Q2 2023 Vermilion Energy Inc Earnings Call

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'd like to ask a question. During this time separate press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press star two thank you Mr. Dion Hatcher you may begin your conference.

Thank you Julie.

Ladies and gentlemen, thank you for joining us at your President and CEO of Vermilion energy.

With me today are Larry <unk>, Vice President and CFO , Darcy Kerwin, Vice President International and agency <unk> Criminal Vice President North America, Jess <unk>, Vice President business development and call Preston Vice President of Investor Relations will be referencing a powerpoint presentation to discuss our Q2 2023 result.

<unk> presentation can be found on our website under invest with us and events and presentations. Please.

Please refer to our advisory on forward looking statements at the end of the presentation describes forward looking information non-GAAP measures and oil and gas terms use today and outlines the risk factors and assumptions relevant to this discussion.

Production during the second quarter averaged 83150 <unk> per day, which was at the top end of our Q2 guidance range of 80 to 83000.

We revised our Q2 production guidance in mid May to reflect the temporary shut in of approximately 30000 per user day in west Central Alberta due to forest fires.

The impact of Q2 volumes from the <unk> and <unk>.

The Australia downtime was approximately 8000 per user day, our team was quick to respond to the fire situation in Alberta, It was able to safely restore all of the production within weeks of the initial shut in which minimize the impact of it.

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In addition, we achieved strong operational performance across many of our other assets.

We generated $247 million of fund flows and invested $167 million of E&P capital, resulting in $80 million of free cash flow of which we return 40 million to shareholders via the base dividend and share buybacks, representing a return of capital payout of approximately 50% during the first half of 2023, we have declared.

<unk> $33 million in dividends and repurchased $54 million of our common shares representing $87 million returned to our shareholders. We continue to target shareholder returns, but 25% to 30% of free cash flow for 2023 with debt reduction remaining the priority and until we achieve our next net debt target of $1 billion.

Net debt at the end of Q2 decreased slightly to $1 3 billion, representing a trailing net debt to funds flow ratio of one times given the front end weighting of our capital program combined with higher forecast production and cash flows in the back half of the year, we anticipate generating more free cash flow in the second half, which should translate to accelerated debt reduction.

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Production from our North American operations averaged 54064, we use today in Q2, a decrease of 10% or 6000 Boes per day from the prior quarter, mainly due to the disposition of approximately 8500 per user day of higher cost assets in our southeast Saskatchewan and approximately.

<unk> 4000 abuse at AFR related downtime in West Central Alberta.

We were able to partially offset this impact with organic production growth from our Micah Montney.

Southeast, Saskatchewan, and the U S assets, which added approximately 3400 views at any combined in Q2.

All of the production that was temporary shut in as a result of the wildfires has been restored thanks to our hard work of our employees and contractors.

Although there was no major damage to our facilities or well sites. We will continue to monitor the forest fire and take any necessary actions to ensure the safety of our people and assets.

I want to thank our operations staff for the safely restoring production during this difficult period.

In West Central Alberta, we completed one and brought on production five manville liquids rich gas wells by Mike hit we drilled two completed four brought on production one montney liquids rich gas well.

In Saskatchewan, we drilled completed and brought on production when oil well in the U S. We drilled seven completed 10 and brought on production five oil wells in Wyoming.

As part of our activity in the quarter, we participated in the drilling of two non operated Parkman wells and one non operated Niobrara well, we continue to evaluate these formations as it relates to future development prospects on our powder River basin acreage in Wyoming.

Yeah.

Across North America, we are seeing strong overall performance from our capital program and ongoing operations, which has helped in mitigating the impact of fire related downtime in Alberta.

Our recent BC montney wells that might continue to perform very well with minimal decline seen over the first 120 days of production.

<unk> pad results validates our tier one inventory in BC and presents an opportunity for future Downspacing or 2024 program will be focused exclusively on RBC lands.

With approximately 10 wells on or offsetting the 16 to 28 pad.

We recently received the final permit required for the construction of the 16000 beauty battery on BC Lance or planning to start site preparation later this year.

The majority of this construction will occur in the first half of 2024, and we funded through a financing agreement with a third party midstream company.

This agreement was part of the Mic acquisition.

Excited to execute the next expansion phase and look forward to providing future updates in the quarters ahead.

Okay.

Production from our international operations averaged 29087 views per day, an increase of 30% from the prior quarter, mainly due to the acquisition of additional working interest in Corp, which closed on March 31 of this year. This acquisition added approximately 7000 abuse today are premium priced European natural gas production.

This production more than doubled in Q2 to an average of 11250 won't be used today to the due to the closing of this acquisition as well as better than forecast operational run rates.

In the Netherlands, we completed one conventional gas flow from our Q1 drilling program in Germany, We continue to advance our deep gas exploration and development plans as we prepare for our first of all to be drilled in the fourth quarter of this year.

In Australia, we completed all remaining inspections and repair work within the primary systems of platform at the end of Q2.

Preparations to restart the facility as a result, we expect higher operational run rates with less unplanned downtime in the future.

Inspection and repair work completed on the platform was conducting the safe and efficient manner without incident.

We would again like to thank our staff and contractors for their diligence in executing a safe and successful program.

After completing all inspections repair work within the primary systems on the platform.

We were preceded the function tests all systems as part of the facility restart in early July .

During this step we noted that leak supplying seawater to a secondary area of the dilution fire suppression system to ensure we have addressed any offsetting items.

<unk> to replace the CVR piping at this time, which was a late start up to the end of Q3.

This is the longest period that the wandoo platform has been offline since.

$2 million is operated it.

Hope of the repair work itself was mainly pipe valves and fittings and replacements. It was time consuming process given the logistics associated with working on an offshore platform.

Particular, there are a limited number of beds to accommodate workers and the work itself require the assembly and the disc assembly of complex gasoline thrift platform. Although major work is now behind us.

Systems and platform, our function tested and ready for startup once a seawater piping is replaced.

With these delays impact short term production and cash flow. It is the right long term decision as enhances the safety and the integrity of our assets, while improving future operational run rates.

I wanted to ask that has been in our portfolio. Since 2005 has generated significant amount of free cash flow over this timeframe 2022, wandoo crude sold at our U S $14 premium to Brent, which drives very strong net backs on our current strip pricing, we are forecasting over $100 million of free cash flow from Australia and <unk>.

24.

I will now pass it over to Lars to discuss our guidance and financial outlook.

Thank you Dr. As a result of the increased scope of repair work on the wandoo platform in Australia as well as the planned turnaround at the core facility in Ireland.

We expect Q3 volumes to be consistent with Q2 guidance of 80 to 83000 BOE a day.

As we complete the Australia integrity work and core turnaround, we will be positioned to deliver Q4 production in the range of <unk> 86 to 89000 BOE a day.

As a result of strong operational execution and performance across our portfolio. We are maintaining our 2023 annual production guidance of 82 to 86000 BOE a day as we have been able to offset much of the impact from the Alberta wildfires and extended Australia downtime.

The rest of our annual financial guidance remains unchanged from our last revision.

Our disciplined approach towards debt reduction combined with our asset high grading initiatives over the past three years has made vermilion a more resilient business today.

By the end of this year, we will have nearly cut our debt in house. While also funding over 1 billion of strategic acquisitions and have significantly increased our average annual <unk> from pre COVID-19 levels.

While strong commodity prices have contributed to this improvement we believe the company is much better positioned.

Our top decile map apps low base decline diversified commodity exposure and capital efficient asset base combined with our modest base dividend payout translates to a very resilient business that can be managed through low commodity cycles and is well positioned for increased return of capital to shareholders as debt is reduced.

As we look out to 2024, we are currently forecasting a significant increase in <unk> to over one 4 billion, assuming a flat production profile.

With this we expect to achieve our next net debt target of $1 billion. During the first half of 2024.

Consistent with our previous messaging, we plan to increase shareholder returns upon achieving this target and we will communicate the method and targeted targeted payout range at that time we.

We anticipate that share buybacks will remain the primary mechanism for returning incremental capital beyond the base dividend and as such we renewed our normal course issuer bid in early July and continue to buy back shares.

Since July of last year, we have bought back five 7 million shares.

Lastly, I wanted to provide a brief update on our hedge position in particular, our European gas hedges.

European gas has been trading at elevated levels for the past few years and we believe there has been a structural positive shift in European gas fundamentals as you can see in our forward price on this chart.

European gas prices are currently trading approximately seven times higher than April gas prices and the forward curve is holding in at around $20 Canadian per MN Btu.

This is a very attractive price as it generates high project returns and significant free cash flow from our European gas assets.

As such we have been actively hedging our forward European gas production at or above these levels.

For the upcoming periods on European gas in Canadian dollar terms, we have 51% hedged for second half of 2023 at an average price of $30 per <unk>.

30% hedged for the first half of 2024 at an average floor of $47 per Btu.

And 16% hedged for second half 2024 at an average floor of $25 per btu.

We have also been starting to layer in some oil hedges.

And intend to increase our corporate hedge position from current levels with a view to lock in a reasonable amount of cash flow to provide greater certainty and achieving our debt targets and in support of executing our operational and return of capital plans.

With that I would like to pass it back to <unk> for his closing remarks.

To further expand on <unk> comments on free cash flow generating capacity I would like to highlight the following chart, which shows our free cash flow allocation over the past few years.

Blue bar shows that total amount of free cash flow generated by the stack bar shows how this free cash flow was allocated each of the years as you can see the majority of our free cash flow a total of $1 6 billion between 2021, and 2023 was allocated to debt reduction and acquisitions is aligned with our strategy of ensuring a.

Strong balance sheet and robust asset base.

In 2024, and most of that heavy lifting on debt reduction will be behind us.

It means we have more free cash flow to allocate the shareholder returns in the years ahead.

As you look into 2024, we are positioned to generate significantly higher free cash flow as I mentioned earlier, we intend to increase the amount of return thresholds shareholders hopefully achieve our 1 billion debt target expected during the first half of 2024.

Well that concludes my prepared remarks, and with that we would like to open it up for questions.

Thank you, ladies and gentlemen should you have a question please press <unk>.

Star followed by the one on your Touchtone phone if you'd like to withdraw your question. Please press the star followed by the Q.

One moment. Please for your first question.

Your first question comes from Amir Arif from ATB capital. Please go ahead.

Thanks. Good morning, guys. Just a few quick questions first of all just on the Montney side.

I think Youre planning 10 wells next year were planning on drilling those currently with the construction in the first half so should we expect montney production to start.

Being meaningful in the second half in terms of growth or will the drilling would be happening.

<unk> got better clarity on the startup of the facility.

Maybe I can take that a high level question here John Thanks for the question.

As noted on the call. The construction of the battery itself will some of that site prep work will initiate second half this year, but the bulk of it will be in the first half of 2024. So from a planning point of view, we would initiate that drilling but realistically I think the timeline for that production coming on will be closer to mid year.

That's our assumptions our plans right now.

Okay, and then thirdly on which it will all 10 wells in the first half or the.

<unk> 10.

Spread throughout the year for next year.

Yes.

Well, there's basically two mainly two pads and so that this would be back to back drilling as you can imagine there are some cost synergies and efficiencies. So yes, we would look to drill those pads back to back and lineup for midyear.

Got it I appreciate that.

And then just a quick question on the chairman.

Germany I know you.

Continue to drill that exploration.

Well over there can you just give us an update on when you expect to hit TD in and when do they expect to have some results on that.

Sure I'm going to pass it over to Darcy curve and our vice President of International Darcy you want to take that one yes. Thanks Amir.

As you know we've been excited about the deep gas exploration potential in Germany, we have successfully drilled deep gas wells there before we drilled <unk> five in 2019 that that will still producing nicely for us.

And so it kind of after some pause during the Covid downturn.

With renewed focus on that exploration program, both on the GSI side and on the permitting side. So we have a.

We have a number of interesting prospects.

To look out there in Germany, and we will kick off kind of the first of that.

Of that.

Set of prospects.

Starting here in Q4 2023 with the with the first exploration well that we plan to drill.

So I guess from a TD point of view. So we're really looking at early next year with the time, we take to spud, the well and again those well results, yes, we will spud the well spud the well in Q4, and then that well drill through the end of the year.

And TD.

In 2024.

Okay I appreciate that and just final question on the windfall taxes.

Tcf gas price was down sequentially quarter over quarter, yet windfall taxes were up can you just help me understand.

Why wouldn't move with the TTM places is there just a lag in terms of the payment.

Yes, let me pass over to Lars to address that question yes.

Yeah. Thanks, Sameer the big reason for the increase in windfall taxes from Q1 to Q2 of this year is the fact that we close the <unk> acquisition on March 31 of this year and so in Q2, we started to recognize the production and <unk> or free cash flow impact of the incremental 36, 5%. So.

That would explain the bulk of the increase Q1 to Q2.

I appreciate that thanks.

Ladies.

Okay.

Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.

There are no further questions at this time.

Please proceed with your closing remarks.

With that thank you again for participating in our Q2 conference call.

Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now begin.