Quarterly / Earnings Reports | Third Quarter (3Q) Update

Vermilion Energy Reports Q3 2019 Results

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   |    Thursday,October 31,2019

Vermilion Energy Inc. reported its Q3 2019 results.

Highlights

• Q3 2019 production averaged 97,239 boe/d, a decrease of 6% from the prior quarter. The lower production level resulted from a number of plant turnarounds, unplanned downtime, and weather delays. Higher production in the US and France was more than offset by lower production in Canada, Netherlands, Ireland and Australia.
  
  
• We have reduced our 2019 capital investment guidance by $10 million to $520 million. With nine months of results in place, we are revising our 2019 annual production guidance range to 100,000 to 101,000 boe/d to account for the unplanned downtime and lower capital investment. We expect to deliver annual production at the mid-point of this revised guidance range, reflecting strong year-over-year production per share growth of 5%.
  
  
• Fund flows from operations ("FFO") for Q3 2019 was $216 million ($1.39/basic share⁽¹⁾), a decrease of 3% from the previous quarter, primarily due to lower production volumes and weaker commodity prices. FFO for Q3 2019 decreased 17% from the same quarter last year as increased production was more than offset by weaker global commodity pricing.
  
  
• In the United States, Q3 2019 production averaged 4,925 boe/d, an increase of 12% from the prior quarter, primarily driven by contributions from our 2019 drilling program, which continues to perform above our expectations. New well results were partially offset by a longer-than-expected turnaround at a third-party operated gas plant.
  
  
• In Central and Eastern Europe, we drilled one (1.0 net) exploration well in Croatia during Q3 2019, which resulted in a second consecutive gas discovery. The well tested at a rate of 17.2 mmcf/d⁽²⁾. We were also provisionally awarded the SA-07 license in Croatia, adding approximately 500,000 net acres to our portfolio, which will bring our total licensed acreage to approximately 2.4 million net acres in the country.
  
  
• In France, Q3 2019 production averaged 10,347 boe/d, an increase of 6% from the prior quarter. Production volumes in the Paris Basin were no longer restricted after restart of the Grandpuits refinery in mid-August.
  
  
• In Canada, Q3 2019 production averaged 58,504 boe/d, a decrease of 5% from the prior quarter. The decrease was primarily due to planned turnarounds and project delays caused by abnormally wet weather.
  
  
• In the Netherlands, Q3 2019 production averaged 7,429 boe/d, a decrease of 17% from the prior quarter, primarily due to a planned turnaround and subsequent repairs required on a gas compression facility.
  
  
• In Ireland, Q3 2019 production averaged 43 mmcf/d (7,202 boe/d), a decrease of 12% from the prior quarter. The decrease was primarily due to a planned plant turnaround and unplanned downtime at the Corrib natural gas processing facility. The downtime, which was unrelated to the plant turnaround, was remedied by early October.
  
  
• In Australia, Q3 2019 production averaged 5,564 bbl/d, a decrease of 17% from the previous quarter primarily due to well management and unplanned vessel maintenance on the Wandoo platform.
  
  
• Our Board of Directors has approved a 2020 Exploration and Development ("E&D") capital budget of $450 million, with associated production guidance of 100,000 to 103,000 boe/d. Our 2020 budget reflects continued emphasis on returning capital to investors, while still providing modest production growth. Within this budget, we also continue to advance strategic capital projects associated with early-stage exploration and development activities.
  
  
• We have elected to phase out the Dividend Reinvestment Plan ("DRIP"), prorating the available DRIP shares by 25% each quarter starting in Q1 2020, until completely eliminated in Q4 2020.
  
  
• Vermilion received top quartile rankings for 2019 for our industry sector in both the Sustainalytics ESG Rating and SAM (formerly known as RobecoSAM) annual Corporate Sustainability Assessment ("CSA"). These agencies analyze sustainability performance across economic, environmental, governance and social criteria, and the CSA is also the basis of the Dow Jones Sustainability Indices.

Message to Shareholders

The third quarter of 2019 continued to be an exceptionally difficult period for energy investors, as the upstream oil and gas sector traded down to multi-year lows and significantly underperformed the broader equity market.  Vermilion was not spared.  Our stock price declined over 30% during the quarter, bringing our current dividend yield to approximately 14%.  While we are certainly disappointed with our share price performance, we would like to stress that Vermilion's dividend policy is not based on the market price of our shares. Our dividend policy is based on the fundamental economic sustainability and free cash flow generation of our business, which remains strong.

The capital markets environment for oil and gas companies has changed dramatically over recent years due to a multitude of factors, including poor investment returns from energy issuers, increased focus on ESG and SRI mandates, and a growing concern about the future of fossil fuels amongst both investors and the general public.  This has led to valuation multiple compression across the entire sector with many companies, including Vermilion, trading significantly below their historical valuation metrics.  Despite these changing capital market dynamics, the oil and gas sector is a vital contributor to the global economy and will be around for many decades to support the long-term energy transition.  During this transition, we believe there is significant value to be realized from responsible energy investment, and that Vermilion is optimally positioned to prosper in this industry and market environment.  Our belief in Vermilion is founded in the economic sustainability of our business model and our leadership in environmental sustainability in the upstream oil and gas sector.

Throughout our 25-year history, we have repeatedly made the necessary adjustments to adapt to the changing landscape around us.  Our business model has focused on sustainable growth and income, which we have successfully delivered to our shareholders over the years.  Vermilion has paid over $39 per share in distributions and dividends since 2003 and generated compounded growth in production per share of over 8% annually since 2012.  Our investment cycle time is short with minimal fixed commitments.  Consequently, we have flexibility to adjust our investment and growth levels to provide the combination of return of capital and growth which we think will maximize shareholder value in a changing capital market environment.  Based on the current market and commodity environment, we believe a strategy that is even more focused on free cash flow generation will create the most value for our shareholders.  As such, for 2020, while maintaining our dividend at current levels, we have elected to reduce our production growth rate and to introduce additional flexibility in how we return capital to investors.

This lower growth strategy was embedded in the preparation of our 2020 budget as well as our capital plans for the remainder of 2019.  For 2019, we have reduced capital investment by $10 million, and now expect to invest $520 million.  As a result of this reduced level of investment and after accounting for higher-than-expected downtime and weather delays, we have correspondingly reduced our 2019 annual production guidance to 100,000 to 101,000 boe/d.  We expect to deliver annual production at the mid-point of this revised guidance range,  reflecting strong year-over-year production per share growth of 5%.  Our Board of Directors has approved a 2020 capital budget of $450 million with associated production guidance of 100,000 to 103,000 boe/d.  This budget is designed to deliver modest production growth of about 1%.  The 2020 budget includes approximately $20 million of strategic capital associated with early-stage exploration and development activities.  These activities will lay the groundwork for future development and production growth from a highly economic asset base.

During the third quarter we received approval from the TSX for a normal course issuer bid ("NCIB"), which will allow us to buy back up to 7.75 million shares.  With this approval, we intend to use the NCIB in combination with debt reduction when we have excess free cash flow available (beyond dividends) to enhance per share growth.  We will also be phasing out our DRIP over the course of the next year, prorating the available DRIP shares by 25% each quarter starting in Q1 2020 until the DRIP is completely eliminated in Q4 2020.  The DRIP has been a shareholder service that we have provided since our first income distribution in 2003, with discounted share purchases offered until 2018.  We recognize that the elimination of the DRIP may be a disappointment to some shareholders.  Nonetheless, we feel that in an environment of lower trading commissions, the establishment of our NCIB, and lower energy issuer valuation multiples, the elimination of the DRIP is in the best interests of our broad shareholder group.

We remain committed to maximizing value for our shareholders over the long-term through a combination of a sustainable dividend, low financial leverage, share buybacks, and production growth as appropriate.  In addition, we will remain disciplined in our acquisition strategy as we continue to evaluate strategic opportunities that fit within our business model and add value for existing shareholders.  Our highest financial priority is our balance sheet, and under no circumstance will we do anything that jeopardizes Vermilion's long-term financial stability.  We have a robust balance sheet with termed-out borrowing, strong liquidity, and a very low cost of debt.  Coupled with low operating leverage due to high margins, a diversified product mix, and a strong hedge position, our balance sheet provides us with the flexibility to weather volatility in commodity prices.

Q3 2019 Operations Review

Our Q3 2019 operational results were impacted by several planned turnarounds, a high level of unplanned downtime, weather related delays and a moderate carry-over impact from the refinery outage in France.  As a result, our Q3 2019 production decreased 6% from the prior quarter to 97,239 boe/d, with variances discussed by business unit below.  We generated FFO of $216 million in the third quarter, down by 3% from the prior quarter, with positive contributions from hedging gains, lower G&A expense, and lower taxes partially offsetting lower production and commodity prices.

Europe

In France, Q3 2019 production averaged 10,347 boe/d, an increase of 6% from the prior quarter.  Production volumes in the Paris Basin returned to near full capacity in mid-August following the restart of the Grandpuits refinery which had been offline due to a failure on its main feedstock pipeline.  Most of our wells in the Paris Basin have returned to pre-shutdown production levels, although some wells continue to clean up and workover activity is continuing to restore full productivity.  The net impact from the refinery outage reduced our Q3 2019 production volumes by approximately 400 boe/d.  In the Aquitaine Basin, production was consistent with the prior quarter as we successfully completed our 2019 workover campaign, which continues to yield results above our expectations.

In the Netherlands, Q3 2019 production averaged 7,429 boe/d, a decrease of 17% from the prior quarter.  The decrease was primarily due to a planned turnaround and unexpected downtime to repair a gas compressor, which extended the length of the turnaround.  The combined impact was a reduction in Netherlands production of approximately 1,200 boe/d in Q3 2019.  Our facilities have returned to service and production has been restored.  We are currently in the process of drilling the Weststellingwerf well (0.5 net), representing our first drilling activity in the Netherlands since 2017, and we expect drilling to be completed before the end of the year.

In Ireland, production averaged 43 mmcf/d (7,202 boe/d) in Q3 2019, a decrease of 12% from the prior quarter.  The decrease was primarily due to planned and unplanned downtime at the Corrib natural gas processing facility and natural decline.  Our planned turnaround was successfully completed as scheduled in mid-September.  Later in the month, we identified the need for repairs in one of the plant auxiliary systems which necessitated shutting the plant down for approximately 10 days spanning the end of Q3 and early Q4 2019.  The combined impact of the planned and unplanned downtime was approximately 800 boe/d in Q3.

In Germany, production in Q3 2019 averaged 3,269 boe/d, a decrease of 6% from the prior quarter.  The decrease was primarily due to unplanned downtime on several operated and non-operated assets, partially offset by contributions from successful workovers performed earlier this year.  Following the successful drilling of the Burgmoor Z5 (46% working interest) well, completed early in the third quarter of 2019, we continue to evaluate tie-in alternatives and expect to bring the well on production in late 2020.

In Central and Eastern Europe ("CEE"), we drilled one (1.0 net) natural gas exploration well in Croatia during Q3 2019, which resulted in a second consecutive gas discovery, testing at a rate of 17.2 mmcf/d⁽²⁾.  During the third quarter, we were also provisionally awarded the SA-07 license in Croatia, which is contiguous with our existing land position and will add approximately 500,000 net acres to our portfolio in the country.  Vermilion continues to be the largest onshore landholder in Croatia, with total licensed acreage of approximately 2.4 million net acres, including the new SA-07 block.  In Hungary, we began tie-in activities for the Mh-21 (0.3 net) and Battonya E-09 (1.0 net) wells, drilled in the second and third quarters of 2019, respectively, and expect to bring them on production during the fourth quarter of 2019.

North America

In Canada, production averaged 58,504 boe/d in Q3 2019, a decrease of 5% from the prior quarter.  The decrease was primarily due to planned turnarounds (700 boe/d impact) and project delays caused by abnormally wet weather (2,100 boe/d impact).  We drilled or participated in 40 (38.3 net) wells in the third quarter of 2019, all of which were drilled in Saskatchewan, as no drilling in Alberta was possible due to wet conditions throughout the summer.  Well activity in Alberta, including tie-in and completions, was delayed until late September due to extremely wet ground, three months later than when we typically resume post-break-up activity.  We brought 41 (36.2 net) wells on production in Saskatchewan and three (2.5 net) wells on production in Alberta during the quarter.  We have continued to realize capital and operating efficiencies in our southeast Saskatchewan assets, achieving a 10% improvement in drilling, completion, equipping and tie-in ("DCET") costs on our Q3 2019 open-hole drilling program compared to our Q1 2019 program.

In the United States, Q3 2019 production averaged 4,925 boe/d, representing an increase of 12% from the prior quarter.  The increase was primarily driven by production contributions from our 2019 Hilight drilling campaign, as we successfully completed and brought on production four (4.0 net) wells during the third quarter.  The increased production was partially offset by planned and unplanned third-party gas plant maintenance, which reduced production by approximately 200 boe/d.  The first two wells drilled in the quarter were brought on production in late August and achieved an average peak IP30 rate of approximately 600 boe/d per well (86% oil and NGLs).  The other two wells were brought on production at the end of September and are currently producing at an average rate of approximately 500 boe/d per well (92% oil and NGLs).  We continue to progress along the learning curve in reducing costs since our Hilight acquisition one year ago, with a 20% DCET cost reduction in our H2 2019 program to-date compared to our H1 2019 program.  As a result of these cost savings, we have added two (1.5 net) wells to our 2019 program and plan to drill these wells in Q4 2019.

Australia

In Australia, production averaged 5,564 bbl/d in Q3 2019, a decrease of 17% from the previous quarter, primarily due to well management and unplanned vessel maintenance on the Wandoo platform.  We plan to conduct facility upgrades in Q4 2019 to increase fluid handling capacity, which will necessitate a shutdown of the Wandoo platform for an estimated eight days in the fourth quarter of 2019.

2020 Budget

Our Board of Directors has approved an exploration and development capital expenditure budget of $450 million, with associated production guidance of 100,000 to 103,000 boe/d.  As previously communicated, we are placing less emphasis on production growth as we navigate the current commodity price and capital markets environment.

We plan to drill 13 (8.7 net) wells in Europe.  In addition, we plan to continue significant workover programs in France, Netherlands and Germany, and facility optimization in Ireland.  The capital budget includes approximately $20 million of strategic, non-production-adding capital invested to facilitate our long-term future growth plans in Europe.

In North America, our activity will focus on our three core areas of southeast Saskatchewan (light oil), west-central Alberta (condensate-rich natural gas), and the Powder River Basin in Wyoming (light oil).  We have made significant progress on improving the capital and operating efficiencies on the North American assets we acquired in 2018, and we plan to continue that trend in 2020.

Assuming WTI oil prices remain at approximately US$55/bbl in 2020, and holding all other commodities at the October 11, 2019 commodity strip, we would more than cover our dividend and capital investment.  Excess cash generated beyond our capital program and dividend commitment will be allocated to a combination of debt reduction and share buybacks.  Our top financial priorities in 2020 will be balance sheet and dividend protection, and we maintain the capital investment flexibility to reduce capital outlays if required by lower commodity prices.

Europe

In France, our 2020 E&D capital budget of $57 million represents a 23% reduction from our 2019 spending.  While we do not intend to invest in any new wells in 2020, we plan to continue with our workover and asset optimization programs in both the Paris and Aquitaine Basins.  These workover programs are expected to maintain production at roughly the same level in 2020 as we have averaged in 2019.

Our 2020 E&D budget in the Netherlands of $18 million represents a 22% decrease from 2019.  While significant progress has been made on our permitting efforts, we will plan for modest growth in the Netherlands in 2020 as we reschedule our slate of capital projects in the context of a lower corporate growth rate target.  We plan to drill or participate in three (0.6 net) wells.  Assuming success on the Weststellingwerf well (0.5 net) currently being drilled, we plan to bring this well on production during the first half of 2020.  We will continue to advance our well permitting throughout the year in order to compile a backlog of projects for implementation beginning in 2021.

In Ireland, we plan to invest approximately $3 million of E&D capital in 2020 as we continue to focus on facility maintenance and compression optimization.

In Germany, our 2020 E&D capital budget of $18 million represents a decrease of 18% year-over-year.  In addition to our planned workover and facility program, we plan to drill sidetracks in three (3.0 net) of our operated oil wells and begin drilling activities on one (0.6 net) exploratory gas prospect.

In Central and Eastern Europe, our 2020 E&D budget will be approximately the same as in 2019, building on the success we had in 2019 and laying the groundwork for future growth.  We plan to invest $20 million in E&D capital expenditures in 2020.  While the majority of this capital program will be focused on following-up our successful 2019 drilling program, a portion of the budget will be directed to strategic infrastructure investments in Croatia and Slovakia, notably the commencement of construction of natural gas compression facilities in each country.  In 2020, we plan to drill six (4.5 net) wells in CEE comprised of two (2.0 net) wells in Croatia, one (1.0 net) well in Hungary and three (1.5 net) wells in Slovakia.

North America

In Canada, we plan to invest $250 million of E&D capital in 2020, a decrease of 14% from our 2019 capital program.  We plan to drill 107 (95.5 net) wells in Canada in 2020, comprised of 87 (76.3 net) light oil wells in southeast Saskatchewan and 20 (19.2 net) wells in Alberta.  In addition to the drilling program, we will also continue to focus on our waterflood program in southeast Saskatchewan, as well as production and facility optimization opportunities, as we have in previous years.

In the United States, our 2020 E&D capital budget of $59 million represents a 4% increase from our 2019 capital program.  We plan to drill 10 (9.6 net) wells on our Hilight asset in Wyoming.  This expanded drilling program will allow us to capitalize on the efficiencies we have achieved since the Hilight acquisition and to continue to increase production in the Powder River Basin.

Australia

In Australia, our 2020 E&D budget of $25 million will focus primarily on workovers and facility modifications to increase artificial lift capacity and facility throughput.

Dividend Reinvestment Plan

We have elected to phase out the Dividend Reinvestment Plan ("DRIP"), prorating the available DRIP shares by 25% each quarter starting in Q1 2020.  It is our intention to increase this proration each quarter throughout next year, such that the DRIP will be eliminated by the fourth 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 October 29, 2019, we currently have 51% of our expected net-of-royalty production hedged for Q4 2019.  More than half of our Q4 2019 corporate hedge position consists of two-way collars and three-way structures, which allow participation in price increases up to contract ceilings.  For 2020, approximately one-third of our production is hedged, with 54% of our hedge position in participating structures.

With respect to individual products within our product mix, we have currently hedged 74% of anticipated European natural gas volumes for Q4 2019.  We have also hedged 75% 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, 47% of our expected Q4 oil production is hedged.  For Q4 2019, 51% 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 16% of our North American gas production is located in Saskatchewan and Wyoming.