drilled our second natural gas exploration well.
Croatia during Q3 following the successful discovery, we announced with our Q2 release, the second well tested at a stabilized rate 17.2 million cubic feet per day slightly better than the perspiration, well, which tested the rate of 15 million cubic feet per day.
Although lease were limited duration test the results are encouraging as they prove up a very good shallow gas play, which we believe could lead to additional similar discoveries in the say 10 block, we're currently engaging and tie and planning for these wells.
During the third quarter. We're also provisionally awarded DSE seven license in Croatia, which will add approximately 500000 net acres contiguous with our existing land position in the country.
And hungry, we completed a tie in activities for the M. age 21.3, net and the Tanya nine 1.0 net wells drilled in the second and third quarters of 2019, respectively.
The Tanya <unk>, well, which tested at a rate of 3.4 million cubic feet per day was brought on production last week, MH 21, well, which tested at a rate of 2 million cubic feet. Today is expected to start up in Q4 2019.
In Australia production averaged 5600 barrels a day in Q3 2019, a decrease of 17% from a previous quarter, primarily due to well management and unplanned vessel maintenance on the onto platform year to date production in Australia has averaged just over 6000 barrels a day, which is in line.
Line with our annual target.
We realized an average selling price $93.71 per barrel, which translates to approximately U.S. $71 per barrel, reflecting a premium of approximately.
Yes, $9 over dated Brent.
We have seen a significant improvement in pricing for one do crude in anticipation of IMO 2020 coming into effect and we expect these stronger pricing levels to continue into Q4 2019 and 2020.
Slide seven North America Q3 highlights in Canada production averaged 58500 be already in Q3 2019, a decrease of 5% from the prior quarter. The decrease was primarily due to planned turnarounds in both Alberta, Saskatchewan drilling and completion delays caused by abnormally wet weather in Alberta and other.
Our unplanned downtime.
We drilled or participated in 40 38.3 net wells in the third quarter 2019, all of which were drilled into sketch one as a result of the wet weather in Alberta throughout the summer.
Our drilling and completion activity in Alberta was delayed until.
Late September due to extremely wet ground conditions, which is three months later than we typically resumed post breakup. According to environment, Canada Edmonton had 54 days of rain. This summer, making it the wet summer in nearly 40 years picture on this slide illustrates the conditions at one of our well sites in Alberta.
In the United States third quarter production increased 12% from the prior quarter to 4900 view he be primarily driven by production contributions from our 2019 highlight drilling campaign, we completed and brought on production for 4.0 net additional wells during the third quarter.
The first two wells drilled in the quarter were brought on production late August at a peak IP 30 rate 600 deal, we deeper well, 86% oil and Ngls. The other two wells were brought on production at the end of September and are currently producing at an average rate of 500, Boe d. per well, 92% oil and Ngls.
Four wells drilled in the third quarter of 2019 were equipped with electrical submersible pumps.
Through ongoing learnings and efficiency improvements in the U.S., we have achieved a 20% reduction in our second half 2019 diesel costs compared to our first half 2019 program as a result, these cost savings we've added.
To 1.5 net wells to our 2019 program and plan to drill these wells in Q4.
Slide 820, 20 budget overview. The next part of this presentation I'll review, our 2020 budget that we first like to discuss our philosophy in preparing the budget and realigning our growth targets and the current market.
Slide nine for open income history.
Rubber millions 25 year history, we have repeatedly made the necessary adjustments to adapt to the changing landscape around us our business model is focused on sustainable growth in income, which we have successfully delivered to our shareholders over the years as you can see any exhibits included on this slide Vermillion has generated compounded annual growth and production per share.
Of over 8% since 2012, even stronger per share growth and reserves and we paid out $3.7 billion or $39 per share and distributions and dividends. Since 2003, we did this while making significant improvements in our economic sustainability as you can see in the lower record chart even.
Including the dividends paid out a shares through our drip we've achieved total payout ratio close to 100% over the past three years and are currently at our lowest total payout ratio since 2008.
Despite this positive track record our share prices at its lowest level in 15 years.
Slide 10 growth target realignment.
As many of you are aware the capital markets environment for oil and gas companies.
Has changed dramatically over recent years due to a multitude of factors, including poor investment returns from energy issuers increased focus on U.S.G. in Sri mandates and a growing concern about the future of fossil fuels amongst the general public investors. This has led to compression to valuation multiples across the entire sector, but many companies.
Including Vermillion trading significantly below their historical valuation metrics.
One of our advantages are short investment cycle time with minimal fixed commitments. Consequently, we have flexibility to adjust our investment in growth levels to provide the combination of return of capital in growth, which we think will maximize shareholder value in a change in capital markets environment.
Based on the current capital and commodity market environment. We believe a strategy that is even more focus on free cash flow generation will create the most value for our shareholders, while maintaining our dividend at current levels, we've elected to reduce our growth rate and to introduce additional flexibility in how we returned capital.
To investors this lower growth strategy was embedded in the preparation of our 2020 budget as well as our capital plans for the remainder of 2019.
Slide 11 2020 budget.
Our board of directors approved a 2020 capital budget of $450 million with associated production guidance of 100000 to 103000 BOE D. This budget is designed to deliver modest annual production growth of approximately 1%.
In Europe , we plan to drill 13 8.7 net wells.
And continue with significant workover programs in France, Netherlands in Germany and facility optimization in Ireland.
Capital budget includes approximately $20 million of strategic Nonproduction, adding capital invested in order to facilitate our long term future growth plans from these business units in North America or activity will focus on our three core areas the southeast Saskatchewan for light oil west Central Alberta for condensate rich natural gas.
And the powder River basin in Wyoming for light oil, we've made significant progress in improving the capital and operating efficiencies on the North American assets, we acquired in 2018, and we plan to continue this trend during 2020.
In addition, we will be phasing out or drip over the course of the next year Prorating the available drip shares by 25% each quarter starting in Q1 2020 until the drip is completely eliminated in Q4 2020.
The drip has been a shareholder service that we have provided since our first income distribution in 2003 with this kind of share purchases offered until 2018.
However, we feel that in an environment of lower trading conditions, the establishment of our NC IB and lower energy issuer multiples the elimination of the drip isn't the best interest of our broad shareholder group.
Slide 12 production in Capex Slide 12 illustrates how 2020 production in Capex lineup compared to prior years.
As you can see we're delivering a modest increase in production represented by the blue bars or spending less capital represented by the yellow box.
Assuming but to get T.I. remains at approximately usfifty $5 per barrel and 2020 and holding all other commodities at the recent strip, we expect to be able to cover our entire capital program and dividend payout ratio at or below 100% sustaining capex, which we estimate at $420 million.
And the dividend can be covered at a Wi Fi price of approximately $52.50 per barrel should commodity prices increase from current levels any excess cash generated beyond our capital program and dividend will be allocated to a combination of debt reduction and share buybacks.
Slide 13 hedging.
Our hedging program has served us well during these volatile these volatile commodity cycles, we continue to actively hedged for the remainder of this year and through 2022 as of August 24, excuse me as of October 24, we at 51% of our expected net of royalty production hedged for Q4 2019 more than half.
For Q4 corporate hedge position consists of two way callers and three way structures, which allow participation price increases up to contract ceilings for 2020, approximately 35% of our production is hedged.
54% of our hedge position in participating structures.
With respect to an individual products within our mix. We have currently has 74% of anticipated European natural gas volumes for Q4 2019, we have also hedged 75% of our anticipated full year 2020 European natural gas volumes at prices, which are expected to provide for strong project economics and free cash flows.
At present, 47% of our expected Q4 oil production is hedged.
For Q4, 2019, 51% of our North American natural gas production is priced away from Aiko due to diversification hedges and the location of a portion of our gas production in Scotland in Wyoming.
In conclusion, we remain committed to a low risk capital markets model that returning significant cash directly to shareholders were also committed to leadership and environmental social and governance performance. We're proud to note that in Q3 gremillion receive top quartile rankings for 2019 for our industry sector in both.
The sustainability and SCM, formerly known as we'll Pico Sam assessments, we believe the integration of sustainability principles into our business strategy is the right thing to do will increase long term shareholder return and will decrease long term risks to our business model. These ratings demonstrate our commitment to maintaining leadership in sustainability.
And yes key performance.
We would be happy to address questions. Operator, please open the phone line.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Keith.
And your first question comes from a line of Patrick Burke from all Altacorp capital. Your line is open.
Hey, guys. Just one quick question on the U.S. that then maybe that strategy here going forward in 2020, it's one of the few assets that seems to be seeing an increasing focus at the margin. When you look at the percentage of capital it seeing relative to the whole budget in 2020 versus 2019.
Is this 10 well program is there going to be a geological exploratory element to it or do you guys. Thank you have a pretty good handle on what you're doing there and it's more just on moving into a bit of a development mode. At this point.
Patrick Thanks for the question.
The us program is.
Really one of.
Development drilling it is not necessarily infill drilling there is delineation not the highlights.
Turner pool.
With.
With wells that are broadly away from the current development area. So we're able to drill wells and.
New reservoir that has already been delineated as being within the within the Turner pool.
So.
It's it's not really exploratory in nature, we think that the.
We think we've got to get certainty on the expected results there.
Okay, and the one thing you've drilled to date at least the way. They look you've got a couple that are above type curve and a few that are mainly in line with type curve thing you're fairly comfortable with that type curve at this point in time.
Hi, yes.
Yes, Patrick that assessment is correct. Some are above the type curve summary in line with it and we're comfortable that the type curve, perhaps something a little bit better is deliverable out of that drilling program.
Okay. Thank you.
And again, if you like to ask a question. Please press star one of your telephone.
And there are no further questions at this time Mr., Anthony Marino I turn the call back over to you for some closing remarks.
Thank you again for participating in our Q3 2019 conference call. We look forward to speaking with you again. After Q4 2019 results are reported in the new year.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.