Vermilion Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 5 speakers on the call.

Operator

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vermillion Energy Q2 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Mr. Dion Hatcher, you may begin your conference.

Speaker 1

Thank you, Julie. Well, good morning, ladies and gentlemen. Thank you for joining us. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lawrence Lemster, Vice President and CFO Darcy Kirwan, Vice President, International and HSE Bryce Kremnica, Vice President, North America Jessen Tan, Vice President, Business Development and Kyle Preston, Vice President of Investor Relations will be referencing a PowerPoint presentation to discuss our Q2 2023 results.

Speaker 1

Presentation can be found on our website under Invest With Us and Events and Presentations. Please 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 today and outlines the risk factors and assumptions relevant to this discussion. Production during the Q2 averaged 83,152 bees per day, which was at the top end of our Q2 guidance range of 80,000 to 83,000. We revised our Q2 production guidance in mid May to reflect the temporary shut in of approximately 30,000 BVs a day in West Central Alberta due to forest fires, The combined impact of Q2 volumes from the wildfires and the Australia downtime was approximately 8,000 views per day.

Speaker 1

Our team was quick to respond to the fire situation in Alberta and was able to safely restore all of the production within weeks of the initial shut in, which minimized the impact of In addition, we achieved strong operational performance across many of our other assets. We generated $247,000,000 of fund flows and invested $167,000,000 of E and D capital, resulting in $80,000,000 of free cash flow, of which we returned $40,000,000 to shareholders via the base dividend and share buybacks, representing a return of capital payout of approximately 50%. During the first half of twenty twenty three, we have declared $33,000,000 in dividends and repurchased $54,000,000 of our common shares, representing $87,000,000 return to our shareholders. We continue to target shareholder returns of 25% to 30% of free cash flow for 2023 Debt reduction remaining the priority until we achieve our next net debt target of $1,000,000,000 Net debt at the end of Q2 decreased slightly to 1 point $3,000,000,000 representing a trailing net debt to fund flow ratio of 1x. Given the front end weighting of our capital program combined with higher Forecast production and cash flows in the back half of the year, we anticipate generating more free cash flow in the second half, which should translate to accelerated debt reduction.

Speaker 1

Production from our North American operations averaged 54,064 BUs a day in Q2, A decrease of 10% or 6,000 BUUs per day from the prior quarter mainly due to the disposition of approximately 5,500 BUs a day of higher cost assets in our Southeast Saskatchewan and approximately 4,000 BUs a day of fire related downtime in West Central Alberta. We're able to partially offset this impact with organic production growth from our Mica, Montney, Southeast Saskatchewan and the U. S. Assets, which added approximately 3,400 bussed a day combined in Q2. All the production that was temporary shut in as a result of the wildfires has been restored.

Speaker 1

Thanks To the hard work of our employees and contractors. Although there was no major damage to our facilities or well sites, we will continue to monitor the forest fire and take any necessary action to ensure the JP were people and assets. We again want to thank our operations staff for the safely restoring production during this difficult period. In West Central Alberta, we completed 1 and brought on production 5 man build liquids rich gas wells. At Mica, we drilled 2, completed 4, brought on production 1 Montney liquids rich gas well.

Speaker 1

In Saskatchewan, we drilled, completed and brought on production 1 oil well. In the U. S, we drilled 7, completed 10 and brought on production 5 oil wells in Wyoming. As part of our activity in the quarter, we participated in the drilling of 2 non operated Parkland wells and 1 non operated Niobrara well. We continue to evaluate these formations as they relate Future development prospects on our Pet River Basin acreage in Wyoming.

Speaker 1

Across North America, we are seeing strong Overall performance from our capital program and ongoing operations, which has helped in mitigating the impact of fire related downtime in Alberta. Our recent BC Montney wells at Mica continue to perform very well with minimum declines seen over the 1st 120 days of production. BCPAD results validates our Tier 1 inventory in B. C. And presents an opportunity for future down spacing.

Speaker 1

Our 2024 program will be focused Exclusively on our BC lands with approximately 10 wells on or offsetting the 16 to 28 pad. We recently received the final permit required for the construction of the 16,000 booyah battery on the BC lands and are planning to start site preparation later this year. Majority of this construction will occur in the first half of twenty twenty four and we funded through a financing agreement with a third party midstream company. This agreement was part of the Mica acquisition. We're excited to execute the next expansion phase and look forward to providing future updates in the quarters ahead.

Speaker 1

Production from our international operations averaged 29,087 BOEs per day, an increase of 30% from the prior quarter, mainly due to the acquisition of additional working interest in Corp, which closed on March 31st this year. This acquisition added Approximately 7,000 BUs a day of premium priced European natural gas production. Ireland's production more than doubled in Q2 to Average of 11,251 BUs today due to the closing of this acquisition as well as better than forecast operational run rates. In the Netherlands, we completed 1 conventional gas well from our Q1 drilling program. In Germany, we continue to advance our deep gas exploration and development plans as we Prepare for our first well to be drilled in the Q4 of this year.

Speaker 1

In Australia, we completed all remaining inspections and repair work within the primary systems of At the end of Q2, we made preparations to restart the facility. As a result, we expect higher operational run rates with less on time downtime in the future. Inspection and repair work completed on the platform was conducted in a safe and efficient manner without incident. We would again like to thank our staff and contractors for their diligence After completing all inspections repair work within the primary systems on the platform, we proceeded to function test all systems as part of the facility restart in early July. During this step, we noted a leak supplying seawater to a secondary area of the diluage fire suppression system.

Speaker 1

To ensure we have addressed Any upsetting items we elected to replace the COR piping at this time, which will delay start up to the end of Q3. This is the longest period that the WANDU platform has been outlined since Vermillion has operated it. The scope of the repair work itself It was mainly pipe belts and fittings and replacements. It was time consuming process given the logistics associated with working on an offshore platform. In particular, there are limited number of beds to accommodate workers and the work itself require the assembly and the disassembly of complex scaffolding through the platform.

Speaker 1

All the major work is now behind us. Systems and platform are function tested and ready for start up once the seawater piping is replaced. If these delays impact short term production and cash flow, it is the right long term decision as it enhances the safety and the integrity of our asset while improving future operational run rates. The Wandu asset has been in our portfolio since 2,005 It's generated significant amount of free cash flow over this timeframe. In 2022, 1 new crude sold at a U.

Speaker 1

S. $14 premium to Brent, which drives very strong netbacks. On our current strip pricing, we are forecasting over $100,000,000 of free cash flow from Australia 2024. I will now pass it over to Lars to discuss our guidance and financial outlook.

Speaker 2

Thank you, Dion. As a result of the increased scope of repair work on the Wandu platform in Australia, as well as the planned Turnaround at the core facility in Ireland, we expect Q3 volumes to be consistent with Q2 guidance of 80 to 83,000 BOE a day. As we complete the Australia Integrity work and core turnaround, we will be positioned to deliver Q4 production in the range of 86,000 BOE a day. As a result of strong operational execution and performance Across our portfolio, we are maintaining our 2023 annual production guidance of 82,000 BOE to 86,000 BOE a day, as we have been able to offset much of the impact from the Alberta wildfires and extended Australia downtime. The rest of our annual financial guidance remains unchanged from our last revision.

Speaker 2

Our disciplined approach towards debt reduction Combined with our asset high grading initiatives over the past 3 years has made Vermillion a more resilient business today. By the end of this year, we will have nearly cut our debt in half, while also funding over $1,000,000,000 of strategic acquisitions and have significantly increased our average annual FFO from pre COVID levels. While strong commodity prices Have contributed to this improvement, we believe the company is much better positioned. Our top decile netbacks, low base decline, diversified Commodity exposure and capital efficient asset base combined with our modest base dividend payout translates to a very resilient business that can be managed As we look out to 2024, we are currently forecasting a significant increase in FFO to over 1,400,000,000 Assuming a flat production profile. With this, we expect to achieve our next net debt target of $1,000,000,000 during the first half of 2024.

Speaker 2

Consistent with our previous messaging, we plan to increase shareholder returns upon achieving this debt target and we'll communicate the method and targeted payout range at that time. We anticipate that share buybacks Will remain the primary mechanism for returning incremental capital beyond the base dividend. And as such, we renewed our normal course issuer bid in early July Lastly, I wanted to provide a brief update on our hedge position, in particular our European gas hedges. European gas has been trading at elevated levels for the past few years and we believe there has been a structural Positive shift in European Gas Fundamentals, as you can see in our forward price on this chart. European gas prices are currently trading approximately 7 times higher than AECO gas prices and the forward curve is holding in at around CAD20 This is a very attractive price as it generates high project returns and significant free cash flow from our European gas assets.

Speaker 2

As such, we have been actively hedging our forward European gas production at We're above these levels. For the upcoming periods on European gas, in Canadian dollar terms, we have 51% hedged for second half of twenty twenty three at an average price of $30 per MMBtu, 30% hedged for the first half of twenty twenty four at an average floor of $47 per MMBtu And 16% hedged for second half twenty twenty four at an average floor of $25 per MMBtu. We have also been starting to layer in some oil hedges and intend to increase our corporate hedge position from current levels with a view to lock in a reasonable amount of cash flow to provide greater certainty in achieving our debt targets and in support of executing our operational and return to capital plans. With that, I would like to pass it back to Dion for his closing remarks.

Speaker 1

Thanks, Lars. To further expand on Lars' comments on free cash flow generating capacity, I would like to highlight the following chart which shows our free cash flow allocation over the past few years. The blue bar shows the total amount of free cash flow generated by the STACK bar shows how this free cash flow was allocated each of the years. As you can see, The majority of our free cash flow, a total of $1,600,000,000 between 20212023 was allocated to debt reduction and acquisitions. This is aligned with our strategy of ensuring a strong balance sheet and robust asset base.

Speaker 1

Going in 2024, most of that heavy lifting on debt reduction will be behind which means we have more free cash flow to allocate to shareholder returns in the years ahead. As we look into 2024, we are positioned to generate As I mentioned earlier, we intend to increase the amount of return to our shareholders once we achieve our $1,000,000,000 debt target expected during the first half of twenty twenty four. Well, that concludes my prepared remarks. And with that, we would like to open it up for questions.

Operator

Thank you. Call. Your first question comes from Amir Arif from ATB Capital. Please go ahead.

Speaker 3

Thanks. Good morning, guys. Just a few quick questions. First of all, just on the Montney side, Well, I think you're planning 10 wells next year. Were you planning on drilling those currently with the construction in the first half?

Speaker 3

So should we expect Montney production to start Being meaningful in the second half in terms of growth? Or is it will the drilling be happening once you've got better clarity on startup of the facility?

Speaker 1

Maybe I can take that high level question here. It's Dion. Thanks for the question. As noted on the call, the construction of the Battery itself will some of that site prep work will initiate second half this year, but the bulk of it will be in the first half of twenty twenty four. So from a planning point of view, we would initiate that drilling, but realistically, I think the timeline for that production coming on would be closer to mid year.

Speaker 1

So that's our assumptions or plans right now.

Speaker 3

Okay. And then so, Dion, would it allow 10 wells in the first half or The 10 is spread throughout the year for next year?

Speaker 1

These well, there's basically 2 Mainly 2 pads and so this would be back to back drilling. As you can imagine, there's some cost synergies and efficiencies. So yes, we would look to drill those pads back Back and line it up for mid year.

Speaker 3

Got it. Appreciate that. And then just a quick question on the German in Germany, I know you Can you just give us an update on when you expect to hit TD and And when did you expect to have some results on that?

Speaker 1

Sure. I'm going to pass it over to Darcy Kirwan, our Vice President International. Darcy, you want to take that one?

Speaker 4

Yes. Thanks, Javier. I think as you know, we've been excited about the deep gas exploration potential in Germany. We have successfully drilled Deep gas wells there before drilled Bergmor Z5 in 2019, that well is still producing nicely for us. And So we're kind of after some pause during the COVID downturn, we've put renewed focus on that exploration program both on the GSI side and on the permitting side.

Speaker 4

So we have a number of interesting prospects to look out there in Germany and we'll kick off Kind of the first of that set of prospects, starting here in Q4, 2020

Speaker 1

So I guess from a TD point

Speaker 4

of view, Darcy, we're really looking at early next With the time we take to spud the well and get those well results. Yes, we'll spud the well in Q4 and then that well will drill through the end of the year And TD, early in 2024.

Speaker 3

Okay. Appreciate that. And just final question on the windfall taxes. The TTF gas price was down sequentially quarter over quarter. Again, windfall taxes were up.

Speaker 3

Can you just help me understand Why would it move with the TTF prices? Is there just a lag in terms of the payments?

Speaker 1

Yes. Let me pass over to Lars to address that question.

Speaker 2

Yes. Thanks, Sameer. The big reason for the increase in windfall taxes from Q1 to Q2 of this year is the fact that we closed the core of acquisition on March 31st this year. And so in Q2, we started to recognize the production and FFO or free cash flow impact of the incremental 36.5 percent. So that would explain the bulk of the increase Q1 to Q2.

Speaker 3

I appreciate that. Thanks.

Operator

There are no further questions at this time. Please proceed with your closing remarks.

Speaker 1

With that, thank you again for participating in our Q2 conference call.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now

Powered by Quartr
Earnings Conference Call
Vermilion Energy Q2 2023
00:00 / 00:00