Q3 2021 Vermilion Energy Inc Earnings Call
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Good day, otherwise come true energy quarter three conference call. Today's conference is being recorded at this time I would like to turn the conference over to President Curtis Hicks. Please go ahead Sir.
Thank you operator, good morning, ladies and gentlemen, thank you for joining us I'm Curtis Hicks President of Vermillion energy.
With me today are Dr. Hatcher, Vice President North America, and incoming President as of January one 2022.
As Glenn <unk>, Vice President and CFO, Darcy Kurland, Vice President International and HFC.
And Kyle Preston Vice President of Investor Relations.
We will be referring to a powerpoint presentation to discuss our Q3 2021 results, we announced yesterday afternoon. The presentation can be found on our website under invest with us and events and presentations.
Slide two in the presentation refers to our advisory on forward looking statements.
Advisories describe the forward looking information non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion.
Let me start off with a summary of our Q3 results.
On slide three.
We delivered strong third quarter results production from the quarter averaged 84633, Boes, a day, which was down slightly from the previous quarter, primarily due to planned maintenance activity.
The third quarter is generally a busy period for maintenance activities in Canada, but this year. We also had a three week turnaround scheduled for the corrib facility in Ireland.
This was a major turnaround at corrib, which occurs only every five years or so.
We're pleased to report that everything went according to plan.
The impact from these turnarounds was partially offset by higher production in the Netherlands, Germany, Australia, and the United States, including the contribution from a small bolt on acquisition in the powder River basin in Wyoming.
We did have a three week turnaround plan for Australia in the third quarter as well, but this was deferred until Q4 to optimize work schedules.
On the financial side, we delivered funds from operation of $263 million and free cash flow of $196 million. These figures represent represents a 52% and 109% increase respectively relative to the previous quarter.
The primary driver for the increase in our financial results was the higher commodity prices.
Global commodity prices continued to strengthen during the third quarter, which we were able to take advantage of to our internationally diversified asset base.
Vermilions exposure to global commodity prices is what sets us apart from our North American peers.
Not only does this global commodity exposure enhance our revenue and cash flow during strong market cycles, but it also serves to reduce cash flow volatility over the long term.
Year to date, we have generated $369 million of free cash flow and expect to generate in excess of 500 million for the full year 2021.
Just on current strip prices.
This significant free cash flow generation has enabled us to accelerate our debt reduction this year well behind what we projected when we announced our budget in January 2021.
Net debt decreased 5% from the previous quarter to $1 8 billion at the end of Q3, 2021 and was down 12% since the beginning of the year.
We expect to exit 2021 with net debt in the range of $1, six 5 billion, which would imply a net debt to trailing funds from operation ratio of approximately one eight times.
Slide four.
Let me now speak to some of our operational highlights during the quarter, starting with our international business.
Production from our international assets averaged 27612 deal a day in Q3 2021, a decrease of 1% from our prior quarter, primarily due to the planned turnaround in Ireland, which I referenced earlier.
The impact from the turnaround was largely offset by new production added in the Netherlands, and Germany and strong operational uptime in Australia.
Most of the activity in Europe during the third quarter was focused on completing and tie in.
The one.
One last data 0.5, net gas wells in the Netherlands, and the Burgh more Z five gas well, 46% working interest in Germany.
In the Netherlands deny how well was tightened during the third quarter, while our blessed that go well is currently undergoing stimulation operations in Germany. The Burgh more has advised us that five well was also brought on production during the third quarter.
We continue to advance our exploration initiatives in Europe through the acquisition of additional <unk> three D seismic in the Netherlands in Croatia.
We also took a physical delivery of the gas plant for the SA 10 block in Croatia, which was shipped from the Netherlands. Once we finished the detailed design work we plan to finish construction of the gas plant in 2022, which will allow the tie in of two successful gas wells drilled in 2019, which tested at 15 million a day at 17 million a day respectively.
We expect these wells to be on production in early 2023.
Slide five.
Moving on to North America production from our North American assets averaged 57022, Boe's a day in Q3, 2021 a decrease of 2% from the prior quarter, primarily due to planned maintenance in Canada.
Production downtime in Canada was offset partially offset by strong performance from our United States business unit, including the impact from a strategic bolt on acquisition, which we completed during the quarter and which I will touch on shortly.
In Saskatchewan, we drilled 1919, net wells and completed 20, $19 five net wells and tighten the remaining Turner wells from our Q2 drilling program in Wyoming.
Results from our Turner drilling program continues to meet or exceed expectations from both a cost and production performance basis.
With our growing knowledge of this play and region, we were able to identify and execute a strategic acquisition during the third quarter of 2021.
Slide six.
The next slide provides a bit more detail on the U S acquisition, although although the acquisition was not material from a financial or current production basis. As it is a good example of the type of bolt on opportunities, we pursue across all areas of our diversified asset base.
The acquisition includes 20000 net acres of land immediately adjacent to our highlight field in Wyoming, which we acquired in 2018.
The assets have current production of approximately 1500 Boe's a day seven.
72% liquids and generated operating netback in excess of $45 a Boe at current commodity prices.
The free cash flow from these assets is expected to self fund turning to development over the next five plus years.
The acquisition increases our Turner drilling inventory by 40 locations to 62, consisting of 24, one mile and 38 two mile laterals.
By expanding our land base, we were able to optimize the number of two mile wells in this play which deliver superior economics.
Well at Turner as the play that underpins our development of this field that we also believe the acquired acreage is prospective for the Niobrara and Parkman formations based on our initial assessment and recent positive results by nearby industry peers across our combined land base in this area, we see over 200 potential drilling locations.
In the Niobrara and Parkman.
It's still early days, but we're encouraged by the results we see from nearby competitors and we will continue to evaluate our acreage position well monitoring in the industry activity.
Total consideration for the acquisition was U S $76 million, which was funded through our credit facility.
Slide seven.
As a result of the strong production results achieved to date.
The combined with the U S acquisition completed in Q3 2021, we have increased our 'twenty one annual production guidance to 84580 5500, Boe's a day.
When we announced our 2021 capital budget of $300 million earlier. This year, we indicated that our primary focus for 2021 was to maximize free cash flow and reduce debt, while retaining the flexibility to adjust investment levels, depending on commodity prices.
As we're all aware commodity prices have been much stronger than anyone anticipated and because of this we have been able to exceed our debt reduction target for the year.
As a result combined with the continued strength in commodity prices, we have increased our 21 capital program by $75 million to $375 million.
The increased level of investment is better aligned with our sustaining capital requirements of our asset base.
The incremental capital investment will be primarily directed towards our Alberta condensate rich natural gas and Saskatchewan light oil drilling programs together with seismic acquisitions in Europe.
In Saskatchewan, we will extend our current drilling program by keeping one rig active through the end of the year, which will add eight eight.
Eight net wells.
You know Berta, we have advanced the completion date for 986 net condensate rich Manville gas flows into Q4 2021, which were originally planned for Q1 2022.
Accelerating this capital into Q4 2021 has allowed us to secure our preferred drilling and completion vendors, while also improving overall capital efficiencies by executing the majority of this program in Q4 2021 compared to the busier winter months of 2022.
This capital efficiency improvement will help offset some of the inflation impact that we're seeing in our program cost the.
Production from this incremental capital will be realized in 2022 and beyond.
Slide eight.
Well, we have not finalized our 2020 to budget and guidance, we are close and we wanted to provide the market with our preliminary outlook.
When we announced our 2021 budget in January of this year, we indicated that we are allowing our production to decline in 2021, as we focused on maximizing free cash flow and reducing debt. The original production guidance. We provided for 2021 of 83000 to 85000 Boe's a day as a targeted production level for our existing assets.
And is the level that we believe are sustainable for the foreseeable future.
While we continue to pursue strategic acquisitions like the U S acquisition completed in Q3.
Our intent would be to use these acquisitions does it mean to high grade and extend our inventory while managing to a similar production range.
Our preliminary capital plans for 2020 to contemplate a two well drilling program in Australia as well as continued strategic investment into Europe to expand our business in that region.
In order to achieve our production targets execute the Australia drilling program and deliver on our capital.
Strategic capital investment to support long term free cash flow generation and accommodate anticipated inflation in our cost structure, we anticipate a 2022 capital program in the range of $400 million to $450 million.
Based on this targeted capital and production range using forward strip pricing for 2022, we anticipate free cash flow in excess of 600 million as big as can be seen in the chart to the right.
We expect to release our formal budget in early December.
Slide nine.
The last slide that I would like to speak to is our debt position and return of capital framework.
As I mentioned, we have been able to accelerate our debt reduction this year due to strong commodity prices and the significant free cash flow generating capacity of our asset base.
Just on a revised 2021 guidance 22 preliminary outlook and forward commodity strip you can see the significant deleveraging that has occurred to date and what is expected to occur in 2022, if the commodity strip holds.
We expect to exit 2021, with net debt of approximately 165 billion and a net debt to trailing <unk> ratio of one eight times for.
For perspective. This compares to four times at the start of the year.
For 2022, using current strip pricing, we are forecasting net debt in the range of $1 billion by the end of the year, which represents greater than a 50% reduction from the debt net debt level at the end of Q2 2020.
This would imply a net debt to trailing <unk> ratio of less than one times and puts us comfortably back in our targeted leverage range of <unk> eight to one five times, which is the range that Vermillion maintained your it during its first 10 years at a dividend or distribution pink.
We have been consistent with our messaging over the past year, indicating that we would consider reinstating a dividend once we made significant debt reduction progress and had line of sight to achieving our targeted net debt to trailing <unk> ratio of one five times or less.
We now have a clear line of sight to achieving our targeted debt to trailing <unk> ratio of one times or less in 2022 and with that we plan to reinstate a dividend in Q1 2022.
Although this is still subject to board approval, our intention is to restate a fixed quarterly dividend, 5% to 10% of our <unk> stress tested at lower prices, including 55 U S $55 a barrel for <unk>.
While continuing to focus on debt reduction.
As further debt targets are achieved we will consider augmenting our return of capital through fixed dividend increases share buybacks <unk> special dividends.
We look forward to announcing our 'twenty two budget and sharing more details on our return of capital framework in the coming weeks.
That concludes my prepared remarks remarks, and with that I'd like to open it up for questions.
Yeah.
Thank you if you would like to ask a question. Please shaken out by pressing star one on your telephone keypad.
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We'll pause for just a moment to allow everyone an opportunity to shaking up for questions.
Once again, ladies and gentlemen.
Star one to ask your question.
Okay.
Okay.
And one final reminder.
Sorry, I wanted to ask a question.
We can now take the first question from Hamed <unk> from <unk> investments.
Hi, gentlemen, how are you guys.
Yes. Thank you how are you.
Yeah. Good Okay. What is the debt covenants currently on that.
Hedges with the $1 8 billion still upside to it.
Okay.
Debt covenants I think.
Sorry. Your question there was related to covenants.
Yes, Im just because the reason for it is you got a forward hedge of six months. That's currently running into 2022.
Walked in so I'm just curious what the covenants as they are.
And Oh, let's say the forward strip going into 2022.
You know I go to slide the hedges are pretty much locked in for about six months.
And what is it a 30% whats the rate there.
Yes, so from a hedging perspective, we are about 20% hedged for 2022.
We typically target, 25% to 50% on a rolling four quarter basis.
And then we do have optionality within the various commodities. So for 2022, we're about 50% hedged on European gas that'll be about 60% for the first quarter and then drops off from there.
And then basically 20% hedged on the oil side.
So the impact of those hedges are fully embedded in our free cash flow estimates of $500 million for 2021, and then in excess of $600 million for 2022.
Okay, and paying down the debt getting it down to the end of the year down to 165 billion. What are you guys forecasting if everything breaks.
<unk> stays commodity prices sort of behave and are in a multi multiyear bowl bull market.
You know what are we looking at like going forward or are we looking at trying to get it down by the end of 2020 to fourth quarter.
Into the billion dollar Mark.
Yes, no great great question and.
Ignore the multiyear impact on debt reduction I think if you just look out to 2022.
If we go into that year with $1 $65 billion of debt.
We've got free cash flow generation in excess of $600 million at current strip pricing that takes us down to $1 billion level and I think it's something that we've been quite clear on with investors is we wanted to make sure that decisions are structurally sound and when we look at debt to F F OHL and that target of one five.
Times that we've been quoting.
When you start to get down to that $1 billion of absolute debt and you look at our mid cycle price deck, which is 55 USW Ti to 50, North American gas eight dollar Canadian European gas.
We see ourselves getting to that structural comfort level in terms of debt to <unk> of one five times on that absolute debt number and that that has really given us the confidence here to accelerate our messaging around return of capital to shareholders.
And messaging that first quarter of 2022 will we will be looking to reinstate a fixed dividend now we are really trying to make sure that that is structurally sound as well and the 5% to 10% of <unk> that we have.
Quoted in our Q3 release here that's attached to the same mid cycle price deck that I quoted there in terms of a $1 billion of debt you do the math in terms of what one five times implies on <unk>, let's call that $700 million range, that's not a bad way to think about sort of the quantum of the <unk>.
Dividend and we think that that works quite nicely, we're still a debt reduction strategy in 2022, and then it really unlocks.
Further optionality around return of capital to shareholders as we get make progress towards that that debt target. So.
That was the messaging, we really wanted to get across here in the Q3 report is this is a first step in our return of capital strategy with shareholders because of the quantum of free cash flow in the system, we think that we're able to execute on.
Multiple levels of initiatives in terms of return of capital as well as debt reduction.
Okay can we get can I also get a little bit of color on just the impairments and.
And the write downs there.
Just a little bit of color on that please.
Yeah. So so 2020 was characterized by write downs from an impairment perspective, I would say 2021 has been characterized by write ups of those impairments.
As we've had a.
A strong backdrop from a pricing perspective so.
That has been the driver behind the impairment reversals that we've seen through the first three quarters here of 2021.
Okay, and how about how about any currency hedges are there any currency.
Impacted because of the international exposure.
No.
Okay, great. Thank you very much that's it for me. Thank you.
Thank you.
Once again, if you would like to ask a question. Please press star one.
We can now take the next question from Menno wholesale from TD Securities.
Good morning, everyone.
Thanks for taking my question I just have one.
What are you seeing in the powder River basin that gave you the confidence to do that.
Acquisition, and what are you anticipating for activity levels in the in the powder River in 2022, and then I guess longer term how meaningful do you think that play could it could become.
Yes. This is Steve.
Sure.
Been there for a few years we've drilled.
In access of 20 wells, so what we like its still early days and we think we can optimize the play so that means things like completion strategies, helping strategies and as well Wang will be able to go for more of a one mile to two mile length. So that's near term.
Optimization potential which of course would improve our free cash flows.
Okay.
Longer term, maybe I can comment on.
We need.
We're going to drill maybe five six wells a year to keep that asset flat. So if you look at the world.
Well counts in particular the lengths.
Lengths of those wells again, we see some upside in being able to grow that asset over time.
Okay.
Okay. Thanks, a lot.
Great. Thank you thanks Bill.
Yeah.
This concludes today's Q&A.
I'd like to turn the call back over to your host Curtis Hicks for any additional or closing remarks.
Thank you operator and thanks.
To all of you again for participating in our Q3 2021.
<unk> conference call. If there are any further questions would suggest that you reach out to our Investor Relations Department and the information to reach out is available on our website, so with that well.
Thank you all again and have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
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Yeah.