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Vermilion Energy Details Fourth Quarter 2019 Results

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   |    Friday,March 06,2020

Vermilion Energy Inc. reported its operating and financial results for the year ended December 31, 2019 along with our 2019 reserves and resources information.

Highlights

  • Fund flows from operations (“FFO”) in Q4 2019 was $216 million ($1.38/basic share(1)), which is in line with the previous quarter despite a significant inventory build in Australia. FFO in 2019 was a record $908 million ($5.87/basic share), representing an increase of 8% from the prior year primarily due to higher production, partially offset by lower commodity prices.
  • Q4 2019 production averaged 97,875 boe/d, representing a 1% increase from the prior quarter, primarily due to higher performance in our US and Netherlands business units. Annual average production for 2019 increased by 15% year-over-year to a record 100,357 boe/d, reflecting a full-year contribution from the assets acquired in 2018 and organic growth from our Netherlands, Australia and US business units. Production per share increased by 5% in 2019.
  • In the United States, Q4 2019 production averaged 5,683 boe/d, an increase of 15% from the prior quarter, primarily driven by contributions from our Q3 2019 drilling program.
  • In the Netherlands, Q4 2019 production averaged 8,088 boe/d, an increase of 9% from the prior quarter, primarily due to the restoration of production following planned and unplanned facility downtime in Q3 2019. During the fourth quarter, we successfully drilled and completed the Weststellingwerf well (0.5 net), representing our first drilling activity in the Netherlands since 2017. We encountered three gas-bearing zones in the Vlieland, Zechstein and Rotliegend formations. The Weststellingwerf well flowed at an initial gross rate of 14.7 mmcf/d(2) and is expected to be brought on production during 2020.
  • In Canada, Q4 2019 production averaged 58,593 boe/d, up slightly from the prior quarter as strong results from new well completions more than offset natural decline. During the quarter, we drilled one of our best ever condensate-rich Lower Mannville wells in Drayton Valley, achieving an IP30 rate of 1,900 boe/d (60% liquids).
  • Our 2019 reserves as evaluated by GLJ as at December 31, 2019 are as follows:
    • Proved plus probable (“2P”) reserves increased 3% from year-end 2018 to 501.2(3) mmboe. We replaced 120% of 2019 production through development activities and 136% including acquisitions. Our 2P finding and development (“F&D”) cost(4) was $9.93 per boe, including future development capital (“FDC”)(4), resulting in an organic 2P Operating Recycle Ratio(5) (including FDC) of 3.0x.
    • Proved (“1P”) reserves increased 4% from year-end 2018 to 310.2(3) mmboe. We replaced 121% of 1P reserves through development activities and 133% including acquisitions. Our 1P F&D cost was $11.90 per boe, including FDC, resulting in an organic 1P Operating Recycle Ratio(5) (including FDC) of 2.5x.
    • Proved developed producing (“PDP”) reserves increased 4% from year-end 2018 to 200.0(3) mmboe. We replaced 113% of PDP reserves through development activities and 122% including acquisitions. Our PDP F&D cost was $12.71 per boe, including FDC, resulting in an organic PDP Operating Recycle Ratio(5) (including FDC) of 2.3x.
  • Vermilion’s board of directors has approved a 50% reduction in our monthly dividend to $0.115 per share in response to weakness in commodity prices and reduced global economic prospects following the outbreak of the novel coronavirus (COVID-19). The revised dividend will be effective for the March dividend payable on April 15, 2020.

Q4 2019 Operations Review

Europe

In France, Q4 2019 production averaged 10,264 boe/d, representing a slight decrease from the prior quarter primarily due to weather-driven downtime in the Aquitaine Basin.  Production in the Paris Basin was relatively consistent with the prior quarter.

In the Netherlands, Q4 2019 production averaged 8,088 boe/d, an increase of 9% from the prior quarter.  The increase was primarily due to the restoration of production following planned and unplanned facility downtime in Q3 2019.  During the quarter, we successfully drilled and completed the Weststellingwerf well (0.5 net), representing our first drilling activity in the Netherlands since 2017.  We encountered three gas-bearing zones in the Vlieland, Zechstein and Rotliegend formations.  The Weststellingwerf well flowed at an initial gross rate of 14.7 mmcf/d(2) and is expected to be brought on production during 2020.

In Ireland, production averaged 42 mmcf/d (7,049 boe/d) in Q4 2019, a decrease of 2% from the prior quarter.  The decrease was primarily due to natural decline, partially offset by higher uptime at the Corrib natural gas processing facility compared to the prior quarter.  As disclosed in our Q3 2019 release, we had 10 days of unplanned downtime in one of the plant auxiliary systems, which occurred at the end of Q3 2019 and continued into Q4 2019.  Since assuming operatorship of Corrib at the end of 2018, we have reduced operating costs by approximately 20% and continue to evaluate other optimization opportunities.

In Germany, Q4 2019 production averaged 3,373 boe/d, an increase of 3% from the prior quarter.  The increase was primarily due to improved uptime on our operated oil and natural gas assets, partially offset by unplanned downtime on our non-operated oil assets.  Following the successful drilling of the Burgmoor Z5 (46% working interest) well in 2019, the partner group has agreed to a tie-in plan which should allow for production early next year.

In Central and Eastern Europe (“CEE”), production averaged 276 boe/d following the tie-in of two discoveries from our 2019 drilling program late in the year.  In Hungary, we tied-in the Mh-21 (0.3 net) and Battonya E-09 (1.0 net) wells, drilled in the second and third quarters of 2019, respectively.  The wells were brought on production midway through the fourth quarter of 2019 at a restricted rate of approximately 600 boe/d net for the two wells combined.  In addition, we were provisionally awarded the Kadarkút exploration license in western Hungary during the quarter and we expect to receive final government approvals in the first quarter of 2020.  The license covers approximately 298,500 net acres and consists of primarily oil prospects.  Most of the license is covered by 3D seismic.  The license term covers a four year period, with the option to extend the license for a further two years.  In Croatia, we continued to prepare for our 2020-2021 drilling programs, in addition to evaluating natural gas plant processing facility construction options, which we expect to allow tie-in of our 2019 natural gas discoveries next year.

North America

In Canada, production averaged 58,593 boe/d in Q4 2019, up slightly from the prior quarter.  Strong results from new well completions in the quarter more than offset natural decline.  We drilled or participated in 26 (16.8 net) wells in the fourth quarter of 2019, eight (8.0 net) of which were drilled in Alberta and 18 (8.8 net) drilled in Saskatchewan.  During the quarter, we drilled one of our best ever condensate-rich Lower Mannville wells in Drayton Valley, Alberta, achieving an IP30 rate of approximately 1,900 boe/d (60% liquids).  In Ferrier, we drilled a liquids-rich Upper Mannville well which delivered an IP30 rate of approximately 1,800 boe/d (15% liquids).  We brought 33 (23.5 net) wells on production in Saskatchewan and four (4.0 net) wells on production in Alberta during the quarter.  We are currently in the midst of a very active Q1 2020 drilling campaign in Canada, with rig activity in the quarter peaking at six rigs in Saskatchewan and four rigs in Alberta.  We plan to complete the majority of our 2020 Canadian drilling program in the first quarter of the year in order to avoid potential delays from an extended spring break-up season or unseasonably wet summer weather.

In the United States, Q4 2019 production averaged 5,683 boe/d, representing an increase of 15% from the prior quarter.  The increase was primarily due to a full quarter of contribution from the four wells we brought on production during the third quarter of 2019.  These wells continue to perform in line with our type curves, achieving an average IP90 rate of approximately 450 boe/d.  We also began drilling two (1.98 net) wells in December 2019, for which drilling finished in January 2020, and are currently undergoing completion.  We currently have two rigs operating in our Hilight field in the Powder River Basin.  Similar to our Canadian business unit, we plan to execute a front-end weighted capital program in the United States, completing our twelve (11.9 net) well 2020 drilling program in the first half of the year.

Australia

In Australia, production averaged 4,548 bbl/d in Q4 2019, a decrease of 18% from the previous quarter, primarily due to the planned shutdown of the Wandoo platform for eight days to perform facility upgrades and regular maintenance.  We recently began the installation of electric submersible pumps on two wells and will continue to advance process optimization projects throughout 2020.

Dividend Reinvestment Plan

As previously announced, we are phasing out the Dividend Reinvestment Plan (“DRIP”) in 2020 by prorating the available DRIP shares by 25% each quarter starting in Q1 2020.  It is our intention to increase this proration each quarter throughout the year, such that the DRIP will be eliminated at the end of the third quarter of 2020.

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 February 24, 2020, we currently have 51% of our expected net-of-royalty production hedged for Q1 2020.  More than half of our Q1 2020 corporate hedge position consists of two-way collars and three-way structures, which allow participation in price increases up to contract ceilings.  For 2020 as a whole, approximately 42% of our production is hedged, with 63% of our hedge position in participating structures.

With respect to individual products within our product mix, we have hedged 70% of anticipated European natural gas volumes for Q1 2020.  We have also hedged 78% of our anticipated full-year 2020 European natural gas volumes at prices which are expected to provide for strong project economics and free cash flows.  At present, 44% of our expected Q1 2020 oil production is hedged.  For Q1 2020, 45% of our North American natural gas production is priced away from AECO, with a variety of contracts to sell gas at the SoCal Border, Henry Hub, Saskatchewan and Wyoming.

Sustainability

We delivered another year of industry-leading performance as indicated by a number of important ESG rankings.  The Company received a top quartile ranking for our industry sector in SAM’s 2019 Corporate Sustainability Assessment (“CSA”).  The CSA analyzes sustainability performance across economic, environmental, governance, and social criteria, and is the basis of the Dow Jones Sustainability Indices.  Vermilion was ranked second in our peer group in the Sustainalytics ESG (environment, social, governance) rankings.  Vermilion’s MSCI ESG rating increased to AA in 2019, and our Governance Metrics score ranked in the top decile globally.  We received ISS QualityScore decile ratings of 1 for both Environmental and Social, which assess corporate disclosure and transparency practices in these areas, where 1 indicates the lowest risk.  These rankings reflect our high degree of ESG focus, and we will strive to continue to this record of high performance as we move forward.

Executive Message

The company stated: "We are now in the sixth year of a period of reduced energy prices that began in the second half of 2014, with the novel coronavirus (COVID-19) being the latest event to produce a retracement in commodity markets.  Throughout this period, we have maintained focus on profitability by grinding costs out of all phases of our business ranging from field operations to financing expense, upgrading our capital project slate, and adapting our capital markets model to focus even more acutely on returning capital to shareholders.  In this environment, we have been unique among our traditional competitor group in maintaining our dividend while still providing a moderate level of growth.  We have paid a monthly dividend (or distribution in the trust era) for the past 205 consecutive months, returning over $40 per share to shareholders over this period.  During the energy downturn, we have put more production, reserves and free cash flow behind each share despite dramatically lower capital budgets.  While still modestly over 100%, we brought our total payout ratio down to 103% in 2019, representing our lowest total payout ratio since before the financial crisis in 2008.  Moreover, we are phasing out the small level of remaining DRIP participation at the end of Q3 2020, resulting in 100% of dividends being paid in cash.

"We are proud of this record of returning capital to shareholders while still providing per share growth.  We think paying dividends is the right thing to do.  This model has kept us disciplined in a capital-intensive industry and has put substantial cash back in the hands of investors.  As we started 2020, our funding status continued to improve to a projected total payout ratio below 100%, driven by a significantly lower capital budget for 2020 as compared to 2019, and by a modestly positive trend for oil prices.  In that environment, we were confident in our ability to continue our monthly dividend at $0.23 while deleveraging our balance sheet.  We were clear in stating that we would reevaluate the dividend in the event of a structural change in commodity prices that could affect our ability to self-fund our combination of capital expenditures and dividends, and that we would prioritize balance sheet strength over other objectives, including either growth or dividends.

"The emergence of COVID-19 was an unanticipated event, and we do not claim any special expertise in assessing what the appropriate type or degree of public health responses are to the outbreak.  Nonetheless, we must make an assessment of its current and probable future market and economic impacts.  We observe that COVID-19 has dramatically altered individual, business and government behavior, and that these impacts are decidedly negative for the outlook for global economic growth, commodity prices in general, and oil demand and prices in particular.  We do not believe that the long-term prospects for the oil and gas industry are likely to be significantly altered, and ultimately we expect a resumption of a positive trend for commodity prices.  However, we do think the recovery in oil prices that we began to experience at the outset of 2020 will be pushed back for an unknown period.  In the short-to-medium term, we believe COVID-19 represents a hard-to-quantify set of macro risks, probably lower in economic severity than the financial crisis of 2008, but of a type that is also likely unprecedented in our lifetimes.

"We have maintained our dividend though a number of other periods of downside volatility since the commodity crash of 2014, making all of the necessary adjustments to costs and growth levels.  During these periods, we continuously assessed our dividend policy in light of our top priority of balance sheet strength.  As we consider today’s economic and commodity outlook, we believe it is unlikely that we would achieve fully-funded status for our present dividend at a reasonable level of capital expenditures.  Therefore, we have determined that a reduction to our dividend is the most prudent course of action at this time.  Accordingly, our board of directors has approved a 50% reduction in our monthly dividend to $0.115 per share, or $1.38 on an annualized basis.  The revised dividend will be effective for the March dividend payable on April 15, 2020.  At the current forward commodity strip, we estimate a 2020 payout ratio of 99%, including previously declared dividends.  Any excess cash generated beyond the dividend and capital requirements will be allocated towards debt reduction at this time, while retaining the option of buying back shares through our NCIB program in an improved macroeconomic environment.

"We have had no operational impacts from COVID-19 to-date.  We have business continuity plans for each of our business units and for our corporate center that can be invoked if the outbreak significantly worsens and threatens our supply chain or workforce capabilities.

"During 2019, Vermilion generated record cash flow, production and reserves despite a continued environment of challenging commodity prices.  We recorded FFO of $908 million in 2019 on a capital program of $523 million, which translated to free cash flow(1) generation of $385 million, also the highest in our history.  The resulting 2019 total payout ratio, after accounting for dividends and asset retirement obligations, was 103%.  In Q4 2019, we generated $216 million of FFO which was in line with the prior quarter despite a large inventory build in Australia due to the timing of crude liftings.  Net debt in 2019 increased modestly to $2.0 billion, however the net debt to trailing FFO ratio improved to 2.2x, compared to 2.3x in 2018.  In addition to an improving leverage profile, we also enhanced the quality of our balance sheet over the past year.  We have recently received commitments to extend our $2.1 billion covenant-based credit facility, resulting in a new a maturity date of May 2024. The closing of the extension remains subject to customary closing conditions.  In addition, in June 2019, we executed a cross currency interest rate swap on our 2025 US$300 million long-term senior notes, converting our 5.625% interest cost on these notes to 3.275% for the remainder of their term.  As a result of these initiatives, our pre-tax cost of debt today is approximately 3.2% with a weighted-average remaining term of 4.4 years.

"We delivered record production of 100,357 boe/d in 2019, representing year-over-year growth of 15%, or 5% on a per share basis.  We achieved these results despite several unexpected operational challenges throughout the year, including a third-party refinery outage in France and uncharacteristic weather-driven delays in Canada.  During the fourth quarter we tied-in two discoveries in Hungary and successfully drilled the Weststellingwerf well in the Netherlands, marking our first drilling activity in that country in two and a half years.  In the US, new well completions from our Q3 2019 program drove increased production from our North American region.  Two months into the new year, the execution of our 2020 capital program is progressing as planned.  To mitigate the risk of another season of post-breakup weather delays, which affected our results in 2019, we are front-loading our 2020 capital program by scheduling most of our North American drilling activity into the first quarter.

"Proved plus probable reserves increased by 3% year-over-year to 501.2 mmboe.  The large majority of our new reserve additions were through organic activities as we continue to enhance the recovery factor on existing assets and advanced resources to reserves in a number of our operating areas.  We added these reserves at an organic F&D cost of $9.93/boe, including FDC, resulting in an operating recycle ratio of 3.0x and funds flow recycle ratio of 2.5x.  Our F&D costs have been below $10.00/boe for the past three years (3-year average F&D of $9.38, including FDC), while growing our liquids weighting.  Driven by a capital-efficient project slate and a continued focus on cost improvements, our 3-year organic operating recycle ratio stands at 3.2x.  Our contingent and prospective resource bases remain a source of reserve additions, with 31.8 mmboe of contingent and 5.0 mmboe of prospective resources converted to 2P reserves during 2019.

"As we stated earlier, our top financial priority remains balance sheet strength.  Both our debt-to-cash flow ratio and weighted-average interest rate decreased in 2019, and our debt exposures are fully termed-out via our covenant-based bank facility and long-term notes.  Nonetheless, we will continue to be vigilant regarding commodity prices and resulting cash flows.  It remains to be seen how long oil demand and economic growth will be suppressed by the global reaction to COVID-19.  Should we experience an even more-pronounced and protracted commodity downturn due to COVID-19 or any other cause, we will be attentive to all forms of cash outlays, focusing first on capital investment levels, to protect the financial position of the company."

 

2019 Reserves and Resources

In 2019 we increased our reserves and resources predominantly through development activities.  Based on the 2019 GLJ Reserves Report, our 2P reserves increased 3% from year-end 2018 to 501.2(3) mmboe, while our 1P reserves increased 4% from year-end 2018 to 310.2(3) mmboe in 2019.  PDP reserves increased 4% from year-end 2018 to 200.0(3) mmboe.  Our PDP reserves represent 65% of our 1P reserves.

Through development activities, we replaced 120% of 2P reserves, 121% of 1P reserves and 113% of PDP reserves, respectively.  Including acquisitions, we replaced 136% of 2P reserves, 133% of 1P reserves and 122% of PDP reserves, respectively.  Reserve additions included 15.0 million boe of positive technical revisions at the 1P level.

Our Operating Recycle Ratio(5) (including FDC) at the 2P level was 3.0x in 2019.  We have achieved F&D costs below $10.00/boe for the past three years (3-year average F&D of $9.38, including FDC) as a result of our highly capital-efficient project slate and continued focus on cost improvements.


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