Q2 2026 Vermilion Energy Inc Earnings Call

Speaker #1: If at any time during this call you require immediate assistance, please press *0 for the operator. This call is being recorded on July 30, 2026.

Speaker #1: I would now like to turn the conference over to Deion Hatcher, President and CEO. Please go ahead.

Speaker #2: Thank you. Good morning, ladies and gentlemen. I'm Deion Hatcher, President and CEO of VERMILION ENERGY. With me today are Lars Glemster, Vice President and CFO.

Dion Hatcher: Thank you. Good morning, ladies and gentlemen. I'm Dion Hatcher, President and CEO of Vermilion Energy. With me today are Lars Glemser, Vice President and CFO, Darcy Kerwin, Vice President, International and HSE, Randy McQuaig, Vice President, North America, Lara Conrad, Vice President, Business Development, and Travis Thorgeirson, Director of Investor Relations and Corporate Planning. Please refer to the advisory and forward-looking statements in our Q2 release. It describes 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 Q2 2026 was another strong quarter for Vermilion, with production averaging 125,800 BOEs per day, exceeding the top end of our guidance range. Positive results across our portfolio continue to support performance that is trending ahead of our five-year plan that we communicated during our Investor Day in December 2025.

Speaker #2: Darcy Kerwin, Vice President, International and HSE; Brandon McQuaid, Vice President, North America; Laura Conrad, Vice President, Business Development; and Travis Thorgerson, Director, Investor Relations, and Corporate Planning.

Speaker #2: Please refer to the advisory and forward-looking statements in our Q2 release. It describes forward-looking information, non-GAAP measures, and oil and gas terms used today, and it outlines the risk factors and assumptions relevant to this discussion.

Speaker #2: The second quarter of 2026 was another strong quarter for VERMILION, with production averaging 125,000, 800 BUEs per day, exceeding the top band of our guidance range.

Speaker #2: Positive results across our portfolio continue to support performance that is trending ahead of our 5-year plan that we communicated during our investor day in December 2025.

Speaker #2: With this current performance in mind, and with significant progress our return to capital target and our range of 40 to 60 percent of excess free cash flow up from 40 percent previously.

Dion Hatcher: With this current performance in mind, and with significant progress in debt reduction, we have increased our return of capital target in our range of 40% to 60% of excess free cash flow, up from 40% previously. Production performance is driven by record output at Mikisew in Montney, continued strong execution in the Deep Basin and the state's restart of production in Australia following the back-to-back cyclones earlier this year. Based on operational performance year to date, we have increased our full year production guidance, now 121,000 to 123,000 BOEs per day while maintaining our E&D capital budget range of CAD 600 to 630 million. Our E&D capital expenditures and operating expenses are weighted towards the H2 of the year, and we expect full year costs to be within the stated guidance ranges for these items.

Speaker #2: Production performance is driven by record output in micromonety, continued strong execution in the deep basin, and the state's researcher production in Australia, following the back-to-back cycles earlier this year.

Speaker #2: Based on operational performance year to date, we have increased our full-year production guidance to now 121 to 123,000 BUEs per day, while maintaining our E&D capital budget range of 600 to 630 million.

Speaker #2: Our E&D capital expenditures and operating expenses are weighted toward a second half of the year, and we expect full-year costs to be within the stated guidance ranges for these items.

Speaker #2: In the monety, strong performance from the most recent BC 612 pad at 835 drove quarterly production at micro of 18,000 BUEs per day. The pad achieved an IP90 of more than 950 BUEs per day for weld, comprised of 3 million a day of natural gas, and 470 barrels per day of oil and NGLs, 50 set costs reduced, 8.2 million per weld.

Dion Hatcher: In the Montney, strong performance from the most recent BC 612 pad at 8-35 drove quarterly production at Mica of 18,000 BOEs per day. The pad achieved an IP90 of more than 950 BOEs per day per well, comprised of 3 million a day of natural gas and 470 barrels per day of oil and NGLs, with DCET costs reduced to 8.2 million per well. These results continue to support the quality, the repeatability, and the improving capital efficiency of our Montney inventory. In the Deep Basin, activity was moderated through spring breakup. The program continues to outperform budget expectations. That has been the primary driver of corporate production outperformance through the H1 of the year. In Europe, following the quarter end, we achieved another important milestone in our German deep gas exploration program, with the Wisselshorst well being brought on to production in July.

Speaker #2: These results continue to support the quality, the repeatability, and the improving capital efficiency of our monetary inventory. In the deep basin, activity was moderated through spring breakup, the program continues to outperform budget expectations, and has been the primary driver of corporate production outperformance through the first half of the year.

Speaker #2: In Europe, following the quarter end, we achieved another important milestone in our German deep gas exploration program, with the Visselhorst Well being brought on to production in July.

Speaker #2: This represents first production from the largest discovery VERMILION has made in Europe to date. I would like to take this opportunity to thank our teams for their commitment to safe operations during the many steps required to bring this well in production.

Dion Hatcher: This represents first production from the largest discovery Vermilion Energy has made in Europe to date. I would like to take this opportunity to thank our teams for their commitment to safe operations during the many steps required to bring this well in production. We are excited about the next steps, debottlenecking the production with a new sales pipeline, as well as drilling the next two wells on this license in 2027. Elsewhere, the Osterheide well continues to perform in line with prior quarter rates, with cumulative free cash flow of CAD 43 million since startup. We expect production growth in Germany to be driven by our deep gas exploration program, reaching 10,000 BOEs per day by 2030, and given the significant resource continuing to grow into the next decade. Also in Germany, we closed the previously announced bolt-on acquisition following quarter end.

Speaker #2: We are excited about the next steps, the bottlenecking the production with a new sales pipeline, as well as drilling the next two wells on this license in 2027.

Speaker #2: Elsewhere, the Osterhide Well continues to perform in line with prior quarter rates, with cumulative free cash flow of $43 million since startup. We expect production growth in Germany to be driven by our deep gas exploration program, reaching 10,000 BOEs per day by 2030, and given the significant resource, continuing to grow into the next decade.

Speaker #2: Also in Germany, we closed the previously announced bolt-on acquisition following quarter end. The transaction adds approximately 1,000 BUEs per day of production, weighted 85 percent to natural gas, as well as ownership of key infrastructure around the Osterhide Well.

Dion Hatcher: The transaction adds approximately 1,000 BOEs per day of production, weighted 85% to natural gas, as well as ownership of key infrastructure around the Osterheide well. Adding production from Wisselshorst and these acquired assets is particularly impactful with the recent rally in European gas prices, currently over $25 per MMBtu through winter 2026. European storage levels are well below average for this time of year, and the current pace of refilling is not sufficient to reach the 80% target before winter. We plan to increase our domestic gas production through debottlenecking the infrastructure, as well as exploration development across our significant land base in both Germany and the Netherlands. The growing prospect list of high return capital efficient targets, Vermilion Energy is well positioned to grow our production and free cash flow while providing our communities with a reliable source of energy.

Speaker #2: Adding production from Visselhorst and these acquired assets is particularly impactful with the recent rally in European gas prices, currently over $25 per MMBtu through winter 2026.

Speaker #2: European storage levels are well below average for this time of year, and the current pace of refilling is not sufficient to reach the 80 percent target before winter.

Speaker #2: We plan to increase our domestic gas production through the debottlenecking of infrastructure, as well as exploration and development across our significant land base in both Germany and the Netherlands.

Speaker #2: The growing prospect list of high-return capital-efficient targets VERMILION is well positioned to grow our production at free cash flow while providing our communities with a reliable source of energy.

Speaker #2: In Australia, production operations have gone through safely resumed following repair work completed during the quarter. Our next export is planned for the third quarter, and we expect to return to more regular exports thereafter.

Dion Hatcher: In Australia, production operations at Wandoo safely resumed following repair work completed during the quarter. Our next export is planned for the Q3, and we expect to return to more regular exports thereafter. Our 5-year plan continues to progress well. Operational execution across the portfolio, combined with the first production from Wisselshorst and continued success in the Deep Basin and Montney reinforces our confidence in the ability to generate growing free cash flow. Before I pass it to Lars to further discuss these results, I want to take a moment and acknowledge the challenges faced by some of our employees, contractors, and their families that are impacted by the fires in southern France. Our thoughts are with you, and we hope the situation continues to improve in the upcoming days.

Speaker #2: Our 5-year plan continues to progress well. Operational execution across the portfolio, combined with the first production from Visselhorst, and continued success in the deep basin and monety, reinforces our confidence in the ability to generate growing free cash flow.

Speaker #2: Before I pass it to Lars to further discuss these results, I want to take a moment and acknowledge the challenges faced by some of our employees, contractors, and their families that have been impacted by the fires in southern France.

Speaker #2: Our thoughts are with you, and we hope the situation continues to improve in the upcoming days.

Speaker #1: Thank you, Dion. In the second quarter, VERMILION generated fund flows from operations of 231 million. On E&D capital expenditures of 110 million, resulting in free cash flow of over 120 million.

Lars Glemser: Thank you, Dion. In Q2, Vermilion generated fund flows from operations of CAD 231 million on E&D capital expenditures of CAD 110 million, resulting in free cash flow of over CAD 120 million. Capital allocation remains focused on disciplined investment, continued balance sheet improvement, and shareholder returns. During the quarter, net debt was reduced by approximately CAD 70 million to CAD 1.22 billion. As of 30 June 2026, net debt to trailing four-quarter fund flows from operations was 1.3 times. Over the past 5 quarters, Vermilion has reduced debt by approximately CAD 840 million, accelerating progress toward our CAD 1 billion net debt target and significantly strengthening the balance sheet. This continued deleveraging has also reduced structural financing costs, with unit interest expense declining approximately 35% from the prior year, and we are on track to reduce full-year interest expense by CAD 30 million from 2025.

Speaker #1: Capital allocation remains focused on disciplined investment, continued balance sheet improvement, and shareholder returns. During the quarter, net debt was reduced by approximately 70 million to 1.22 billion, as of June 30, 2026, net debt to trailing four-quarter fund flows from operations was 1.3 times.

Speaker #1: Over the past five quarters, VERMILION has reduced debt by approximately 840 million. Accelerating progress toward our 1 billion net debt target and significantly strengthening the balance sheet.

Speaker #1: This continued deleveraging has also reduced structural financing costs. With unit interest expense declining approximately 35 percent from the prior year, and we are on track to reduce full-year interest expense by 30 million from 2025.

Speaker #1: Reflecting this progress, as well as improved visibility to future cash flow and confidence in the sustainability of the business, we have enhanced our return to capital framework.

Lars Glemser: Reflecting this progress, as well as improved visibility to future cash flow and confidence in the sustainability of the business, we have enhanced our return to capital framework. Vermilion now intends to return 40% to 60% of excess free cash flow to shareholders compared to the previous target of 40%. This framework continues to be supported by our base dividend and ongoing share repurchase program. Subsequent to the quarter, we announced the renewal of our NCIB out to July 2027. During the quarter, we returned approximately CAD 26 million to shareholders through dividends of CAD 21 million and CAD 5 million of share repurchases. With the increased return of capital target, we expect the pace of share buybacks to increase.

Speaker #1: VERMILION now intends to return 40 to 60 percent of excess free cash flow to shareholders, compared to the previous target of 40 percent. This framework continues to be supported by our base dividend and ongoing share repurchase program.

Speaker #1: Subsequent to the quarter, we announced the renewal of our NCIB out to July 2027. During the quarter, we returned approximately $26 million to shareholders through dividends of $21 million and $5 million of share repurchases.

Speaker #1: With the increased return of capital target, we expect the pace of share buybacks to increase. Turning to commodity risk management, VERMILION recognized a gain on hedging during the quarter, as a realized loss of 57 million was more than offset by unrealized mark-to-market gains of 174 million, on our hedge portfolio.

Lars Glemser: Turning to commodity risk management, Vermilion recognized a gain on hedging during the quarter as a realized loss of CAD 57 million was more than offset by unrealized mark-to-market gains of CAD 174 million on our hedge portfolio. These unrealized gains reflect changes in forward commodity prices relative to our hedge position at 31 March 2026. Our percentage of production hedged will decrease in H2 2026 relative to Q2 levels, which increases our exposure to current elevated commodity prices. Operationally, Canadian production averaged 99,605 BOE per day during the quarter, which included record production from Mica. We continue to actively manage AECO exposure and prioritize profitability over production during periods of weaker natural gas pricing. We maintained strong well performance and continued to shift Deep Basin activity toward liquids-rich opportunities in the Rock Creek, Niton, and Ellerslie.

Speaker #1: These unrealized gains reflect changes in forward commodity prices relative to our hedge position at March 31, 2026. Our percentage of production hedged will decrease in the second half of 2026 relative to the second quarter levels, which increases our exposure to current elevated commodity prices.

Speaker #1: Operationally, Canadian production averaged 99,605 BUE per day during the quarter. Which included record production from MICA. We continue to actively manage eco-exposure and prioritize profitability over production during periods of weaker natural gas pricing.

Speaker #1: We maintain strong well-performance and continue to shift deep basin activity toward liquids-rich opportunities in the Rock Creek, Knighton, and Ellersley. Several of our wells in Canada, in both the deep basin and monety, ranked among the most prolific wells brought online during the quarter.

Lars Glemser: Several of our wells in Canada, in both the Deep Basin and Montney, ranked among the most prolific wells brought online during the quarter. In Europe, in addition to our work getting Wisselshorst online and preparing for follow-up drilling, our activity this quarter focused on workovers, maintenance programs, and preparation for drilling activities in the Netherlands during H2 2026. These activities, together with production from Wisselshorst and Osterheide, support the continued development of our European gas platform. Looking ahead, we expect Q3 production to average between 116,000 and 118,000 BOE per day, reflecting planned maintenance activities in Ireland, Germany, and Canada. This is consistent with our assumptions at the time of the budget release. We expect Q4 production to be approximately 122,000 BOE per day, with European gas production back in line with H1 levels.

Speaker #1: In Europe, in addition to our work getting Visselhorst online and preparing for follow-up drilling, our activity this quarter focused on workovers, maintenance programs, and preparation for drilling activities in the Netherlands during the second half of 2026.

Speaker #1: These activities, together with production from Visselhorst and Osterhide, support the continued development of our European gas platform. Looking ahead, we expect third-quarter production to average between 116,000 and 118,000 BUE per day, reflecting planned maintenance activities in Ireland, Germany, and Canada.

Speaker #1: This is consistent with our assumptions at the time of the budget release. We expect Q4 production to be approximately 122,000 BUE per day, with European gas production back in line with first-half levels.

Speaker #1: For the full year, production guidance has been increased, to 121 to 123,000 BUE per day. While E&D capital expenditure guidance remains unchanged at 600 million to 630 million.

Lars Glemser: For the full year, production guidance has been increased to 121,000 to 123,000 BOE per day, while E&D capital expenditure guidance remains unchanged at CAD 600 million to 630 million. Both operating expenses and capital expenditures are expected to be weighted toward H2 of the year, as Dion previously noted. The increased production guidance reflects our strong operational performance year to date, which has more than offset the impact of back-to-back cyclones in Australia earlier this year. We are confident in the ability of the company to continue to deliver on our Investor Day outlook. I will now pass it back to Dion.

Speaker #1: Both operating expenses and capital expenditures are expected to be weighted toward the second half of the year, as Dion previously noted. The increased production guidance reflects our strong operational performance year to date, which has more than offset the impact of back-to-back cyclones in Australia earlier this year.

Speaker #1: We are confident in the ability of the company to continue to deliver on our investor day outlook. I will now pass it back to Dion.

Speaker #2: Thank you, Lars. In summary, VERMILION delivered another strong quarter and made significant progress executing our five-year plan. Production exceeded the top end of our guidance range, free cash flow totaled 122 million, and net debt was reduced by another 70 million.

Dion Hatcher: Thank you, Lars. In summary, Vermilion delivered another strong quarter and made significant progress executing our five-year plan. Production exceeded the top end of our guidance range, free cash flow totaled CAD 122 million, and net debt was reduced by another CAD 70 million. These results reflect the strength of our asset base, the quality of our teams, and our disciplined approach to capital allocation as Vermilion continues to focus on what we can control. As a result, we're seeing structural improvements in the business through stronger capital efficiency, improving well performance, lower controllable costs, which improves our full-cycle margins. Operationally, record production at Mica continued Deep Basin net performance, and the successful restart of Wandoo supported strong results across the portfolio. In Europe, we achieved first production of Wisselshorst, marking another important milestone, executing our long-term European gas growth strategy.

Speaker #2: These results reflect the strength of our asset base and quality of our teams, and our disciplined approach to capital allocation. As VERMILION continues to focus on what we can control, as a result, we're seeing structural improvements in the business through stronger capital efficiency, improving well-performance, lower controllable costs, which improves our full-cycle margins.

Speaker #2: Operationally, record production at MICA continued deep basin and performance, and the successful restart of Wandu supported strong results across portfolio. In Europe, we achieved first production from Visselhorst, marking another important milestone in executing our long-term European gas growth strategy.

Speaker #2: Financially, our balance sheet continued to strengthen with approximately 840 million of debt reduction achieved over the past five quarters. As leverage declines and visibility to the growing free cash flow continues to improve, we are increasing our shareholder return framework to target 40 to 60 percent of excess free cash flow.

Dion Hatcher: Financially, our balance sheet continues to strengthen with approximately CAD 840 million of debt reduction achieved over the past five quarters. As leverage declines and visibility to growing free cash flow continues to improve, we're increasing our shareholder return framework to target 40% to 60% of excess free cash flow. Looking forward, operational momentum remains strong. Production performance for H1 of 2026 has allowed us to increase annual guidance without increasing capital spending. Supported by a repositioned portfolio, growing European gas exposure, a strengthening balance sheet, and a disciplined capital allocation framework, we believe Vermilion is well positioned to continue generating sustainable free cash flow and shareholder value. With that, we will now open the line for questions.

Speaker #2: Looking forward, operational momentum remains strong. Production performance for the first half of '26 has allowed us to increase annual guidance without increasing capital expenditure.

Speaker #2: Supported by our repositioned portfolio, growing European gas exposure, and strengthening balance sheet and a disciplined capital allocation framework, we believe VERMILION is well-positioned to continue generating sustainable free cash flow and shareholder value.

Speaker #2: With that, we will now open the line for questions.

Speaker #3: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your touchtone phone.

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will 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. 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 Menno Huysmans with TD Cowen. Please go ahead, Menno.

Speaker #3: You will 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 2.

Speaker #3: If you are using the speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Menno Holfaath with TD Cohen.

Speaker #3: Please go ahead, Menno.

Speaker #4: Thanks, and good morning, everyone. I'll start with the question on the higher-level operational setup through the middle of next year, and you did touch on this to some degree in your opening remarks.

Menno Huysmans: Thanks. Good morning, everyone. I will start with the question on the higher level operational setup through the middle of next year. You did touch on this to some degree in your opening remarks. I understand that you cannot provide guidance for 2027, but beyond turnarounds this quarter, is there any significant downtime or other considerations we should be aware of between now and the middle of next year? What could the, I think you did guide Q4, but what could the exit rate look like for this year?

Speaker #4: I understand that you can't provide guidance for 2027, but beyond turnarounds this quarter, is there any significant downtime or other considerations we should be aware of between now and the middle of next year, and then what could the and I think you did guide Q4, but what could the exit rate look like for this year?

Speaker #2: Great. Menno, thanks for that. A couple of comments. To your point, I think the turnarounds that we're planning for, and executing here in this quarter, I mean, Ireland's a great example.

Dion Hatcher: Great, Menno. Thanks for that. A couple of comments. To your point, I think the turnarounds that we are planning for and executing here in this quarter, Ireland is a great example. That is a 5-year cycle on that turnaround. That would be very unique, but something we plan for on that key asset. Looking out from now into mid-2027, the answer is no. We do not see any key downtime. Not yet. Quick answer is no. The setup, we are quite excited. If you look at the exit rate, Lars referenced this, we are back to 122 or better. If you reference back to European Gas, what does that mean for our business? The H1, we were 95 to 100 million a day. Hopefully, we are on the higher end of that range as we exit this year.

Speaker #2: That is a five-year cycle on that turnaround, and so that would be very unique. But something we planned for on that key asset looking out from now into mid-2027, yeah, the answer is no.

Speaker #2: We don't see any key downtime not yet. So quick answer is no. The setup, we're quite excited. So if you look at the exit rate, Lars referenced this, we're back to 122 or better.

Speaker #2: If you reference back to European gas, what does that mean for our business the first half? We were 95 to 100 million a day.

Speaker #2: Again, hopefully we're on the higher end of that range as we exit this year. So we'll get these turnarounds behind us, and I think have a strong Q4, and that really is a good setup going into 2027.

Dion Hatcher: We will get these turnarounds behind us and I think have a strong Q4. That really is a good setup going into 2027.

Speaker #4: Terrific. And then second question is on the Germany drilling program. Can you maybe just remind us of how you manage the risk on these larger wells?

Menno Huysmans: Terrific. Second question is on the Germany drilling program. Can you maybe just remind us of how you manage the risk on these larger wells, including the two that will get drilled next year? I understand there is the farm down component, but maybe you could just remind us of the broader risk mitigation strategy and maybe also the math on the out-of-pocket cost of Vermilion in the event of a dry hole, because if I recall, it is significantly lower than the actual well cost. Thank you.

Speaker #4: Including the two that we'll get drilled next year, I understand there's the farm-down component, but maybe you could just remind us of the broader risk mitigation strategy and maybe also the math on the out-of-pocket cost of VERMILION in the event of a dry hole.

Speaker #4: Because if I recall, it's significantly lower than the actual well cost. Thank you.

Speaker #2: Oh, thanks, Menno. Yeah, a lot of good questions there. So first of all, I think it encompasses I think the quality of the team and the G&G and the science and the decades that we have, multiple decades of working on these structures.

Dion Hatcher: Thanks, Menno. That, a lot of good questions there. First of all, it comes down to the quality of the team and the G&G and the science and the decades that we have, multiple decades of working on these structures in Europe. This particular formation, the Rotliegend, again, is something we've been drilling for decades. I would say we're in a proven fairway. When you look at some of those maps where we're drilling these structures, it is not uncommon. There's multiple, let's call it, a handful of structures that have cumulatively produced over TCF. If you're going to find big oil, big gas, start drilling in areas where there's been big gas found. We're excited about the setup. As to how we look at the risk-reward, let's call it, first is economically.

Speaker #2: In Europe, this particular formation of the Rotligen, again, is something we've been drilling for decades. Second, I would say we're in a proven fair way.

Speaker #2: When you look at some of those maps where we're drilling these structures, it is not uncommon. There's multiple let's call it a handful of structures that have cumulatively produced over TCF.

Speaker #2: So if you're going to find big oil, big gas, start drilling in areas where there's been big gas found. So we're excited about the setup.

Speaker #2: As to how we look at the risk-reward, let's call it, first is economically. If you think about the cost to drill these wells at 50 million CAD, our target rate is 30 BCF recoverable.

Dion Hatcher: If you think about the cost to drill these wells at CAD 50 million, our target rate is 30 Bcf recoverable. Wisselshorst, of course, is twice that. If you spend CAD 50 million in the success case, and that gets you the drill, the test, the on-lease gas plant, the pipeline, for CAD 50 million and you get 30 Bcf of gas, that's CAD 1.15 Mcf. If you assume gas prices are CAD 13, and of course they're more than double that now, if at CAD 13, the NPV per well is CAD 60 million, right. You can see with Osterheide, it's been on for a year and it's cummed over CAD 40 million of free cash flow and the well hasn't started to decline yet. The success case is pretty, hopefully straightforward.

Speaker #2: Visselhorst, of course, is twice that. But if you spend $50 million in the success case, and that gives you the drill, the test, the on-lease gas plant, the pipeline for $50 million, and you get 30 BCF gas, that's $1.15 per MCF.

Speaker #2: If you assume gas prices are $13 in the course or more than double that now, but if at 13 dollars, the MPV per well is $60 million.

Speaker #2: Right? And you can see with Osterheide, it's been on for a year and it's queued over 40 million dollars of free cash flow, and the well hasn't started to decline yet.

Speaker #2: So the success case, I think, is pretty hopefully straightforward. The failure case is we drill the well, we don't like what we see, we get off of the well, it's less than 15 million bucks.

Dion Hatcher: The failure case is, we drill the well, we don't like what we see, we get out of the well, it's less than CAD 15 million. Okay. The CAD 50 million is the all-in success case. The dry hole case, let's call it, is sub 15, so 15. The final point is commercially. When we drilled Wisselshorst, we knew that it was a very large structure. Also we viewed that one as a little more higher risk, but it was big. Commercially, we did use a farm-in to provide a promote. With that carry, it effectively meant that the after-tax dry hole cost was zero. Right. Or less than zero, maybe. That's another quiver in our strategy here, is we can use farm-ins. They're good prospects.

Speaker #2: Okay? So the 50 million is the all-in success case. The dry oak case, let's call it, is sub-15, so 15. The final point is commercially, when we drilled Visselhorst, we knew that it was a very large structure, but also we viewed that one as a little more higher risk.

Speaker #2: But it was big. And so commercially, we did use a firm in to provide a promote, and with that curry, it effectively meant the after-tax dry hole cost was zero.

Speaker #2: Right? Or less than zero, maybe. So that's another quiver in our strategy here is we can use firm ins, they're good prospects, we're going to drill these prospects, but if someone wants to come in and leverage some of the great work we've done, commercially, we can further reduce our risk.

Dion Hatcher: We're going to drill these prospects, if someone wants to come in and leverage some of the great work we've done, commercially we can further reduce our risk. Hopefully, that gives you, right from, hey, we're looking for big targets in the period where, in the area where big gas has been found. We've got a team that's been doing this for decades. We've done all the technology and reprocessed seismic, the failure case is sub 15, commercially, we can further mitigate that failure case with a promote or carry.

Speaker #2: So hopefully that gives you right from, "Hey, we're looking for a big targets in the period where in the area where big gas has been found, we got a team that's been doing this for decades." We've done all the technology and the reprocess seismic, and then the failure case is sub-15, and then commercially, we can further mitigate that failure case with a promote or curry.

Speaker #4: Thanks for the rundown, Deon. I'll pass it back.

Menno Huysmans: Thanks for the rundown, Dion. I'll pass it back.

Speaker #3: Thank you, Jonas. Your next question comes from Greg Party, with RBC Capital Markets. Please go ahead, Greg.

Operator: Thank you.

Dion Hatcher: Thank you.

Operator: Your next question comes from Greg Pardy with RBC Capital Markets. Please go ahead, Greg.

Speaker #5: Yeah, thanks. Good morning. And I wanted to stay just maybe on the back of Menno's question, maybe just to stay with Germany. For a minute.

Greg Pardy: Yeah. Thanks. Good morning. I want to stay just maybe on the back of Menno's question, maybe just to stay with Germany for a minute. Just in terms of the next two exploration wells that you have planned for early next year, I am just wondering how far away those might be from Wisselshorst. Then in addition to that, maybe just any potential de-bottlenecking opportunities that you would have in that area, maybe just to increase rates and what is required to accomplish that.

Speaker #5: And just in terms of the next two exploration wells that you have planned, for early next year, I'm just wondering how far away those might be from Wisselhorst.

Speaker #5: And then in addition to that, maybe just any potential deep bottlenecking opportunities that you would have in that area, maybe just to increase rates and what's required to accomplish that.

Speaker #2: Thanks, Greg, for those questions. I'm going to pass it over to Darcy to talk about the location of the next two Visselhorst wells and some of the steps noted for the deep bottlenecking of the gas.

Dion Hatcher: Thanks, Greg, for those questions. I am going to pass it over to Darcy and just talk about the location of the next two Wisselshorst wells and some of the steps as noted for the de-bottlenecking of the gas.

Speaker #6: Yeah, Greg, thanks for that. Can I answer your first question? Those next two wells are located on a common pad, so they'll be drilled together on one pad.

Darcy Kerwin: Yeah. Greg, thanks for that. To answer your first question, those next two wells are located on a common pad, so they will be drilled together on 1 pad. That location is kind of between 1 and 2 kilometers away from the original Wisselshorst discovery well, as the crow flies. In terms of de-bottlenecking the first Wisselshorst well that we brought online, we are in the process of permitting, acquiring land to build a new sales pipeline for that well. We expect that that pipeline be online, ready for service towards the end of next year. Then we do for the next two new wells, have a plan for an initial gas plant on that 1 site to capture their production. We have the opportunity to twin that gas plant on that site, if we have strong results there.

Speaker #6: That location is kind of between one and two kilometers away from the original Visselhorst discovery well. As a crow flies, in terms of deep bottlenecking, the first Visselhorst well that we brought online, we are in the process of permitting and acquiring land to build a new sales pipeline for that well.

Speaker #6: We expect that that pipeline be online, ready for service towards the end of next year. And then we do, for the new the next two new wells, have a plan for an initial gas plant on that one site to capture their production.

Speaker #6: We have the opportunity to twin that gas plant on that site if we have strong results there. And then that sales pipeline that we're building for Visselhorst-1 will also be the sales point for the next two wells in Visselhorst.

Darcy Kerwin: Then that sales pipeline that we are building for Wisselshorst 1 will also be the sales point for the next two wells at Wisselshorst. Lots of opportunity to de-bottleneck that area kind of next year with this sales pipeline and then, hopefully a new gas plant for those next two wells, in a success case.

Speaker #6: So lots of opportunity to de-bottle that area, kind of next year with this sales pipeline and then hopefully a new gas plant for those next two wells in a success case.

Speaker #2: Thanks, Darcy. Yeah, so to summarize there, that sales line, it's a 12-inch piece of pipe. I think all the materials ordered, we're going to plan to start construction here early next year and, as Darcy noted, that'll allow us to open that well up and get it up to that full 16, 17 million a day design rate.

Dion Hatcher: Thanks, Darcy. Yeah, summarize there, that sales line, it's a 12-inch piece of pipe. I think all the materials ordered. We're going to plan to start construction here early next year. As Darcy noted, that'll allow us to open that well up and get it up to that full 16, 17 million a day design rate. Further on that is this twinning of the infrastructure that Darcy mentioned. Effectively, you're able to double to go from 17 to 34 million a day, with the amount of gas we've got behind pipe. First step, Greg, to your point is, as Darcy mentioned, is getting that 12-inch pipe in the ground, and we're well on our route to do that.

Speaker #2: And further on that is this twinning of the infrastructure that Darcy mentioned. Effectively, you're able to double—to go from 17 to 34 million a day—with the amount of gas we've got behind pipe.

Speaker #2: But first step, Greg, to your point is, as Darcy mentioned, is getting that 12-inch pipe in the ground and we're well on our routes to do that.

Speaker #5: Okay, terrific. Yeah. No, thanks for that. And maybe just staying with Europe, but maybe just moving into the Netherlands. In the past, you'd probably drilled potentially smaller prospects.

Greg Pardy: Okay, terrific. Yeah, thanks for that. Maybe just staying with Europe, but maybe just moving into the Netherlands. In the past, you probably drilled potentially smaller prospects. Now, what I understand is you're drilling maybe perhaps fewer, but bigger prospects. Am I thinking about that the right way? Just any color around that would be great.

Speaker #5: Now you're, what I understand, is you're drilling perhaps fewer, but bigger prospects. Could you is that am I thinking about that the right way?

Speaker #5: And just any color around that would be great.

Speaker #2: Yeah, I'll pass it back to Darcy, but I think just on wind the clock a little in the investor day, Jeff McDonald would have talked a lot about this and the plot that we that he was emphasizing is these targets are two and a half to three times bigger than what we were targeting before.

Dion Hatcher: Yeah. I'll pass it back to Darcy, but I think you can just unwind the clock a little. In the Investor Day, Geoff MacDonald would've talked a lot about this, the plot that I think he was emphasizing is these targets are two and a half to three times bigger than what we were targeting before. Darcy, do you want to build on that?

Speaker #2: But Darcy, do you want to build on that?

Speaker #6: Yeah, sure. Thank you. Yeah, and in the Netherlands, I think if we look back, kind of the last 10 years, as you said, the prospects we were drilling were getting smaller.

Darcy Kerwin: Yeah, sure. Thank you. Yeah, in the Netherlands, I think if we look back kind of the last 10 years, as you said, the prospects we were drilling were getting smaller. That was really driven by an effort from the permitting side to stay drilling on existing leases in existing areas. We've been continuously pursuing drilling locations outside of those areas to access some of these bigger pools. The drilling that we have planned for later this year, as well as next year, kind of is on the back of that, where we are stepping out a little bit further from our existing operations and able to access bigger pools again in that area. Permitting for the wells that we have planned this year, kind of firmly in hand. We're ready to go once we have the rig available towards the end of September.

Speaker #6: That was really driven by an effort from the permitting side to stay drilling on existing leases in existing areas. And we've been continuously pursuing drilling locations outside of those areas to access some of these bigger pools.

Speaker #6: And the drilling that we have planned for later this year, as well as next year, kind of is on the back of that, where we are stepping out a little bit further from our existing operations and able to access bigger pools again in that area.

Speaker #6: So permitting for wells, the wells that we have planned this year kind of firmly in hand, we're ready to go once we have the rig available.

Speaker #6: Kind of towards the end of September, then wells for 27 and 28 are in the midst of permitting. We have everything kind of in hand to drill wells in these bigger pools.

Lars Glemser: wells for 2027 and 2028 are in the midst of permitting. We have everything kind of in hand to drill the wells in 2027 and onward into 2028 in these bigger pools.

Speaker #2: Yeah, the team's done a great work—again, on the permitting, but also the technical side—building on Darcy's comments to bring these larger structures forward. We're quite excited to allocate capital there.

Dion Hatcher: Yeah, the team's done great work, again, on the permitting, also the technical side, building on Darcy's comments, to bring these larger structures forward. We're quite excited to allocate capital there.

Speaker #5: Got it. All right. Thank you very much, both of you.

Greg Pardy: Got it. All right. Thank you very much, both of you.

Speaker #2: Great. Thanks, Greg.

Dion Hatcher: Great. Thanks, Greg.

Speaker #3: As a reminder, if you wish to ask a question, please press star one. Your next question comes from Dennis Fong. With CIBC, WM. Please go ahead.

Operator: As a reminder, if you wish to ask a question, please press star one. Your next question comes from Dennis Hong with CIBCWM. Please go ahead.

Speaker #5: Hi, good morning, and thanks for taking my questions. Sorry to keep focusing on Germany here. Obviously, a lot of kind of exciting things there.

Dennis Hong: Hi. Good morning, thanks for taking my questions. Sorry to keep focusing on Germany here. Obviously, a lot of kind of exciting things there. I was hoping to dig into the recent concessions that you've been awarded and how specifically you're thinking about balancing, we'll call it, step outs or follow-up drilling, like things that you're doing at the Bommelsen license, versus, we'll call it, little E exploration work to, again, further build out the depth of inventory that you have out in Germany, especially with the winning of these new concessions.

Speaker #5: I was hoping to dig into the recent concessions that you've been awarded. And how specifically you're thinking about balancing we'll call it step-outs or follow-up drilling, like things that you're doing at the Balmisn license, versus we'll call it Little E exploration work to, again, further build out the depth of inventory that you have out in Germany, especially with the winning of these new concessions.

Speaker #2: Thanks for that, Dennis. I can give you a good summary there. And the team has done a great job with the land we currently have, which is obviously a big number—over a million acres.

Dion Hatcher: Thanks for that, Dennis. I can give you a good summary there. The team's done a great job with the land we currently have, which is obviously a big number, over a million net acres, identifying those nine structures, and we see up to 30 wells on those structures. We're excited to now develop Wisselshorst, but also test some of those additional six structures in the upcoming years. To build on that, deals like the one we closed, but also the new concessions, another half a million net acres. The team will do, let's call it, more of that study, G&G work, relatively low cost, pulling a lot of data. We'll spend the next two to three years really defining the prospectivity, maturing prospectivity. You would look at the next couple of years after that to think about drill commitments and those kind of things.

Speaker #2: Identifying those nine structures and we see up to 30 wells on those structures, and we're excited to now develop Visselhorst, but also test some of those additional six structures in the upcoming years.

Speaker #2: To build on that, deals like the one we closed, but also the new concessions and other half-million net acres, the team will do, let's call it more of that study, G&G work, relatively low cost, pulling a lot of data, but we'll spend the next two, three years really defining the prospectivity, maturing prospectivity than you would look at the next couple of years after that to think about drill commitments and those kind of things.

Speaker #2: So really, we see this with the defined inventory that we've got, let's call it a decade at a risk base, things like this new concession is really extending that runway even further.

Dion Hatcher: Really, we see this with the defined inventory that we've got, let's call it, a decade at a risk base. Things like this new concession is really extending that runway even further. I think, as we're having this conversation a couple of years from now, Dennis, we'll be able to start to point to things on the map. Right now, it's a lot of land in the fairway that we like. We're going to spend a year or two just doing the G&G work to mature what we expect to be some prospects on that. It's just really building on that decade that we've got in front of us. You're going to see us test some new structures in the upcoming years, as well as develop the Wisselshorst.

Speaker #2: And I think as we're having this conversation a couple of years from now, Dennis, we'll be able to start to point to things on the map right now.

Speaker #2: It's a lot of land in the fairway that we'd like. We're going to spend a year or two just doing the G&G work to mature what we expect to be some prospects on that.

Speaker #2: But it's really about building on that decade we have in front of us. So you're going to see us test some new structures in the upcoming years.

Speaker #2: As well as develop Visselhorst.

Speaker #5: Okay, great. I appreciate that color in context there, Dion. My next question focuses a little bit more on the balance sheet and allocation of free cash, allocation to shareholders.

Dennis Hong: Okay, great. I appreciate that color and context there, Dion. My next question focuses a little bit more on the balance sheet and allocation of free cash allocation to shareholders. Obviously, you've continued to delever, and this is kind of a nice bump up in terms of directing 40% to 60% of excess free cash towards shareholder returns. Can you talk towards what kind of drives you to maybe a 40% versus a 60%? Is that more commodity or kind of value that you see in the shares? And then how do you think about the confidence that you build in terms of allocating more and more free cash to shareholders? Especially just given as you've improved, obviously, depth of inventory across the asset base and then continue to execute across the various assets, whether it be in Canada or in Europe, or Australia.

Speaker #5: So, obviously, you've continued to deliver, and this is a nice bump up in terms of directing 40 to 60 percent of excess free cash towards shareholder returns.

Speaker #5: Can you talk towards kind of what kind of drives you to maybe a 40 versus a 60 percent? Is that more commodity or kind of value that you see in the shares?

Speaker #5: And then, how do you think about the confidence that you build in terms of allocating more and more free cash to shareholders, especially given that you've improved, obviously, the depth of inventory across the asset base and then continued to execute across the various assets, whether it be in Canada or in Europe?

Speaker #5: Or Australia.

Speaker #2: Great. Larry can't wait to answer that question. We're going to pass it over to him.

Dion Hatcher: Great. Lars can't wait to answer that question, I'm going to pass it over to him.

Speaker #6: Great. Yeah, no, thanks, Dennis. And I'll just try to give a little bit of context in terms of how we arrived at the decision to move to 40 to 60 percent.

Lars Glemser: Great. No, thanks, Dennis. I'll just try to give a little bit of context in terms of how we arrived at the decision to move to 40% to 60%. Maybe two key data points that we look at. Obviously, the first one is just the status of the business today, in terms of where we've taken the balance sheet, the quality of inventory. Maybe what I'll spend a bit more time on is just the rate of change of how we've gotten here. Made the comment in my remarks. We've reduced net debt by CAD 840 million over the past 15 months. A lot of progress there made in a short period of time. You think back to 15 months as well, we had just closed the Westbrick acquisition, consolidated into a 1.2 million acre deep basin position.

Speaker #6: So maybe two key data points that we look at. Obviously, the first one is just the status of the business today. In terms of where we've taken the balance sheet, the quality of inventory, but maybe what I'll spend a bit more time on is just the rate of change of how we've gotten here.

Speaker #6: And so, as I mentioned in my remarks, we've reduced net debt by $840 million over the past 15 months. So, a lot of progress has been made there in a short period of time.

Speaker #6: And you think back to 15 months as well, we had just closed the Westbrook acquisition, consolidated into a 1.2 million acre deep basin position.

Speaker #6: We still had some infrastructure spend in the Montney to execute on, some key pads to deliver on as well. And we were still trying to quantify what we had in Germany.

Lars Glemser: We still had some infrastructure spend in the Montney to execute on, some key pads to deliver on as well. We were still trying to quantify what we had in Germany. You fast-forward 15 months to the end of the Q2 here. I think a lot of boxes have been checked in a very short period of time. Those are the type of things that we want to look at. It's structurally, are we executing on the plan within the business? As we look back, we said, "You know what? We are more comfortable increasing that return to capital." You'll recall when we did the Westbrick acquisition, we temporarily reduced the return to capital from 50% to 40%. With those boxes checked, happy to move to the 40% to 60%.

Speaker #6: And so, you fast forward 15 months to the end of the second quarter here, and I think a lot of boxes have been checked.

Speaker #6: And in a very short period of time. And so those are the type of things that we want to look at. It's sort of structurally, are we executing on the plan within the business as we look back?

Speaker #6: We said, you know what, we are more comfortable increasing that return of capital. You'll recall when we did the Westbrook acquisition, we reduced or temporarily reduced the return of capital from 50% to 40%.

Speaker #6: So with those boxes checked, happy to move to the 40 to 60 percent. Now, one thing that we are going to continue to maintain here is flexibility within that 40 to 60 percent.

Lars Glemser: Now, one thing that we are going to continue to maintain here is flexibility within that 40% to 60%. You think back to the Q2 here, lots of volatility, whether it was commodity price-wise, share price-wise. We want to maintain flexibility in terms of how we allocate capital over the longer term. With this announcement today, we are looking to increase what we're allocating to shareholder returns. Then maybe just the last point I'll make, Dennis, if you go back to the Investor Day last December, we laid out a framework of what we wanted to achieve here over the five-year plan in terms of end of 2030. I think we are well into that plan, delivering on that plan. We've been able to increase our guidance here in 2026 on the production side, maintain the capital as well.

Speaker #6: And so you think back to the second quarter here, lots of volatility, whether it was commodity price-wise, share price-wise. And so we want to maintain flexibility in terms of how we allocate capital over the longer term.

Speaker #6: But with this announcement today, we are looking to increase what we're allocating to shareholder returns. And then maybe just the last point I'll make, Dennis, if you go back to the investor day last December, we laid out a framework of what we wanted to achieve here over the five years five-year plan in terms of end of 2030.

Speaker #6: I think we are well into that plan, delivering on that plan. We've been able to increase our guidance here in 2026 on the production side and maintain the capital as well.

Speaker #6: And so we are looking at this from a long-term perspective. In terms of allocating that capital, maybe just lastly, you asked about Australia as well.

Lars Glemser: We are looking at this from a long-term perspective, in terms of allocating that capital. Maybe just lastly, you asked about Australia as well, in terms of how we think about allocating capital. We continue to evaluate the prospect of drilling in Australia in 2027. With where oil prices are, we are leaning towards that being the right decision. As we foreshadowed in our Investor Day, that would push capital for 2027 into that CAD 700 million range, something that we'll manage within this framework. Anyways, I'll maybe stop there, Dennis, just to see if there's any follow-up.

Speaker #6: In terms of how we think about allocating capital, we continue to evaluate the prospect of drilling in Australia in 2027, with where oil prices are we are leaning towards that being the right decision.

Speaker #6: So as we foreshadowed in our investor day, that would push capital for 2027 into that 700 million dollar range, something that will manage within this framework.

Speaker #6: So anyways, I'll maybe stop there, Dennis, just to see if there's any follow-up.

Speaker #5: Yeah, just I appreciate that color there, Lars. I guess that was kind of a little bit of a lead into my follow-up question is kind of how to think about 27 CapEx.

Dennis Hong: Yeah, I appreciate that color there, Lars. I guess that was a little bit of a lead into my follow question is how to think about 2027 CapEx and then, again, as you see that kind of free cash flow rate of change in the H2 of next year as you round out effectively Montney drilling and then I guess now this Australia program. Does that help drive more comfort in maybe moving up that targeted range if the balance sheet improves and so forth? Or is there going to be a balance in terms of where you want to really drive down net debt even further because, for whatever reason, on a go-forward basis?

Speaker #5: And then again, as you see that kind of free cash flow rate of change in the second half of next year as you round out effectively Montney drilling and then I guess now this Australia program, does that help drive more comfort in maybe moving up that targeted range if the balance sheet improves and so forth?

Speaker #5: Or is kind of there going to be a balance in terms of where you want to really kind of drive down net debt even further because for whatever reason, on a go forward basis?

Speaker #6: Yeah, no, I think you framed it very appropriately there. So as we get into the second half of 2027 and then sort of let's call it the later three years of the five-year plan that we laid out, capital comes back into that 600 to 630 million dollar range as the business grows towards that 130,000 barrels a day.

Lars Glemser: Yeah, no, I think you framed it very appropriately there. As we get into the H2 of 2027 and then let's call it the later three years of the five-year plan that we laid out, capital comes back into that CAD 600 to 630 million range as the business grows towards that 130,000 barrels a day. The reason that we are able to keep capital within that range, grow production are for the reasons that you referenced there. Montney infrastructure spend starts to come down. We start to get some gas behind pipe in Germany online. We get the Australia drill behind us as well. Those will be the type of things that we look at. I think with the flexibility we have in the framework now, we don't necessarily need to wait for those inflection points to buy back shares.

Speaker #6: And so, the reason that we are able to keep capital within that range and grow production is for the reasons that you referenced there: Montney infrastructure spend starts to come down.

Speaker #6: We start to get some gas behind pipe in Germany online. We get the Australia drill behind us as well. And so those will be the type of things that we look at.

Speaker #6: And I think with the flexibility we have in the framework now, we don't necessarily need to wait for those inflection points to buy back shares.

Speaker #6: If we want to be a bit more aggressive leading up to that, we have the capability within the framework here. The vice versa is also true in terms of toggling within that 40 to 60 percent.

Lars Glemser: If we want to be a bit more aggressive leading up to that, we have the capability within the framework here. The vice versa is also true in terms of targeting within that 40% to 60%.

Speaker #2: Maybe just to build on Larry's comments there, because he Larry would have presented a slide. It's in our deck that shows how would that 1.7 billion of excess free cash flow potentially be allocated over that five-year timeframe?

Dion Hatcher: Maybe just to build on Lars's comments there, because Lars would've presented a slide, it's in our deck, that shows how that CAD 1.7 billion of excess free cash will potentially be allocated over that five-year timeframe. If you look at that plot, it shows the net debt getting down midpoint around CAD 750 million. Shows the dividend, of course, lots of runway there. Then on share buybacks, right? We showed a range, but share count was coming down about 30%, right? Now that, of course, would've been based on a CAD 12 stock price, but that was based on CAD 70 oil, that was based on CAD 13 TTF. To summarize this, Lars' points there, as the business fundamentals continue to improve, as return to capital, there's more free cash flow in the system. We're looking forward to returning more of that.

Speaker #2: And if you look at that plot, it shows the net debt getting down, midpoint, around $750 million. It shows the dividend—of course, lots of runway there.

Speaker #2: And then on the share buybacks, right, we showed a range, but I mean, share count was coming down about 30%, right? Now that, of course, would have been based on a $12 stock price.

Speaker #2: But that was based on $70 oil. That was based on $13 TTF. So to summarize this, Larry's points there as the business fundamentals continue to improve, as the return of capital there's more free cash flow in the system, we're looking forward to returning more of that.

Speaker #2: And again, I think the IR day, five-year plan is a good summary of what this business can deliver at reasonable commodity prices, i.e., $70 oil.

Dion Hatcher: Again, I think the Investor Day five-year plan is a good summary of what this business can deliver at reasonable commodity prices, i.e., CAD 70 oil. It's a big number, CAD 1.7 billion of excess free cash over five years.

Speaker #2: It's a big cash flow over five years.

Speaker #5: Great. I appreciate the color both of you. I'll turn it back.

Dennis Hong: Great. I appreciate the color, both of you. I'll turn it back.

Speaker #2: Thanks, Dennis.

Dion Hatcher: Thanks, Dennis.

Speaker #1: Is there no further questions at this time? I will now turn the call over to Deion Hatcher for closing remarks. Please continue.

Operator: There are no further questions at this time. I will now turn the call over to Dion Hatcher for closing remarks. Please continue.

Speaker #2: Thank you again for participating in our Q2 conference call. Enjoy the rest of your day.

Dion Hatcher: Thank you again for participating in our Q2 conference call. Enjoy the rest of your day.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.