Q3 2023 Vermilion Energy Inc Earnings Call

In Germany exploration targets are deeper and higher risk would have been much larger resource 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 and multi year drilling campaign, providing vermillion of years of organic production growth of high value European gas.

In Croatia, we started site preparation for the gas plant, which is scheduled for startup in mid 'twenty four and we'll facility production from the SA 10 block, where we have previous gas discoveries as gas is currently behind pipe waiting startup of the gas plant and we see additional prospects on our acreage for future development.

At current strip pricing and a mid year startup, we would expect approximately $40 million of fund flows in 'twenty four.

I'll now pass it over to Larry to discuss our guidance and financial outlook.

Thank you Dion or 2023 production guidance remains unchanged with Australia back online and the planned turnaround at the core facility in Ireland complete we.

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 of offsetting the forest fires in Alberta, and extended downtime in Australia, resulting in strong performance across our asset base we.

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 rig and drill 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 BC 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.

24 capital expenditures are expected to increase by about 5% over 2023 levels due to infrastructure spending required to advance our BC Micah Montney 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.

So that increasing 2024 cash flow just referenced is the key takeaway of this slide.

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 <unk> six 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 our 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 be honest.

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.

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.

The combination of a very warm winter and government policy to mandate full storage during the summer has resulted in European storage being effectively full today.

Reality is that Europe will continue to depend heavily on LNG imports to meet winter demand maybe.

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 gas prices.

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.

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We sell directly into the European gas markets not by other LNG. So we realize these high prices for the upcoming periods on European gas in Canadian dollar terms, we have 45% hedged for Q4 23 at an average floor of $34.

<unk>, 38% hedged for 'twenty four at an average floor of $33, 20% hedged for 25% hedged at an average floor of $22.

These hedge prices or 13 at 11, six times higher than equivalent periods of Canadian equal gas prices, we will continue to be opportunistic during periods of volatility increase our hedge position.

So we think all of our products, we have approximately 30% of our corporate production hedged for 'twenty four.

It provides greater certainty on achieving our debt targets and supports a return of capital secure holders.

In closing it is an exciting time for Vermillion and its shareholders. We are gaining operational momentum with Australia now back online and.

Mike B C battery inquiries of gas by construction underway in.

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 there.

We're pleased with our current hedge levels that will continue to be opportunistic during periods of volatility to 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, 'twenty four 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 the Dutch telephone you will then hear from.

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.

Perfect.

Please go ahead and press Star one now if you do have any questions.

The first question will be from Travis Wood.

Financial Please go ahead.

Yes. Good morning, Thanks for taking my question.

I wanted to get out of 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.

<unk>.

How should we be thinking about volumes through the beginning of next year.

Later later next year as you kind of start to fill those facilities.

And then if you could.

Maybe some kind of year over year comparison on Capex would be helpful. As well. Thank you.

Thanks, Travis I can take this one as well.

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 montney.

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 about 15 million a day of gas, but again mid year. So again, we will 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.

Thank you very much for that.

Thanks Ross.

Thank you as a reminder, ladies and gentlemen, please press star one if you have any questions.

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 Darrin, Croatia can you outline a little bit more of the opportunity opportunity set that exists there.

What that could mean kind of going forward, especially given its European.

Yes.

Revenue line. Thanks.

Thanks, Dennis I'll pass that over to Darcy.

Detail on ratio Capex.

Capex says Darcy here.

We are currently in the process of.

Building that Croatian gas plants Dion mentioned earlier, that's kind of we've got a nominal sales capacity of about 15 million cubic feet. A day I think I think in Europe, you need to think of those numbers not 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 in Mcf on those two wells going through the plant and <unk> forecast to generate $10 million of revenue per month and it's.

Net backs that are.

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 and the intent there would be two.

To over time continue to drill that block keep that plant full overtime and then.

Outside of the block of SA 10 of course, we have seven which is a pretty prospective block that we're quite excited about.

Its intent to drill four wells on that block in early 2024.

Thanks Darcy.

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 a where maybe even next net debt target looks like and how you think about capital structure as well as how.

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 mix 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 target.

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.

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.

But 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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