Q3 2023 Vermilion Energy Inc Earnings Call
Good morning, My name is Sylvie and I will be your conference operator today at this time I would like to welcome everyone to the Vermilion Energy Q3 conference call.
Please note that all lines have been placed on mute to prevent any background noise. Mr. Don Hatcher, you may begin your conference.
Thank you Sylvia.
Good morning, ladies and gentlemen, thank you for joining us on the unhedged your president and CEO of Vermilion energy.
Today, alerts glimpsed or vice President and CFO.
Darcy Kerwin, Vice President International and HSE.
Tracy Krumme, Vice President North America.
Tan Vice President of business development co Preston Vice President of Investor Relations will be referencing a powerpoint presentation to discuss our Q3 23 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. It describes forward looking information non.
GAAP measures and oil and gas terms used today outlines the risk factors and assumptions relevant to this discussion.
Production during the third quarter averaged 82727 Boes per day, which was at the top end of our Q3 guidance range of 80 to 83000.
This is mainly due to the successful restart of the one new facility in Australia in early September and an efficient turnaround at the core facility in Ireland, which was completed five days ahead of schedule.
In addition, we continue to see strong operational performance across the majority of our assets.
We generated $270 million of funds flow, which represents a 9% increase over the prior quarter, we invested $126 million of <unk> capital.
<unk> and $144 million of free cash flow, which represents an 80% increase over the prior quarter.
Level of free cash flow was more than sufficient to fund current asset retirement obligations lease payments and the base dividend with the excess free cash flow allocated to debt reduction and share repurchases.
During the quarter, we returned $28 million to shareholders through the base dividend share repurchases and we have returned $115 million to shareholders year to date, representing about 35% of our free cash flow.
Given the improving free cash flow profile, we are now targeting 30% return of capital of 23 compared to the prior range of 25% to 30% until we achieve our net debt target of $1 billion.
I need to make progress on debt reduction.
Debt decreasing approximately $80 million from the prior quarter to $1 2 billion at the end of the third quarter, representing a trailing net debt to funds flow ratio of one two times.
Based on the forward strip pricing, we expect to achieve our $1 billion debt target in Q1 of 'twenty four at which time, we plan to increase the amount of capital returned to our shareholders by the base dividend and share repurchases.
Yeah.
Moving on to the operational updates for the quarter.
<unk> from our North American operations averaged 56758 Boe's per day in Q3.
An increase of 5% or 2700 Boe's per day for the <unk>.
Higher quarter, mainly due to strong recovery following fire related downtime at our deep basin assets and new production from our recently drilled wells in the U S.
In the deep basin, we drilled two and completed one manville liquids rich gas well, Mike we brought up production for Alberta, Montney liquids rich gas wells, which are producing into constrained montney infrastructure capacity.
Approximately 8000 meters per day.
In Saskatchewan, we built 10 completed nine and brought on production eight oil wells in the U S. We brought up production five oil wells in Wyoming, where production increased 21% from the prior quarter.
Okay.
We continue to progress our BC Montney development during the third quarter, we completed the site preparation and awarded all major contracts for our 16000 Bpd COPD battery in BC.
We're excited to break ground on the battery in August and we will continue to progress. This project over the next several months shown here is a clearer battery site awaiting delivery of the facility modules that are currently in fabrication.
The key piece of infrastructure will underpin future development and growth of RBC.
Montney asset.
Majority of construction is scheduled to occur in the first half of 'twenty four.
That are expected to be operational by mid 'twenty four.
The additional capacity provided by this battery, we were able to move forward with our growth phase of our micra asset our upcoming Winter program includes 11 wells at RBC lands offsetting our recent 16 to 2008 BC pad.
Which has produced at an average per well rate of 1150 Boe's per day over the first six months with an average 36% liquids yields which is mainly oil.
Given the strong rates, we are piloting a downspacing program to evaluate the potential for drilling more wells in BC.
Production from our international operations averaged 25960 <unk> per day, a decrease of 11% from the prior quarter, mainly due to plant turnaround the core facility in Ireland.
And natural declines partially offset by the resumption of production in Australia. Following the restart of the wandoo facility.
In Australia, we successfully completed the remaining inspection and repair work on our winder facility and restarted production in early September.
The wells continue to produce at strong rates with Australia expected to contribute approximately 4000 barrels per day in Q4 and through 24. This is resulting in a 150 million positive swing in free cash flow relative to 'twenty three.
In Ireland, we successfully completed a major turnaround at Corp. Five days ahead of schedule in August Corvus forecast to produce approximately.
10000, BS per day net to Vermilion, a premium price European gas in Q4.
We're excited about the future European gas growth potential in both Germany, and Croatia will speak more of those projects on the following slides.
On the left of this slide we have a picture of the drilling rig on our first of two exploration targets in Germany.
The picture on the right is a map of our Germany, Netherlands land illustrate the proximity we.
We see our development plans in Germany, as a natural extension of our successful drilling campaigns, we've executed over the past two decades in neighboring Netherlands.
We have approximately 700000 net acres of undeveloped land in Germany, located approximately 300 kilometers east of our producing fields in northern Netherlands or.
Or similar distances between Calgary and Edmonton.
Our gas exploration targets are on trend to the Netherlands plays where we have drilled 29 gas flows over the past two decades with an average success rate of over 70% of <unk>.
There are many exploration targets are deeper and higher risk, but have a much larger reserve potential in the Netherlands. In addition, we have access to existing infrastructure network.
Regulatory support for permits and a track record of execution in Germany with the success of our Germany exploration drilling program. We believe our land base can support a multi year drilling campaign, providing vermillion of years of organic production growth of high value European gas.
Yes.
In Croatia, we started site preparation for the gas plant, which is scheduled for startup in mid 'twenty four.
While facility production from the SA 10 block, where we have previous gas discoveries. This gas is currently behind pipe awaiting startup of the gas plant and we see additional prospects on our acreage for future development at.
At current strip pricing and a mid year startup, we would expect approximately $40 million of fund flows in 24.
I will now pass it over to Larry to discuss our guidance and financial outlook.
Thank you Dion.
Our 2023 production guidance remains unchanged with Australia back online and the planned turnaround at the core facility in Ireland is complete.
We remain positioned to deliver annual production of 82 to 86000 BOE per day in Q4 production of 86 to 89000 Boe per day.
Our operations teams have done a great job offsetting the forest fires in Alberta, and extended downtime in Australia, resulting in strong performance across our asset base.
We increased our 2023 capital expenditure guidance by 20 million to $590 million to accommodate accelerated BC montney drilling into Q4.
This ensures we secure a high performing break and drove some of the wells before winter, which helps reduce costs.
In addition, it also gives us production behind pipe to be ready for a potential early startup of the new B C battery should construction go better than planned.
We plan to release, our 2020 for budget and guidance in the upcoming weeks, which will also include an update to our return of capital framework 'twenty.
2024 capital expenditures are expected to increase by about 5% over 2023 levels due to infrastructure spending required to advance our BC, Mike come on <unk> development, and we anticipate corporate production will be consistent with 2023 annual levels.
Given the expected increase in <unk> and free cash flow generated by the business driven by the full year impact of the Corp acquisition and Australia, we are able to advance long term organic growth projects that will support profitability and shareholder returns over the long term.
That increasing 2024 cash flow just referenced is the key takeaway of this slide as.
As well as the significant improvement in our financial position over the past several years by the end of 2023, we will have nearly cut our debt in half as shown in the red bars, while also funding over $1 billion of strategic acquisitions.
We have also significantly increased our <unk> from pre COVID-19 levels as shown in the blue bars.
This progress has reinforced with an estimated 2024 debt to <unk> leverage 0.6 times.
Although we have not finalized our 2020 for budget. We're currently forecasting <unk> to increase to $1 4 billion, assuming a flat production profile at current strip pricing.
With this we expect to achieve our net debt target of $1 billion. During the first quarter of 2024, which will be the trigger for increasing our return of capital to shareholders from the current target of 30%.
On this slide we show free cash flow based on recent pricing and the breakdown of how free cash flow was allocated.
The majority of CF was allocated to debt reduction and acquisitions for the period of 2021 to 2023.
We expect to generate significantly higher year over year SCS in 2024 due to the full year impact of the Corp acquisition, having Australia back online for a full year and first gas from our SAP <unk> project in Croatia. These.
These three items alone contributed unexpected $270 million year over year increase to Fcs.
Which is further underpinned with robust and well hedged European gas prices. This will position us well to invest in our assets and increase our percentage and absolute level of free cash flow returned to shareholders in 2024.
With that I will pass it back to John.
Thanks, Larry.
Like to take this opportunity to provide some background on European gas as we head into the winter heating season for European consumption typically increases, 30% to 40 Bcf per day compared to the summer.
Last year Europe lost approximately 12 Bcf a day, Russia supply, which has resulted in even greater dependence on LNG imports.
Winter Europe demand was down about 10 Bcf per day compared to the prior winters due to it being the second warmest winter on record and government policy focus on gas conservation.
Even with this gas averaged over $30 Canadian during the winter.
A combination of a very warm winter and government policy to mandate full storage during the summer has resulted in European story as being effectively full today.
Reality is that Europe will continue to depend heavily on LNG imports to meet winter demand.
It may be more challenging this year due to higher Chinese demand post COVID-19 zero policy and potentially a return to a more normal winter any potential supply disruptions or increased demand from Asia will put upward pressure on your old gas prices.
You see the impact from this tight supply and the forward curve on this slide as European gas prices continue to hold at or above $20 Canadian.
<unk>.
We sell directly into the European gas markets not by LNG.
We realize these high prices for the upcoming periods of European gas in Canadian dollar terms, we have 45% hedged for Q4 23 at an average floor of $34.
38% hedged for 24 at an average floor of $33, 20% hedged for 25% hedged at an average floor of $22.
These hedge prices are 13 at 11, six times higher than the equivalent periods of Canadian Eco gas prices, we will continue to be opportunistic during periods of volatility increase our hedge position.
Including all of our products, we have approximately 30% of our corporate production hedged for 'twenty, four which provides greater certainty on achieving our debt targets and supports a return of capital to shareholders.
In closing, it's an exciting time for Vermillion and its shareholders, we're gaining operational momentum with Australian now back online and.
Mike B C battery in Croatia gas plant construction underway and the first well of our German gas exploration program being drilled.
Second we have direct exposure to premium price European gas, which remains an extremely tight supply and we are progressing projects to increase our European gas production.
We are pleased with our current hedge levels and will continue to be opportunistic during periods of volatility add more hedges.
Third we are seeing the benefits of the strategic asset high grade and focus on debt reduction with a significant increase in 'twenty four free cash flow.
With that we are attracted achieve our debt targets in Q1, 24, and intend to increase our return of capital to shareholders.
That concludes my prepared remarks, and with that I'd like to open it up for questions.
Thank you Sir.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear his sweet home prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and if you are using a speaker phone. We do ask you. Please lift the handset before pressing.
Please go ahead and press Star one now if you do have any questions.
Our first question will be from Travis Wood.
Financial Please go ahead.
Yes. Good morning, Thanks for taking my question.
I wanted to get it in 2024.
In terms of volumes and a bit of cadence I know you've provided some.
Indicative commentary in terms of the average rates, but with a strong Q4.
This year and then some interesting projects and facilities.
Kind of a drill to fill program in Canada for the Montney.
How should we be thinking about volumes through the beginning of next year and into later later next year as you kind of start to fail those facilities.
And then if you could.
Maybe some kind of year over year comparison on Capex would be helpful. As well. Thank you.
Okay.
Thanks, Travis I can take this on as Dion.
We'll be providing more details when we released our budget in the upcoming weeks as noted on the call, but I think how you should be thinking about it as noted flat volumes and capital, 4% to 5% higher really driven by the increased investment in infrastructure in the Montney.
From a cadence point of view again will provide more details later, but the two significant drivers of that would be the <unk>.
Montney battery that 16000 beauty battery would be mid year, we will have a pad behind pipe ready for that start up until then we're capacity constrained.
As well as the <unk> plant that we talked about it's 15 ammonia gas, but again mid year. So again, we'll provide more details, but really there will be a.
Ramp up in the second half of the year is how we're thinking about it.
Okay. That's perfect. Thank you very much for that.
X reps.
Thank you as a reminder, ladies and gentlemen, please press star one if you have a question.
And your next question will be from Dennis Fong.
Please go ahead.
Hi, good morning, and thanks for taking my questions I guess my first one here is obviously with the upcoming.
Potential completion of the infrastructure Darin quick Croatia can you outline a little bit more on the opportunity opportunity set that exists there.
And what that could mean kind of going forward, especially given its European.
Gas.
Revenue line.
Thanks, Dennis I'll pass it over to <unk> to provide some detail on Russia.
Thanks, guys Darcy here.
We are currently in the process of building that Croatian gas plants Dion mentioned earlier Thats kind of we got a nominal sales capacity of about 15 million cubic feet a day.
I think in Europe, you need to think of those numbers.
Necessarily in terms of just in terms of volume, but in terms of much higher netback that we get.
In Europe versus here in North America. So if we think of Croatia $20 Canadian an mcf.
Two wells going through that plant is forecast to generate $10 million of revenue per month.
Snap backs that are kind of seven or eight times, what they are in Canada going forward.
In terms of future potential on that block, we do see some some prospects there the intent there would be two.
Two over time continue to drill that block to keep that plant full overtime.
Over time and then.
Outside of the block assessing 10 of course, we have <unk>, seven which is a pretty prospective blocks and we're quite excited about with intent to drill four wells on that block in early 2024.
Thanks Darcy.
Okay, great I appreciate that color there.
My second question just Lars Thank you for providing that update around the financials and the driving down of obviously net debt can you talk towards a little bit more around.
Where maybe even next net debt target looks like and how you think about capital structure as well as how the.
The company and the board will think about free cash flow allocation once you kind of get towards that level.
Great. Thanks for the question Dennis Yes, so as we referenced that next that target will be a $1 billion line of sight to getting that in the first quarter of 2024.
And looking forward to providing what that next step is going to look like with the budget release here in the coming weeks I think the best way to think about it is we do have a clear plan in place in terms of getting to that debt targets.
I think the big thing that we're trying to emphasize as well as if you look at the free cash flow for 2020 for not only is there going to be an increase in the percentage of free cash flow that is allocated to return of capital for shareholders, but the absolute amount of free cash flow as well as increasing quite significantly in 2024 to 2023.
About 60% or $300 million year over year in terms of debt targets beyond that we're quite comfortable with that $500 million to $1 billion range. The lower end of that target would represent the amount of debt that we have termed out to 2030, and so we think that thats a good way to think about longer term debt levels for vermillion.
<unk>.
Thanks Lars.
Great I appreciate that I'll turn it back.
Okay. Thanks Dennis.
Thank you and at this time gentlemen, it appears we have no. Other questions registered. Please proceed with any additional comments.
With that I'd like to thank you again for participating in our Q3 conference call.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for calling and at this time, we ask that you. Please disconnect your lines.
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