Vermilion Energy Q4 2023 Earnings Call Transcript

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March 7, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Vermilion Energy Q4 Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, March 7, 2024. I would now like to turn the conference over to Mr.

Operator

Dion Hatcher. Thank you. Please go ahead.

Speaker 1

Thank you. Morning, ladies and gentlemen. Thank you for joining us. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Gleimster, Vice President and CFO Darcy Kirwan, Vice President, International and HSE Brandon McQuade, Vice President, North America Jensen Tan, Vice President, Business Development and Kyle Preston, Vice President of Investor Relations.

Speaker 1

We'll be referencing a PowerPoint presentation to discuss our 2023 Q4 and year end results. Presentation can be found on our website under Invest With Us and Events and 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 Q4 averaged 87,597 views per day, which was at the midpoint of our Q4 guidance range of $86,000 to $89,000 This represents a 6% increase over the prior quarter, primarily driven by the Wandu platform in Australia and Corb Gasfield in Ireland, which were online for the full quarter following maintenance downtime in the prior quarter.

Speaker 1

Wandu and Corb are high margin assets and both continue to perform quite well in Q1. We generated $372,000,000 of fund flow and $225,000,000 of free cash flow in Q4, which represents a 38% and 59% increase over the prior quarter respectively. With this amount of free cash flow, we were able to reduce net debt by $164,000,000 and returned $45,000,000 to shareholders during the quarter comprised of $16,000,000 in dividends and $29,000,000 in share buybacks. Looking at the full year results on Slide 3, we achieved the midpoint of our annual production guidance of 84,000. We achieved that despite wildfire related downtime in Western Canada and on plant maintenance downtime in Australia.

Speaker 1

Our bill of day to meet annual production guidance despite these issues illustrates the strategic advantage of operating a diverse portfolio as we're able to reallocate capital offset the production impacts in Canada and Australia. We generated over $1,100,000,000 of fund flow in 2023. This represents the 2nd strongest year ever for the company. Capital expenditures of $590,000,000 was in line with guidance and resulted in free cash flow $550,000,000 This free cash flow was used to fund the closing costs associated with the core acquisition, asset retirement obligations, while also allowing us to reduce net debt by $266,000,000 and return $160,000,000 to shareholders, which represents about 30% of our free cash flow. We exited the year with net debt under $1,100,000,000 which is the lowest level in a decade and represents 0.9 times our annual fund flow.

Speaker 1

This is a key milestone for the company as it aligns with our internal leverage target of 1 times net debt to fund flow or less and positions us for increasing shareholder returns. Moving on to the operational updates for the quarter. Production from our North American operations averaged 54,216 BVs per day in Q4, a decrease of 4% from the previous quarter due to natural declines. In the Deep Basin, we drilled and completed 5 wells and brought on production 4 Manville, Liquorice Rich Gas Wells. At Mica, we drilled the initial 4 Montney wells in our BC lands as part of our winter drilling program in advance of the expected completion and startup of our A-thirty three BC Battery in mid-twenty 24.

Speaker 1

Slide 5 includes a map of our Montney position. As you can see, our land is in the oil window and the results of our first 2 BC wells validate our geological assessment and development plans. On Slide 6, you can see the 16 to 28 wells continue to produce at very strong reach, 800 BOEs day per well after 11 months on production. These 2 wells run on production March 23 and produced nearly 700,000 BOEs combined to the end of February, including over 215,000 barrels of liquids, which is mainly oil. Given the relatively shallow decline profile, we also believe this presents an opportunity for down spacing, which could add further drilling locations and this is something we will be testing this year.

Speaker 1

The 11 wells we plan to drill this year will be on or offsetting the 16 to 28 pad. We have drilled 6 wells on the 1st pad and commenced frac operations on this pad in late February. We expect these wells to be ready for production and tie in in Q2 in time for the mid year startup of the AIDA-thirty three battery. We're also currently drilling the second pad, which we expect to finish in mid Q2 and should complete fracking operations on that second pad in Q3. Slide 7 shows a picture of the new 16,000 BVD battery being constructed on our Mica Montney lands.

Speaker 1

Construction is progressing as planned and remains on schedule for mid year startup. Once operational, this battery more than double our Montney infrastructure capacity to approximately 20,000 beavers a day and allows us to move forward with the growth phase of our Mica asset. Production from our international operations averaged 33,381 BUs per day in Q4, an increase of 29% over the previous quarter, mainly due to a full quarter of production from our Australia and Ireland operations following maintenance downtime in the prior quarter, as well as increased production in the Netherlands due to new production from our 23 drilling program being brought online in the quarter. We continue to advance our deep gas exploration plans in Germany. We commenced drilling of our 1st deep gas exploration well at the end of November and expect to reach total depth in the upcoming weeks.

Speaker 1

These wells are over 5,000 meters deep and typically take 100 plus days to drill. We will then move the rig to our next location where the second well of our program will be drilled during Q2. We're excited about the exploration plans in Germany as we see this as a natural extension of the successful drilling campaigns we have executed over the past 2 decades in the Netherlands. We have approximately 700,000 net acres of undeveloped land in Germany, located approximately 300 kilometers east of our producing fields in Northern Netherlands. The exploration targets in Germany are on trend to our Netherlands place where we have drilled 29 gas wells over the past 2 decades with an average success rate over 70%.

Speaker 1

The Germany exploration targets are deeper and higher risk, but have a much larger resource potential than the Netherlands. We believe our land base can support a multiyear drilling campaign providing Vermillion years of organic production growth of high valued European gas. In Croatia, installation of the gas plant on the SA-ten Block is progressing as planned. And remains on schedule for start up mid year. The 15,000,000 day gas plant will facilitate production from the SA-ten Block.

Speaker 1

We have gas behind pipe from previous discoveries. Subsequent to year end, we commenced drilling on our 1st exploration well on the SA-seven Block and reached total measured depth of 2,371 meters of discovered hydrocarbons in multiple zones. We're currently evaluating the results and plan to test the well during the Q2 by commencing drilling operations on the second of 4 wells planned on the SA-seven block. In addition, we recently signed a firm agreement with the INA Group to jointly develop the SA-seven block. INA is the largest integrated oil and gas company in Croatia, brings local expertise and access to existing infrastructure that will play a critical role in developing assets.

Speaker 1

We're excited with the future of European gas potential in Germany and Croatia and look forward to providing update as the year progresses. We included our updated reserve evaluation with our Q4 release. Our 23 PDP reserves decreased by 8% from the prior year to 173,000,000 boes, while our total proved plus probable reserves decreased by 18% from the prior year to 430,000,000 BOEs. Decrease was primarily due to dispositions, production and technical revisions, including technical revisions resulting from capital allocation decision. It reflects the divestment of non core assets in Sotheby Saskatchewan, other non core assets in the U.

Speaker 1

S. And also incorporates updated capital allocation decisions as a result of our asset high grading for the past couple of years. Given the greater focus on our Mike Montney development and Germany exploration program, we have removed or divested reserves associated with undeveloped locations that are not prioritized for investment under our current plans. The assets most impacted by these capital allocation revisions are located in our U. S.

Speaker 1

And Saskatchewan and operating regions. Approximately 40% of the 2B technical revisions relate to the capital allocation decisions and therefore some of these reserves could be recognized at a future date, if they align with our capital allocation parameters at that time. In addition, we expect to recognize additional reserves over time from our Mica, Montney and Germany exploration program as we develop these assets. Our Montney asset is in the early stages of development and is conservatively booked today, while the potential multiyear German exploration program is largely on booked at this time. The PDP and 2P reserve life index as of December 31, 2023 is 5.6 14 years respectively, both of which are in line with our long term average and reflect the conventional composition of our asset base.

Speaker 1

I will now pass it over to Lars discuss our financial outlook and updated return of capital targets.

Speaker 2

Thank you, Dion. We released our 2024 budget in early December and the execution of our capital program to date is progressing as planned. Our 2024 full year guidance remains unchanged and we are also providing Q1 production guidance of 83,000 to 85,000 BOE a day. As a result of progress made on debt reduction, we are pleased to announce an acceleration of our return of capital. As you recall, we previously planned to increase our return of capital target to 50% of excess free cash flow starting April 1, but we will now apply that 50% target against full year excess FCF.

Speaker 2

To date this year, we have purchased 1,400,000 shares and we plan to increase the pace of buybacks going forward to align with this increased ROC target. We continue to believe share buybacks represent a very compelling return of capital option, which will result in the majority of our return of capital for this year going towards share buybacks. We have updated our internal forecast with the latest strip pricing and are forecasting annual FFO of approximately 1,250,000,000 dollars with resulting free cash flow of approximately $650,000,000 Under current strip pricing and applying our new ROC allocation target, we would expect to return approximately $250,000,000 to shareholders through our base dividend and share buybacks, representing approximately 10% of our market cap, while continuing to reduce debt, which is also an indirect form of returning capital to shareholders. We believe this is an appropriate allocation of capital as further debt reduction will make us an even stronger and more resilient company. Looking back on our FCF allocation over the past 3 years, we will have reduced debt by over 1,200,000,000 by the end of 2024 over the time period shown here.

Speaker 2

This is value that accrues directly to our equity shareholders. At the same time, we have increased our return of capital to shareholders each year over this timeframe. We believe a 50% return of capital target is appropriate for our business as it will allow us to provide ratable, annual dividend increases and buyback shares while also creating excess capacity on our balance sheet to be opportunistic. With that, I will pass it back to Dion.

Speaker 1

Thanks, Lars. Our disciplined focus on strengthening the balance sheet and high grading the asset base, along with diligent capital allocation has made Permian a much stronger and a much more resilient company. We ended 2023 with a strong balance sheet and continued our operational momentum from the Q4 into 2024. Our 2024 capital program is well underway and we're very pleased with how things are progressing on our 3 growth initiatives in Canada, Germany and Croatia. The development of our gas prospects in Germany and Croatia will increase our exposure to premium price European gas, expansion of our Montney infrastructure in Canada will set the stage for long term development and growth of this asset.

Speaker 1

We're excited about Vermillion's outlook and believe that we have a robust portfolio capable of generating strong compounded returns to our shareholders through a combination of modest annual production growth, a resilient and growing base dividend and share buybacks. Well, that concludes my prepared remarks. And with that, we'd like to open it up for questions. Thank

Operator

Your first question comes from the line of Greg Pardy from RBC Capital Markets. Please go ahead.

Speaker 3

Yes, thanks. Good morning and thanks Dion and Lars for the rundown. A couple of questions for you, but maybe the first one is just on the

Operator

Hello. May I have Mr. Greg Pardy to press star 1 again. Thank you. And your line is now open.

Speaker 3

Terrific. Can you guys hear me?

Speaker 1

Yes. You bet you. We got you now.

Speaker 3

Okay. All right. Listen, Lars Dion, thanks very much for the rundown. Couple of questions. First one, maybe just on net debt thresholds in terms of opening up the return of capital.

Speaker 3

So I know $1,000,000,000 was the first trigger. Have you thought about what net debt floor you'd like to achieve for the business and then what the implications might be? Is it possible that you could see yourselves going to 100% payout? That would be question 1 and then I've got a follow-up.

Speaker 1

Okay. Well, thanks, Greg. I'll pass it over to Lars to discuss our debt levels and return to capital.

Speaker 2

Yes. No, thanks for the question, Greg. And we're quite excited to get to this point here where we will be targeting that 50% for 2024. I would say at this point, we're comfortable not putting out guidance in terms of the next net debt level that would trigger a higher return of capital. I think what you're going to see here in 2024 is that 50% target still allows us to return potentially up to 10% of our market cap through the dividend, but primarily through the share buyback.

Speaker 2

The way we think about absolute debt levels is that $500,000,000 to $1,000,000,000 range we're quite comfortable in. As you get closer to the $500,000,000 level, that represents the amount of debt that we have turned out to 2,030. And so if we started to approach that, that may be a catalyst to rethink the 50% of EFCF at this point. But I think we're very comfortable with the 50% now.

Speaker 3

Okay. That's great. That makes a lot of sense. I mean, basic question, how fussed are you with the reserve revisions? And then maybe just related to that, given the shift in capital allocation that you're looking at to areas like the U.

Speaker 3

S. Or even portions of your ops in Saskatchewan become non core or could those areas become non core? I'm just curious as to maybe what the medium to longer term planning might be with those areas?

Speaker 1

No, I can take this one, Greg. Thanks for that. I mean, as you know, over the last couple of years, we put a lot of focus on debt reduction, asset high grading with Korb and MICA in particular and actually selling some assets in the U. S. Sorry, in the U.

Speaker 1

S. And Saskatchewan most recently. And what we're excited about is we're able to advance these growth opportunities in Germany, in Croatia and as well, Micah, where we see a lot, a lot of running room. So at this point, we're happy with our portfolio as we look out to the running room, being able to deploy capital in those key growth areas. As to the actual reserves themselves, as noted, 40% of that is capital allocation as we work through our permitting process, our budgeting process and now our reserves process.

Speaker 1

And in Saskatchewan, we still have a rig going there. We've got a lot of inventories on the book that we quite like and the inventory that moved out of reserves has the potential to come back should we find ourselves changing our capital allocation in the future. So we like the option, we like the exposure to oil in Saskatchewan. In the US, what excites us about the US is that oil stack, there's 4 oily zones. We continue to look at all 4 zones, in particular the Nile where there's been a lot of industry activity and it's material.

Speaker 1

This year, we did hit the pause button on drilling in the U. S. So we can really work through those 4 zones where we see competitor activity in all 4 zones to determine how best to develop that asset. So at this point, no changes to our portfolio with respect to the U. S.

Speaker 1

And Saskatchewan, and we've made these technical revisions, partially due to capital allocation and then partially due to performance. And you're right, of the performance issues were in the U. S. And Saskatchewan, we've made those changes.

Speaker 3

Yes. Thanks for it. Thank you very much.

Speaker 1

No, thanks for that, Greg.

Operator

Thank you. And your next question comes from the line of Travis Wood from National Bank Financial. Please go ahead.

Speaker 3

Yes, thanks for taking the question. One question, but it's the same question for both Germany and Croatia. Dion, in your opening remarks, you talked about kind of 70% risk profile as you look at drilling these exploration wells. What as you think about the size of the prize and the impact from wells, how should we think about that potential production impact on success? What's the can you remind us on the cost to drill and tie in these big wells?

Speaker 3

And then are there any kind of analog wells in proximity that you guys are using to kind of derisk that, whether it's tests from yourselves or other operators in the area?

Speaker 1

Thanks, Travis. So definitely we can get excited to talk about Germany upside potential. When we look at that land base and the teams working it for 5, 6 years, we see a TCF of gas on our land base. We've got 700,000 net undeveloped acres. We've got 3 d seismic across that land base.

Speaker 1

And we've got 2 decades of drilling similar formations just 300 kilometers away in the Netherlands. So we like the size of the prize. We also like the jurisdiction in which Germany is working with us to develop these wells as well as still are very much needing gas to replace about a third of their energy which comes from coal and lignite. As to the targets themselves, what we see are targets that are in that 30 to 40 Bs typically and costs that are in similar $35,000,000 to $40,000,000 wells to drill. And so if you zoom out how I think about it, it's a buck in Mcf.

Speaker 1

If we can drill these wells and get exposure for a buck in Mcf and then sell that gas still at 5 to 6 times AECO at $10 to $12 in Germany. We like that trade off on a risk reward. Of course, the dry hole costs, if you're not successful, are much lower than the total $35,000,000 to $40,000,000 to drill. So what we see right now, and we see 2 wells per year, we see a multi year program on that. With success, we can more than double the German production and we're quite excited to get these first couple of wells drilled and to be able to come back to and provide an update later this year.

Speaker 1

There is an element of exploration here. We want to make sure that we talk about that with our success rate in Netherlands, it's been about 70% and we think that's a reasonable number to use for our German program. As to analog wells, I mean, we're drilling in pools where we're offsetting wells within those pools that have done 30, 40 Bs. And so we're surrounded by producing wells or producing plays that are very similar and have wells in the structure. And so that gives us more confidence to be able to put this capital to work and assess that upside.

Speaker 1

So we're excited, but we do recognize that it's we're going to have to look at this as a program versus individual wells. We look forward to providing more updates in the next couple of months here.

Speaker 3

Okay. And would that be similar commentary as you think about de risking and exploring Croatia?

Speaker 1

Yeah, okay, shifting to Croatia, Croatia is interesting. We've got 2 blocks. So SA-ten is the area where we've drilled and tested and we've got gas behind pipe and with the gas plant that you can see the pictures, the unit is built. We're just finalizing the pipeline tie ins. Gas behind pipe and this will be basically dry gas that will produce into that unit.

Speaker 1

That's the SA-ten block. The SA-seven block is an area where we're surrounded by known producing fields, oil and gas. And we did the partnership with INA who has a lot of that infrastructure and offsetting production. So we're in the first of 4 wells that we've drilled there. First well looks encouraging.

Speaker 1

We've seen hydrocarbons in multiple zones. We'll drill the next 3 wells and then progress after that. As for size of the price, it's really early days in SA7. So I would say too early to comment, but we can come back once we get these 4 wells in the ground. SA-ten, it'll be a couple of 1,000 BUs a day of high netback gas that will produce through that compressor.

Operator

Thank you. There are no further questions at this time. Mr. Hatcher, please proceed.

Speaker 1

Well, again, we want to thank you for participating in our year end results conference call. Enjoy the rest of your day.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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Earnings Conference Call
Vermilion Energy Q4 2023
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