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Vermilion Energy Second Quarter 2021 Results

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   |    Wednesday,September 01,2021

 Vermilion Energy Inc. reported its Q2 2021 results.

Highlights:

• Fund flows from operations ("FFO")⁽¹⁾ was $173 million in Q2 2021, an increase of 7% from the prior quarter. The increase was primarily due to higher commodity prices.
• We generated $94 million of free cash flow ("FCF")⁽¹⁾ in Q2 2021 after investing $79 million in exploration and development ("E&D") capital expenditures, resulting in a payout ratio of 48% including reclamation and abandonment expenditures. During the first half of 2021, we have generated $173 million of FCF compared to negative $24 million in the first half of 2020. With the continued strength in commodity prices, as reflected under current strip pricing, we expect to generate significantly higher FFO during the second half of 2021 and now forecast annual FCF in excess of $400 million, or over $2.50 per share, for 2021.
• Net debt at the end of Q2 2021 was $2.0 billion, representing a 5% decrease compared to year-end 2020. We have reduced the amount outstanding under our revolving credit facility by over $327 million or 19% since Q2 2020. With the excess FCF we expect to generate over the balance of the year, we will continue to reduce net debt, with our ultimate goal of having leverage reduced to 1.5 times debt to cash flow or less.
• Production in Q2 2021 averaged 86,335 boe/d⁽²⁾, relatively consistent with first quarter production of 86,276 boe/d as new production adds in Canada from our Q1 2021 drilling program offset declines in other operating regions.
• Production from our North American assets averaged 58,354 in Q2 2021, an increase of 3% from the prior quarter primarily as a result of new production added from our Q1 2021 Canadian drilling program.
• Production from our International assets averaged 27,981 in Q2 2021, a decrease of 5% from the prior quarter primarily due to natural declines and downtime in Australia and Ireland.
• In Canada, during the second quarter we drilled one (0.2 net) well and brought on two (1.7 net) condensate-rich Mannville natural gas wells and initiated our drilling campaign in south-east Saskatchewan, where we drilled eight (6.9 net) wells and completed six (5.4 net) wells. Five (4.4 net) of these wells were brought on production during the quarter with the remaining wells to be brought on production in Q3 2021.
• In the United States we commenced our four (4.0 net) well drilling program centered on Turner horizontal wells in the Powder River basin. Two of the wells were completed and brought on production in the quarter, and are performing as expected. The remaining two wells are expected to be completed and brought on production in Q3 2021. Drilling costs on this program were reduced by 20% compared to budget.
• In the Netherlands, we successfully drilled one (1.0 net) natural gas well which encountered a 16 meter gas column in the Rotliegend Slochteren formation and multiple thin sands with reservoir potential in the Rotliegend Ten Boer formation. The well was completed at the end of June and we expect to bring it on production in Q3 2021. Subsequent to Q2 2021, we began inline testing of the Rotliegend formation on the Blesdijke natural gas well (0.5 net) drilled in Q1 2021 and achieved initial rates up to 7.0 mmcf/d. We plan on conducting further testing in Q3 2021 and expect to bring the well onstream later in the year.
• Furthering our focus on the energy transition, we established a third geothermal application from our produced water in France. Our Vic Bilh facility will provide geothermal heat to a nearby Fleur de Vie facility that produces high quality spirulina, a microalgae with a wide variety of uses. The facility is expected to be completed in autumn 2021.
• We published our 2021 Sustainability Report, Value Matters, which includes 2020 ESG-related data updates.

Message to Shareholders

Commodity prices continued to strengthen through the second quarter as economies around the world began to reopen following the year-long COVID-related lockdowns. Benchmark oil prices increased approximately 14% in Q2 2021 compared to the previous quarter and European natural gas prices increased approximately 30% from the previous quarter, driving an 11% increase in our quarterly revenue on production of 86,335 boe/d which was up slightly from the previous quarter.

We generated $173 million of FFO in Q2 2021, representing an increase of 7% over the previous quarter. E&D capital expenditures were $79 million in the quarter, resulting in $94 million of FCF⁽¹⁾ and a payout ratio of 48% including reclamation and abandonment expenditures. During the first half of 2021, we generated $172 million of FCF compared to negative $24 million in the first half of 2020.

With the continued strength in commodity prices, as reflected under current strip pricing, we expect to generate significantly higher FFO during the second half of 2021 and now forecast annual FCF in excess of $400 million, or over $2.50 per share, for 2021. This significant improvement in FCF is not only due to higher commodity prices but is also the result of a more level-loaded capital program compared to last year. We continue to believe a level-loaded capital program delivers more efficient operations and a more manageable production base. Some of the benefits from a level-loaded capital program were evidenced during the second quarter as we realized a 20% reduction in our US drilling costs which is the result of a number of initiatives including executing the program in the spring (versus winter) and using an experienced drilling crew that worked on our Canadian winter drilling campaign in Q1 2021.

The majority of FCF generated in the quarter was used to reduce our revolving credit facility. Over the past year we have reduced the amount outstanding under our revolving credit facility by $326 million or 19%. Net debt at the end of Q2 2021 was relatively unchanged from the previous quarter at $2 billion mainly due to an increase in derivative liabilities associated with higher commodity prices; however, our net debt to four-quarter-trailing FFO ratio improved to 3.4x from 4.0x in the previous quarter. While this is still well above our comfort level, it is a step in the right direction and moves us closer to our ultimate leverage target of 1.5x or lower.

We have made solid progress during the first half of 2021, with our production and FCF results exceeding budget expectations. As we move through the second half of 2021, we will remain disciplined in our strategy with a continued focus on improving operational efficiencies and reducing debt. Production levels averaged in excess 86,300 boe/d in 1H 2021 but are expected to moderate in 2H 2021 due to planned maintenance across several of our operating jurisdictions, including extended turnarounds in Ireland and Australia. Our 2021 production guidance of 83,000 to 85,000 boe/d remains intact and our E&D capital budget remains unchanged at $300 million; however, we may still consider adding up to $50 million of incremental capital in Q4 2021 if commodity prices remain supportive. We have several projects lined up and ready to execute should we decide to invest incremental capital in Q4 2021; however, any new production associated with these projects would not contribute to 2021 volumes.

As we look to 2022 and start working through our budgeting process over the coming months, it is our intent to remain financially disciplined and manage towards a similar production range as 2021 with a continued focus on striking the right balance between allocating FCF to the balance sheet and asset base. We aim to achieve this through a combination of organic capital development and strategic acquisitions if and when the right opportunities become available. As we have stated previously, our long-term goal is to return to a dividend paying capital markets model and we believe this balanced approach is the most appropriate way to achieve this. We will continue to focus on debt reduction in the near-term, and once we are comfortable with our leverage ratio, we will consider returning capital to our shareholders through the re-instatement of a dividend as we believe the FCF capability of our asset base is supportive of the dividend capital markets model.

Q2 2021 Operations Review

North America

Production from our North American assets averaged 58,354 in Q2 2021, an increase of 3% from the prior quarter primarily as a result of new production added from Q1 2021 Canadian drilling program. During the second quarter, we drilled one (0.2 net) well and brought two (1.7 net) condensate-rich Mannville natural gas wells on production in west-central Alberta and initiated our drilling campaign in south-east Saskatchewan, where we drilled eight (6.9 net) wells and completed six (5.4 net) wells. Five (4.4 net) of these wells were brought on production during the quarter with the remaining wells to be brought on production in Q3 2021.

In the United States, we moved one of our experienced drilling crews from our Canadian operations to Wyoming and commenced our four (4.0 net) well drilling program in April, centered on Turner horizontal wells in the Powder River basin. Two of the wells were completed and brought on production in the quarter, and are performing as expected. The remaining two wells are expected to be completed and brought on production in Q3 2021. Drilling costs on this program were reduced by 20% compared to budget.

International

Production from our International assets averaged 27,981 in Q2 2021, a decrease of 5% from the prior quarter primarily due to natural declines and downtime in Ireland and Australia. In Europe, we drilled one (1.0 net) natural gas well in the Netherlands and continued our workover programs in France, Netherlands and Germany.

In the Netherlands, we successfully drilled the Nijega well (1.0 net), which encountered a 16 meter gas column in the Rotliegend Slochteren formation and multiple thin sands with reservoir potential in the Rotliegend Ten Boer formation. The well was completed at the end of June 2021 and we expect to bring it on production in Q3 2021. Subsequent to Q2 2021, we began inline testing of the Rotliegend formation on the Blesdijke natural gas well (0.5 net) drilled in Q1 2021 and achieved initial rates up to 7.0 mmcf/d. We plan on conducting further testing in Q3 2021 and expect to bring the well onstream later in the year.

In Germany, we had strong operational performance and runtime across our operated and non-operated assets and we continued to prepare for the start-up of the Burgmoor Z5 well (46% working interest) in Q3 2021.

In France, our trucking operations in the Paris Basin continue to run smoothly following the transition of our Paris Basin oil production from pipeline delivery to trucking after the Total Grandpuits refinery ceased crude oil refining in Q1 2021. The majority of the Paris Basin production is being delivered to the Total Le Havre refinery in northwest France and to our Parentis facility which delivers crude to various refineries in Europe through the Ambes terminal in southwest France. Additionally, we started trucking some volumes to a refinery in Germany and will continue to evaluate other shipping options to further optimize operations and reduce costs.

In Central and Eastern Europe ("CEE"), we successfully completed our 3-D seismic program in the SA-10 block in Croatia, with an additional seismic program planned for the SA-07 block later this year, which will further enhance our knowledge of the region prior to our next drilling program planned for 2022. Work is continuing to progress on the Croatian gas plant on the SA-10 block in preparation for the tie-in of the two successful gas wells drilled previously.

In Ireland, one of the 6 producing sub-sea wells was offline for approximately 40 days during Q2 2021 due to a stuck choke valve. The valve has been replaced and the well was brought back on production at the end of June 2021. We continued to make preparations for the 21-day turnaround at Corrib scheduled in Q3 2021.

In Australia, we had a 4-day shutdown in Q2 2021 due to a vessel cleanout, and we continue to plan for a 20-day scheduled turnaround in the second half of 2021.

Commodity Hedging

Vermilion hedges to manage commodity price exposures and increase the stability of our cash flows. In aggregate, as of August 13, 2021, we have 29% of our expected net-of-royalty production hedged for the second half of 2021. With respect to individual commodity products, we have hedged 69% of our European natural gas production, 5% of our oil production, and 49% of our North American natural gas volumes for the second half of 2021, respectively.