Q2 2019 Earnings Call
At this time I would like to welcome everyone to the Vermilion energy Inc. second quarter 2019 earnings results.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question answer session.
If you would like to ask a question. During this time simply press Star then the number one key on your Touchtone phone.
If youd like to withdraw your question press the pound here. Thank you.
Anthony Perkins, President and Chief Executive Officer, you May begin the conference.
Good morning, ladies and gentlemen, thank you for joining us I'm, Tony Marino, President and CEO of Vermilion energy.
With me today are Mike Kaluza, Executive Vice President and COO.
Ours, glimpse or vice President and CFO .
Kyle Preston now, our vice President of Investor Relations.
And other members of our management team, who may be called upon during the Q and a session.
As in our last quarterly call.
We'll be referring to a powerpoint presentation to discuss our second quarter 2019 financial and operating results.
The presentation can be found on our website under invest with us and events and presentations.
Slides two and three in the presentation refer to our advisory on forward looking statements.
These 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.
Slide four Q2 review.
We delivered average production of 103003, b or we'd be down slightly from the prior quarter.
The decrease was primarily due to a third party refinery outage in France, which temporarily curtailed our production in the Paris basin.
Impacting the quarter by approximately 1300 Boe easy.
Partially offsetting this were strong production results from our U.S. and Australia business units was which increased by 21% and 14% respectively compared to Q1.
I will talk about the operational results of each business unit later in this presentation.
Q2, F.F. FFO was $223 million or $1.44 cents per basic share.
Which was down 12% from the prior quarter.
The decrease was primarily due to the refinery impact in France $11 million, the timing of crude lifting on Australia $8 million and weaker natural gas prices in Europe , and North America $22 million net of realized hedging gains.
The results were positively impacted by stronger oil prices and lower operating costs.
Which decreased 15% from the prior quarter to $11.04 per Boe.
Now I'll get into the country specific updates.
Slide front five France.
Q2 production in France averaged 9800, BOE d. down 15% from the prior quarter, primarily due to the refinery outage that I referenced earlier.
The grant we refinery where all of our Paris Basin production is normally process was shut down in Q2 due to a failure on the refineries main feedstock line.
This pipeline Doesnt carry vermilion crude.
Nonetheless, the refinery did not have enough feedstock available to operate until the line was repaired.
During the outage, we made arrangements to ship, most but not all of our oil to alternate delivery points in France, and Germany on trucks and barges.
This reduced production by approximately 1300 Boe d. and reduced after tax AFFO by approximately $11 million due to reduced sales and higher transportation expense.
We also had to expend 2 million in capital to put the necessary equipment in place for trucking and barging.
The refinery recently returned to service and as resume processing Vermilion deliveries.
I want to recognize the tremendous effort and accomplishment of our French staff to put in place the trucking and barging operation in a very short time.
In the trucking portion alone our distance hold was 1.5 million kilometers.
Most importantly, our French staff and their vendors did this without any significant safety or environmental incidence.
Slide six Netherlands.
In the Netherlands, Q2 production increased 3% quarter over quarter.
8917 Boe D.
Primarily due to our successful workover and maintenance program.
We recently began site construction for the first well of our 2019 drilling program.
The west only were well, 50% interest which is expected to commence drilling in August .
During the second quarter, we received the draft drilling permit for the Baltic site Southwell also 50% interest.
The second well in our planned 2019 drilling program.
We expect to commence drilling this well in Q4.
These wells will represent our first drilling in the Netherlands in two years.
Slide seven Ireland.
In Ireland Q2 production decreased.
5% from the prior quarter to 8201 BOE D. The decrease was primarily due to natural declines and some minor facility downtime.
We have now been operating the core of facility for eight months and have focused on improving overall operating efficiency and costs.
As a result of our efforts operating costs decreased 14% in the first half of 2019 compared to the first half of 2018.
Looking forward, we will continue to focus on evaluating future facility and drilling projects and optimizing our maintenance activities.
Slide eight Germany.
In Germany production in Q2 averaged 3473 BOE a decrease of 8% from the prior quarter, primarily due to unplanned downtime operated and non operated assets.
During the second quarter, we successfully drilled our first operated exploratory well in Germany, the bird more z. five well, 46% working interest.
This complex well was completed near the end of June and was then hand, it over to our partner Exxon Mobil for well test activities in July .
The well was drilled to a measured depth of 11480 feet and encountered 260 feet of gross pay in the Zechstein carbonate.
Around half of the growth section has matrix porosity above our frosty cut offs and the other half may contribute as well be a natural fractures.
During the fourth week of July Exxonmobil tested the well at a final flow rate of 8.8 million cubic feet a day.
The test rate was limited due to weather conditions.
Following the successful completion of our first operated well this summer.
We are planning to drill at least one exploration well in Germany each year over the next several years targeting other sizable gas prospects in the North German basin.
Slides nine through 11 central and Eastern Europe .
In central and Eastern Europe , we commenced our 2019 drilling campaign during the second quarter.
Including a well drilled and completed in July we drilled five 4.3 net exploration wells.
Four of these five exploratory well as result of the new gas discoveries, while the commitment well in Hungary was dry.
Slide 10 provides an overview of the Hungarian drilling results.
We drilled a total of three 2.3 net exploration wells in Hungary during the second quarter and one.
1.0, net subsequent to the quarter.
The first well was a commitment well and did not encounter an economic quantity of gas the second well hundred percent interest encountered 15 feet of net gas pay and tested at a rate of 1.4 million cubic feet, a day and 55 barrels a day of condensate.
The third well, 30% interest in counter 26 feet of net gas pay and tested at a rate of.
2 million cubic feet a day.
The fourth well, 100% interest in countered 17 feet of net pay and floated rate of 3.4 million cubic feet a day on test.
Slide 11 shows our Croatian results.
Our first will improve Asia, the search one well, 100% interest was quite a success in countering 32 feet of net gas pay and testing at a rate of 15 million cubic feet a day.
We're very encouraged with the initial results from our 2019 sea drilling campaign to date.
We look forward to the rest of our Hungarian and Croatian program.
And to initiating our Slovakian program later this year.
These are high production rate low capital cost wells and over time, they will allow our CE unit to contribute meaningfully to the sustainability of our capital markets model.
Subsequent to the second quarter, we further expanded our presence in the C. As we are awarded.
Two exploration licenses in Ukraine in a 50 50 partnership with UGC.
Our Ukrainian state owned gas producer.
The two exploration licenses totaled 585000 gross acres of land.
In the prolific Neeper Donuts basin.
And are in close proximity to several multi tcf gas fields.
Most of the basin.
And the subject license area is still not covered by Threed seismic and is under exploited and under tact in our view.
The licenses include a modest back end weighted capital commitment over a five year period.
Our entry into Ukraine is a natural progression of our CE strategy.
It aligns with our approach of capitalizing on opportunities an under exploited basins by using modern technologies to improve sex success rates and recoveries.
Ukraine has very high oil and gas prospectivity with minimal use of modern technology over the past 30 years similar to our approach with other new country entries. We have partnered with a local established company you GB, which provides regulatory know Hal access to data and access to services given that the licenses include a modest and back end loaded capital commitment over five years. This provides us with plenty of lead time to plan and execute our future activities.
Slide 13, Canada.
In Canada production averaged 61507 Boe D. in Q2.
Representing a slight increase from the previous quarter.
Contributions from our active Q1 drilling program were partially offset by and planned facility downtime in spring breakup.
Our Canadian revenue in Q2 was negatively impacted by weaker NGL and natural gas prices, which were down 50% and 39% respectively relative to Q1.
However, this was partially offset by lower opex, which decreased 6.3% from the prior quarter to $10.79 per Boe.
Slide 14, United States.
In the United States Q2 production increased 21% over the prior quarter to 4414 Boe D., reflecting the positive contributions from our first half 2019 drilling campaign.
We drilled completed and tied in four wells all 100% interest during the quarter.
The wells have performed ahead of our expectations to date.
The first two wells were equipped with Rod pumps and produced a peak IP 30 rates of 325 Boe D.
On average per well.
The next two wells were equipped with Sps and produced at a peak 30, IP 30 rates of 635 Boe D. on average per well.
With the higher production volumes during the quarter. We also saw market improvement in our unit operating costs, which decreased 15.5% from the prior quarter to $8.82 per Boe in Q2.
The fifth well the program at 100% interest was spud toward the end of Q2.
And was drilled in less than 12 days, representing a 28% improvement over the fastest well in the first half of 2019.
We plan to complete this well and drill the remaining three 3.0 net wells of our 2019 program during the second half of the year.
Since taking over Operatorship last year, we've achieved a 15% reduction in drilling completing equipping and tie in costs and expect another 10% improvement and the remaining wells this year.
Slide 15, Australia.
In Australia, Q2 production averaged 66689 barrels a day, an increase of 14% from the previous quarter due to a full quarter contribution from our two well program completed in January .
We continue to manage production to meet our annual production target of 6000 barrels a day.
Production for the first half of 2019 averaged 6270 barrels a day slightly above target we receive premium pricing on this crude year to date. This premium to Brent has averaged us $5.29 per barrel on prom contracted volumes and up to a US 12 dollar 50 cent per barrel premium for spot Liftings.
For our Q2 sales volumes, we realized an average price of $99.39 per barrel.
Which translates to use $74.32 a barrel, reflecting a premium of usfive dollars 50 cents over dated Brent.
Slide 16 corporate update.
We have several other corporate developments that we reported with our Q2 2019 results our board of directors authorized an application to the TSX to implement a normal course issuer bid for a maximum amount of 5% of the issued an outstanding shares of Vermillion.
The NC IB is intended to augment our ongoing return of capital via dividends.
We plan to employ the NC IB under appropriate market conditions, and we'll allocate excess free cash flow beyond our dividend stream to both debt reduction and buybacks.
On June 12, 2019, we entered into a series of cross currency interest rate swaps with a syndicate banks converting the remaining term of our 5.625% Usthree hundred million dollars senior unsecured notes due March 2025 into a $265 million euro obligation bearing interest at 3.275%. This swap is expected to reduce our annual cash interest cost by approximately $9 million.
Along with our European gas hedging program, and our M&A and country entry advantages, we see this cross currency swap as another example of benefiting from our strong presence in Europe .
And lastly on the ESG front Vermilion was recently rated double a in MFC eyes annual SG rankings for 2019.
Which is an improvement from our a rating last year.
This new rating places us in the top 19% of oil and gas companies worldwide.
We are determined to be the leader in energy sector SG performance.
Slide 17 hedging.
The last topic I'd like to discuss is our hedging strategy.
We actively hedge to manage our commodity price exposures and increase the stability of our cash flows which provides greater certainty for our dividend and capital programs. One of the unique advantages we have at Vermilion is the ability to hedge across multiple products and currencies.
Moving to our internationally diversified asset base. We currently have approximately 40% of our expected net of royalty production hedged for Q3, 2019, including 71% of anticipated European European natural gas volumes for Q3 2019.
European gas prices have been particularly weak this summer due to increased LNG deliveries. However, European gas remains in strong contango compared to the front month price with the calendar 2020 strip for NBP at approximately $8.50 per MB to you.
In fact, the calendar year strips for each of the next three years are within about 1% of where they were a year ago.
While our fundamental view on European gas is that the forward market realistically reflects supply and demand drivers were willing to lock in this curve and attended strong levels of free cash flow and expected project economics, Accordingly, we've hedged, 69% and 65% of our anticipated full year 2019, and 2020 European natural gas volumes respectively.
At prices, which are expected to provide for strong project economics and free cash flows the hedge program continues on into 2022.
And we're continually raising our European gas hedge percentages into that strong contango curve.
With respect to oil we are one third hedged for the rest of this year at very attractive prices most of our structures are participating contracts, either two way or three way collars.
Our average floor is $73.50 per barrel and our average swap is $87.88 per barrel as always these are in Canadian dollars unless otherwise noted.
Based on our 2019 capital budget and production guidance and applying the forward commodity strip and current hedge position, we expect to cover our full capital program and dividend with internally generated cash flow.
Our 2019 capital program is designed to deliver annual production per share growth of 8%.
We believe this level of growth combined with a dividend yield of 12% represents significant value.
As we look forward to 2020, we believe that a redoubled emphasis on restrained and efficient capital investment both in North American overseas.
Continuing to take advantage of unique opportunities afforded by our European assets in areas such as hedging.
And our early stage success in the US Germany in the CE will underpin continued sustainability in our capital markets model, including our monthly dividend.
The establishment of our NC IB gives us another tool to return capital to our owners and another vehicle to augment per share growth.
That concludes my planned remarks, we would be happy to address questions.
Operator would you please open the phone line.
Certainly at this time I would like to remind everyone in order to ask a question Press Star and then one on your telephone keypad.
We'll pause for just a moment to compile the Q and a roster.
Your first question comes from Dennis Fung with Canaccord Genuity. Your line is open.
Hey, good morning, and thanks for taking my question.
The first one just quickly on the burglar that five I just wanted to understand it sounded like there was either.
A shortened testing period or something different than the standard testing that you guys did there I just was wondering if you could provide a little bit more detail on that I have a follow up question.
Okay for sure Dennis Thank you.
Yes so.
That will was being tested at a time of unusual weather conditions.
In in Europe .
Temperatures there were around 40 c.
104, as it had been dry for several weeks.
And.
We never want to do very much flaring, but.
Some limited amount of flaring is required during the testing time.
And.
The.
Our operator, there I think.
Exactly correctly.
Limited the test to a lower rate because of the higher the rate that you test at the greater the temperatures are around that flare and.
We always want to take the most.
Conservative approach when it regards safety and just didn't want to increase.
Fire risks so.
The well was.
Steadily cleaning up.
As they typically do during the test and.
So.
Of course, it would have been exciting to report an even higher rate.
But.
In the end I think we got the information necessary out of the test despite the the rates being held down and I think we've got a very good result, there so.
That's the.
Let's see.
Background on the testing.
Okay, great. Thanks, and then the second question here is just on capital allocation and so forth. So.
I know you outlined that.
Excess free cash flow will be looked allocated between debt repayment and.
Potentially share buybacks whenever that potentially gets approved by the TSX I was curious as to how you guys plan on thinking about capital allocation on a go forward basis.
If this could mean a potential modifications to your capital spend profile as well as what kind of priorities you guys have with respect to allocating dollars across.
Great. Thanks.
Yes, yes so.
You're asking about a kind of a forward capital profile.
So as I am.
As I spoke to a little bit in the.
In the presentation there.
We've got a we've got a long term record of.
Providing very significant per share growth very steady record.
In.
PPS growth.
Cash flow growth, particularly free cash flow growth and.
I think as we look forward looking at the.
The market conditions and the difficulties that the.
Independent energy sector, especially the.
Intermediate sector I would say.
Probably a little more pronounced in Canada, but also a factor in the us industry as well.
Has in.
I guess attracting capital.
I think we will have a increased emphasis go forward on.
You know even further restraint in our in our capital budget levels now are our capital program is substantially reduced from where it was in the early part of the decade, even though the company has tripled in size. So we have I think had a very efficient capital program.
And that's why we've been able to run this growth and income model as we have during this time.
But I think.
As we look forward.
We haven't set any kind of budget for 2020, and we're not going to.
Speak numerically to that today.
It would be later in the year last year. We release was Q3 that was relatively actually I think the earliest of any of the intermediates and the.
In the budget cycle.
That might be the case again or perhaps this year, we'll wait until even later in the year to release a budget just to look at the pricing.
Conditions that are unfolding in front of us.
But.
I think it's very very possible that will.
I see.
Even greater emphasis on restraining capital and therefore.
Perhaps less of an emphasis on growth than we have had.
In the past.
The.
The uses of that.
Capital.
First of all we've got our dividend program and we don't anticipate any change to that.
And it is extraordinary to me the levels to which the.
Yield has been traded in the market.
We're certainly very committed to the dividend.
Here.
And.
There can be.
An additional return of capital via the NC IB.
We will look at the forward pricing conditions and look at the excess.
Cash that is available beyond the use of dividends and then a portion of that excess cash would be allocated to the NC IB Andy.
A portion to the.
To continue debt.
Reduction.
And then sorry last question.
Last last question here is just with respect to the potential installation of in NCM <unk>, how should we think about the drip program forward.
Yeah, Let me just spend a couple of minutes kind of going through the history of the drip and why we have a drip.
So.
The.
The drip started at the beginning of the Trust era, you know three and it was the.
Mode of the trust too.
Offer a 5% discount.
For participants in the drip if they wanted to reinvest Uh huh.
In shares of the company.
And we we kind of recognize that large discount as an anachronism kind of related to the trust era. So when we were in the corporate era.
Beginning in 2013, we reduced the discount the 3% I believe we subsequently reduced it to 2% and 2016 and we eliminated the discount a little bit over a year ago. So what we offer currently isn't on discounted drip.
Now there isn't a huge percentage uptake on the drip.
Currently I think for for this year, we have about 6% or so.
Average uptake on it.
So it is a.
Pretty small amount.
It's probably on the order of 20 or 25 million a year.
That is reinvested and that's the first point I'd like to make the magnitude is not very large.
Given that you might.
First to ask I think.
Why do you have the drip at all then.
Because I've seen some.
Market commentary.
Suggesting that it's sort of inconsistent with the other things that we are doing.
Now.
This strip at an undiscounted level.
Exists as a service to our shareholders.
I have had done.
Some.
Bigger.
Kind of institutions I've had a family office tell me they participate however.
We believe that the vast vast majority of the participants in it.
Our individual investors, what we would call retail investors.
Now.
Yes, there is a I think theres a perception out there in general as Doesnt really specifically apply $2 million or even energy companies, but it's kind of about the financial markets overall that there.
Tilted against the little guys that these.
The big institutions have greater economies of scale lower transaction costs.
That.
They are all of these advantages that to institutions and hedge funds have.
In their activities in the market.
So for US the drip is something that we have had traditionally available for the benefit of small investors retail investors and we have many of them in our company.
Who own shares in our company and we do hear from them fairly frequently about there.
Participation and their appreciation of having that drip there is no discount on the drip. However, it does mean that they at least can reinvest a cash stream that depending on their individual preferences of during the drip they.
Clearly don't have as great a preference for cash they want to reinvest in the company. They can reinvest it with no transaction costs. So it's just a little thing that our company can do to level the playing field.
In the face of all this criticism that small investors don't have an opportunity to.
To be.
Treated equally or have an equal chance in this market. So we have the drip, it's a de minimis amount and.
I appreciate your question in combination with the ANSI Ivy.
If you like you can view the NC IB if you.
Identity I wouldn't put you in this category, but for those drip haters that exist out there.
Well you could view it as a way to immunized.
At this time.
Small, but apparently to them devilish.
Impact from the from the drip.
Okay. Thank you.
Your next question is from S. Hudson with Bank of America Merrill Lynch. Your line is open.
Thanks, Good morning, guys Tony appreciate the.
The increased focus on capital returns, but just wondering how you're thinking about.
The optimal or target debt level relative to.
The one roughly $2 billion net debt and.
Let's say two times net debt to EBITDA here.
Yes.
So our target.
Is to continue to de lever as we have been really for the last five years in the debt ratio.
From the current level of about two x.
Two.
1.5.
One point Fivex actually we would define that target in terms of debt to cash flow. So if we're speaking in terms of.
Debt to EBITDA.
This might be.
1.3 extra so so we're determined to de levered to that.
Target, we have been on a downward path.
For about the last five years and that debt ratio.
We.
Seek that target, even though our operating leverage is a lot less than.
Other companies would have in the sector. This is because of the high margins that we start with its because of the product mix diversify diversification that we have with the low correlation of.
Pricing on the various.
Commodity.
Inputs to our model.
And despite the fact that we do run a.
Pretty consistent hedging program to further dampen down the volatility of the cash flow. So there are variety of things that control the operating leverage.
Which is sort of half the equation.
And it is lower than other companies. So the other part of the the leverage question.
Is the.
Is the.
Debt side.
And.
We.
We do seek.
You know too.
To bring it to this 1.5 level and it's not going to happen overnight. It does depend on commodity prices for sure.
But that is our target and Thats why we don't take all of that excess cash and put it towards an NC IB.
I might turn it to Lars for just a second to to comment on.
Our interest cost and cost of debt while we.
Well, we contemplate that that debt level.
Thanks, Tony.
Yes, I think didnt highlight as well is targeting a leverage ratio that is lower than where we are today, we'll get there over time I think the thing to highlight as well and this is a unique characteristic that were afforded by our European presence is the ability to control the cost of the debt that we have on the balance sheet as well.
We drew attention to the trade that we did in mid June where we swapped some of our us de debt to euro and that will now carry an interest rate of 3.275%.
When you factor that in the overall cost of our debt to serve it serves it from an interest rate perspective is below 3.4% now so I think thats just another unique attribute I would point out as well.
Looking to de leverage.
Low overall overall operating leverage and then in addition to that a very competitive cost of capital in terms of where we are able to service that debt at as well. So I would just add that to tonys comments.
I appreciate the details guys. So my follow up here is on.
Tony your comment on a risk between capital spending.
Could you remind us on your capital spending flexibility in other words, what's your current sustaining capex level to keep production flat and.
What are kind of the levers that you initially think about.
Okay. So we have related.
Previously at the beginning of the year.
Our estimate of sustaining Capex for 2019 so.
The history on this is that we were quite early in the budget cycle vis-a-vis other companies to put out our 19 capex adjusted our than our tradition to release it with the Q3 results and.
You know that turned out to be kind of early in the market a number of companies that weren't out with Q3 quite as early.
Delayed it all the way to the end of the year circumstances were at the end of 18 relating to this 19 capex budget that we have this rapidly cratering.
Oil price.
And we're about a month into the.
Two and a half month decline that started at the beginning of October at the time, we release that budget.
So.
We established our budget.
Early and then of course.
We began to get inquiries about well you know.
How flexible is this budget.
What are your priorities.
Between if we're in this low oil price environment I think it bottomed at 42.
Dollar WT Guy in December .
And.
How would how would you respond to protracted weakness in the in the commodity as we pointed out of that time, our priorities are balance sheet and dividend and.
Capex or growth well after that so.
In.
The last.
Quarter of the year. After we had released the budget kind of the December 1st part of January timeframe, we actually established a whole range of alternative.
Budgets.
One is that called for the.
Starting with the full 530 that we had for the year.
Outlined that the.
Release at the end of October and then ones that steadily took the growth rate down in fact.
Oh gosh, we had a whole a whole set of them I think.
We had a fivethirty delayed budget so that is.
Basically what we implemented this year, we pushed out certain projects to later in the year just to give greater flexibility entry year.
We had.
I think a $400 million budget, a $300 million budget and a $200 million budget that we constructed.
And we built up the actual projects inside of each of these.
Budgets so.
The one that kept us flat.
At times, so we have $300 million $400 million budgets.
The one that kept us flat at 2018 production levels annual 18th annual 19.
And making an adjustment for the acquisitions that we did in 2018 C. hadn't had the add back into the 18 volume.
The.
Months that we did not own the acquired assets.
Really applied to Spartan and and.
Highlight.
And so we established.
Bye.
Taking away projects between the 300 and $400 million budgets.
That to keep us flat at that level 18 to 19.
It was $365 million, so thats, a thats the sustaining capex level required to be flat on an annual basis 18 to 19.
Appreciate the color. Thank you.
You bet.
Your next question is from Joseph Shuttered with chatter Energy Research Your line is open.
Thank you very much good morning, Tony just to clarify on all fronts.
Production now is back up to the 11000 plus range and the trucking.
And all of that required during the interim.
Unplanned outages now behind you.
I'm, sorry, I missed the very first part of it.
With that.
So with the 1300 be always a day that was.
You have the outages because of the Grand Pugh refinery is then is that now behind you and others have shipments are now shipping full amounts over 11000 and not using trucks anymore.
And barges.
Yes that is that is basically correct.
The refinery just came on.
In the last week or so and.
They have started taking our our oil directly in by pipeline. So I don't think we are running any more trucks and were probably very close to getting all the.
All the wells back on that we had shut down so if we're not there today, we should be there very very shortly.
Okay. Thank you second question on Ukraine.
The area you're in is just.
West of.
The disputed territories with Russia.
Is there any operational working problems in the area or is it totally within the you have governments auspices.
Okay, yes so.
The.
The two blocks that we have.
Bellic lease going even east.
Our.
About I think that the closest they're about 150 kilometers from.
The dawn boss, which is the.
Occupied.
Part of it.
Eastern Ukraine.
And.
No there are no.
Operational.
Difficulties in.
In conducting operations there.
We are I would say we are we think Ukraine as a country that is definitely on the way up I'm sure you're probably pretty familiar with the.
Recent election.
Recent election of.
There are other than they are in the news.
Yes, our presidents Alinsky.
And.
Hello.
Continuing the and accelerating I would say expanding.
The progress of the country made ever since the my Dan.
Five years ago. So.
The country ranks pretty well on ease of doing business.
I think that this government.
Is.
Very very committed to.
Transparency and.
To elimination of corruption at something that.
An advantage Vermilion brings to the table is our exceptional SG standards that we have as it applies.
You know on the contracting and governance side as well as the environmental side.
And.
We we think.
We think it's a great place to be because.
There there just aren't very many places in the world, where you can be around next to on our licenses.
For example in 18 Tcf field.
Yet you haven't had.
Meaningful application of technology sense.
The Soviet era.
And.
For us Thats exactly the position, we want to be and we had the success already in the C which.
You know.
In Croatia alone.
We we were able to produce a very significant result, there in an area I don't think that anybody had.
Really counted on for.
Producing meaningful.
Production and significant cash flow and a good pricing environment at such low capital costs and now.
If you think of.
Ukraine is.
Extension and amplification of this you've got an area that is.
Amazingly hydrocarbon prone I mean it.
Up to the discovery of the Siberian fields around the Seventys in the Eightys. It was the big majority of the USS ours production, yet its kind of been frozen in time with respect to investment and technology and we are right next to these.
Fields and it's not just the.
18, Tcf field, there's a variety of.
Multi tcf fields.
Next to the license areas of course existing fields are not part of licenses, but the areas next to them are there isn't much three d. that has been shot so.
We think it's a great way to take care of this expanding.
European franchise that we have.
It's a way to take advantage of the great.
SG performance that our company has and we think it's going to be in a country that gets better and better and better over time. So.
That's our that's our view on Ukraine.
Yes, no I think that's a good idea.
Ukraine definitely.
Hi, Naved natural gas discovery, so that they don't have to import from Russia last question from me is.
Once the TSX approves the NC IB.
And you have the option of buying shares is there what are you looking at.
Waiting till you get free funds flow from higher commodity prices in the sixties.
You don't increase debt or are you willing to increase debt to take advantage of these very low prices for your stock and allow debt to go up a little bit once you have the TSX approval.
Yes.
We're going to look at the commodity environment, we want to do it in situations, where we have excess cash beyond dividends and.
We're we're just starting with the sense the IB what the application now.
I think as you look forward to 2020, we have an opportunity to formulate a brand new budget under.
As I said in the call and it was in the in the.
Introductory presentation and in one of the answers.
One that I think will reflect redoubled emphasis on.
Capital.
You know restraint and capital efficiency.
That will give us a great opportunity to.
You know look forward in the.
To the year at the commodity prices that we have at that time, but.
The answer would be of course could be applied earlier, but we're going to want to do it in situations, where we can look at the.
We can look at the market prices, the commodity strip and say that we have excess cash.
Beyond the need for dividends and then at that point.
We'll be dividing it up between.
Debt reduction and the NC IB.
Okay Super Thank you for taking my questions.
Thank you.
Your next question is from Mike <unk> with TD Waterhouse Your line is open.
Hi, just given the dynamics that are going on in the industry today versus what it was.
A decade ago, obviously planning going forward is going to be challenging here.
And Im trying just to reconcile the the drip plan with the FDA.
Seems like its contradict each other but.
I'm wondering if you've given any thought to creating some flexibility with regards to your dividend in terms of using that or.
Provide yourself with greater flexibility to buy back your shares by maybe reducing your dividend going to special dividends or something along those lines.
You could then decide to give yourself greater flexibility going forward.
As to how best to play that capital because what your stocks you hit a 52 week lows here.
Obviously, its very frustrated the markets, obviously, believing that the dividends could it be.
Jeopardy here I guess.
Try to get some flexibility around that would be helpful. Just curious on your thoughts on that.
Yes, Thanks, Youve got to several elements and the question I'm going to try to remember and work backwards on here.
So the first thing is you have the markets I think we totally hear you on that one the market.
Is saying that we don't believe this dividend, it's a funny thing right because.
As we.
As we discussed it among the management team, while we're we're very well cognizant of the.
Of the stock price and the market reaction in.
As you point out of the very beginning of your question what has been.
Markedly different and difficult.
Environment for.
Energy equities.
When we when we have our discussions.
We don't entertain reducing the dividend.
We don't have any intent to reduce the dividend even today with a.
The most recent downdraft in commodity prices.
It is still covered along with the full capital program, even including all of the growth Capex. Its cover. These uses of cash are covered by internal.
Generation of cash so we we just have not entertained a reduction in the dividend and it's not something that we intend to do.
Now as I say this.
I will never say and I never have said anytime I've been asked this question that there was is there any circumstance in which you would reduce the dividend will obviously, if we had significantly lower lower commodity prices, perhaps across the board and they stuck around for a significant period of time.
Would we have to entertain a reduction.
In the dividend.
The answer to that is yes done that but that's the only qualification I will put on this support for the dividend.
No we didnt cut the dividend when it went to 42.
Dollar W.T.I. in December .
In previous history, Yes, as you point out conditions were different a few.
A few years ago, but.
You know I think we got too.
$27 oil in Jan 16.
You know the.
The dividend is something we're proud of we think it's good for the owners of the company. We think it's good for the shareholders to get a dividend back we think it the model.
We think it's what has made the model successful over the years it.
Is what enforces capital discipline on an industry that has lacked capital discipline I don't think that has so much applied to vermilion myself, but nonetheless.
It's the.
You know its a.
A wrap that the that the industry gets and.
It has forced us to put both overseas and in North America.
Operations in place that have the right characteristics, the right margins decline rates capital efficiencies.
Such that we can generate enough cash flow.
To grow the assets and to throw off significant.
Excess cash beyond that so that we can pay the dividend and that's we we have those assets overseas we've shifted around the north American unit to be able to do the same thing and.
So.
No. We don't we don't intend to cut the dividend and the bringing in the NC IB.
The purpose of that is not too.
Let us cut the dividend and instead use it for buybacks.
It is there to augment the dividend.
And.
That is true.
Stock seems awfully low to us.
But it's a it's a long.
It's a long term.
Effort that we are engaged in here the dividend has been there for the long term previously we intended.
To have it there for the long term going forward. The NC IB just gives us the flexibility to using another tool to return.
Capital to the owners of the company.
To to.
To try to.
Redress.
Inordinately low.
Stock prices, it's even a way to give you another method to produce per share growth instead of just drilling for it. So we think that the flexibility associated with it is great.
But it's not there too it's not there to take away from the dividend.
I think in the in the list of questions that you had we also.
We also.
Had one about the drip now.
Dennis long asked about that earlier and again.
What I would summarize all of that earlier answer is that first of all it's a de minimis amount that secondly, it's therefore, the retail investors, primarily and we don't want to take that away from them.
Thirdly, I think people should view this NC IB as a positive thing in conjunction with the drip and instead of it somehow being contradictory to the drip.
If.
If you're one of those bigger market participants that.
Sees it as a.
Like a real bad thing to have that drip available to choose by the retail investors then.
The NC IB gives away of immunizing for that de Minimis amount of issuance that occurs under the drip.
I mean.
We'll we'll look at all of our programs, including the drip will continue to.
Assess their validity their relevance.
As we go forward, but that is one traditional service for the smaller investors of the company that at least based on what they report to us their use of it.
I know commissions have come down across the board, but still the small investor does not get the razor thin transaction cost that these big hedge funds for example get and.
They tell us that they see it as something positive that we do too.
To help level the playing field.
Thanks for the uptick.
Thank you.
Your next question is from running Gerra with JP Morgan Your line is open.
Hey, Good morning, Tony I was wondering if you could talk a little bit about the implications of the Berg more well.
Thoughts on the.
On the E or from that initial well and just from a on a go forward basis.
How Germany think we'll keep compete from capital.
Okay. Thank you.
So what are the implications.
Of the the bird more well.
So.
We have constructed a whole series of exploration prospects in Germany.
And and kind of on this continuum of places.
Just haven't had very much investment.
Germany would sort of.
It would have had.
More investments say then.
Croatia.
And a lot more investment than say, Ukraine. So kind of can establish continue on Germany, Croatia, Ukraine, but theyre all on the Underinvested side of the spectrum way way way under invested compared to what you would ever see in North America and they've all got a different set of reasons in the in the case of Germany.
It's.
It's really driven by the.
Very large companies have dominated.
Over the years and.
There was just the.
Onshore Europe .
Isn't going to be the kind of thing that can move the needle Forum. This is what we found earlier in.
Producing acquisitions and in France, and Netherlands.
In these places that are just they just don't get the capital because typically they can't move the needle for the bigger companies. There is a good investment stream available and Thats why if you turn to the investor deck Im sure Youve seen. This previously we can have quite a record of outperformance upon taking over assets like that just because.
You know they they get more.
Emphasis.
Investment emphasis than they could get as.
As kind of just.
Total cash cows.
Under under their previous.
Ownership and they still throw off a ton of free cash I mean, Europe overall throws off about two thirds free cash for us, but nonetheless, there there's an investment stream. That's available there that is just higher rate of return than you would find for the average project in in North America for the industry in North America.
And we've got a whole string of these exploratory prospects.
None of them is the same.
They are not in our view.
They are independent prospects and so by that I mean that the success on one actually does not have a success or failure on one does not have a specific.
Technical bearing and changing our estimates a success on that on the next wells.
Now what we have outlined is that we intend to drill one exploration well per year for the next four years and this was the first of them here.
The kind of the chance factors and the.
Distributions for you are are outlined elsewhere in our disclosure in our deck.
In our.
Corporate Powerpoint.
But the way I simplified this down was to say if you just call them, all roughly 50% chance factor projects.
And you drilled four of them in a row that would.
Suggest that your chance of rolling Snake eyes on the entire program would be about 6% I think specifically 6.25%.
The other 94% of the time you'd make at least one discovery you'd have a 6% chance of.
Making four in a row.
Any one of them is pretty significant to our German unit and a combination of them of course would be very very powerful for us. So the first first implication to talk about here isn't is it means that.
Well, we're not going to be completely shut out in this program, we've eliminated that 6% that we had.
Prior to drilling the well.
I don't think we're going to change the.
Probabilities.
On the remaining prospects because reduce consider them technically to be independent of each other.
Perhaps I guess you could say does it suggest that there is a little bit of technical.
Conservatism.
In.
You know in our.
Chance factors that we place on the prospects, especially given.
Hitting four out of five so far this year in the CE, maybe those are maybe or kind of underwriting.
The chances on those a little bit and that may well be the case, so and that there is.
I'm not going to commit to it here, but there is some possibility that were a little conservative in the in the placing of those chance factors.
But I think the implication is first of all.
We're not going to be shut out.
Secondly, it makes us even more enthusiastic about the rest of the program.
As you look at the the next prospects.
These are some very large.
Potentially.
Very many multi pool.
Prospects that we're drilling I mean, some of them are on the order of maybe a half a t. in size.
Gross.
There is more than just three prospects that we've been maturing. So we're going to have a few alternatives and maybe.
And even longer program than what we have outlined so I am very optimistic about it we don't have it.
I knew you our estimate.
Although well testers is down about a week ago, we will have to we're just in the process of the the analysis to to to try to estimate that.
So did I.
Did I cover your questions on on that or.
You did you did I just had one quick follow up Tony.
Into Q.
You had a little bit of unplanned downtime I think you talked about France, Germany, Ireland, Netherlands, you did address France, I think on the call but is there any.
Lingering impacts from Germany, Ireland, and Netherlands, and Threeq, you and how do you. How do you think you know production is shaped shaping up for the back half of the year relative to your.
One on one to one a 6K.
Per day guide.
Yes. The overall answer is we don't have any change to guidance. We're we're producing around the middle of the guidance range.
And the first part of your question.
Any lingering problems and Netherlands, Ireland or.
France.
Journey.
Germany, Germany, you just highlighted in the hub and the ops update that you just had some unexpected downtime I was just trying to gauge if any of that.
Had a knock on effect to Q3 and the back half of the year, you talked about France already on the call.
Yes, yes, so there's a small impact from France.
But I think on this other one I'd like to turn it to Mike lose the our COO.
Yes on the like you said the France has already been covered in terms of buyer on that was just some some minor.
Some minor minor shutdowns there so thats theres and there is no lingering effects in France, we had a.
We had a couple issues with the.
One of our we had a pipeline leak on injector from one of our field. So we had the field down for for several weeks. So thats been repaired that's up and running again.
And then the other issues on one of our gas assets, we had some.
Some equipment on there that.
That went down took us a little bit to define the parts to to get that going again, but thats. All been resolved also so all the all those shutdowns, we referred to there they've all been resolved and no no future impact from that.
Thanks.
This concludes the Q and a period I will turn it back over to Anthony Marino for any closing remarks.
Thank you again for participating in our Q2 2019 conference call. We look forward to speaking with you again after our Q3 2019 results are reported in October .
This concludes today's conference call you may now disconnect.
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