Q4 2022 Vermilion Energy Inc Earnings Call
Please standby we're about to begin.
Good morning, My name is Jess and I will be your conference operator today at this time I would like to welcome everyone to the Vermilion Energy, Inc. Q4 conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press star one on your telephone keypad.
If you would like to withdraw your question. Please press star two.
Mr. Don Hatcher, you May begin your conference.
Thank you Jess good morning, ladies and gentlemen, thank you for joining US today do you have at your President and CEO of Vermilion energy.
With me today are alerts Webster, Vice President and CFO , Betsy Cohen, Vice President International and HSE.
Criminal Vice President North America.
Jetson Tan Vice President business development and call Preston Vice President of Investor Relations.
We will be referencing a powerpoint presentation to discuss the Q4 for year 'twenty 'twenty 'twenty results presentation can be found on our website under invest with us and events and presentations.
Please refer to our advisory on forward looking statements at the end of the presentation describes forward looking information non <unk>.
GAAP measures and oil and gas terms year to date.
The risk factors and assumptions relevant to this discussion.
2022, we delivered on our strategic priorities.
To reposition rebellion for long term success, we remain focused on financial discipline and reduced net debt by another 300 million, we benefited from strong European gas prices as a result of our international diversified asset base, we have.
Vance Corp acquisition, just significantly enhance our euro gas exposure, which is planned to close March 31 of this year.
Completed the strategic acquisition of La Crosse exploration Bakken provides entry into the prolific montney resource play.
It significantly increased the depth and quality of our drilling inventory.
Looking at our financial results for mailing generated record, but what was the $1 6 billion record free cash flow of $1 1 billion in 2022.
Representing a year over year increase of 78%, 99% respectively.
Our results were achieved despite 406 million realized hedging losses, and $223 million temporary European windfall taxes.
Right.
This free cash flow allows us to fund over $500 million of strategic acquisitions reduced net debt by over 300 million and returned over $100 million to our shareholders through dividends and share buybacks.
We launched our return of capital frameworks, and 2022, which included a reinstated quarterly dividend in Q1, and the commencement of a share buyback program in Q3, returning a total of 11% of our free cash flow during the year.
We exited the year with net debt of $1 3 billion and a resulting net debt to funds flow ratio of one eight times.
The lowest leverage in over 10 years.
Yes.
In the fourth quarter of 2022 reported 284 million of fund flows over is important to note that this includes the full year impact of the temporary you went full taxes. The windfall tax was enacted in Q4 'twenty two it was applied retroactively. So the format is reflected in our Q4 results.
Excluding the windfall tax Q4, one floor would've been 507 million, which is in line with the prior quarter.
Free cash flow in Q4 was $150 million 115 million, including the impact.
The impact of the windfall taxes or 338, excluding the wasteful tax production for the quarter was 85450, BP, which day, which is up slightly from the prior quarter production in Q4 was impacted by unplanned downtime in Australia Cold weather and third party downtime in North America, and the delayed startup.
Of our six well montney pad in Alberta.
Production from our North American assets averaged 58499, Boe's per day, which is an increase of 2% from the prior quarter, mainly due to new production for our Montney assets in Canada.
At a full quarter contribution of our U S drilling program. Our primary focus in Q4 was tying in their first six well, Alberta Montney pad it might get as you can recall. This is a pad that we took over drilling operations from a crowd out following the close of the acquisition at the end of May.
The wells were brought on stream at the end of November it cleaned up during December resulting in Montney production of approximately 7500 per user day in December and Q1, we've drilled and completed a follow up three well pad, we'll bring those wells on production early in Q2.
In January the British Columbia Government announced agreements with the Blueberry member first nations and other treaty eight first nations wanting specific guidelines pertaining to future resource development in the region.
We view this agreement as a positive development RPC assets are located outside of the Bluebird. If you ever first nations high value areas Theyre predominantly on private freehold land, which we will continue and we continue to receive permits.
This will help facilitate the timely approval of future permits required to expand our montney development in British Columbia.
Inventory provided us with an operational buffer and then remember first nations resolution, though we will continue to maintain our production and capacity in Alberta for efficiency purposes.
Now in a position to pivot back to the heart of all of inventory in B C.
In Q1, we finished drilling a two well pad and we're currently preparing for completion operations.
Production from our international assets averaged 26953, Boe's per day, which is down slightly from the prior quarter.
Due to natural decline in Netherlands, and Germany, as well as lower than anticipated production in Australia unplanned downtime.
We drilled one well, Germany, which was brought on production in Q1 and drove one gross five net gas fall in the Netherlands, which encountered 19 meter gas column, we expect to bring this new Netherlands, well on production in the first half of 'twenty three.
In Australia production from the Wandoo field was temporary shut in during December to repair a minor leak on.
On further inspection, we've identified additional maintenance and as a precautionary measure to ensure continued safe operations of the facility.
Likely to complete a detailed inspection of the entire facility and conduct all necessary repairs at this time as.
This will result in production being offline for the entire first quarter. However, we expect this maintenance activity to help minimize future downtime.
The repairs themselves are minor in nature, but due to the complexity of working on an offshore platform. It takes several months to safely complete the work.
Looking at our 2022 reserves, we increased our proved plus probable reserves 9%.
523 million Viewy primary driven by the <unk> acquisition and positive economic revisions.
The after tax net present value of our proved plus probable reserves discounted at 10% increased 36% for the prior year to $8 9 billion or $54 per share with PDP reserves, making up more than 50% of this value.
Including acquisitions, we replaced 234% of production on approved plus probable basis at an F DNA costs, including future development costs of $19.22 per Boe.
Resulting in a total proved plus probable F D N a operating recycle ratio of four four times.
On a proved plus probable reserve life index increased by 9% to 20 in 2022 to 16.8 years, reflecting our continuing focus on enhancing the depth of our drilling inventory.
For the past decade, we have successfully increased our reserve life index by approximately 40% due to a combination of organic development and strategic acquisitions.
European gas prices averaged $48 per btu and traded in a range of just under $30 to over $120 in 2022.
In response to the higher prices being faced by consumers European Union introduced a temporary windfall tax in Europe .
<unk> will provide an update on the windfall tax later in the presentation.
European gas prices have traded down over the last several months as Europe experienced the second warmest winter on record.
However, as you can see on church slip this chart on slide seven four.
Forward price for the balance of 'twenty, three and 'twenty four remains six to seven times higher than forward Canadian equaled prices.
Approximately 40% of our forecast 2023, corporate gas production or about 100 million cubic feet per day is produced in Europe . So directly into the European market have received euro gas made FERC prices with minimums offsets.
There are three key observations I would like to point out first domestic supply shown in the dark Gray bar is in decline and will drop even further with the pending closure of the granting of build in the Netherlands.
Second Russians pipeline supply shown in the Blue bar has dropped off significantly from 16 Bcf per day in 2021, just a couple of Bcf a day in the second half of 2022.
And third LNG imports shown in red have been steadily increasing over the past several years, we saw a greater than 50% increase in 2022 alone as Europe raced to secure LNG to offset Russian volumes. It feels storage ahead of the winter season.
Keep in mind. This was achieved while China had an aggressive COVID-19 lockdown policy in place, we believe refilling gas storage in 'twenty, three will be more difficult without Russian supply and with more competition for LNG from Asia.
As we look out over the next several years, we expect Europe to become even more dependent on LNG imports to meet its future demand in the global LNG market is already very tight we don't see any material new supply coming on the market until the 2025 2026 timeframe.
Majority of these volumes are locked into long term contracts. Meanwhile, Asia demand is also expected to continue growing in the years ahead, which ultimate means Europe will need to continue outbidding Asia for spot LNG.
We believe the underlying supply and demand fundamentals for European gas will remain strong for many years to come.
Before I hand, it over to Lars talked about our guidance and financial outlook I wanted to provide an overview of the asset high grading we've achieved over the past two years.
But the Q4 release, we announced the successful divestment of approximately 5500 views a day of select non core light oil assets in our southeast Saskatchewan for $225 million.
Following our entry into the Montney. These mature assets are unlikely to attract capital.
Divestment was part of a broader strategy to reposition vermillion for long term success of.
A high grading or nork record inventory, reducing unit cost in the southern and the time line of achieving our debt reduction targets. This asset sale combined with the three strategic acquisitions announced in 'twenty, one and 'twenty two being in the powder River Basin Ecuador's Corp interests. The crowd of mountain as a resulted in a stronger more resilient.
Asset base thing.
At the corporate level or generate more free cash flow per Boe.
We have more exposure to European gas, we have a longer reserve life index.
Lower unit Opex, we have fewer wells and facilities, which results in less arrow and lastly, our ghd emission intensity has improved.
Asset portfolio enhancements combined with our lower debt makes for an even stronger company today with that I would like to pass it over to Lars.
Thank you Dion as Dion mentioned in his earlier remarks, our Australia production will be offline for the first quarter and is expected to restart in Q2.
As a result, we expect our Q1 production to be in the range of 80 to 82000 BOE a day.
We are also revising our full year 2023 guidance to a range of 82 to 86000 BOE a day to reflect the planned southeast Saskatchewan asset sale and the impact of the Australia, Australia downtime.
We have also updated our financial guidance within the table on the right hand side of this slide.
Most notable would be an approximate $1 per BOE a reduction in our operating costs due to the planned asset sale and lower European gas prices.
Our cash taxes and windfall taxes are also expected to be lower as a result of weaker European gas prices on an absolute basis. We now expect the temporary we European windfall tax for 2023 to be 200 million or less compared to the 300 million guidance, we provided with our budget release in January .
Slide 11 provides a historical and forward looking view of our <unk> in the red bars and debt levels in the blue bars and serves to illustrate the significant improvement in the resilience of our business.
When you look at our results prior to 2022, you can see that our business was generating annual F. F O in the $800 million to $900 million range, excluding 2020, while operating with $2 billion of debt implying leverage of over two times as you look at our 2022 results and forward projections for 'twenty three.
And 24, you can see that we are generating significantly more F. F O. Even after factoring the impact of the temporary windfall tax.
We have benefited from strong commodity prices, specifically European gas to proactively derisk the business with lower debt.
As Dion just noted we have also enhanced asset resilience over the last two years through an active high grade of our portfolio.
As a result, we are on track to achieve our stated debt target of 1 billion by the end of 2023 or early 2024, and although we have not provided a debt target for 2024. We believe we have the capacity to balance further net debt reduction in 2024 with increasing shareholder returns based on forward strip pricing.
We are a more resilient company today with a higher quality asset base enhance long term inventory and a much stronger balance sheet.
Slide 12 further illustrates the progress we've made on debt reduction and our commitment to increasing the return of capital to shareholders.
In the first quarter of 2022 we reinstated our quarterly dividend in the third quarter of 2022, we increased the dividend and commenced the share buyback program.
In the first quarter of 2023, we then increased our base dividend again and resumed our share repurchases. Following a brief pause in the fourth quarter of 2022.
Over this time period.
Absolute debt balances have guided our piece of shareholder returns as we outlined in our 2023 budget release in January we are targeting to return up to 25% of free cash flow to shareholders until we achieve our next debt target of $1 billion.
Once we achieve this debt target. It is our intent to increase shareholder returns the amount of the increase will be determined once we achieve our debt targets and we expect the incremental return of capital capital to be in the form of an increase to our base dividend and share buybacks.
With that I would like to pass it back to Dr. <unk> to provide some closing remarks. Thank you <unk>.
Well as you can see from the presentation today, it's delivered on our strategic priorities over the past two years and continue to reposition for the long term success.
Summarize reject generated record financial results in 2020, twos, largely driven by strong European gas prices, which demonstrates the value of Vermilions international diversified asset base.
European gas fundamentals remain strong and we expect elevated prices to persist for the foreseeable future.
A divestment of non core mature assets within our southeast Saskatchewan operations unlocks funds, just salary debt reduction reduce unit cost and improved capital efficiencies.
Combination of core Montney and the powder River acquisitions enhance the overall inventory profitability and free cash flow of Vermilions folio.
Our focus on debt reduction and growing free cash flow over the past several years has made vermilion and much more resilient company today.
And finally, the reinstatement of a quarterly dividend and the commencement of a share buyback program in 2022 demonstrates our commitment to returning capital to shareholders and sets us on a path for increasing returns in the year ahead.
That concludes my prepared remarks with that like to open it up for questions.
Thank you all if he would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're on a speaker.
Speaker phone. Please make sure your mute function is turned off to like your signal to reach our equipment.
Again press star one for any question.
Our first question comes from I mean, your era that ATB capital. Your line is open. Please go ahead.
Thanks. Good morning, guys. Just a quick question on the on the Montney development plans.
With the shift back could be see I think you have 10 wells planned. This year could you just give us a sense of how many of those wells are on the PC side and I know, there's no guidance for 'twenty four yet, but you do have plans to ramp up to 13000 barrels next year is that more of a second half weighted production outlook.
In 2020, thanks for the question.
Yes, no I'll just summarize yet.
Some of the prices provide a summary of our activity in 'twenty <unk> three this year the number of wells, we're drilling and then we can talk with our our plans for 2024, but Bruce do you want to summarize our activity this year and I've looked at 44 or so yes.
For 2023, thanks for the question, we're planning to drill nine wells in $2023 seven of them are in Alberta, two of them are on the BC side of the property thankfully because where we've received some permits on the BC side.
And really the plan for 2023 is to drill to fill our existing infrastructure capacity, we have a three well pad in Alberta that we started in December initiated completions in February and we'll have those wells on production in April the two well pad in B C. We drilled in February and we're going to initiate.
Completion operations in March and we'll have.
Of them on production in May of this year incidentally, the first well on that D. C pad was the pace setter well for the area, we drilled 6000 meters measured depth and in 90 days. So we're very happy with that and then we're going to pivot back to drilling.
Third pad.
Pad in Alberta, and a March and April completed after breakup and won't be bringing that opened up likely in Q4 of 2023.
Thanks Bryce.
And then just in terms of 24 plants like I don't know you've talked about production getting up to 13 or average 13 next year.
Bryce do you want to just summarize our plans for 24, yeah high level, our plans for 'twenty four to drill 10 or 11 wells.
Really the focus in 2024 is building out our DC infrastructure.
The 833, Betsy that we're going to build out in 2020 for targeting.
Targeting production in that 12 to 13000 BOE a day level for 2024.
All wells would be in BC right now for our class of 2024 as well.
Got it appreciate that.
And then just on the on the reserves I noticed there was some negative technical revisions is that just reflecting the higher operating cost structures, we're seeing in the industry or is there anything else driving that.
Thanks, I'll pass it over to Jensen to address that question.
Yes. So we did have some technical revisions mostly in Saskatchewan. This year really what we did is looked at our reserve book in the context of our capital allocation priorities and as we brought in.
The Montney Mike assets other.
Other assets just weren't able to compete for capital and so those were.
It's an opportunity for us to just take some of.
The locations in Saskatchewan off the books.
That is aligned with.
With what we talked about as high grading our portfolio.
I would highlight that our despite the technical revisions are a light has increased over time and this year are now sitting at 16 eight years.
Thanks, gentlemen.
No I appreciate the color there and then just finally on the on the buybacks I know you've become a little more aggressive for year to date on the buybacks.
Also bumped up the dividend just in terms of your allocation of the 25%.
Free cash allocation is it just to keep the dividend at a higher rate and allocate the rest to the buybacks.
Thanks ill pass over to Lars to address that yes, that's being autonomy or to our strategy here. What we will look to do is return on that incremental capital to shareholders in terms of that up to 25% through share buybacks.
We think we have ample room to increase the base dividend over time.
But we have made the increase here in the first quarter of 'twenty three so our focus will be on share buybacks.
Okay terrific. Thanks, guys.
Thanks for the questions.
Once again it was star one if you had a question we will go next to them in our wholesale with TD Cowen. Your line is open. Please go ahead.
Thanks, and good morning, everyone I'll, just maybe start with a follow up on shareholder capital returns I'm just looking at your December slide deck, you had a detailed table for return of capital outlining how are you.
Expected to transition from 25% to 50% and eventually up to 90%, but I don't think I've seen that table senses is that still the plan or could we see you.
A more measured approach.
Thanks, Manuel passenger that alerts to address that question. Yeah. Thanks, Thanks metal and the focus for 2023 will be on achieving that billion dollar absolute debt targets.
What we are managing between is debt reduction and shareholder returns through buybacks argue at the end of the day is that both of those allocation of capital will increase equity value for the shareholders.
Mentioned in my prepared remarks that we have not set a debt target for 2024, but what shareholders can expect is as we achieve that $1 billion absolute debt target. We would then move into the 25% to 50% range that we illustrated earlier today versus the up to 25%. This year. So that's.
That's the direction that we're providing to shareholders in terms of continuing to have those debt balances guide our pace of return of capital.
Okay. Thanks for the confirmation Lars.
The next question I'm going to ask because I'm getting the question just on the $570 million budget for 2023, it's unchanged.
The the drop in production guidance in the release you talked about the key driver being.
Minimal capital being spent on the Saskatchewan assets that you sold. So the question is does that explain all of it or were there other moving parts that we should be aware of.
Okay. Thanks for that answer and you're speaking to production or capital.
Capital.
Got it helpful for $5 70.
Yes, no that's it.
As mentioned as part of our prepared remarks are those assets, we've been working on that process for a while and so on.
Our our expectation was that we would be able to divest of those assets, but you know these things go your neighborhood sure until you're able to get it across the line. So from a budgeting point of view, we weren't allocating much capital at all.
Two of those assets, which again in line with our strategy that they were attracting capital. So that's the reason there is no effectively no change to our capital budget, even with the divestment of those those mature assets within southeast Saskatchewan.
Yes.
Thanks, I'll turn it back.
Okay. Thanks.
We'll go next to host of character with Schecter Energy. Your line is open. Please go ahead.
Good morning.
Lars et cetera.
Just wanted a question about what's going on in Europe .
With Germany, now, having its first LNG import and others coming in.
Alright.
Keeping their coal fired and nuclear is open or are they going to be closing those in the next year or two to meet their climate goals and does that build up of potential.
The bigger opportunity in natural gas.
LNG imports from the states and of course higher prices for you.
Europe .
And if you have higher volumes in much greater returns.
Thanks, Joseph for the question and I think you've we've had those.
Comments as well in the past around when you look at the outlook in Europe , I mean, most of the conversation and the reset a year, it's been or how to displace or.
Attract LNG to backfill the missing volumes that were being provided by Russia and that itself is quite significant when you think of the materiality of that volume.
It's equal to all of the U S Gulf Coast LNG export capacity. So that's why again theres been a lot of tension around LNG supply.
On the LNG importing you're right Europe has continued to Germany.
Do you have any particular to get these import facilities.
It's really again, you've got to compete for that LNG against the backdrop of increasing demand across the globe to your point on the future outlook I agree I mean the.
Gas has been recognized in Europe , as a necessary transition fuel.
You look at the jurisdictions, Germany in particular, which is the largest our.
Largest economy large industrial country in Europe up their plan is to retire all facilities and retired nuclear facilities into effect, what you're doing on the nuclear side. So 40% of their energy comes from coal lignite and nuclear and so that's a significant part of their economy that ultimately will need to be replaced by other sellers other.
Form of energy and again, I think natural gas will be a big part of that what we like about our land base in Germany is we've got just under 1 million acres of land that's covered under three D. Seismic Oh, we've got infrastructure in place given the it's a mature asset that we've been able to buy from others and work those assets harder.
So we see several larger prospects that we've been maturing through the permitting process and we've had good work with the stakeholders there to continuing to advance those permits to be able to start that drilling program late this year. So we like Germany, we think theres a need for gas I think the demand is going to grow and again, we like the prospects.
All of our asset base, there as well.
Okay.
I'm glad to hear that anything changing in Netherlands, where they were at one point trying to close down farms.
Methane gas from the animals.
The issues of permitting as Netherlands, getting worse or better to work with.
I would say you know the Nox emissions.
Emissions is something that we were monitoring as well we were able to mitigate that with our systems for example, that's.
That's not a new issue so what when we.
<unk> select rigs and equipment those kind of things are all geared around managing Nox emissions were drilling into that was right now as part of our drilling program, we referenced well that we drilled earlier as well so.
We continue to get permits in Netherlands, we continue to drill two to four wells a year, we're drilling now so.
It's an area that we'll continue to work with with again all stakeholders there they've got what they call a small field.
Development, So a policy in which we're looking for pools that are in that two to 10 BS of gas and those are the ones that we target for our drilling program.
Strong track record of being able to bring that gas to market.
Super Thanks, very much for answering my questions.
Okay. Thanks Joseph.
And with no other questions holding Mr. Hatch I will turn the conference back to you for any additional or closing comments.
Well. Thank you again for participating in our Q4 results conference with that we'll close the meeting.
Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation you may disconnect at this time.
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