Q2 2025 Vermilion Energy Inc Earnings Call

Speaker #3: Thank you, Kelsey. Good morning.

Speaker #4: Yep. Good morning, ladies and gentlemen. Welcome to the Vermilion Energy Q2 2025 conference call. At this time, all lines are in listen-only mode. Following presentation, we will conduct a question and answer session.

Speaker #4: If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, August 8th, 2025.

Speaker #4: I would now like to call over to Mr. Dion Hatcher. Please go head.

Speaker #5: Thank you, Kelsey. Well, good ning, ladies and gentlemen. I'm ion Hatcher, president and CEO of Vermilion Energy. With me today are Lars Glemser, vice president and CFO, Darcy Kerwin, vice president of international and SE, Randy McQuaid, vice president of North America, Laura Conrad, vice president of business development, and Kyle Preston, vice president of investor relations.

Speaker #5: Please refer to our advisory on forward-looking statements in our Q2 release. It describes forward-looking information, non-GAAP measures, and oil and gas terms used today.

Speaker #5: And it aligns to risk factors and assumptions relevant to this discussion. Vermilion delivered strong, second-quarter results. Production for Q2 averaged 136,000 BUEs per day.

Speaker #5: Representing a 32% increase over the prior quarter. Mainly due to a full-quarter contribution from the Westbrook acquisition that closed in February. Subsequent to second quarter, we closed both of the previously announced sketch one and US asset sales for a combined gross proceeds of $535,000,000, which has been allocated to debt reduction.

Speaker #5: These divestments were a key component of Vermilion's broader strategic transition towards becoming a global gas producer. Enabling us to enhance operational scale and long-duration assets and better position the company for sustainable, profitable growth.

Speaker #5: Vermilion now has a production base of approximately 120,000 BUEs per day, 70% weighted to natural gas, with over 90% of our production coming from our global gas assets.

Speaker #5: Which include liquid-rich and gas assets in Canada, as well as high-net-back gas in Europe. We expect over 80% of our future capital investment will be directed toward these global gas assets.

Speaker #5: Which will be the primary growth drivers within our portfolio. We generated $260 million of fund flows from operations and $144 million of free cash flow in Q2.

Speaker #5: After deducting E&D capital expenditures, capital expenditures were down from the previous quarter due to the seasonality of drilling activity in Western Canada and the deferral of some E&D capital associated with the Saskatchewan and U.S. assets.

Speaker #5: Activity during Q2 was focused on our global gas assets and the Micomontany, Alberta Deep Basin, and Germany. At Micom, Vermilion completed five and brought on production 11 liquids-rich Monty wells.

Speaker #5: Monty production averaged approximately 15,000 BUEs per day in Q2. Which includes production from new wells and increased takeaway capacity from the operated infrastructure expansion that was completed earlier this year.

Speaker #5: Production from our two most recent pads continues to be in line with our expectations. Our operations teams are always focused on continuous improvement. And through these efforts, we were able to achieve a new cost benchmark for a Monty wells with our illing completions, equipment tie-in costs coming in at approximately $8.5 million per well for two most recent pads.

Speaker #5: These cost reductions were mainly driven by reduced trucking due to our water infrastructure, reduced tester costs due to optimized flowback, and lower drilling costs due to faster drill times.

Speaker #5: This is a reduction of a half million dollars per well from our prior target and over $1 million per well compared to just one year ago.

Speaker #5: We are confident we can turn our new cost benchmark of $8.5 million per well into our program average, which will reduce future development costs and improve full selection returns on our Monty development.

Speaker #5: With the second expansion phase at Micom now complete, our Monty team is now planning for the third and final expansion phase. We plan to invest approximately $100 million in the additional infrastructure and gathering pipelines over the next few years along with drilling another 40 wells over this timeframe to reach our targeted production rate of 28,000 BUEs per day by 2028.

Speaker #5: Once we get to this level, we anticipate drilling approximately eight wells per year to meet this production level for over 15 years. Which translates to a generating approximately 125 to 150 million of annual free cash flow assuming a price of $70 WTI and $3 annual.

Speaker #5: In the Deep Basin, we executed one rate program during the quarter and drilled four, completed three, and brought on production three liquids-rich wells. We plan to add two rigs and execute a three rig program during the second half of '25 as we ramp up activity heading into the winter.

Speaker #5: We're very pleased with how the integration of the Westbrook assets has unfolded. And we continue to identify further upside. Including proving up new locations, reducing our service costs, and processing costs.

Speaker #5: As a result, in Q2, the first full quarter of our operating these new assets, the team has identified another $100 million of synergies. That now brings the total to date to over $200 million on an MPP10 basis of synergies post-acquisition.

Speaker #5: This clearly demonstrates the benefit of our dominant and continuous Latin base in the Deep Basin and our continued focus on enhancing profitability. Following the divestment of our Saskatchewan and U.S. assets and the continued integration of the Westbrook acquisition, we have taken additional steps to further streamline the business by reorganizing our Canadian business unit.

Speaker #5: This has led to dedicated technical and corporate teams concentrating exclusively on our liquids-rich assets in the Deep Basin and the Monty. In Germany, we drilled, completed, and brought on production two oil wells.

Speaker #5: These high-return wells have initial rates in the 100 to 200 barrels of oil per day range, but they represent low-risk water flow development opportunities in Germany.

Speaker #5: Facility and tie-in activity on the Aserhai Deep Gas well was completed at the end of Q1, and the well averaged approximately 1,100 BUEs per day in Q2, which is above our original constrained expectations due to the stronger-than-anticipated seasonal demand.

Speaker #5: We continue to advance the permitting and infrastructure expansion plans for the first Bissell well, which remains on schedule for tie-in and startup during the first half of '26.

Speaker #5: The team continues to work on the full-filled development plans for our Deep Gas Prospects in Germany, where we are excited about the long-term growth potential from this asset.

Speaker #5: These prolific wells combined with strong European gas prices, currently over $15 per MMBTU, will translate to significant free cash flow for Vermilion in the future.

Speaker #5: In addition to the organic development in Germany, we will continue to evaluate opportunities in our core European operations, specifically pursuing European gas acquisition opportunities that complement our existing portfolio and enhance value for our shareholders.

Speaker #5: We also have achieved a significant milestone on the ustainability front, achieving our scope one emission reduction target one year ahead of plan. In 2021, we set our get to reduce scope one emissions intensity by 15 to 20 percent, compared to the 2019 intensity levels.

Speaker #5: We achieved this target with a 16% reduction at the end of 2024. Looking forward, we are well positioned for our 2030 target, a goal of reducing scope one plus scope two emission intensities by 25 to 30 percent versus our 2019 levels.

Speaker #5: The first half of 2025 was one of the busiest times in Vermilion's history. As we executed our portfolio enhancement strategy, we successfully closed our largest ever production acquisition and divested our North American oil-weighted assets.

Speaker #5: Through these high-grating initiatives, Vermilion now has a much more focused and resilient asset base, underpinned by high return development opportunities and unique exposure to premium price European gas and a lower cost structure.

Speaker #5: We believe this more efficient, more resilient business will drive significant shareholder value over the longer term. I am especially proud that during this very busy period of integration and divestment, we remain focused on operational excellence.

Speaker #5: Since the start of the year, we have identified Monty drill cost equipment tie-in savings and synergies related to the Westbrook acquisition, where the combined $300 million on an MPV10 basis with only 154 million shares outstanding that equates to approximately $2 per share of value.

Speaker #5: We also maintain a strong safety record across our operations through this period, a true testament to our commitment to sending everyone home safe every day.

Speaker #5: The second half of '25 will be an active period as we add two additional rigs to our Deep Basin program and commence drilling two wells in the Netherlands.

Speaker #5: Factoring in the timing of the July divestments, combined with the planned seasonal turnaround activity and some shutting gas due to the low summer acorn prices, we expect Q3 production to average between 117,000 and 120,000 BUEs per day.

Speaker #5: Our full-year production guidance of 117,000 to 122,000 BUEs day and capital guidance of 630,000 to 660,000,000 remain unchanged. However, we do have the flexibility to decrease spending if necessary.

Speaker #5: We expect the end 2025 with approximately $1.3 billion of net debt. That's a rease of 750 million dollars from Q1. Reflecting the inorganic deleveraging from asset divestments and organic deleveraging over the balance of the year.

Speaker #5: We continue to balance debt repayment and shareholder returns. Currently, 60% and 40% of excess free cash flow, respectively. And we expect to be in a position to increase shareholder returns and debt as debt trends towards a billion-dollar level.

Speaker #5: In periods of commodity volatility, we're able to lean on our hedge book, where we have over 50% of our corporate production hedged for 2025 and over 40% hedged for '26.

Speaker #5: In particular, we are very well protected during the current period of weak acorn pricing, with approximately 60% of our Q3 Canadian gas hedged at an average floor price of $2.65 per MCF.

Speaker #5: It's worth noting our realized gas price in Q2 was $4.88 per MCF, versus acorn of $1.69. This shows the competitive advantage of our unique gas portfolio.

Speaker #5: For context, our European gas volumes represent 20% of our gas production, but that gas was sold directly into the European market for a price of 10 times higher than acorn in Q2.

Speaker #5: As we look ahead over the next few years, our efforts will continue to focus on our key growth assets, Monty Deep Basin and Germany.

Speaker #5: In the Monty, we will build at the final phase of our infrastructure to support our target production rate of 28,000 BUEs per day. A third of that volume being liquids, we expect to hit that target by 2028.

Speaker #5: In the Deep Basin, we'll focus on optimizing our development of our larger high-graded asset base while in Germany, we will continue to progress our deep gas exploration program, where we expect to grow production to over 10,000 BUEs per day in the coming years.

Speaker #5: Over this period of investment, we will continue to prioritize free cash flow generation, supporting both organic debt reduction and continued shareholder returns. We look forward to the coming quarters, where the picture of Vermilion as a global gas producer will become clearer following this busy period of A&D activity.

Speaker #5: We believe the company is now better positioned drive long-term shareholder value. With a more focused longer-duration asset base and an approved cost structure combined with structural tailwinds for natural gas around the world.

Speaker #5: With that, we'll now move to Q&A.

Speaker #4: Thank you. Ladies and gentlemen, we will now begin the estion and answer session. Should you have a question, please press the star followed by the one on your touchstone phone.

Speaker #4: You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two.

Speaker #4: Again, if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Greg Pardee from RBC Capital Markets.

Speaker #4: Please go head.

Speaker #6: Yeah. Thanks. Good morning. Thanks, Dion, for the, for the rundown. I wanted to ask you two things, which you definitely touched on in your opening remarks.

Speaker #6: So maybe just in terms of streamlining the portfolio, like, there's definitely been coring up in areas, you still have a number of areas, perhaps, you know, maybe they're smaller assets or less core or even some of the stuff in Europe and so on.

Speaker #6: I'm just curious, what's next in terms of shaping, you know, reshaping the portfolio? And where would that be?

Speaker #5: Thanks, Greg, for the question. Yeah. No, I think you're right. If you think about Canada, of course, we've exited the US, and we've exited, Saskatchewan and, you know, I think we're ing to see the benefits with improved capital efficiency and lower cost structure as we look forward.

Speaker #5: As you look to Europe, you know, we have announced earlier this year that we're exiting Hungary, and we're well, in the progress of, h, making that happen.

Speaker #5: We did also have some interest in Slovakia, which we've decided not to pursue. And so that is another couple of jurisdictions that we're deciding not to allocate capital to afford.

Speaker #5: And then finally, Croatia, Croatia is an area where we've had some success. we've drilled some good wells. We have some production and also on the SA7 block, we did have some exploration success.

Speaker #5: but that is yet another area that we're oking at to, although we've got a very strong technical team and I, I think a pretty interesting land base, you know, well at, we'll test the market maybe on some retention value for that asset.

Speaker #5: Especially given the, you know, capital allocation decisions we have in front of us with the success in Germany, some of the drilling opportunities in the Netherlands, and of e, the long-suited projects that we've got in America.

Speaker #5: So we're not done yet. Greg, to answer your estion, I think you're going to see, continue to focus on making the business more streamlined, which will improve our capital efficiency and our cost structure.

Speaker #6: Okay. Thanks for that. And maybe just shifting into the shareholder returns. Let's say you were at a ion dollars today. Then perhaps given the value, I'm just trying to, I'm not trying to lead you.

Speaker #6: 'm just trying to get a better sense as to whether, with, with the, where would the payout ratio presumably go? and then is there a bias towards dividends or buybacks on, I'm assuming maybe the buyback just in just given your relative valuation, but curious there.

Speaker #5: Yeah. No. Thanks, Greg. I'm going to pass it to Lars to walk us through that.

Speaker #7: Yeah. Thanks, Dion. Good morning, Greg. On the shareholder return front, I think we have been pretty clear and transparent the last couple of years here.

Speaker #7: And so we were at 50% of excess free cash flow being returned. We did a very material acquisition late last year, announced late last year with the Westbrook acquisition.

Speaker #7: Funded with the balance sheet, primarily at the time of the acquisition. And then with the dispositions that Dion mentioned in US and Saskatchewan. It was a, cash, as a result of it being a cash-funded acquisition, we reduced the return of capital to 40% of excess free cash flow.

Speaker #7: we have been buying some shares this year. And we're, we're quite comfortable with that 40% level as we chip away at the debt look to get back to one time's leverage.

Speaker #7: I think on the dividend front, we, we still like the idea of ratable per annum increases. I don't think there'll be the 20 to 25 percent increases that you saw the last couple of years.

Speaker #7: And so we will look to prioritize share buybacks with that incremental return of capital over and above the, the dividend.

Speaker #6: Okay. Makes sense. Thanks very much.

Speaker #5: Thanks, Greg.

Speaker #4: Thank you. And your next question comes from Manuel Halsa from TD Cowen. Please go head.

Speaker #8: Thanks. And good morning, yone. I'll, I'll start with a, a estion on the, the Westbrook, synergies. Can, can we perhaps get a, a more detailed breakdown on what drove the increase to the, to the estimate of $200 million?

Speaker #8: And if there is upside beyond your new estimate, where is that most likely to, to come from?

Speaker #5: No, thanks, Manuel, for that. I can't wait to hear about it, but I'm going to pass it over to Randy to walk us through some of those synergies that are being discussed.

Speaker #9: Hi there. Yeah. So, yeah, as you ioned, we're, you know, as Dion mentioned, we've got about $200 million of V synergies identified. we expect to achieve about two-thirds of that in the next five years.

Speaker #9: So in terms of the details that you're oking for, like in the Q1 announcement, it was very much the first 100 million that we announced.

Speaker #9: It was around development and operational. So that would have been drilling the, you ow, extended reach wells with the combined land base. optimized production.

Speaker #9: And then our, you know, our, our operating cost reductions that we've en. This next 100 million dollars that we've en here or announcing in the Q2 call, was, is focused on or related to the reorganization of the Canadian orga, the, the restructuring of the Canadian organization.

Speaker #9: And that was based on the efficiencies that we've identified, with the combination of Westbrook and the ING teams that we had in place. The other synergies that we're looking at are related to the reduced drilling costs and service costs that we get with this bigger program.

Speaker #9: and more consistent program. And then the processing fees that we reduction in processing fees, that, you ow, as we continue to negotiate with our various third parties.

Speaker #9: So in overall, I think when we look at it, we kind of estimate it to be about $30 million a year, of savings. So quite significant.

Speaker #9: we would allocate about a, you know, a third of that would be on the CapEx side, two-thirds on the, expense side. So I think, you know, in, in, you know, we're very happy with the, the work that's been done to date.

Speaker #9: The team continues to work as we integrate Westbrook. We're very pleased with the acquisition, and we do, would expect to see more synergies as we continue to integrate.

Speaker #5: Thanks, Randy. Yeah. And to marize, I think we're really seeing, like, you looked at that image we published at the time of the announcement on December 23rd, like, just the sheer synergies around land, touching each other, offsetting, infrastructure.

Speaker #5: And so the teams having more time to work with, with it and, you know, 're talking again $30 million a year of, of kind savings, which EMP bill, all that, as Randy was saying, is how we got to that $200 million number.

Speaker #5: But you know, great work by Randy and the team to start to realize these synergies.

Speaker #8: Yeah. No, no question that it's, it's a, it's a very ong number. maybe just moving on to, you touched on this in your opening remarks just on acquisition potential.

Speaker #8: Could, can we get an update the, the opportunity set in Europe? Do you envision any packages coming to market, anytime soon? And maybe a refresh on how you would go about, funding it, would be, would be helpful as well.

Speaker #5: No. Thanks, Manuel. you know, we deal, we still see the potential, you know, as, a reminder, we're 5% of the market in Netherlands and Germany.

Speaker #5: And a lot of that other 90%, 95%, I should say, is owned and controlled by the majors. Then they position their attention over time to divest.

Speaker #5: The one, of course, we've talked about the most is in the Netherlands. I think that is still their intention to divest of those onshore assets.

Speaker #5: And we're quite well positioned given our history there and we're the second largest operator. As to funding and, you know, Lars, feel free to ump in here.

Speaker #5: The unique thing about these opportunities, and I think Corb was the poster child, was that the headline number to acquire those assets at the time was $600 million, but the cash to close when you closed 15 months later was about $200 million.

Speaker #5: So when we think about our ability to do deals in Europe, I mean, we are deleveraging by the day, with approximately $750 million off the balance sheet here this year.

Speaker #5: but also the time to close and the type of assets that we would buy, which are typically high free cash flow generation, we feel really, really comfortable that our ability to, to be able to finance those.

Speaker #5: But Lars, anything, no? Sure. Gave me the thumbs up. We're good there, uel. Okay.

Speaker #8: Terrific. Thank ou. I'll turn it back.

Speaker #5: Great. Okay. Thank ou.

Speaker #4: Thank you. As a reminder, if you wish to ask a question, press star one. Your next question comes from Chris Worley from Hughes Fund Management.

Speaker #4: Please go head.

Speaker #10: Hey, guys. Thanks for taking my question. I want to ask a little bit about Q3 CapEx. There was a lot of CapEx from Q2 that's clearly getting deferred.

Speaker #10: It, looks like, so can you just kind of talk through what happened with those deferrals and maybe, e, which parts of the development plan got deferred and sort of, like, how will those deferred dollars get spent in Q3 and Q4?

Speaker #5: Oh, thanks for that. I'll, I'm ing to pass it to Lars. And, you know, couple, couple of comments there for I do is, you know, there is some seasonality, as we talked , with in Canada, you know, breakup and things to do tend slow down here.

Speaker #5: And then we are picking up rigs to additional rigs here in the Deep Basin and drilling in the Netherlands right now. So, I think you'll see that cadence change.

Speaker #5: But hey, back with that, I'm going to pass it over Lars to, to talk more about that.

Speaker #7: Yeah. Thanks, Dion. good ning, Chris. maybe just a, a couple of data points as well to, to level set, and then I'll provide a little bit of perspective here.

Speaker #7: So Q2 was a strong quarter. As you heard from Randy, a really successful integration. We're starting see the, the synergies come to fruition as well.

Speaker #7: And so what we did in the second quarter is we started to pull back on investments in some of the non-core assets that were announced as being sold, such as Saskatchewan and the U.S., to help prioritize debt reduction.

Speaker #7: you know, I 't think that can be understated as well. And to or overstated in terms of we printed a $2.1 billion net debt number at Q1.

Speaker #7: We're now at 1.4 billion. That's a combination of both the disposition proceeds as well as the fact that we were able to defer some capital on those non-core assets.

Speaker #7: So just to level set here, we have invested $297 million year to date. As you referenced, Q2 was a lower spent quarter with 115 million dollars spent.

Speaker #7: you have the, the, the lower, activity levels due to spring break up here in western Canada. And so we, we are on track to spend 630 to 660 million dollars for the year.

Speaker #7: And then that includes $23 million on the sold assets. When we look at our current forecasting, we're trending to be at the lower end of that guidance range.

Speaker #7: So closer to the 630 level, which includes the 23 million dollars of investment on sold assets. That number is 100 million dollars lower than our previous guidance.

Speaker #7: And so as I referenced, when you combine that with the proceeds from the dispositions, that's what's allowing us to delever from that 2.1 billion dollar level to, to 1.3 billion dollars.

Speaker #7: While high grading the asset base. And so looking ahead, Chris, a capital run rate in the low 600s is not a bad way to think about annual spend as a proxy for the business.

Speaker #7: And then, just in advance of the third quarter coming up here, we provided some guidance in the release to expect production in the range of 117,000 to 120,000 barrels a day.

Speaker #7: To put that into context, 2024 production was 84,500 on 623 million of capital. And so we're now guiding to 117 to 120 for the third quarter here.

Speaker #7: And an annual run rate in the low 600s of capital. So I think that just speaks to the stronger capital efficiency efficiencies we're seeing in the business.

Speaker #7: Some of the synergies that Randy alluded to, coming through here in the actual numbers. And then I, I know this wasn't your, your question, Chris, but maybe the last thing I would just point out as well.

Speaker #7: When you look at our OPEX and G&A cost structure, we are now forecasting that to be a $4.50 reduction from our original 2025 guidance that came out pre the Westbrook acquisition.

Speaker #7: So you're seeing it on the capital efficiency side. You're also seeing it on the operational efficiency side. So hope, hopefully that helps frame it, Chris, just in terms of, that lower Q2 spend and what that means going forward here for the second half and into 2026.

Speaker #5: Yeah, no. Thanks, Lars. To summarize, you know, production is up now only 35% year over year. Capital efficiency is significantly improved, and our cost structure is lower.

Speaker #5: And, and this is why we're excited as a management team as we start to look out in the future years. I ink we've got a much more concentrated focus asset base and that, that's why we're excited about the sustainable, profile that we're seeing with our excess free cash flow, especially as we think about the wrap-up in Monty, the pivot, as we become free cash flow positive on the 2028 timeline.

Speaker #5: And then to build up in Germany. But with that, Chris, back to you. Thanks.

Speaker #9: No, tha-thanks, guys. That was, that was super helpful.

Speaker #4: Thank you. I will now turn it over to Kyle Preston for additional questions.

Speaker #11: Yeah. Thanks, Kelsey. So we did have a few questions come in online here. I think a couple them have already, but already been addressed by the questions we received so far, there was one other outstanding here.

Speaker #11: your Q2 corporate realized gas price premium relative to acorn was lower than the previous quarters. Can you help me understand this?

Speaker #7: Yeah. Great. Thanks, Kyle, for the question here. So, yeah, as the, individual referenced here, we've reported a realized gas price of $4 and 88 cents for the quarter at the corporate level.

Speaker #7: the acorn benchmark, which a lot of us are familiar with, was $1.69. So just about a 3X premium, to that. So the thing to keep in mind is when we report that corporate realized price, it is a blend of the, production that we are selling in Europe combined with the, Canadian gas production.

Speaker #7: That is a very unique feature of Vermilion. The gas that we produce in Europe is sold at local prices. What we have found over the last couple of years is that European gas prices are highly correlated to global LNG prices.

Speaker #7: So you are getting that global LNG price today through, the Vermilion production profile. just to sort of reiterate these numbers that in our release here, for the second quarter of 2025, the TTF price in Europe averaged $16.27 Canadian.

Speaker #7: Versus the acorn price of $1.69 in the second quarter, we produced just over 390 million a day of gas in Canada. I'll just remind you that these come from our liquids-rich gas assets in Canada.

Speaker #7: So, on average, those gas wells are contributing about 30%, with liquids contributing as well. We produced about 105 million cubic feet of gas per day in Europe.

Speaker #7: and so really what you're getting today with Vermilion is you're getting that LNG, price exposure through our European gas production. Here in North America, or western Canada, you're getting a very material exposure to Canadian gas.

Speaker #7: That is well hedged with a very high liquid weighting as well. in fact, for the second quarter here, our, Canadian revenues on the continuing operations are on that global, gas business.

Speaker #7: We're about 60% driven by, by the liquids. So, you know, I think those are just some nuances that are good to, to stop and walk through because they are very unique to Vermilion in the sense that we are giving you that global gas exposure through indigenous production in Europe as opposed to, contracts that, that can be risky to, to get gas exposure.

Speaker #7: From western Canada to Europe or Asia, for that matter.

Speaker #5: Thanks, Lars. I ink that's it. We had all, we had for, online questions operating. Okay.

Speaker #4: Thank you.

Speaker #5: Well, with.

Speaker #4: Yep. Turn it back over to you.

Speaker #5: Well, thanks again for participating in the Q2 conference call. We appreciate everyone's time.