Vermilion Energy Q1 & AGM 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Vermilion Energy's Virtual 2023 Annual General Meeting. Following the formal portion of the meeting, a presentation will be given by Dion Hatcher, Vermillion's President and Chief Executive Officer. As a reminder, this event is being broadcast live on the Internet and is being recorded.

Operator

The archived event will be posted on Vermillion's website under the heading Invest With Us and subheading Events and Presentations. To participate in the discussion or ask I would now like to turn the conference call over to Robert Mykolesky, Vermillion's Chair of the Board. Please go ahead, Mr. Michelske.

Speaker 1

Thank you. Good afternoon, ladies and gentlemen. As permitted by Vermillion's bylaw number 1, our meeting will be held today as a virtual only shareholder meeting with participation electronically as explained in the proxy statement and information circular for this meeting dated March 15, 2023. By holding this virtual meeting, we're able to welcome a broader base of shareholders to participate regardless of geographic location. I would like to begin by welcoming you to Vermillion's virtual 2003 Annual General Meeting of Shareholders.

Speaker 1

We will complete the formal part of this meeting first and afterwards, Dion Hatcher, the President and Chief Executive Officer of the company will provide you with an overview of our business and an update on our strategy moving forward. First, I would like to review the rules for discussion and debate to facilitate an orderly virtual meeting. The formal meeting will deal with the items of business outlined in proxy circular. Once we have completed that work, we will move to the informal part of the meeting. During the formal meeting, each shareholder or proxy holder wishing to address a motion may do so when I have indicated the motion is open for discussion.

Speaker 1

To participate in the discussion, select the Messaging tab, type your comment and click the Send button. Each shareholder may take up to 5 minutes to contribute to the discussion, but I reserve the right to terminate discussion on a matter. All discussion must be courteous and respectful of other participants in the meeting. All questions for management will be dealt with in the informal part of the meeting after the formal meeting is completed. Thank you in advance for your cooperation.

Speaker 1

So I'd like the call to order. Ladies and gentlemen, the meeting will now come to order. As Chair of the Board of Directors of Vermillion Energy, Inc, it is my responsibility and privilege to chair this Annual General Meeting of the Shareholders of Vermilion. James Gangie of Lawson Mundell LLP will act as secretary of the meeting and Jackie Fisher of Odyssey Trust Company will act as a scrutineer. I would like to welcome to the meeting all others participating in the online meeting.

Speaker 1

At this point, I would like to introduce the other independent directors of Vermillion electronically attending the meeting today: James Kleckner, Jr, Karen Nicholl, Steven Lark, Timothy Marchand, William Roby, Manjeet Sharma, Myron Stadnik and Judy Steele. I would like now to introduce the principal members of the executive leadership team participating electronically in the meeting. Dion Hatcher, President and Chief Executive Officers Lars Demzer, Vice President and Chief Financial Officer Bryce Kermeka, Vice President, North America Darcy Kirwan, Vice President, International and Health, Safety and Environment and Jensen Tan, Vice President, Business Development. The notice of this meeting along with the information circular and form of proxy were mailed on April 3, 2023 to all shareholders as of the record date for this meeting, being the close of business on March 15, 2023. As part of our ongoing stewardship of the environment and as a cost saving measure for the 5th consecutive year, Beneficial's shareholders received a voting instruction form and a notice hand access notification, which included a link to the meeting materials consisting of the proxy statement and information circular and the 2022 annual report.

Speaker 1

This procedure for the electronic delivery of meeting materials is known as notice and access and as mentioned is an environmentally friendly alternative that's now used by a number of companies. As in past years, registered shareholders and those beneficial shareholders that previously requested to receive paper copies continue to receive a printed copy of the meeting materials and a former proxy. I would ask that copies of all such documents be filed with the minutes of this meeting. A quorum for the transaction of business at today's meeting is at least 2 people present, being a registered holder or duly appointed proxy holder and representing an aggregate not less than 25% of the total outstanding shares. According to Vermillion's bylaw, a person participating in today's meeting through the virtual meeting platform for today's meeting is deemed to be present at the meeting.

Speaker 1

I am advised by the scrutineer that there is a quorum present. The scrutineer's report is available for inspection, and I ask the secretary to follow-up with the minutes of this meeting. I hereby declare the Annual General Meeting of Shareholders of Vermillion Energy, Inc. To be properly convened and regularly constituted to conduct business. Now there are various matters of business to be dealt with today.

Speaker 1

A description of each matter is provided in the information circular, a copy of which is available on our website under the heading Invest With Us and subheading Annual General Meeting. In the interest of time, I do not propose to make a detailed presentation on each item. For the purpose of moving the meeting along, shareholders who are representatives of Vermillion, Lars Glimser, Bryce Kameka, Darcy Curran and Jensen Tan have been asked to move and second the motions to be brought before this meeting. I would like to take a moment to comment on the voting procedures to be used at today's meeting. Voting for all matters will proceed by way of electronic ballot through the virtual meeting platform.

Speaker 1

The polls are now open and will remain open until the end of the formal part of the meeting. If you have not voted your shares, please vote now. If you wish to wait until the end of the formal session, there will be additional time allotted for voting as well. If you have previously voted, you do not need to vote again. By voting again, you will revoke your votes made prior to the voting cutoff and only July votes will be counted.

Speaker 1

The exact results of the voting on the items of business at today's meeting will be announced tomorrow, Thursday, May 4, in our press release and in the report of voting results and will be filed on sedar.com under Vermillion's profile. The first item of business is fixing the number of directors of Vermillion Energy, Inc. To be elected at 10. May I have a motion to fix the number of directors to be elected at 10?

Speaker 2

My name is Lars Glemser, and I am a representative of Vermillion and a shareholder. I move that the number of directors of Vermillion Energy Inc. To be elected be fixed at 10.

Speaker 1

May I have the motion seconded?

Speaker 3

My name is Greg Pemnica, and I am a representative of Vermillion and a shareholder. I second the motion.

Speaker 1

Is there any discussion? I'm advised there is no further discussion requested on this item. The next item of business is the election of the directors of Vermillion for the ensuing year or until their successors are elected or appointed. As we have done in previous years, we will be nominating and approving individual directors and not a slate of directors. The Board of Directors has adopted a policy stipulating that if the director nominee receives a greater number of votes withheld from the election of that director and votes for the election, the nominee will offer to resign.

Speaker 1

The Governance and Human Resource Committee will then review the matter and recommend to the Board whether to accept the resignation and the Board's decision to accept or reject the resignation will be publicly announced within 90 days of the meeting. It is expected that resignations will be accepted except in situations where exceptional circumstances would warrant that the applicable director continue to serve as a Board member. The number of directors to be elected at the meeting has been fixed at 10. Information with respect to each of the nominees was set forth in the information circular for this meeting. I now declare the meeting open for nominations for the Board of Directors of Vermilion Energy, Inc.

Speaker 1

May I have a motion to nominate the Board of Directors of Vermilion Energy, Inc?

Speaker 4

My name is Darcy Kirwan, and I am a representative of Vermilion and a shareholder. I nominate Dion Hatcher, Robert Mikileski, James Kleckner, Jr, Karen Knickle, Steven Lark, Timothy Marchand, William Roby, Manjeet Sharma, Myron Stanek and Judy Steele as Directors of Vermillion Energy Inc. For the ensuing year.

Speaker 1

I will ask to move the resolution electing those individuals nominate its Directors of Vermillion Energy Inc. To serve as directors until the close of the next annual meeting of shareholders or until their successors are duly appointed.

Speaker 4

My name is Jenson Tan, and I am a representative of Vermillion and a shareholder. I move that each of the 10 persons nominated be elected as a Director of Vermillion Energy, Inc. To hold office until the close of the next annual meeting of shareholders or until a successor is duly elected or appointed.

Speaker 1

May I have the motion seconded? I second the motion. As previously stated, directors will be elected individually and not as a slate. For a nominee to be elected as a Director of Vermillion Energy, the votes cast in favor of the election of the Director nominee should represent no less than a majority of the votes cast by shareholders represented in person or by proxy at this meeting. Is there any discussion?

Speaker 1

I'm advised that there is no further discussion requested on this item. The next item of business is the appointment of the auditors of Vermillion. Deloitte LLP are Vermillion's current auditors and have agreed to act as auditors of Vermillion if appointed. May I have a motion for the appointment of the auditors?

Speaker 3

I move that Deloitte LLP be appointed as the auditors of Vermillion to hold office until the next annual meeting of shareholders.

Speaker 1

May I have the motion seconded? I second the motion. Is there any discussion? I'm advised that there's no further discussion requested on this item. The next item of business is the advisory vote on executive compensation.

Speaker 1

As part of Vermillion's ongoing commitment to strong corporate governance practices, we continue to hold a non binding advisory vote on the approach to executive compensation, commonly referred to as say on pay. In 2022, 96.6 percent of shareholders supported our say on pay vote. In respect of this meeting, 2 leading independent third party proxy advisory firms, ISS and Glass Lewis, have both recommended the Cheryl's vote for the approval of the proposed say on pay vote at this meeting. May I have a motion for the say on pay advisory vote?

Speaker 4

I move that on an advisory basis and not to diminish the role and responsibilities of the Board of Directors that the shareholders accept Vermillion's approach to executive compensation disclosed in the information circular accompanying the notice of this meeting.

Speaker 1

May I have the motion seconded?

Speaker 4

I second the motion.

Speaker 1

Is there any discussion? I am advised that there is no further discussion requested on this item. If you have not already voted, please complete the electronic ballot for all items of business now through the virtual meeting platform. The voting will close momentarily. The next item of business is to table the consolidated audited financial statements of Vermillion for the year ended December 31, 2022, and the report of the auditors thereon.

Speaker 1

These financial statements were included in Vermillion's annual report, which was mailed to those shareholders who requested the financial statements along with a notice of this meeting and the information circular. For your ease of reference, links to Vermillion's annual report, which include the financial statements, are available on our website under the heading Invest With Us subheading Reports and Filings. Are there any questions regarding the financial statements? I am advised that there are no questions regarding the financial statements. At this time, the voting is closed on all items of business.

Speaker 1

Please allow us a few moments to tally the votes and collect the scrutineers' report. As mentioned at the beginning of the meeting, the exact results of ballot voting on the items at today's meeting will be disclosed in the voting results report and our press release, which we filed tomorrow, Thursday, May 4, 2023. The scruiters have provided their preliminary report of voting results. On the matter of fixing the number of Directors of Energy to be elected at 10, I am advised by the scrutineer that greater than a majority of the votes cast have been voted in favor of this resolution. Therefore, I declare the motion to fix the number of directors is carried.

Speaker 1

On the matter of electing directors of Vermilion Energy, Inc, I'm advised by the scrutineer that for each of the director nominees, greater than a majority of the votes cast have been voted in favor of the election of each director. Therefore, I declare that this motion is carried and each of the nominees for election as director has been elected. On the matter of appointing Deloitte LLP as auditors of the Marillanteau Hold Office until the close of the next Annual Meeting of Shareholders or until their successors are appointed, I am advised by the scrutineer that the greater than a majority of the votes cast have been voted in favor of the appointment of Deloitte as auditors. Therefore, I declare that this motion is carried. On the matter of the approval of say on pay advisory vote, I'm advised by the scrutineer that a greater than a majority of those cast have been voted in favor of this resolution.

Speaker 1

Therefore, I declare that this motion is carried. Is there any further business? As there is no further business to be brought before this meeting, the meeting has concluded. I will now turn it over to Dion Hatcher, President and Chief Executive Officer of Vermillion to provide you with an update on our business and our strategy moving forward. Questions will be addressed at the end of his presentation.

Speaker 2

Thank you, Bob, and thank you to everyone that has joined us today. Now I'm going to provide you a quick summary of our 2022 highlights, an overview of our Q1 2023 results and recent Montney activity as well as the outlook for the balance of the year. Before I get started, I would like to refer to our advisory and forward looking statements at the end of the presentation. It describes forward looking information, non GAAP measures and oil and gas terms used state and outlines the risk factors and assumptions relevant to this discussion. 2022, we delivered on our strategic priorities and continue to position Vermillion for long term success.

Speaker 2

We remain focused on our financial discipline and reduced net debt by another $300,000,000 We've benefited from strong European gas prices as a result of our internationally and diversified asset base. We advanced the core acquisition to significantly enhance our Eurogas exposure, which we closed on March 31 this year. And we completed the strategic Montney acquisition, marking Vermillion's entry into this prolific resource play, which has significantly increased the depth and quality of our drilling inventory. Looking at our financial results, Vermillion generated record fund flows of $1,600,000,000 and record free cash flow of $1,100,000,000 in 2022, representing a year over year increase of 78% 99%, respectively. This free cash flow allowed us to fund over $500,000,000 of strategic acquisitions, reduce net debt by over $300,000,000 and return over $100,000,000 to our shareholders through dividends and share buybacks.

Speaker 2

We reinstated the quarterly dividend in Q1 and commenced the share buyback program in Q3, returning a total of 11% of free cash flow during the year. We exited the year with net debt of $1,300,000,000 and the resulting net debt to fund flow ratio of 0.8 times, which is the lowest leverage in over 10 years. In the Q1 of 2023, we reported $253,000,000 of fund flows and $98,000,000 of free cash flow. Production for the quarter was 82,455 BUs per day, BUs per day, which was down slightly from the previous quarter due to unplanned downtime in Australia as we noted with our Q4 results. This was partially offset by the new production from our Alberta, Deep Basin and Montney assets in Canada.

Speaker 2

Excluding the downtime in Australia, we saw strong operational results in Q1. We also made significant progress on our asset high rating initiatives, the closing of the CORB acquisition and the divestment of select non core assets in Southeast Saskatchewan. These transactions position Vermillion for long term success by increasing our exposure, premium priced European gas, by reducing our operating costs and as well reducing our asset retirement obligations. In addition to funding the core acquisition, we allocated a significant portion of our free cash flow to the return of capital during Q1. We repurchased 1,600,000 common shares for $30,000,000 and declared cash dividends of $0.10 per share or $16,000,000 dollars for a total of $46,000,000 returned to shareholders in the quarter.

Speaker 2

The base dividend was increased by 25% in Q1 of this year and increased 67% since Q1 of 2022. Production from our North American operations averaged 60,046 boos per day, an increase of 3% from the prior quarter, primarily due to new production from Alberta, Deep Basin and Montney assets in Canada. Drilling activity was concentrated in Canada where we drilled 7 gross, 3 net Manville condensate and liquids rich gas wells, 6 Montney wells and 3 oil wells in Southeast Saskatchewan. Our Deep Basin wells delivered strong production results, while we saw continued improvement in our Montney development. The 2 Montney wells recently drilled on BC lands were tied in during the second half of March and produced at an average IP30 rate of approximately 12 50Vs per day with 51% liquids per well.

Speaker 2

The vast majority of our Montney development including all of our planned 2024 drilling program will be in BC. I will review our Montney asset in more detail later in the presentation. In the U. S, we participated in 2 non operated apartment wells and 1 non operated Niobrara well and look forward to evaluating these results as it will enhance our understanding of these formations as it relates to future development prospects on our Wyoming acreage. We have a large land base with approximately 15,000 net acres perspective for the Narvera and the Parkman.

Speaker 2

In addition, we participated in a one non operated Turner well and we have initiated our operated 6 well Turner program, which consists of 2 mile wells. Production from our international operations averaged 22 1,408 BUs per day, which was down from the prior quarter, primarily due to on time downtime in Australia. Also worth noting is that Q1 production excluded the 7,500 BUs per day from the acquired 36.5 percent interest in CORP, which closed on March 31. We drilled wells in both Germany and Netherlands during the quarter. Production in Netherlands increased over the prior quarter due to volumes for a new well brought online and production in France increased over the prior quarter as volumes were restored following the forest fire related downtime in the second half of twenty twenty two.

Speaker 2

We also continued to advance our deep gas exploration and development plans in Germany as we prepare for our first wells to be drilled in the Q4 of 2023. In Australia, maintenance work on the Wandu platform has progressed well, but due to weather delays, we are now estimating the platform will remain offline for most of the Q2. To date, we have performed over 95% of the inspections and completed repairs where necessary to ensure we operate with the highest safety standards. Much of the identified repair work resulting from the inspections is preemptive, which we expect to result in less unplanned downtime in the future. Early April, as Cyclone entered the region, which forced us to evacuate the platform and temporary halt maintenance operations.

Speaker 2

Fortunately, there was no physical damage to the platform. However, the evacuation occurred during final maintenance work and we now are required additional time to reorganize and complete the remaining inspections. Vermillion would like to thank the efforts of all staff on the safe and expeditious evacuation of the platform. Before I provide an update on our Montney development, I wanted to spend a few minutes talking about Vermillion's philosophy around operational excellence. Vermillion operates in multiple bases around the world, both onshore and offshore.

Speaker 2

This diversification not only provides exposure to global commodities and greater flexibility for capital allocation, but also allows us to leverage expertise across our operational teams. Our expertise spans from offshore drilling to building and operating gas plants to optimizing conventional oil assets, well as executing on conventional horizontal drilling and completion operations. This breadth of technical expertise is particularly helpful when entering a new basin or play as we're able to quickly draw upon this knowledge. Key elements of our approach to operational excellence are continuous improvement, technical excellence and leveraging technology. Our global teams work collaboratively on initiatives such as operation and maintenance best practices and the deployment of technology in our field operations, as well as the day to day activities such as subsurface geological peer reviews and project look backs.

Speaker 2

This way of thinking is part of our culture and improves safety, operational efficiencies and profitability. One of the common attributes across our North American assets is the presence of multi zone development opportunities. On Slide 24, we show some of the stacked plays in our Deep Basin asset. Our initial focus on this asset was the Curium, which you can see ramped up to nearly 14,000 BUs a day in the middle of the last decade. As we were developing the Cardium, we were also studying and testing other zones and eventually transitioned our development to the Mandeville condensate rich zones, which then doubled the production base over the subsequent years.

Speaker 2

Given the stacked nature of our land base and our ability to utilize the same aboveground infrastructure, this development was very capital efficient and profitable as we continue to assess and develop additional zones within our Deep Basin asset. Having made significant progress on our asset high grading and debt reduction strategy over the past 2 years, are now placing an even greater focus on operational execution throughout our asset base. In the United States, we will continue to develop and grow our Turner oil plant at Powder River Basin, while also testing new prospects across our land base, including the Narborough and the Parkman. In Canada, we will continue to develop and grow our strategic Montney position. We are seeing very encouraging results from recently drilled wells.

Speaker 2

The Montney is a very important asset for Vermillion and will be the primary focus of our Canadian business unit in the years to come. It will underpin our long term return of capital. We've been operating these assets for about a year and to date have drilled 9 wells and completed 11 wells. Core of our Montney position is in BC. We allocated capital to the Alberta lands prior to the resolution of the permitting restrictions in BC.

Speaker 2

And we are now pursuing a drill to fill strategy on our Alberta lands to utilize the existing infrastructure and prioritize free cash flow generation. Our primary focus today is on the B. C. Lands where the majority of our inventory is located. We are waiting one more permit before proceeding with the construction of the 16,000 BUs per day battery at the 833 location, which we expect to receive during the second half of the year.

Speaker 2

This will be part of our 2024 development program. And in preparation for this, we have already completed the detailed facility design and ordered long lead equipment. We are currently bidding contracts for the installation. We also have the permit in place for a multi well pad at 16 to 28, which we plan to drill in 2024. The completion of this battery will then have approximately 22,000 BUs per day of infrastructure capacity across our Mica asset.

Speaker 2

And we expect to increase this capacity over time to achieve our targeted production base of 28,000 buss per day. We have sufficient inventory to maintain this production level for over 2 decades. We are leveraging our Deep Basin expertise to quickly improve the well productivity on our Montney asset. I will take a few minutes to walk you through the operational improvements we have made and the Tier one productivity we are seeing with our recent BC wells. Starting with the 4 0.3 6 well pad in Alberta, which is the pad that we took over drilling operations on, then completed in Q3 and brought online in Q4 22.

Speaker 2

As you can see in the production plot on Slide 28, we achieved an average rate of approximately 4.40 Bs per day with 50% liquids per well in the 1st 30 days. This was below our expectations for Alberta acreage, but we learned a lot from these wells. Late December 2022, we drilled the 2nd pad in Alberta, the 6 to 5 3 well pad. These wells were drilled at slightly longer laterals, optimized well placement and flowback as well as plug and perf completions. The pad has been on production for about 50 days.

Speaker 2

And as you can see, we realized a significant improvement in productivity with an average IP30 rate of 610 BUs per day per well, which is about a 40% increase over the IP30 of the prior Alberta path. The B. C. Lands represent the majority of our drilling inventory. The reservoir on our B.

Speaker 2

C. Lands is higher quality and as such we expect to see better results. That was shown with the delineation wells such as the 9 to 33 pad that was brought on production in 2021, which achieved an average IP30 rate of 900 BUs per day with about 57% liquids. Worth noting is that this pad was drilled with shorter laterals and completed with a sliding sleeve system. In Q1, we drilled and completed 2 BC wells from the 16 to 28 pad.

Speaker 2

The wells have only been on production for just over a month. But as you can see, they produce at an average IP30 rate of about 12 50 boobies per day with about 51% liquids per well. This is again approximately a 40% increase to the well results in the 933 BC delineation pad. We are pleased with the results as they exceed our internal type curve and demonstrate the strong deliverability on our BC lands, in particular the high liquid content. We plan to drill 12 wells in 2024, all of which will be on or offsetting the 16 to 28 pad.

Speaker 2

We will continue to optimize our Montney wells and expect to realize further improvements in the development progress. The next few slides provide a summary of our financial projections for the balance of the year. Our 2023 capital budget remains unchanged at $570,000,000 and our production guidance remains unchanged at 82,000 to 86,000 BUs per day, which includes the impact from the Corp acquisition closing on March 31 and the divestment of select Southeast Saskatchewan assets on March 27. Our capital allocation priorities also remain unchanged. Our number one financial priority at this time is to reduce debt and further strengthen the balance sheet.

Speaker 2

We will continue to allocate the majority of our free cash flow to debt reduction until we achieve our next debt target of $1,000,000,000 The majority of the incremental capital return beyond the base dividend will be in the form of share buybacks as we believe our stock remains significantly undervalued. To date, we have repurchased 2,200,000 common shares in 2023 and 4,600,000 in total under our existing NCIB. We plan to renew our NCIB in July 2023 and based on our current pace of share repurchases and base dividend, we anticipate returning between 25% to 30% of free cash flow to shareholders in 2023 depending on commodity prices. Slide 32 shows our improved financial position. Compared to the 2018 to 2020 period, we have reduced net debt by 50% and increased fund flows by 50%.

Speaker 2

Zooming in on 2023, based on our internal forecast and using the forward strip as of April 24, we were projecting approximately $1,200,000,000 of fund flows with the year end net debt at approximately $1,100,000,000 Our preliminary outlook for 2024 also using the April 24 forward strip would see fund flows increasing to over $1,400,000,000 We haven't finalized our capital allocation decisions for 2024, but we believe we have the capacity to balance further debt reduction in 2024 with increasing shareholder returns. I would like to end the presentation with an overview of Vermillion's purpose statement as I believe it is an excellent representation of who we are, what we do and why we do it. We are an international company that responsibly produces essential energy while delivering long term value to our people, to our shareholders, to our customers, to our partners and our communities. Our end goal is to create long term value for all stakeholders, including our investors. In summary, we have made significant progress over the past 2 years of strengthening the balance sheet and high grading the asset base to position Vermillion for long term success.

Speaker 2

I would like to take this opportunity to thank our employees for their hard work and dedication and to thank our Board of Directors for their oversight and guidance. I would also like to thank our shareholders for their support as we undertook this repositioning over the past few years. We're an even stronger and more resilient company today and I'm very excited about our future. With that, I would like now to open it up for questions. Thank everyone again for participating in the AGM and our Q1 2023 results.

Speaker 2

Thank you.

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