Q3 2024 Vermilion Energy Inc Earnings Call
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Cindy: Good morning, my name is Cindy and I will be your conference operator today. At this time I would like to welcome everyone to the Vermillion Energy Q3 conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.
If you would like to withdraw your question, please press star and then the number two. Thank you. Mr. Dion Hatcher, you may begin your conference.
Cindy: Thank you, Cindy. Well, good morning, ladies and gentlemen. Thank you for joining us. I'm Dion Hatcher, President and CEO of Vermillion Energy.
With me today are Lars Glemser, Vice President, CFO, Darcy Kerwin, Vice President, International and HSE, Randy McQuaid, Vice President, North America, Kyle Preston, Vice President, Investor Relations.
Cindy: We'll be referencing a PowerPoint presentation to discuss our Q3 2024 results. Presentation can be found on our website under invest with us and events and presentations.
Cindy: Please refer to our advisory and forward-looking statements at the end of the presentation that describe forward-looking information, non-GAAP measures, and oil and gas terms used today, and outlines the risk factors and assumptions relevant to this discussion.
The third quarter of 2024 highlighted the strength of our diversified portfolio and the compounding impact of our share buyback program.
Production during the third quarter averaged 84,173 buoys per day, including the impact from a planned turnaround in Australia and a partial shutting of some of our Canadian gas as a result of very weak acreage pricing.
Production was up 7% on a per share basis year-over-year reflecting the positive impact of modest production growth coupled with consistent share buybacks.
We generated $275 million in fund pulls from operations during the third quarter, or $1.76 per share. This represents a 19% increase over the prior quarter, mainly due to stronger European gas prices.
The Dutch benchmark, TTF, increased 14% over the prior quarter, averaging $15.52 per MCF and Q3. This compares to ACO of $0.69 per MCF.
Cindy: Our corporate realized gas price for the quarter was $6.57 per mcf. That is nearly 10 times higher than the equal price.
Cindy: Aerogas was the only commodity in our portfolio that increased quarter-over-quarter and year-over-year. Our diversification is a strategic advantage that positions us to generate more stable and higher cash flows.
Cindy: Due to the higher netback of our European operations, the cash flow for every BOE production we had in Europe is equivalent to adding three BOEs in Canada.
Cindy: We invested $121 million of E&D capital in the third quarter. Our primary focus was testing the remaining European wells drilled earlier this year, increasing production for the new gas plant on the SA10 block in Croatia.
Cindy: and increasing production on the new battery at our Mike and Monty asset in British Columbia.
Free cash flow for the third quarter was $154 million, of which $59 million was returned to shareholders, including $19 million in dividends and $40 million of share buybacks.
Cindy: Year-to-date, we have returned $180 million, or $1.13 per share, to our shareholders. This is equivalent to 8% of our current market cap year-to-date.
Cindy: Our share buyback program is having a meaningful impact on our per share metrics as already noted with the per share production growth.
Cindy: Year-to-date, we have repurchased and cancelled 8 million shares and reducing our outstanding share count to 155 million. We had also reduced net debt by 73 million to 833 million by the end of Q3.
Cindy: This represents a net debt trailing fund flow ratio of 0.6 times the lowest in 15 years.
Cindy: Before I discuss the operational highlights, I want to briefly expand on my comment about the value of diversification.
This past year was a very challenging year for North American gas producers, especially Canadian gas producers, who were subject to sub-a-dollar gas prices for most of the summer months.
While we do have exposure to AECO, the majority of our gas wells in Western Canada are liquids-rich, which means the liquids production make these wells more profitable.
Cindy: As a reminder, we also hedged 30% of our equal exposure this year at prices much higher than what we've observed this summer.
Cindy: Furthermore, approximately 40% of our corporate gas production, or over 110 million cubic feet per day, is in Europe, where we have direct exposure to premium price global benchmarks.
Cindy: European gas has historically traded at premium to North American benchmarks, and in the past few years has seen its premium widen.
Cindy: The trend continued in 2024 as European gas prices have increased over 30% year-to-date and now sells at an even wider margin too.
Cindy: of even wider premium to ACO. European gas prices remain elevated as the continent is still heavily dependent on LNG imports to meet demand, especially during the winter months.
Cindy: Europe continues to be our most profitable operating region, and it's an area we expect to grow organically in the years ahead as we tie in some of our recent gas discoveries.
Cindy: while also seeking opportunities to augment this growth for strategic acquisitions.
Cindy: Our European gas production has increased by over 40% in the last two years, and we're excited about the potential for future organic growth in Germany, Croatia, and the Netherlands. The diversification continues to be a strategic advantage to help stabilize our cash flows with exposure to multiple commodities.
Cindy: In addition, our low decline portfolio reduces the amount of capital required to hold production flat, which becomes even more important if we were entering a period of lower commodity prices.
Cindy: Production from our international operations averaged 30,237 views per day in Q3. This incorporates new production from our SA10 block in Croatia and reflecting higher run times in Germany and Ireland, which was partially offset by planned maintenance downtime in Australia.
Cindy: Capital activity during the quarter was focused on completing and testing the remaining European wells drilled earlier this year, as well as increasing production from the new gas plant on the SA-10 block in Croatia.
Subsequent to the quarter, we successfully completed drilling operations on the second deep gas exploration well in Germany and are very pleased to report that we discovered gas in the reservoir. We are now proceeding with completions and testing operations.
Cindy: This represents our third successful deep gas exploration well in Germany, including the Bergmoor ZAD-5 well we drilled in 2019.
In total, we have drilled six exploration wells in Europe so far this year, all of which were successful. We are currently in the process of drilling a third deep gas exploration well in Germany to finish our 2024 European drilling campaign.
Cindy: This year was the largest exploration drilling campaign we have executed in Europe, and the results today continue to validate our geological models while providing valuable information for assessing future drilling prospects.
We have over 1.7 million net acres of undeveloped land in Europe and have identified numerous exploration and development drilling prospects.
representing well over a decade of drilling inventory with the potential to provide meaningful organic growth.
Cindy: As noted in our operational update released in early September, in Germany we successfully tested our first deep gas exploration well in the 2024 program. This well tested at a restricted rate of 17 million cubic feet per day of natural gas with a wellhead pressure over 4,600 psi.
Cindy: The test rate was restricted due to limitations of testing equipment, but at this pressure reading the deliverability would have been much higher without these limitations. Titan operations are progressing as planned with production expected on stream in the first half of 2025.
We commenced drilling on our second deep gas exploration well, as well as a 30% working interest well in August, and we successfully completed drilling operations at the end of October.
Cindy: As mentioned, we discover gas within this reservoir and we're now proceeding with completions and testing operations. Subsequent to the quarter, we commence drilling on our third deep gas well and anticipate results from this well in the first half of 2025.
Cindy: The map on slide 5 shows a subset of the inventory we currently have identified on our over 700,000 net acres of undeveloped land in Germany.
Cindy: While our team continues to mature additional leads across this land base, as a reminder, some of these initial prospects are large enough, if successful, to require a multi-wall development program.
Cindy: In Croatia, we increased production on the SA-10 block after commissioning the gas plant in late June.
Cindy: Production in Q3 averaged 1,855 BUs per day and currently exceeds 2,000 BUs per day. We intend to drill additional wells in the upcoming years to keep this plant full of high net vac European gas.
Cindy: On the SA-7 block, we completed testing on the third well of our four-well program, which was flow tested at 5.6 million cubic feet per day of natural gas.
Cindy: We're very encouraged with four well exploration results in Croatia, which have proven out multiple producing zones and de-risk future development and exploration targets across four discrete areas.
Cindy: In contrast to the Germany exploration wells, the Croatia exploration wells are much shallower and are cheaper to drill. So while the rates on these wells are expected to be lower than the Germany rates, they can deliver strong returns.
Cindy: We're a planner for future exploration drilling programs on this block, given the success of the 2024 program.
Cindy: Production from our North American operations averaged 53,936 BUIs per day in Q3.
Cindy: Our primary focus during the quarter was an increasing production on the new battery and tying in five Montaney liquid-rich gas wells on the 9 and 21 pad on our mica acid.
Cindy: In the Deep Basin, we drilled and completed three wells and brought on production of one man-built, liquid-rich natural gas well. The Deep Basin remains our largest producing area in Canada and continues to provide meaningful and consistent well results.
Cindy: In Saskatchewan, we drilled, completed, and brought on production five light oil wells, while in the U.S., five non-operated light oil wells were brought on production.
Cindy: We continue to provide value data for evaluating the stacked oil zones in the Parkland, the Nile, the Turner, and the Mallory formations on our land.
Cindy: 5 Montany Wells on a 9-21 pad continued to produce at strong rates with an average IP90 of over 1,000 views per day.
Cindy: including 43% liquids. The total drill complete equipped tie-in cost of the 921 pad was approximately $9.6 million per well. We have significantly reduced our per well cost over the last two years and remain on track for a normalized turret cost of $9 to $9.5 million for a two-mile well.
Cindy: This new battery and water infrastructure has achieved 99% run times at startup and is contributing to these cost savings.
Cindy: Our 9-21 wells were followed preferentially through our new 8-33 battery to maximize liquids production during this period of low gas prices. The gas stream for our BC-Montney wells was also partially restricted to capacity constraints on our sales gas line from the 8-33 battery.
Cindy: We plan to debottle NECFIS as part of our Phase 2 infrastructure expansion scheduled for 2025.
Cindy: Total production for our mica acid has increased since the start of the year and it's currently over 13,000 views today due to the strong performance of the 9-to-21 pad.
Cindy: We expect to average approximately 14,000 views a day in 2025 with additional drilling and expansion of our infrastructure.
Cindy: With our current development plans, we expect to increase production from MICA to 28,000 beefs per day within the next few years, which will contribute significant free cash flow for the company going forward.
Cindy: I will now pass it over to Lars to discuss our shareholder returns and outlook.
Speaker Change: We continue to execute robust share buybacks during the third quarter, bringing our year-to-date share repurchases to 8 million shares, or 16 million shares since we started the program in 2022.
Lars Glemser: When you combine dividends, share buybacks, and debt reduction, which are all forms of equity appreciation, we have returned a total of $10 per share to shareholders over the past four years, as can be seen on the left of this slide.
Lars Glemser: We have reduced our share count to approximately $155 million as of September 30, 2024, and we continue to buy back shares in the market.
Speaker Change: As Dion mentioned in his earlier remarks, our share buyback program is having a meaningful impact on our per share metrics, as noted by our 7% year-over-year increase in production and FFO per share.
Speaker Change: The reduced share count also has an impact on the amount of dividends we pay and enhances our ability to increase the dividend per share.
Speaker Change: As you can see on this slide, we have delivered three consecutive years of dividend increases, and we have the capacity to provide more dividend increases in the future.
Speaker Change: Our current annual dividend represents approximately 6% of 2024 FFO, which leaves ample flexibility to manage and even increase the dividend in a lower commodity price environment.
Speaker Change: Our production through the first nine months of 2024 has averaged 84,881 BOE a day, which is about 1% above the midpoint of our original guidance range of 82,000 to 86,000 BOE a day.
Speaker Change: Due to our robust operating performance so far and our internal forecast for Q4 2024 production, which also accounts for approximately 2,000 barrel a day impact from third-party turnarounds and the partial shut-in of Canadian gas.
Speaker Change: We have narrowed the range on our 2024 production guidance to 84,000 to 85,000 BUE a day. The midpoint of this guidance would represent year-over-year growth of approximately 4% on a per-share basis.
Speaker Change: Our 2024 capital budget of $600 million to $625 million remains unchanged.
Speaker Change: With Q4 2024 representing an active capital program in the Deep Basin, Saskatchewan, and the Montney in Canada, along with participating in several non-operated wells in the United States,
Speaker Change: and continuing with drilling and completion operations on the two deep gas exploration wells in Germany.
Speaker Change: With that, I will pass it back to Dion for his closing remarks. Thank you, Lars.
Dion Hatcher: In closing, there's another strong order for a pavilion as we deliver on our production guidance and deliver strong financial results.
Speaker Change: As noted, we benefited from our diversified portfolio that provides exposure to premium-priced European gas, which resulted in a corporate realized gas price of $6.57.
Speaker Change: This quarter, that's nearly 10 times higher than the ECO benchmark. We are excited about the exploration success we've had in Europe. I look forward to getting these wells on stream and following up with additional drilling in the months and years ahead.
Speaker Change: We're equally excited about the progress we've made on our Mike and Monty project in Canada and look forward to increasing production from this asset.
Speaker Change: As Lars mentioned, we have made significant progress on our share buyback program and plan to continue buying back shares through the balance of the year.
Speaker Change: We truly believe in the compound effect of combining modest production growth with a growing base dividend and share buybacks will drive shareholder value.
Speaker Change: We remain on track to achieve our 2024 production and capital guidance and are in the process of finalizing our 2025 budget, which will target modest production growth on a similar level of capital as 2024, while maintaining a return to capital framework.
Speaker Change: We are on track to return 50% of our excess re-cash flow to shareholders in 2024 through our fixed dividend and variable share buybacks, representing approximately 10% of our market cap.
Speaker Change: And expect to continue providing rateable dividend increases and repurchasing shares in future periods.
Speaker Change: We believe Vermilion is very well positioned to execute on this plan, given our robust asset base and strong balance sheet.
Speaker Change: We plan to release our 25 budget later this year, and we look forward to providing future details on our capital investment and our shareholder return plans for 2025.
Speaker Change: Well, that concludes my pair of remarks, and with that, we'd like to open it up for questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star then the number 1 on your touchtone phone. You will hear a prompt that your hand has been raised.
Speaker Change: Should you wish to decline from the polling process, please press the star followed by the number 2. If you are using speakerphone, please lift the handset before pressing any keys.
One moment, please, for your first question.
Speaker Change: And your first question comes from the line of Mr. Dennis Fong of CIDT, please go ahead.
Speaker Change: Hi, good morning, and thanks for taking my question. I guess the first one is just focusing on Germany there. I was hoping you could talk towards a little bit of the potential impact on the positive hydrocarbon gas discovery in that second exploration well. Is there anything – I know it's maybe early before you're into testing, but can you talk towards what you're looking for in terms of size, and depending on that size, what that could mean for follow-up?
Thank you.
Speaker Change: Thanks, Dennis. I think I got most of your question there in Germany, the size and potential follow-up of this recent discovery.
Thank you. Bye-bye.
Speaker Change: I'll kick it off here and pass it over to Darcy, but just, you know, high level, the thing that I wanted to note is...
Speaker Change: We're quite happy with this result. As a reminder, we did message this as being a...
Speaker Change: a lower chance of success, but a larger prospect. We saw more gas in place. And so the fact that we're able to get a discovery here, again, it just confirms the great work the team is doing on the technical side. But yeah, nice to see a well come in that we had deemed to be a lower chance of success. But Darcy, you can maybe provide some context on the size here and what you think for timing and follow-up.
Darcy Kerwin: Yeah, thanks, Dion, and thanks, Dennis, for the question. So, yeah, in this Whistlehorse well that we just reached TD on, we encountered a pretty thick sand package there, about...
Speaker Change: 75 meters of net gas-bearing sands across two zones. Preliminary estimated gas in place is potentially over 100 BCF there. Just to remind you, we're 30% working interest in that well.
Speaker Change: and I think you had a follow-up question around follow-up locations on this prospect. I think there may be follow-up locations immediately adjacent to this well, but it requires a bit more work on our part to understand the results from this first well and then apply them across other leads in that area.
Speaker Change: No, great. I appreciate that context. I presume that's probably more of a 26 story than 25.
Thank you.
Speaker Change: Yeah, I agree with that, Dennis. We'll do the flow testing here next, similar to what we did in Osterheide, and then with that data, we'll be in a better position to provide an update and market here early next year. Great. No, I appreciate that context. My second question is shifting gears towards capital allocation. Just again, thanks, Lars, for the context there. Obviously, seeing you guys pay down incremental leverage and kind of buyback stocks to the quarter is quite helpful. Can you kind of remind us or give us any kind of incremental clarity on how you're thinking about where that ultimate net debt level should or could get to? And then obviously, given where your share price sits here today, how are you thinking about balancing kind of
Speaker Change: and I'm going to share five facts versus debt repayment understanding that you still have that 50-50 allocation policy.
Speaker Change: Thanks, Dennis. Again, I think I got most of the question there around the potential debt targets that might trigger changes to our return of capital policy and the current allocation of share buybacks. But with that, I'll pass it over to Lars.
Lars Glemser: Thanks for the question, Dennis. We still believe that 50-50 allocation of EFCF to return of capital and debt reduction is an appropriate balance, especially for a commodity-based business.
Lars Glemser: Paying down debt, you know, we do feel is prudent fiscal management, it improves the financial flexibility, especially during period of weak commodity prices, and then also allows you to be opportunistic on potential strategic acquisitions.
Lars Glemser: kind of over the peaks and the troughs of the commodity cycle. You know, I think the other thing to sort of reflect on too is, you think about sort of return of capital here over the last three years.
Lars Glemser: We initiated the dividend in 2022. We started buying back shares in the second half of 2022. We were only at 30% of free cash flow being returned in 2023 as we wanted to achieve some of the debt targets that we're at.
Lars Glemser: today. And so 2024 is an interesting year to reflect on, I think, Dennis, just in the sense of we've now repurchased 8 million shares through the first nine months. That's translated to a 7 million share reduction in our share count to that 155 million level. And so
Speaker Change: early days I guess I would say into the return of capital but we are starting to see the benefits of it in terms of delivering some of those per share
Speaker Change: production per share numbers that that Dion quoted in his prepared remarks so
Speaker Change: I think in short, then, it's still very comfortable with the 50-50 split, and the fact that we are providing meaningful return of capital returns, both through the dividend and the share repurchases here in 2024, I think reinforces that.
Speaker Change: No, great, great. Really appreciate that. Thank you, Lars. I'll turn it back.
Thanks, Dennis.
Speaker Change: Your next question from Manohal Shah of TD Securities. Please go ahead.
Speaker Change: Thanks and good morning everyone. I'll start with a question on Croatia. It looks like you just completed testing of the third of a four-well program on SA-7, on the SA-7 block.
Speaker Change: Looking at the the map that's quite a way west of SA-10 where you're producing roughly 2,000 BUED What what should we expect in terms of run rate production if all wells on the SA-7 block hit and maybe you could just remind us of how large that block is
Speaker Change: SA7 that is, how many drilling locations you've identified and how you're positioned from an infrastructure perspective.
Speaker Change: Thanks, Manuel, for the question. You know, it is early days on SA7, but what we're excited about is the four discoveries.
Speaker Change: and the discovery of hydrocarbons in multiple zones. The image, I think, also gives an insight to, you know, there's, this block is surrounded by known, proven...
Speaker Change: production with lots of infrastructure so early days to give a run rate but I you know ranges would be you know we're already over 2,000 bees today with the SA-10 block
Speaker Change: With any success on SE7, I can see us getting to 5,000.
Speaker Change: About that maybe potentially you know seven eight thousand, but it's early days
It really depends as well, gas versus oil mixture.
Speaker Change: The other thing, as a reminder, we did do a partnership with an in-country company that actually owns a lot of that infrastructure around us, so I think that provides good...
Speaker Change: access to infrastructure that will ultimately help reduce our overall development costs. Again, $5,000 is a number that wouldn't be a big stretch from where we are today, and then as we drill more wells and get some more success, we can further refine that.
Speaker Change: As to the number of prospects, we drilled four. I know the team had identified over 20. We do this with leads and 3D seismic, so we still have a long list of additional prospects to test on this block.
Smith.
Speaker Change: Thanks Dion. And then the the second question is on the the Ural nat gas outlook just to since it dovetails so well into all these questions. Could we just get a refresh on what you're currently seeing on the ground in terms of fundamentals?
Speaker Change: and how that's impacting your appetite for acquisitions and some of those asset packages that are hanging out there. And then maybe also an update on how aggressive you'd like to get on Eurogas hedges through 2025. Thank you.
Speaker Change: Thanks, Matt. Maybe I'll answer the second question first on the acquisitions. You know, we do continue to look for, evaluate, and screen opportunities as it's been disclosed by another party that, you know, we do expect the...
Speaker Change: assets that are onshore in Netherlands to come to the market. Our understanding is mid-next year, so that's something that we continue to monitor closely.
Speaker Change: That was for the majors, and again, a significant block of gas onshore in the Netherlands where we're the second largest operator, as you know.
Speaker Change: With respect to Macro Outlook, it's been really interesting. We touched on the call how that commodity, Eurogas, is up significantly year over year, it's up quarter over quarter. Right now we're selling into a market that is bouncing around $17 to $18 per MCF.
Speaker Change: Strip for next year, again, it's bouncing around $17 to $18 CAD per MCF. 2026 is in excess of $15, so quite robust pricing.
Speaker Change: A couple things, maybe the noteworthy is, you know, first you've got weather, so we'll pretend to predict the weather, but we've had two very warm winters in Europe, who knows, maybe this is the year we get a normal winter.
Thank you very much.
Speaker Change: From a demand side, I mean, we still think LNG is robust and can continue to grow in Europe itself. I mean, you're seeing countries that are still, like Germany, for example, where they've said no to nuclear and a third of their power still comes from coal. So it's early days, in our view, in the transition of needing to get off of coal.
Speaker Change: On the supply side, we are seeing risks to some of the volumes that have been coming into Europe. There is about a bead, a bead and a half of gas that comes into Europe from Russia via Ukraine.
Speaker Change: That contract is set to expire later this year, and there's been a lot of news flow on that outcome, I suspect.
Speaker Change: There's a lot of reasons why that gas won't keep flowing, but we'll see what happens there. But that's a bee and a half, that's at risk.
Speaker Change: And then even LNG, like Russia still imports about 2 BCF a day of LNG into Europe and Europe continues from a policy point of view.
Speaker Change: to roll out new initiatives to further restrict that Russian LNG from landing in in Europe. So big picture is domestic production continues to drop in Europe.
Speaker Change: And Europe has really positioned themselves to needing to outbid the world for LNG, and we're seeing that create these robust prices.
to provide a current update.
Dion Hatcher: Yeah, thanks, Dion. Menno, on the hedging side, we did get to 50% here in 2024. We're actually 50% already for 2025 on European gas itself. I think there's a scenario where you potentially get up to 60%, but probably hedging on the margin.
Speaker Change: for the remainder here of 24 for 2025. 2026, we're actually 40% hedged on European gas, you know, as Dion referenced.
Speaker Change: a strong price curve out that far, and so we've taken advantage of that, and then we've initiated a position for 2027. So,
Thanks for the color, Lars. I'll turn it back on.
Thanks, Mennel.
Speaker Change: Your next question from Amir Arif of ATB Capital. Please go ahead.
Speaker Change: Thanks, good morning, guys. A couple of follow-up questions. There one just on the Germany side, given the success of the first world and the initial positive indications from the second world, can you just remind us what your surface infrastructure capacity is and whether that needs to get upgraded or increased given the explosion success you're seeing?
Speaker Change: Just on the bigger infrastructure, I'll kick it off and then Darcy, please jump in to add more. How we can think about Germany as an area where the majors dominated for years and as they've, over time, allocated capital to other areas.
Speaker Change: You've seen a basin that has, over time, declining production and it's left with a lot of legacy infrastructure. So when you think about gas plants and basic infrastructure for gas, all that's in place.
Speaker Change: So, as we look to individual wells, you know, then get into the nuances of getting it from that surface lease to the closest gas plant, and again, there's a lot of infrastructure in place.
Speaker Change: We're happy with that. We can leverage that infrastructure and utilize it as we look to drill wells in areas that were on trend with different prospects that were produced over the decades, but maybe anything to add to that, Darcy, maybe with the first well that we are?
Darcy Kerwin: Yeah, Amir, think of the first well in Osteheida. We have a pipeline right now at Lease Edge to tie in, we're just working on.
Darcy Kerwin: We will be somewhat restricted initially when we tie that well in. There are some seasonal restrictions there and depending on what other wells are producing into that system, we're pretty confident that over time we can
Darcy Kerwin: We can de-bottleneck any restrictions that we see, and usually without spending any significant amounts of capital. You know, Vissel Source dives into another part of the network.
Darcy Kerwin: Only two kilometers away by pipe to the nearest tie-in point there.
Speaker Change: I think there's more capacity in that area and we do have other options to add additional capacity if we chose to do so going forward. So I'd say in summary, both of these wells have access to close-by infrastructure that has capacity.
Speaker Change: may have constraints from time to time but are usually solvable without a bunch of capex.
Speaker Change: It really comes down to a capital allocation. We'll have a list of things that we could do to accelerate production.
Speaker Change: That will compete for capital with other opportunities in the portfolio, but back to you, Mayor. Okay, that's helpful. So just from that $17 million-a-day test rate, though, what rate would you plan to be putting that well on in 2025?
Relative to that test, which is 17.
Speaker Change: In 2025, I think we're thinking about about a thousand BOEs a day, Amir, for that well in 2025 once it's on.
Speaker Change: Okay and then just keeping it flat or potentially increasing it in 26 it sounds like, if you have some debottling opportunities.
Speaker Change: That's it, keeping it flat throughout 2025 and then increasing that rate in 2026.
Speaker Change: Okay, I appreciate that. And then just on that third exploration well that you are drilling now, just on that map on page five, slide five, is this prospect just south of the second exploration well, or is this one a different exploration prospect altogether?
Speaker Change: Terrane, just to clear, you're talking about where's the location of the third well that we're currently drilling? Exactly, relative to that second exploration well.
and the other.
Speaker Change: yeah just picture the map here it's just yeah you're correct just south there
Speaker Change: Okay, so does the success of the first two wells increase your probability or chance of success of what you think you'll find with the third well?
or is it in the prospect?
No, these are separate prospects that are risked separately, Amir.
Speaker Change: While the success certainly has us confident in the area, these prospects are independent and independently risked and we don't think necessarily success on one translates over into success on the next one.
Speaker Change: I think what I'm just building on Darcy's comments, I think it does, you know, kind of validates our geological models and their discrete prospects, but you've got the same team evaluating the seismic across those prospects, so it gives us, you know, increased confidence as we go from...
Speaker Change: prospect to prospect. As a reminder the third well we do view as a higher chance of success and a prospect that would be you know bigger than the first one and maybe smaller than the second one so it's it's a nice combination of a high chance of success with potential some follow-up locations as well.
Speaker Change: Okay, I appreciate that. And then just a final question on, you've touched on the net debt number, net debt a little bit. I know it's coming down actually with every passing quarter. Is there a certain net debt level at which the 50% return of capital number increases?
Speaker Change: Or you just slowly ratchet it. I don't know for 25, you're still assuming or estimating 25%. Just wondering when that number would move up beyond that.
Lars Glemser: Good question. I'll pass it over to Lars to provide some context on that. Yeah, thanks Amir. And as I referenced in the earlier question, very comfortable with that 50% level on the return to capital side.
Speaker Change: debt levels. If we're in that 500 million Canadian to a billion Canadian, that's where we're extremely comfortable with this 50% return to shareholders.
Lars Glemser: If you were to go sub $500 million, and as a reminder, that's the amount of debt that we have roughly turned out to 2030.
Lars Glemser: and you're truly building cash on the balance sheet, that could be an impetus to increase from that 50% level. So that's maybe a way to think about debt level ranges from an absolute perspective.
Okay, appreciate it. Okay, that's all for me. Thanks.
Okay, thanks for that.
Thank you.
Speaker Change: And the last question from Travis Wood of National Bank Financial. Please go ahead.
Speaker Change: Circle back and discuss more around M&A, but less so in the context of what's available and more so from a risk perspective as you think about
Speaker Change: You mentioned the large acreage position that you hold across the continent, so how do you think about drilling those?
You've had some recent success, obviously.
Versus...
Speaker Change: going to buy production in the context of using the cash build.
Speaker Change: Thanks, Travis, for that. I'll kick it off, and then, Lars, feel free to add. I think it comes down to capital allocation. We'll look at opportunities across our portfolio, and we think that's one of our strengths, to be able to choose whether it's a
Speaker Change: acquisition in Ireland like what we did about a year ago
Speaker Change: So we'll frame them or run them all to ground and we'll look at it from a risk basis to say, you know, where do we see...
Speaker Change: The biggest bank for our buck, not just in the short term, but the long term.
Speaker Change: I think we do have some unique skills when it comes to these.
Lars Glemser: acquisitions to be able to buy from the majors and work those assets harder and add incremental value. But it'll be the decision on capital allocation and risk returns. Lars, do you want to add to that? Yeah. And Travis, as we sort of walk through some of the questions here today, I think a theme that you're starting to sense here is there's quite a bit of capital being invested.
Lars Glemser: today that's going to benefit sort of that 2026, 2027 and on period, especially when you start to think about assets like
Lars Glemser: Germany and Croatia. And so, you know, it actually creates a competition within the portfolio in the sense of
Lars Glemser: When you're looking at an acquisition versus accelerating investment into the base portfolio, those are the time periods that we're looking at. We're not looking at the near-term, up-front accretion. It truly is.
Lars Glemser: making a better business for that longer term, which has given us conviction to drill these German wells, drill these Croatian wells, knowing that there's not that wave of instant free cash flow. So,
Lars Glemser: That is what we look at, is you can accelerate investment into the base business, which I think is getting, you know, you're getting more and more projects there that are surfacing.
Lars Glemser: Do you invest it in M&A or do you invest it in your own shares in terms of buyback? So it is that longer term view in terms of where we're going to allocate capital that we would evaluate.
Lars Glemser: Are you able to assess the inventory depth and contrast that against...
Speaker Change: I'm just kind of finding myself asking the question here this morning, given the acreage position, really what would be the point of doing M&A outside of, again, kind of adding on the inventory side?
Speaker Change: Yeah, thanks for that. You know, I think it's just sustainable, excess-free cash flow over the long term. And I think, you know, if we think about our model, we've talked about modest production growth.
Speaker Change: resilient and growing based dividend and then a variable component to share buybacks and a combination of that you know we're going to compound the business at 9-10 percent.
Lars Glemser: try to do our best to do that consistently year over year and then we think what's unique for the shareholders of Vermillion is the ability to augment that with
Lars Glemser: With a strong acquisition that only makes the business even better long term and when we look back to some of the deals We've done especially in Europe. They've been some of our best deals
Speaker Change: When we get into the nuances of what we're looking for, I think maybe where you're going is if you've got a strong, organic outlook in Europe, do you...
Lars Glemser: Are you okay buying an asset that's got, let's call it a corp-like asset, that's got very, very high free cash flows, but maybe not the drilling inventory? So we'll do all that work from a long-range plan to look at anything that's
Lars Glemser: on the market, you know, the combination pro forma in our business. Ideally, you want both, as you always do. But again, I think the good news is, if you've got a strong portfolio, things need to compete for capital to get into it. And that's where we are today. And I think that's, you know, echo Lars's comments on there as well.
Okay, yeah, that's perfect. Thanks, both.
Okay. Thanks, Travis.
Speaker Change: If there are no further questions at this time, I would like to turn the call over to Mr. Dion Hatcher.
Dion Hatcher: Thanks, I'm going to turn it to Kyle and a couple. Yeah, yeah, thanks Dion. So we actually had a few questions coming online from our shareholders which I'll read out here and give the management team an opportunity to respond to. First one is on the Germany exploration wells.
Speaker Change: Are these geological features just localized highs, localized highs, or is the Rottliegen sandstone very widespread? Do you complete these wells vertically and frack them?
Dion Hatcher: And what are you doing to improve the takeaway capacity? I think we might have addressed the takeaway capacity, but maybe, Darcy, you can provide some color on the first part of the question. Yeah, thanks, Kyle. That's a good question. So...
Darcy Kerwin: In Germany, there's a number of different zones that are produced and that we're chasing. We're primarily focused...
Lars Glemser: on that rut legane sandstone that you've mentioned, as well as the zechstein carbonate. So both of those zones, the rut legane and the zechstein...
Lars Glemser: moves into the Netherlands. In fact, those are the same principle geological formations that we've been successfully exploiting in the Netherlands for the 20 years or so that we've been there. So I would say they...
Lars Glemser: You know, as you suggest in your question, both of those formations are very widespread, not just in Germany, but across borders into the Netherlands as well.
Lars Glemser: They are both conventional reservoirs. Those reservoirs typically have high porosity, high permeability, and therefore high deliverability. So they are typically completed conventionally.
Lars Glemser: with vertical or deviated wells to reach targets and complete it without the need to frack.
Good evening. Thank you. Thank you.
Speaker Change: So, yeah, I think we touched on the infrastructure piece already.
Speaker Change: Great, thanks Darcy. Next question here, I think this one's probably for Lars. You appear to be buying back a lot of shares under your NCIB, but this is not being fully reflected in your share count or your share price. Can you explain why this is the case?
Lars Glemser: Yeah, thanks for that question. And we somewhat addressed this a little bit earlier too, but you know, kind of what I'll remind of is, you know, the share buyback program is, this really is the first year that it's kicked into high gear in terms of starting at second half of 22.
Lars Glemser: limiting ourselves for the right reasons in 2023 to 30%. And so I, you know, Q3 here is actually a bit of an inflection quarter in the sense that we've now repurchased 8 million shares.
Lars Glemser: 2% when you translate that to a per share basis you get to 7% and so
Lars Glemser: Not only are you seeing a lot of gross share repurchases, but you're also seeing a high level of net share repurchases. And just on that front, we do have a long-term incentive plan where we do make share issuances to create alignment with the employee base and investors.
Lars Glemser: That's amounted to about a million shares this year. As a reminder for investors as well, for a good chunk of our executives, their compensation is in shares as well, up to 70% of their compensation. And so there's very good alignment there in terms of.
Lars Glemser: We're as keen to see that share count go down as are investors, and I think we are seeing that happen here through the first nine months.
Lars Glemser: We did have another question on when we expect to increase the dividend return capital, but I think Lars has already addressed that in the previous response. Last question we had here, you mentioned over a decade of drilling inventory in Europe. Do you know how many of these locations have been booked in your reserve report so far?
Speaker Change: Thanks Kyle, I can take this one. It's a really good question. You know, if you think about our asset base, it's a third international and as a reminder, why do we do that? You know, we want to have
top-decile netbacks, a low-decline business, and flexibility for capital allocation.
Speaker Change: international assets, we've talked with premium pricing on European gas, as well as, you know, on the oil side, we're able to, I think we've averaged $5 a barrel higher than the Canadian beer. So it works, the declines on those assets are, you know, in around 12% on our international portfolio.
Lars Glemser: But the downside would be, I guess from a reserve booking point of view, when you have conventional assets, you tend to book those individual prospects.
Lars Glemser: When, you know, there's a well in the structure, you prove productivity that is different than what you see in North America, where you're typically able to book more of a fairway view.
Lars Glemser: If you look back at what we've done and we've provided some new slides in our deck on this But Netherlands is a great example where we've been in Netherlands for two decades
Lars Glemser: When we entered Netherlands, we had about 13 million barrels of 2P reserves.
Since that time, we've produced 30 million barrels.
Lars Glemser: You look at our reserve book today, we've still got 13 million barrels and it kind of links back to Darcy's description of some of these formations and how pervasive they are and the number of structures and I think the expertise that we've built up.
Lars Glemser: over almost three decades looking for these things in Europe. So, the conventional nature of those plays means that, you know, you book fewer of them at day one, but over time, we've got the skill sets to add them.
Lars Glemser: As to the question, I would say less than half on a risk basis when we compare our internal long-range plan to what's booked would be how I would characterize that.
Lars Glemser: So yeah, we're happy with that type of assets and excited to deploy our skill sets to it. And I think where you see it show up, we would point investors as our Reserve Life Index.
Lars Glemser: We're right around 14 years reserve life index if you go back to Pete you go back a decade ago We were 14 year reserve life index So the consistency in which we're able to manage the business is again how we think about it
Speaker Change: as we go forward. So, thank you and Doug for that question.
Speaker Change: Well, with that, I think that concludes our prepared remarks and the questions. So I want to thank everyone again for participating in our Q3 results conference call. Enjoy the rest of your day.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.