Q3 2024 Vermilion Energy Inc Earnings Call
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.
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 Laris Glemser, Vice President, CFO, Darcy Kerwin, Vice President, International and HSE, Randy McQuaid, Vice President, North America, Kyle Preston, Vice President, Investor Relations.
will 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.
Please refer to our advisory and forward-looking statements at the end of the presentation. It describes forward-looking information, non-GAD 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 compounding impact of our share buyback program.
Production during the third quarter averaged 84,173 BUEs 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 is 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, TPF, increased 14% over the prior quarter, averaging $15.52 per MCF and Q3. This compares to ACO of $0.69 per MCF.
BureauGas 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.
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.
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, 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.
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.
Our share buyback program is having a meaningful impact on our per share metrics as already noted with the per share production growth.
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.
This represents a net debt trailing fund flow ratio of 0.6 times the lowest in 15 years.
Before I discuss the operational highlights, I want to briefly expand on my comment about the value of diversification.
The 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.
Well, 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.
As a reminder, we also hedged 30% of our equal exposure this year at prices much higher than what we've observed this summer.
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.
European gas has historically traded at premium to North American benchmarks in the past few years as seen as premium widened.
The trend continued in 2024 as European gas prices have increased over 30% year-to-date and now sells at an even wider margin.
of even wider premium J Cole.
Speaker Change: European gas prices remain elevated as the continent is still heavily dependent on LNG imports to meet demand, especially during the winter months.
Speaker Change: Europe continues to be our most profitable operating region and is an area we expect to grow organically in the years ahead as we tie in some of our recent gas discoveries.
while also seeking opportunities to augment this growth for strategic acquisitions.
Speaker Change: 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.
Speaker Change: The diversification continues to be a strategic advantage to help stabilize our cash flows with exposure to multiple commodities.
Speaker Change: 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.
Production from our international operations averaged 30,237 views per day in Q3.
This incorporates new production from our SA-10 block in Croatia and reflecting higher run times in Germany and Ireland, which was partially offset by planned maintenance downtime in Australia.
Speaker Change: 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.
Speaker Change: Subsequent to the quarter, we successfully completed drilling operations on the second deep gas exploration well in Germany. I'm very pleased to report that we've discovered gas in the reservoir. We're now proceeding with completions and testing operations.
This represents our third successful deep gas exploration well in Germany, including the Bergmore 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're currently in the process of drilling a third deep gas exploration well in Germany to finish our 2024 European drilling campaign.
Speaker Change: This year was the largest exploration drilling campaign we have executed in Europe, and the results to date 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.
Speaker Change: representing well over a decade of drilling inventory with the potential to provide meaningful organic growth.
Speaker Change: As noted in our operational update released in early September, in Germany, we successfully tested our first deep gas exploration well, the 2024 program.
Speaker Change: 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.
Speaker Change: Italian operations are progressing as planned, with production expected on stream in the first half of 2025.
Speaker Change: 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.
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.
Speaker Change: 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.
Speaker Change: Our team continues to mature additional leads across this land base as a reminder of some of these initial prospects are large enough if successful to acquire a multi well development program.
In Croatia, we increased production on the SA-10 block after commissioning the gas plant in late June.
Speaker Change: 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-fact European gas.
On the SA-7 block, we completed the 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.
Speaker Change: We're very encouraged with four well exploration results in Croatia, which have proven up multiple producing zones and de-risk future development and exploration targets across four discrete areas.
Speaker Change: 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.
Speaker Change: Production from our North American operations averaged 53,936 BUEs per day in Q3.
Speaker Change: Our primary focus during the quarter was an increasing production on the new battery and tying in five Monteney Liquids-Rich Gas Walls on the 9-21 pad on our mica acid.
Speaker Change: 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.
Speaker Change: Saskatchewan we drilled completed and brought up production five light oil wells while in the U.S. five non-operated light oil wells were brought up production.
Speaker Change: continues to provide value data for evaluating the stacked oil zones in the Parkland, the Nile, the Turner and the Mallory formations on our land.
Speaker Change: Five Montigny wells on the 9021 pad continue to produce at strong rates with an average IP 90 of over 1,000 views per day, including 43% liquids.
Speaker Change: 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.
Speaker Change: This new battery and water infrastructure has achieved 99% runtimes at startup and is contributing to these cost savings.
Speaker Change: 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.
Speaker Change: We plan to de-bottle and connect this as part of our Phase 2 infrastructure expansion scheduled for 2025.
Speaker Change: Total production for a 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 9021 pad.
Speaker Change: We expect to average approximately 14,000 views a day in 2025 with additional drilling and expansion of our infrastructure.
Speaker Change: I will now pass it over to Laris to discuss our shareholder returns and outlook.
Laris Glemser: 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.
Laris Glemser: When you combine dividends, share buybacks, and debt reduction, which are all forms of equity accretion, 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.
Speaker Change: 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: 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 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 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 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.
Speaker Change: along with participating in several non-operated wells in the United States, and continuing with drilling and completion operations on the two deep gas exploration wells in Germany.
Laris Glemser: With that, I will pass it back to Dion for his closing remarks. Thank you, Laris.
Dion Hatcher: But closing is another strong order for a million as we delivered on our production guidance and deliver strong financial results
Dion Hatcher: As noted, we benefited from our diversified portfolio that provides exposure to premium price European gas, which resulted in a corporate realized gas price of $6.57.
Dion Hatcher: We're deeply 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: 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 free cash flow to shareholders in 2024 through our fixed dividend and variable share buybacks, representing approximately 10% of our market cap. We expect to continue providing rateable dividend increases and repurchasing shares in future periods.
Speaker Change: We believe Vermillion is very well positioned to execute on this plan, given our robust asset base and strong balance sheet.
Speaker Change: 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.
Unknown Speaker
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 one 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 star followed by the number 2. If you are using speakerphone, please lift the handset before pressing any keys.
Speaker Change: And your first question comes from the line of Mr. Dennis Pong 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?
Speaker Change: Thanks, Dennis. I think I got most of your question there in Germany, the size and potential follow up with this recent discovery.
Speaker Change: Yes, for that. So yeah, this the second 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. You know, 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 can maybe provide some context on the size here and what you think for timing and follow-up.
Speaker Change: Yeah, thanks, Deanna. Thanks for the question. So yeah, in this in this whistle horse, well that we just just reached TD on
and we encountered a pretty thick sand package there about
75 metres of net gas-bearing sands across two zones.
Speaker Change: Preliminary estimated gas in place is potentially over 100 BCF there. Just remind you, we're 30% working interest in that well. 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
Speaker Change: 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.
Speaker Change: 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 to the market here early next year. Great. 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 buy back stocks in the quarter is quite helpful.
Speaker Change: 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 share buybacks?
Robert Glemser, Anthony Hatcher, Robert Michaleski, Unknown Executive
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: Yeah, no, thanks for the question, Dennis. You know, I think, you know, we still believe that that 50-50 allocation of EFCF to return a capital and debt reduction is an appropriate balance, especially for a commodity based business.
Speaker Change: 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.
Speaker Change: and the Troughs of the Commodity Cycle. I think the other thing to reflect on too is, you think about return of capital here over the last three years.
Speaker Change: 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.
Speaker Change: Today and so 2024 is an interesting year to reflect on I think Dennis just in the sense of
Speaker Change: 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.
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 Dion quoted in his prepared remarks.
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.
No, great, great. Really appreciate that.
Thanks, Dennis.
Speaker Change: Your next question from Menuhal Shah of TD Securities. Please go ahead.
Menuhal Shah: Thanks and good morning everyone. I'll start with a question on Croatia.
Speaker Change: Looks like he just completed testing of the third of a four-well program on SA-7, on the SA-7 block and just
Speaker Change: Looking at the map, that's quite a way west of SA-10, where you're producing roughly 2,000 BOED. 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 Mano 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 2000 bees today with the SA-10 block.
Speaker Change: with any success on SE7, I can see us getting to 5,000.
Speaker Change: Above that, maybe potentially, you know, seven, eight thousand, but it's early days.
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 the infrastructure around us, so I think that provides good
Speaker Change: access to infrastructure that will help me help reduce our overall development costs. So, you know, again, you know, 5000 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.
Speaker Change: Thanks, Dion. And then the second question is on the Ural NatGas Outlook, just to, since it dovetails so well into
Speaker Change: All these questions, could we just get a refresh on what you're currently seeing on the ground in terms of fundamentals 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
Speaker Change: How aggressive you'd like to get on Eurogas hedges through 2025. Thank you.
Speaker Change: I'll answer the second question first on the acquisitions. We do continue to look for, evaluate, and screen opportunities. It's been disclosed by another party that we do expect the acquisition to be successful.
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, you know, we touched on the call how that commodity, Eurogas, is up significantly year over year, it's up quarter over quarter. You know, right now we're selling into a market that is bouncing around $17 to $18 per MCF.
Speaker Change: 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 of things, maybe the noteworthy is, you know, first you 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.
Speaker Change: From a demand side, I mean, we still think LNG is robust and 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, you know, we are seeing risks to some of the volumes that have been coming into Europe. There is about, you know, 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, you know, news flow on the on that outcome, you know, I suspect and again, you know,
The
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 B 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 Europe. So big picture is domestic production continues to drop in Europe.
Lars Glemser: and Europe is really positioned themselves to needing to outbid the world for LNG and we're seeing that create these robust prices. Maybe on the hedging side, I'll pass it over to Lars to provide a current update.
Lars Glemser: I think there's a scenario where you potentially get up to 60%, but probably hedging on the margin for the remainder here of 2024, 2025. 2026, we're actually 40% hedged on European gas, you know, as Dion referenced.
Lars Glemser: a strong, 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
Lars Glemser: The bulk of our hedging focus over the next little bit is likely more on 2026 and 2027 as opposed to 2025, just given we are 50% hedged for that period.
Yeah, thanks for the color, Lars. I'll turn it back.
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 well and the initial positive indications from the second well, can you just remind us what your surface infrastructure capacity is and whether that needs to get upgraded or increased, given the exploration 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, Dercy, maybe with the first well that we are...
Dercy: Yeah, Amir, I think of the first well in Osteheida, you know, we have a pipeline right now at Lease Edge to tie in, we're just working on.
on well site facilities for that gas well.
Speaker Change: 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
Speaker Change: We can de-bottleneck any restrictions that we see and usually without without spending any any significant amounts of capital You know, this will source ties into another part of the network. We're only
Speaker Change: only two kilometers away by pipe to the nearest tie-in point there. I think there's more capacity in that area. We do have other options.
Speaker Change: to add additional capacity if we chose to do so going forward. So I'd say in summary, you know, 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 context.
Speaker Change: Thanks, Darcy. The only thing I can add to that is that it really comes down to a capital allocation. We'll have a list of things that we could do to accelerate production and that will compete for capital with other opportunities in the portfolio. Back to you, Amir.
Speaker Change: Okay, now 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?
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: 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: Turian, 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.
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 that an independent 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 is just building on Darcy's comments, I guess, I think it does, you know, kind of validates our geological models, and their discrete prospects, but you 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 a nice combination of a high chance of success with potential some follow-up locations as well.
Speaker Change: I appreciate that. And then just a final question on, you've touched on the net debt a little bit and 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 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, you know, as I referenced in the earlier question, very comfortable with that 50% level on the return to capital side. I think in terms of
Robert Michaleski, Unknown Executive
Speaker Change: 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.
Hey, thanks for that.
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 know, you mentioned the large acreage position that you hold across the continent. And so how do you think about drilling those?
You've had some recent success, obviously.
Speaker Change: Thanks Travis for that. I'll kick it off and then Laris 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 like what we did a year ago, or allocating capital right now into Germany or Micah for that
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 the biggest bang for our buck, not just in the short term, but the long term? I think we do have some unique skills when it comes to these
Speaker Change: Acquisitions to be able to buy from the majors and, you know, work those assets harder and adding criminal values. So, but it'll be the decision on capital education and risk returns. Lars, you want to add to that?
Lars Glemser: Yeah, you know, Travis, as we sort of walk through some of the questions here today, you know, 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
Speaker Change: Germany and Croatia. And so, you know, it actually creates a competition within the portfolio in the sense of
Speaker Change: 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 kind of the near-term upfront accretion. It truly is.
Speaker Change: 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 sort of that wave of instant free cash flow. So that is what we look at is you can accelerate investment into the base business, which I think is getting
Speaker Change: You know, you're getting more and more projects there that are surfacing. Do you invest it in M&A or do you invest it in your own shares in terms of buyback? So, you know, it is that longer term view in terms of where we're going to allocate capital that we evaluate.
Speaker Change: Thanks, sirs. Okay. Yeah, that makes sense. What about as you're looking at the M&A side, what's
Speaker Change: What's more important? Is it is it picking up production or
Speaker Change: Are you able to assess the inventory depth and contrast that against?
Speaker Change: the land spread that you have. I'm just, I'm just kind of find myself asking the question here this morning, given given the acreage position, really, what would be the point of doing M&A outside of, again, kind of adding on 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, we, if we think about our model, we've talked with 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.
Speaker Change: 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 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.
of the
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, are you okay buying an asset that's got, let's call it a Corb-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...
Speaker Change: on the market, you know, the combination pro forma in our business. Ideally, you want both, as you always do. But 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 that's where we are today. And I think that's, you know, echo Lars's comments on there as well. But
Okay, that yeah, that's that's perfect. Thanks both.
Thanks for having us.
Speaker Change: I would like to turn the call over to Mr. Dion Hatcher.
Speaker Change: Thanks, I'm going to turn it to Kyle in 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 Ligon Sandstone very widespread? Do you complete these wells vertically and frack them?
Speaker Change: And what are you doing to improve the takeaway capacity? I think we might have addressed the takeaway capacity, but maybe Darcy can provide some some color on the first part of the question. Yeah, thanks. That's a good question. So
Speaker Change: In Germany, there's a number of different zones that that are produced and that we're chasing. We're primarily focused
Speaker Change: on that Rottliegen sandstone that you've mentioned, as well as the Zechstein carbonate. So both of those zones, the Rottliegen and the Zechstein, are regionally extensive in Germany. And that kind of regional extension
Speaker Change: moves into the Netherlands. In fact, those are the same principal 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...
Speaker Change: you know, as you as you suggest in your question, both of those formations are very widespread, not just in Germany, but across cross borders into the into the Netherlands as well.
They're both conventional reservoirs. Those reservoirs typically have.
Speaker Change: high porosity, high permeability and therefore high deliverability. So they're typically completed conventionally with vertical or deviated wells to reach targets and complete it without the need to frack.
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, no, 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 its second half of 22.
Speaker Change: limiting ourselves for the right reasons in 2023 to 30%. And so, I, you know, Q3 here is actually a bit of an inflection order in the sense that we've now repurchased 8 million shares
Speaker Change: this year in the first nine months, that's half the shares that we bought over the last three years. And so you're starting to see some of these production per share metrics, for example, where absolute production growth quarter over quarter was
Speaker Change: 2%. When you translate to a per share basis, you get to 7%. And so
Speaker Change: 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
Speaker Change: We do have a long-term incentive plan where we do make shared issuances to create alignment with the employee base and investors.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Perfect, thanks Lars. 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.
Speaker Change: The 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 reports so far?
Speaker Change: Yeah, thanks, Scott. 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
Speaker Change: Unknown Speaker 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
Speaker Change: 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.
Speaker Change: 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 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
Speaker Change: When we entered Netherlands, we had about 13 million barrels of 2P reserves. Since that time, we produced 30 million barrels. You look at our reserve book today, we still got 13 million barrels. And it kind of links back to Darcy's.
Speaker Change: 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 off.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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 when we appoint investors is our Reserve Life Index.
Speaker Change: were right around 14 years Reserve Life Index. If 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 as we go forward. So thank you and Doug for that question.
Speaker Change: Well, with that, I think that concludes our pair of 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.