Vermilion Energy - Q2 2024

Transcript

Operator (participant)

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 Q2 Conference Call. Note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, please press star two. Thank you. Mr. Dion Hatcher, you may now begin your conference.

Dion Hatcher (President and CEO)

Thank you, Sylvie. Well, 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, Brandon McQuaid, Vice President, North America, and Kyle Preston, Vice President of Investor Relations. We'll be referencing a PowerPoint presentation to discuss our Q2 2024 results. Presentation can be found on our website under Invest With Us in Events and Presentations. Please refer to our advisory on forward-looking statements at the end of this presentation that describes the forward-looking information, non-GAAP measures, and oil and gas terms used today, and it relies on risk factors and assumptions relevant to this discussion.

Production during the second quarter averaged 84,974 BOEs per day, which was at the top end of our Q2 guidance range of 83,000-85,000 BOEs per day, mainly due to the early startup of our BC Montney battery. On a year-over-year basis, production increased 2% or 6% on a per-share basis. We generated CAD 237 million of funds flow and CAD 126 million of free cash flow, which was lower than Q1, mainly due to lower realized commodity hedge gains. During the second quarter, we reduced net debt by a further CAD 38 million to CAD 907 million and significantly increased our pace of share buybacks as we transitioned to a return of capital payout target of 50% of an annual excess free cash flow.

We repurchased 2.8 million shares during Q2 for total proceeds of CAD 47 million, and also paid out approximately CAD 19 million in dividends for a total return of CAD 66 million or 62% of excess free cash flow for the quarter. Year to date, we have returned CAD 121 million or 36% of excess free cash flow. During the second quarter, we also achieved key operational milestones with the startup of the Mica Montney battery in British Columbia and the SA-10 gas plant in Croatia. This is in addition to the five successful exploration wells drilled in Europe during the first half of the year. I'll expand on each of these in the upcoming slides. Production from our international operations averaged 29,987 BOEs per day in Q2, reflecting scheduled maintenance on several assets during the quarter.

In Croatia, we commissioned our gas plant on the SA-10 block, slightly ahead of schedule. We currently have both wells on production, and they are expected to ramp up through the third quarter. The SA-10 asset will support the European gas weighting in our portfolio, which represents approximately 40% of our corporate natural gas production, or over 100 million cubic feet per day. This new gas production also benefits from stronger natural gas prices in Croatia, where gas sells at a premium to other European natural gas benchmarks. Over the past two years, we have grown our European natural gas production by over 15%, and we continue to organically grow our European natural gas franchise. The TTF benchmark gas price averaged $13.62 per MMBtu in Q2.

That represents a 16% increase over Q1, and based on forward strip, is expected to further strengthen in the second half of this year and next year. TTF forward price is currently trading at approximately $17 for 2025, and we have approximately 44% of our European natural gas hedged at an average floor price of $17 for 2025. We're very excited with the long-term development potential of our Germany and Croatian assets, and I will speak more about how we expect these two countries to provide meaningful organic growth in the following slides. In Germany, operations are focused on the successful discovery of our first deep gas exploration well. Testing was rescheduled to Q3, and we will continue to prepare for tying operations for an anticipated onstream date of early 2025.

We also plan to commence drilling on the second deep gas exploration well in the upcoming weeks. The second well is a higher risk prospect, targeting a very large structure, over 300 BCF gross of gas in place based on our internal estimates. Success on this prospect could allow for follow-up drilling, given the size of the target structure. We have a 60% working interest in this well, which reduces our risk exposure by limiting our dry hole cost to less than CAD 10 million on an after-tax basis. In Croatia, as noted earlier, we completed construction of the gas plant on the SA-10 block in Q2, and then we commissioned the plant in June. Both of the previous drilled gas wells are currently ramping up production, which will increase our exposure to high netback European natural gas.

On the SA-7 block, we drilled one exploration well and completed two wells from the prior quarter. The first well tested over 300 barrels of light oil, while the second well tested at 4.5 million cubic feet per day of natural gas. Subsequent to the quarter, we also completed drilling on the final well of this 4-well program and discovered hydrocarbons across multiple zones. Three of these four wells are natural gas wells, aligning with our intention to organically grow our European natural gas franchise. Testing operations in the remaining two wells are planned for the second half of 2024, while we continue to move forward with the permitting process and evaluating the long-term development potential of the SA-7 block.

These four new discoveries are very encouraging, as they represent 100% success rate on our inaugural SA-7 exploration campaign and serves to validate our geological models while setting the foundation for future growth in Croatia. Production from our North American operations averaged 54,987 BOEs a day in Q4, an increase of 4% from the previous quarter, due to new production from our recent Mica Montney wells. At Mica, we drilled 1 and brought on production 6 BC Montney wells in advance of the startup of our BC battery in late Q2. Saskatchewan, we drilled 2 and completed 1 oil well, while in the U.S., we participated in the drilling and completion of 5 gross, 0.2 net non-operated oil wells. Construction of the BC Montney battery was completed during the quarter.

The completion of this battery was an important milestone in our Montney development, as it provides the runway for future production growth on our Montney asset. Startup of the Mica battery will allow us to nearly double our Montney production to approximately 14,000 BOEs a day in 2025, and will provide the platform for future expansion to 28,000 BOEs a day through further developing the infrastructure in the coming years. Our team did a great job of getting these infrastructure projects completed and started on time and on budget. Commissioning of the facility went very smooth, and the plant continues to perform very well. During the second quarter, we brought up production six new wells on the 16-28 pad, prior to the start of the new battery.

As shown on the blue line on this chart, these wells were constrained prior to the start of the battery, and production is in line with our expectations for these wells. Subsequent to the quarter, we completed the 5 wells on the 9 and 21 BC pad, and expect to bring these wells on in late Q3 2024. Construction of our water hub infrastructure adjacent to the 8-33 battery was also completed subsequent to the quarter. The startup of this water hub is expected to allow for up to 55% recycling of our water needs and reduce capital costs by approximately CAD 650,000 per well.

In our most recent wells on the 9-21 pad, they were completed in significantly less time than previous wells, used approximately 30% less water, resulting in approximately 15% completion cost savings or CAD 1 million per well. We continue to drive efficiencies in our Montney operations as our activity level increases. I will now pass it over to Lars to discuss shareholder returns and outlook.

Lars Glemser (VP and CFO)

Thank you, Dion. As Dion mentioned during the beginning of the presentation, we significantly increased our pace of share buybacks during the second quarter. As you recall, we achieved our CAD 1 billion net debt target in Q1, and in early March, we announced that we were increasing our ROC allocation to 50% of EFCF on an annual basis. The chart on the left of this slide illustrates the steady increase in shareholder returns since 2021. In addition to dividends and share buybacks, debt reduction is an informal return of capital as it transfers value from debt holders to equity holders. Including these three components, we have returned over CAD 10 per share of capital to our equity holders over the past three and a half years. The chart on the right shows the cumulative effect of share buybacks over the past three and a half years.

Dion Hatcher (President and CEO)

The achievement of our debt target in Q1 of this year marked a pivotal change in our return of capital framework. Q2, 2024 was the first full quarter executing under our revised ROC parameters. To date, this year, we have already repurchased and canceled 6.1 million shares, which is more than we repurchased in the full year of 2023. We have further reduced our share count to 157.3 million shares at July 31, 2024. We continue to believe our share price is significantly undervalued, and as such, we plan to allocate the majority of our shareholder returns to share buybacks.

Given the strong operational performance year to date and anticipation of new production growth during the second half of the year in Mica and Croatia, offsetting some planned downtime, we are increasing our annual production guidance to 83,000-86,000 BOE per day, while maintaining our capital budget guidance of CAD 600 million-CAD 625 million. All other financial guidance remains unchanged. Our Q3 2024 capital program includes completing and bringing on production the 5 wells from the 9-21 pad in the BC Montney, and commencing our second half 2024 drilling program in Alberta and Saskatchewan. In addition, we will commence drilling operations on the second exploration well in Germany, while we conduct further evaluation and testing of the successful exploration wells in Germany and Croatia.

We expect Q3 2024 production to be in the range of 83,000-85,000 BOE a day, taking into account planned turnaround activity, including a third-party turnaround deferred from Q2 2024 in Alberta. Higher downtime during periods of high temperatures and approximately 800 BOE a day of dry gas production in Alberta that we have curtailed due to low gas prices. With that, I will pass it back to Dion.

Thank you, Lars. Well, in closing, it was another strong quarter for Vermilion as we delivered on our production guidance and achieved several milestones on our strategic growth assets. In addition, we benefited from a diversified portfolio that provides exposure to premium price European gas, which resulted in a corporate realized gas price of CAD 5.69 this quarter, or a 4.8x multiple to the AECO benchmark. We're excited about the upcoming test results from the recent discoveries in Germany and Croatia, as well as the ramp-up of our Montney battery and Croatia gas plant, and look forward to providing an update at a later date. As Lars mentioned, we have made significant progress on our share buyback program and plan to continue this momentum through the balance of this year.

We truly believe the compounding effect of combining modest production growth with a growing base dividend and share buybacks will drive shareholder value in the months and years to come. Well, that concludes my prepared remarks. With that, I'd like to open it up for questions.

Operator (participant)

Thank you, sir. Ladies and gentlemen, as mentioned earlier, if you would like to ask a question, please press star, followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star, followed by two. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. Once again, ladies and gentlemen, if you do have any questions, please press star, followed by one. And at this time, sir, it appears that we have no questions registered.

Dion Hatcher (President and CEO)

Thank you, Sylvie. Thank you again for participating in our Q2 2024 results conference call. Thank you.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.