Quarterly / Earnings Reports | First Quarter (1Q) Update

Vermilion Details Q1 2019 Results, Operations

Share Print Bookmark    |    Thursday,April 25,2019

Vermilion Energy Inc. reported its Q1 2019 results.

Highlights

• Q1 2019 production averaged 103,404 boe/d, representing a 2% increase over the prior quarter, due to increases in Australia, Canada, the US, Germany and France.
  
  
• Fund flows from operations ("FFO") for Q1 2019 was $254 million ($1.66/basic share⁽¹⁾), an increase of 14% from the previous quarter (14% on a per share basis) as a result of higher production and realized commodity pricing, partially offset by higher cash taxes. FFO for Q1 2019 increased 58% (27% on a per share basis) compared to the same quarter last year due to higher production, which was partially offset by lower commodity pricing and higher cash taxes.
  
  
• In Australia, production averaged 5,862 bbl/d in Q1 2019, an increase of 40% from the previous quarter primarily due to the contribution from the two (2.0 net) well program completed at the end of January 2019.
  
  
• In Canada, production averaged 61,360 boe/d in Q1 2019, an increase of 1% from the prior quarter, primarily driven by new well completions.
  
  
• In the United States, Q1 2019 production averaged 3,653 boe/d, an increase of 3% from the prior quarter, primarily driven by a full quarter contribution from our first Hilight well drilled in the prior quarter.
  
  
• In Germany, production in Q1 2019 averaged 3,763 boe/d, an increase of 1% from the prior quarter. The increase is primarily due to better than expected results from workovers performed on our operated oil assets. Late in the quarter, we commenced drilling of the Burgmoor Z5 well (46% working interest), marking the first operated drilling program by Vermilion in Germany.
  
  
• In the Netherlands, Q1 2019 production averaged 8,677 boe/d, a 1% decrease from the prior quarter. We continue to make progress on the permitting for our two (1.0 net) 2019 planned wells. We received the drilling permit for one well during the first quarter, and are currently awaiting regulatory decisions on two additional wells, which should enable us to execute our planned program for this year.
  
  
• In Ireland, production averaged approximately 52 mmcf/d (8,619 boe/d) in Q1 2019, a decrease of 1% from the prior quarter. In our first full quarter as operator of the Corrib Project, we completed some minor projects and activities previously identified to increase uptime and optimize plant compression to increase gas throughput. We will continue to evaluate other optimization opportunities throughout 2019 as we build more first-hand knowledge as operator

Q1 2019 Operations Review

Europe

In France, Q1 2019 production averaged 11,470 boe/d, which was up slightly from the prior quarter. Initial results from our 2019 workover program have exceeded our expectations, with one recompletion in the Aquitaine Basin yielding an initial 30-day rate of 600 bbls/d. Production contributions from the 2018 drilling program in the Champotran field continue to outperform internal estimates. Our 2019 Champotran drilling program commenced during the first quarter, as we drilled and completed three (3.0 net) wells. These wells are expected to be brought on production in late April, while drilling of the final (1.0 net) well of the program is ongoing.

In the Netherlands, Q1 2019 production averaged 8,677 boe/d, representing a 1% decrease from the prior quarter. We continue to make progress on the permitting for our two (1.0 net) 2019 planned wells. We received the drilling permit for the Weststellingwerf well during the first quarter, and are currently awaiting regulatory decisions on two additional wells, which should enable us to execute our planned two-well program for this year.

In Ireland, production averaged approximately 52 mmcf/d (8,619 boe/d) in Q1 2019, a decrease of 1% from the prior quarter. We completed some minor projects and activities previously identified to increase uptime and optimize plant compression to increase gas throughput. We will continue to evaluate other optimization opportunities throughout 2019 as we build more first-hand knowledge as operator.

In Germany, production in Q1 2019 averaged 3,763 boe/d, an increase of 1% from the prior quarter. The increase is primarily due to better than expected results from workovers performed on our operated oil assets. Late in the quarter, we commenced drilling the Burgmoor Z5 well (46% working interest), marking the first operated drill by Vermilion in Germany. Drilling is expected to conclude around mid-year, with well testing thereafter. We have identified several other sizeable exploration prospects on our German land base and intend to drill at least one new well per year for the foreseeable future.

In Central and Eastern Europe ("CEE"), we had no production in the quarter. The Mh-Ny-07 well in Hungary watered out at its current location, and we are evaluating the economics of sidetracking the well to access remaining gas at a higher structural location. We have received all necessary permits for the 2019 Hungarian drilling program and are making steady progress on permitting for our Croatia and Slovakia drilling programs. We plan a 10 (7.0 net) well 2019 drilling program for Central and Eastern Europe and remain very confident in the growth outlook for this region.

North America

In Canada, production averaged 61,360 boe/d in Q1 2019, an increase of 1% from the prior quarter. The production increase was driven by continued strong operating performance across our Canadian assets including positive results from our drilling programs in both Saskatchewanand Alberta. We drilled or participated in 58 (54.9 net) wells in the first quarter of 2019, including 45 (41.9 net) wells in Saskatchewan and 12 (12.0 net) Mannville wells in Alberta. In Saskatchewan, we tied in 40 wells from the Q1 program. Of the wells that have been on production for more than 15 days, we achieved an average rate of 162 boe/d (71% oil) on the Midale wells and 109 boe/d (90% oil) on the open hole Frobisher wells. In Alberta, we tied in 11 wells from the Q1 program, including ten Mannville wells that have been on production for more than 15 days achieving an average rate of 790 boe/d (40% oil, condensate and NGLs). The results from our Q1 2019 drilling program in both Saskatchewan and Alberta continue to perform at or above our expectations.

In the United States, Q1 2019 production averaged 3,653 boe/d, an increase of 3% from the prior quarter. The increase was primarily due to a full quarter contribution from our first Hilight well drilled in the prior quarter, which continues to perform in line with our expectations. We commenced our 2019 eight (7.6 net) well drilling program in the Hilight Turner Sands by drilling three (3.0 net) horizontal wells during the quarter. We are in the process of completing and testing these wells and plan to drill the remaining five (4.6 net) Hilight wells in the second and third quarters.

Australia

In Australia, production averaged 5,862 bbl/d in Q1 2019, an increase of 40% from the previous quarter primarily due to the contribution from the two (2.0 net) well program completed at the end of January 2019. The wells began producing in early February 2019 and continue to perform in line with our expectations. We produce these two wells intermittently at restricted rates in order to maximize long-term value and to manage to our annual production target of 6,000 bbl/d. Production in Q1 2019 was partially offset by weather related downtime, as two cyclones resulted in the platform being shut down for 11 days during the quarter.

Commodity Hedging

Vermilion hedges to manage commodity price exposures and increase the stability of our cash flows, providing additional certainty with regard to the execution of our dividend and capital programs. In aggregate, as of April 23, 2019, we currently have 33% of our expected net-of-royalty production hedged for Q2 2019. Over half of the Q2 2019 corporate hedge position consists of two-way collars and three-way structures, which allow participation in price increases, up to contract ceilings.

We have currently hedged 69% of anticipated European natural gas volumes for Q2 2019. We have also hedged 66% and 49% of our anticipated full-year 2019 and 2020 European natural gas volumes, respectively, at prices which are expected to provide for strong project economics and free cash flows. At present 30% of our Q2 2019, and 26% of our full year 2019 oil production is hedged. For Q2 2019, 27% of our North American natural gas production is priced away from AECO, due to diversification hedges to financially sell at the SoCal Border and at Henry Hub for a portion of our Alberta natural gas production, and because 14% of our North American production is located in Saskatchewan and Wyoming.

Sustainability

Sustainability is central to Vermilion's corporate strategy, as illustrated by the constitution of our Sustainability Committee by Vermilion's Board of Directors. We are pleased to note continued external confirmation of our progress in this realm. Our ISS Governance QualityScore increased from 3 to 2 (where a decile score of 1 indicates lowest governance risk), while our Environment and Social QualityScores remain at 1 and 2 respectively. This reflects our ongoing dedication to strong performance on ESG factors.

Guidance

On October 25, 2018, we released our 2019 capital budget and related guidance. The 2019 total budget and production guidance remain unchanged, although we have deferred some activity to later in the year and reallocated capital between business units, the breakdown of which can be found in our corporate presentation located on our website.

The following table summarizes our guidance:

Financials

Message to Shareholders

We delivered strong operational and financial results in Q1 2019. Production increased 2% quarter-over-quarter to 103,404 boe/d and FFO increased 14% from the prior quarter to $254 million. While global benchmark commodity prices were weaker in Q1 2019 compared to the prior quarter, we benefited from a significant improvement in Canadian benchmark prices and continued positive operational momentum across our asset base. On a per share basis we generated $1.66⁽¹⁾ of FFO in Q1 2019 compared to $1.31 in Q1 2018, representing a year-over-year increase of 27% despite most commodity benchmark prices being lower over this comparative period, reflecting accretion from the acquisitions we completed in 2018 and our ongoing organic development activities. Our Australian and Canadian business units were responsible for most of the growth in Q1 2019 as we brought two new offshore wells on production in Australia and executed one of our most active drilling programs to date in Canada. We achieved increased production despite an unusually active cyclone season in Australia, which resulted in 11 days of downtime at Wandoo and extremely cold weather conditions in our producing areas in Canada and the US.

We are committed to our capital markets strategy of sustainable growth and income. With all business units contributing strong development results to-date and most completion and tie-in activities in North America completed at break-up, we expect to deliver robust year-over-year production per share growth in 2019 of 8% or more, while paying a sustainable dividend which is currently yielding approximately 8%. We typically have a front-loaded capital program which seeks to finish as much Canadian drilling and tie-in activity ahead of break-up as possible, and this year was no exception, with nearly 40% of our annual capital investment for Exploration and Development ("E&D") activities executed in Q1 2019. As a result, our total payout ratio exceeded 100% for the quarter. However, based on the current commodity strip, our annual capital program and dividend are more than fully funded with a forecasted total payout ratio of approximately 90%. As we have previously indicated, our intent is to allocate any excess cash generated beyond the capital program and dividend towards debt reduction, targeting a debt-to-FFO leverage ratio of 1.5 times or lower. In Q2 2019, we negotiated an extension to our $2.1 billion revolving credit facility to extend the maturity to May 31, 2023. The closing of the amendment is expected to take place before the end of April, 2019.