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Vermilion Energy (NYSE:) Inc. reported strong third-quarter results for 2023, with production meeting the high end of their guidance range and significant growth in fund flow and free cash flow. The company’s production averaged 82,727 barrels of oil equivalent per day (boe/d), and the fund flow increased by 9% over the previous quarter to reach $270 million. The free cash flow saw a notable rise of 80% over the last quarter, reaching $144 million.
Key highlights from the earnings call:
- Vermilion returned $20 million to shareholders through dividends and share repurchases in Q3, bringing the year-to-date total to $115 million.
- The company is targeting a 30% return on capital in 2023 and expects to achieve their net debt target of $1 billion in Q1 2024.
- Production from North American operations increased by 5% in Q3 due to recovery following fire-related downtime and new production from drilled wells.
- Production from international operations decreased by 11% in Q3 due to planned turnaround in Ireland, but production in Australia resumed following the restart of the Wandoo facility.
- Vermilion is progressing projects in Germany and Croatia, and expects increased capital expenditures in 2024 for infrastructure spending.
- The company has hedged 30% of their corporate production for 2024 to support their debt targets and return of capital plans.
- Vermilion sells directly into the European gas markets and benefits from high prices, driven by increased demand during the winter heating season and reduced supply from Russia.
During the call, Dion Hatcher provided insight into European gas consumption, highlighting increased dependence on LNG imports due to the loss of about 12 Bcf per day of Russia supply last year. He also discussed the company’s operational momentum, including the resumption of operations in Australia and progress in battery and gas pipe construction.
Darcy Kerwin discussed the progress of building gas plants in Croatia, expecting these plants to generate $10 million in revenue per month. Vermilion Energy plans to continue drilling in the area to maintain plant capacity. Lars Glemser, the company’s representative, reaffirmed the net debt target of $1 billion by Q1 2024 and a plan to increase the allocation of free cash flow to shareholders.
Vermilion Energy’s 2023 production guidance remains unchanged, and they plan to release their 2024 budget and guidance in the upcoming weeks. The company is optimistic about their operational momentum and the opportunities ahead, with the anticipation of increased capital expenditures in 2024 for infrastructure spending and consistent corporate production levels.
InvestingPro Insights
InvestingPro’s real-time data and tips provide additional insights into Vermilion Energy’s performance and future prospects.
According to InvestingPro Data, Vermilion Energy has a market capitalization of $2360M USD, a P/E ratio of 2.76, and a PEG ratio of 0.07 as of Q2 2023. This indicates that the company is being traded at a price that is relatively low compared to its earnings, suggesting it might be undervalued. The company’s revenue for the last twelve months as of Q2 2023 was $2121.76M USD, showcasing a robust financial performance.
InvestingPro Tips further highlight that Vermilion Energy yields a high return on invested capital and has consistently increasing earnings per share. This suggests that the company is efficiently using its capital to generate profits and is consistently growing its profitability. Moreover, the strong earnings should allow management to continue dividend payments, offering a potential income stream for investors.
With over 12 additional InvestingPro Tips and real-time data metrics available, investors can gain a comprehensive understanding of Vermilion Energy’s financial health and future prospects. These insights are invaluable for making informed investment decisions, further highlighting the value of the InvestingPro platform.
Full transcript – VET Q3 2023:
Operator: Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vermilion Energy Q3 Conference Call. Please note that all lines have been placed on mute to prevent any background noise. Mr. Dion Hatcher, you may begin your conference.
Dion Hatcher: Well, thank you, Sylvie. Good morning, ladies and gentlemen. Thank you for joining us. 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; Bryce Kremnica, Vice President, North America; Jenson Tan, Vice President, Business Development; and Kyle Preston, Vice President of Investor Relations. We’ll be referencing a PowerPoint presentation to discuss our Q3 2023 results. The presentation can be found on our website under Invest with Us and Events & Presentations. Please refer to our advisory on forward-looking statements at the end of the presentation. 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. Production during the third quarter averaged 82,727 boes per day, which was at the top end of our Q3 guidance range of 80,000 to 83,000. This is mainly due to the successful restart of the Wondu [ph] facility in Australia in early September and an efficient turnaround at the Corpus facility in Ireland, which was completed five days ahead of schedule. In addition, we continued to see strong operational performance across the majority of our assets. We generated $270 million of fund flow, which represents a 9% increase over the prior quarter; we invested $126 million of E&D capital, resulting in $144 million of free cash flow, which represents an 80% increase over the prior quarter. This level of free cash flow was more than sufficient to fund current asset retirement obligations, lease payments and the base dividend with the excess free cash flow allocated to debt reduction and share repurchases. During the quarter, we returned $20 million to shareholders through the base dividend and share repurchases, and we have returned $115 million to shareholders year-to-date, representing about 35% of our free cash flow. Given the improving free cash flow profile, we are now targeting 30% return on capital in 2023 compared to the prior range of 25% to 30% until we achieve our net debt target of $1 billion. We continue to make progress on debt reduction with net debt decreasing approximately $80 million from the prior quarter to $1.2 billion at the end of the third quarter, representing a trailing net debt to fund flow ratio of 1.2 times. Based on the forward strip pricing, we expect to achieve our $1 billion debt target in Q1 of 2024, at which time we plan to increase the amount of capital returned to our shareholders via the base dividend and share repurchases. Moving on to the operational updates for the quarter. Production from our North American operations averaged 56,758 boes per day in Q3, an increase of 5% or 2,700 boes per day. For the prior quarter, mainly due to strong recovery following fire-related downtime at our Deep Basin assets and new production from our recently drilled wells in the US. In the Deep Basin, we drilled two and completed one Manville liquid trace gas well. Mika, we brought up production for Alberta Montney liquids-rich gas wells, which are producing into constrained Montney infrastructure capacity of approximately 8,000 boes per day. In Saskatchewan, we drilled 10, completed nine and brought on production eight oil wells. In the US, we brought up production five oil wells in Wyoming where production increased 21% from the prior quarter. We continue to progress our BC Montney development. During the third quarter, we completed the site preparation and awarded all major contracts for our 16,000 BOPD battery in BC. We’re excited to break ground on the battery in August, and we will continue to progress this project over the next several months. Shown here is a cleared battery site awaiting delivery of the facility modules that are currently in fabrication. The key piece of infrastructure will underpin the future development and growth of our BC Mica, Montney asset. The majority of construction is scheduled to occur in the first half of 2024, but the battery expected to be operational by mid 2024. The additional capacity provided by this battery, we were able to move forward with our growth phase of our Mica asset. Our upcoming winter program includes 11 wells and our BC lands offsetting our recent 16-28 BC pad, which has produced at an average per well rate of 1,150 boes per day over the first six months with an average 36% liquid yields, which is mainly oil. Given these strong rates, we are piloting a downspacing program to evaluate the potential for drilling more wells in BC. Production from our international operations averaged 25,969 boes per day, a decrease of 11% from the prior quarter, mainly due to planned turnaround in the Corrib facility in Ireland. And natural declines, partially offset by the resumption of production in Australia following the restart of the Wandoo facility. In Australia, we successfully completed the remaining inspection and repair work in our Wandoo facility and restarted production in early September. The wells continue to produce at strong rates with Australia expected to contribute approximately 4,000 barrels per day in Q4 and through 2024. This is resulting in a $150 million positive swing in free cash flow relative to $23 million. In Ireland, we successfully completed the major turnaround at Corrib five days ahead of schedule in August. Corrib is forecast to produce approximately 10,000 boes per day net to Vermilion, of premium priced European gas in Q4. We’re excited about the future European gas growth potential in both Germany and Croatia, will speak more about those projects on the following slides. On the left of this slide, we have a picture of the drilling rig on our first of two exploration targets in Germany. While the picture on the right is the map of our German and Netherlands land illustrate the proximity we see our development plans in Germany as a natural extension of the successful drilling campaigns we’ve executed over the past two decades in neighboring Netherlands. We have approximately 700,000 net acres of undeveloped land in Germany, located approximately 300 kilometers east of our producing builds in Northern Netherlands or similar distances to Calgary and Edmonton. Our gas exploration targets are on trend to the Netherlands plays where we have drilled 29 gas wells over the past two decades with an average success rate of over 70%. And the Germany exploration targets are deeper and higher risk but have a much larger resource potential than the Netherlands. In addition, we have access to existing infrastructure network regulatory support for permits and a track record of execution in Germany. With the success of our Germany exploration drilling program, we believe our land base can support a multiyear drilling campaign, providing Vermillion of years of organic production growth of high-value European gas. In Croatia, we started to site preparation for the gas plant, which is scheduled for start-up in mid-2024 and we’ll facilitate production from the SA-10 block, where we had previous gas discoveries. This gas is currently behind pipe waiting start-up of the gas plant, and we see additional prospects in our acreage for future development. At current strip pricing in a midyear startup, we would expect approximately $40 million of fund flows in 2024. I will now pass it over to Lars to discuss our guidance and financial outlook.
Lars Glemser: Thank you, Dion. Our 2023 production guidance remains unchanged with Australia back online and the planned turnaround at the core facility in Ireland is complete. We remain positioned to deliver annual production of 82,000 to 86,000 BOE per day and Q4 production of 86,000 to 89,000 BOE per day. Our operations teams have done a great job, offsetting the forest fires in Alberta and extended downtime in Australia, resulting in strong performance across our asset base. We increased our 2023 capital expenditure guidance by $20 million to $590 million to accommodate accelerated BC Montney drilling into Q4. This ensures we secure a high-performing break and drill some of the wells before winter, which helps reduce costs. In addition, it also gives us production behind pipe to be ready for a potential early start-up of the new BC battery, should construction go better than planned. We plan to release our 2024 budget and guidance in the upcoming weeks, which will also include an update to our return of capital framework. 2024 capital expenditures are expected to increase by about 5% over 2023 levels, due to infrastructure spending required to advance our BC Mica Montney development, and we anticipate corporate production will be consistent with 2023 annual levels. Given the expected increase in FFO and free cash flow generated by the business, driven by the full year impact of the Corrib acquisition and Australia, we are able to advance long-term organic growth projects that will support profitability and shareholder returns over the long-term. That increasing 2024 cash flow just referenced is the key takeaway of this slide, as well as a significant improvement in our financial position over the past several years. By the end of 2023, we will have nearly cut our debt in half, as shown in the red bars while also funding over $1 billion of strategic acquisitions. We have also significantly increased our FFO from pre-COVID levels, as shown in the blue bars. This progress is reinforced with an estimated 2024 debt to FFO leverage of 0.6 times. Although, we have not finalized our 2024 budget, we are currently forecasting FFO to increase to $1.4 billion, assuming a flat production profile at current strip pricing. With this, we expect to achieve our net debt target of $1 billion during the first quarter of 2024, which will be the trigger for increasing our return of capital to shareholders from the current target of 30%. On this slide, we show free cash flow based on recent pricing and the breakdown of how free cash flow was allocated. The majority of FCF was allocated to debt reduction and acquisitions for the period of 2021 to 2023. We expect to generate significantly higher year-over-year FCF in 2024, due to the full year impact of the Corrib acquisition, having Australia back online for a full year and first gas from our SA-10 project in Croatia. These three items alone contributed an expected $270 million year-over-year increase to FCF, which is further underpinned with robust and well-hedged European gas prices. This will position us well to invest in our assets and increase our percentage and absolute level of free cash flow returned to shareholders in 2024. With that, I will pass it back to Dion.
Dion Hatcher: Thanks, Lars. I’d like to take this opportunity to provide some background on European gas, as we head into the winter heating season for European consumption typically increases 30 to 40 Bcf per day compared to the summer. Last year, Europe lost approximately 12 Bcf a day of Russia supply, which has resulted in even greater dependence on LNG imports. Last winter, Europe demand was down about 10 Bcf per day compared to the prior winters due to it being the second warmest winter on record and government policy focused on gas conservation. Even with this, gas averaged over CAD30 during the winter. A combination of a very warm winter and government policy to mandate full storage during the summer has resulted in European stories being effectively cold today. Reality is that Europe will continue to depend heavily on LNG imports to meet winter demand. It may be more challenging this year due to higher Chinese demand post-COVID Zero policy and potentially a return to a more normal winter. Any potential supply disruptions or increased demand from Asia will put upward pressure on euro gas prices. You can see the impact from this tight supply in the forward curve on this slide as European gas prices continue to hold at/or above CAD20 per MMBtu. We sell directly into the European gas markets, not by LNG. So we realize these high prices. For the upcoming periods in European gas, in Canadian dollar terms, we have 45% hedged for Q4 2023 at an average floor of $34. 38% hedged for 2024 at an average floor of $33, 20% hedged for 2025 hedged at an average floor of $22. These hedge prices are 13 times, 11 times and six times higher than equivalent periods of Canadian AECO gas prices. We will continue to be opportunistic during periods of volatility to increase our hedge position. Including all of our products, we have approximately 30% of our corporate production hedged for 2024, which provides greater certainty on achieving our debt targets and supports our return of capital to shareholders. In closing, it’s an exciting time for Vermilion and its shareholders. We’re gaining operational momentum with Australia now back online, the Mica BC battery and Croatia gas pipe construction underway, and the first well of our German gas exploration program being drilled. Second, we have direct exposure to premium priced European gas, which remains an extremely tight supply and we are progressing projects to increase our European gas production. We are pleased with our current hedge levels, and we’ll continue to be opportunistic during periods of volatility to add more hedges. Third, we are seeing the benefits of the strategic asset high grade and focus on debt reduction with a significant increase in 2024 free cash flow. With that, we are on track to achieve our debt target in Q1 2024 and intend to increase our return of capital to shareholders. That concludes my prepared remarks. And with that, I’d like to open it up for questions.
Operator: Thank you, sir. [Operator Instructions] The first question will be from Travis Wood from National Bank Financial. Please go ahead.
Travis Wood: Yeah, good morning. Thanks for taking my question. I wanted to get us – 2024 in terms of volumes and a bit of cadence. I know you’ve provided some indicative commentary in terms of the average rates. But with a strong Q4 this year and then some interesting projects and facilities and drill-to-fill program in Canada for the Montney, how should we be thinking about volumes through the beginning of next year and until later next year as you kind of start to fill those facilities. And then if you could maybe some kind of year-over-year comparison on CapEx would be helpful as well. Thank you.
Dion Hatcher: Thanks, Travis. I can take this one. It’s Dion. We’ll be providing more details when we release our budget in the upcoming weeks as noted on the call. But I think how you should be thinking about it is, as noted, flat volumes and capital 4% to 5% higher really driven by the increased investment in infrastructure in the Montney. From a cadence point of view, again, we’ll provide more details later, but the two significant drivers of that would be the Montney battery, 16,000 boe a battery would be midyear. We’ll have a pad — behind pipe ready for that start-up until then, we’re capacity constrained as well as the SA-10 plant that we talked about, it’s about 15 million a day of gas, but again midyear. So again, we’ll provide more details, but really, there will be a ramp-up in the second half of the year is how we’re thinking about it.
Travis Wood: Okay. That’s perfect. Thank you very much for that.
Dion Hatcher: Thanks, Travis.
Operator: Thank you. [Operator Instructions] Your next question will be from Dennis Fong at CIBC. Please go ahead.
Dennis Fong: Hi. Good morning, and thanks for taking my question. I guess my first one here is, obviously, with the upcoming potential completion of the infrastructure there in Croatia, can you outline a little bit more of the opportunity set that exists there and what that could mean kind of going forward, especially given its European gas revenue line? Thanks.
Dion Hatcher: Thanks, Dennis. I’ll pass that over to Darcy to provide some detail on ratio.
Darcy Kerwin: Yes. Thanks, Dennis, Darcy here. Yes. We’re currently in the process of building that Croatian gas plants. Dion mentioned earlier, that’s kind of — we’ve got a nominal sales capacity of about 15 million cubic feet a day. I think in Europe, you need to think of those numbers not necessarily in terms of just — but in terms of volume, but in terms of the much higher netback than we guessed in Europe versus here in North America. So if we think of Croatia at a CAD 20 million Mcf, those two wells going through that plant in SA, forecast to generate $10 million of revenue per month. And with netbacks that are kind of 7 times or 8 times what they are in Canada, going forward. In terms of future potential on that block, we do see some prospects there and the intent there would be to over time, continue to drill that block to keep that plant full over time. And then outside of the block of SAP, of course, we have S7, which is a pretty prospective block that we’re quite excited about with intent to drill four wells on that block in early 2024.
Dion Hatcher: Thanks, Darcy.
Dennis Fong: Great. I appreciate that color there. My second question, just, Lars, thank you for providing that update around the financials and the driving down of obviously net debt. Can you talk towards a little bit more around, a, where maybe even next net debt target looks like and how you think about capital structure as well as how the company and the Board will think about free cash flow allocation once you kind of get towards that level? Thanks.
Lars Glemser: Great. Thanks for the question, Dennis. Yeah. So as we referenced that mix, that target will be $1 billion line of sight in that in the first quarter of 2024 and looking forward to providing what that next step is going to look like with the budget release here in the coming weeks. I think the best way to think about it is, we do have a clear plan in place in terms of getting to that target. I think the big thing that we’re trying to emphasize as well is if you look at the free cash flow for 2024, not only is there going to be an increase in the percentage of free cash flow that is allocated to return of capital for shareholders but the absolute amount of free cash flow as well is increasing quite significantly in 2024 to 2023 kind of that 60% or $300 million year-over-year. In terms of debt targets beyond that, we’re quite comfortable with that $500 million to $1 billion range. The lower end of that target, we represent the amount of debt that we have termed out to 2030. And so we think that that’s a good way to think about longer-term debt levels for Vermilion.
Lars Glemser: Thanks, Dennis.
Dennis Fong: Appreciate that. I’ll turn it back.
Dion Hatcher: Thanks, Dennis.
Operator: Thank you. And at this time, gentlemen, it appears we have no other questions registered. Please proceed with any additional comments.
Dion Hatcher: Well, with that, I’d like to thank you again for participating in our Q3 conference call
Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for calling. And at this time, we ask that you please disconnect your lines.
InvestingPro Insights
InvestingPro’s real-time data and tips provide valuable insights into Vermilion Energy’s performance and future prospects. According to InvestingPro Data, Vermilion Energy has a market capitalization of $2360M USD, a P/E ratio of 2.76, and a PEG ratio of 0.07 as of Q2 2023. This suggests that the company is being traded at a price relatively low compared to its earnings, indicating potential undervaluation. Additionally, the company’s revenue for the last twelve months as of Q2 2023 was $2121.76M USD, illustrating a strong financial performance.
InvestingPro Tips highlight that Vermilion Energy yields a high return on invested capital and has consistently increasing earnings per share. This indicates that the company is efficiently utilizing its capital to generate profits and is consistently growing its profitability. Furthermore, the strong earnings should enable management to continue dividend payments, offering a potential income stream for investors.
InvestingPro offers more than 12 additional tips and real-time data metrics, providing investors with a comprehensive understanding of Vermilion Energy’s financial health and future prospects. These insights are invaluable for making informed investment decisions, further highlighting the value of the InvestingPro platform.
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