Vermilion Energy Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 3 speakers on the call.

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 Vermillion Energy Q2 Conference Call. Thank you. Mr.

Operator

Dion Hatcher, you may now begin your conference.

Speaker 1

Thank you, Sylvie. 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 Lars Lemster, Vice President and CFO Darcy Kirwan, Vice President, International and HSE Brandon McQuade, Vice President, North America and Carl Preston, Vice President, Investor Relations.

Speaker 1

We'll be referencing a PowerPoint presentation to discuss our Q2 twenty twenty four results. The 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 forward looking information, non GAAP measures and oil and gas terms used today, and it aligns the risk factors and assumptions relevant to this discussion. Production during the Q2 averaged 84,900 and 74 boes per day, which was at the top end of our Q2 guidance range of 83,000 to 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.

Speaker 1

We generated $237,000,000 of fund flows and $126,000,000 of free cash flow, which was lower than Q1 mainly due to lower realized commodity hedge gains. During the Q2, we reduced net debt by a further $38,000,000 to $907,000,000 and significantly increased our pace of share buybacks as we transition to return to capital payout target of 50 percent of an annual excess free cash flow. We repurchased 2,800,000 shares during Q2 for total proceeds of $47,000,000 and also paid at approximately $19,000,000 in dividends for a total return of $66,000,000 or 62 percent of excess free cash flow for the quarter. Year to date, we have returned $121,000,000 or 36 percent of excess free cash flow. During the Q2, we also achieved key operational milestones with the start up of the Micah and Montney Battery in British Columbia and the SA-ten gas plant in Croatia.

Speaker 1

This is in addition to the 5 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 views per day in Q2, reflecting scheduled maintenance on several assets during the quarter. In Croatia, we commissioned our gas plant on the SA-ten block slightly ahead of schedule. We currently have both wells on production and they are expected to ramp up through the Q3.

Speaker 1

The SA-ten asset will support the European gas weighting in our portfolio, which represents approximately 40% of our corporate natural gas production or over 100,000,000 cubic feet per day. This new gas production also benefits from stronger natural gas prices in Croatia for gas sales at a premium to other European natural gas benchmarks. Over the past 2 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.

Speaker 1

TTF forward price is currently trading at approximately $17 for 20.25 and we have approximately 44% of our European natural gas hedged at an average floor price of $17 for 20.25. We're very excited with the long term development potential of our Germany and Croatia 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 first deep gas exploration well. Testing was rescheduled to Q3 and we will continue to prepare for tie in operations for anticipated on stream date of early 2025.

Speaker 1

We also plan to commence drilling on the 2nd deep gas exploration well in upcoming weeks. 2nd 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 $10,000,000 on an after tax basis. In Croatia, as noted earlier, we complete construction of the gas plant on the SA-ten block in Q2 and then we commissioned the plant in June.

Speaker 1

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-seven Block, we drilled 1 exploration well and completed 2 wells from the prior quarter. The first well tested over 300 barrels of light oil, while the second well tested at 4,500,000 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. 3 of these 4 wells are natural gas wells, aligning with to organically grow our European natural gas franchise.

Speaker 1

Testing operations in the remaining two wells are planned for the second half of twenty twenty four. While we continue to move forward with the permitting process and evaluate the long term development potential of the SA-seven block. These four new discoveries are very encouraging as they represent 100% success rate on our inaugural SA-seven 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 BUs 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 B.

Speaker 1

C. Montney wells in advance of the startup of our B. C. Battery in late Q2. Saskatchewan, we drilled 2 and completed 1 oil well, while in the U.

Speaker 1

S, we participated in the drilling and completion of 5 gross 0.2 net non operated oil wells. Construction of the B. C. 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.

Speaker 1

The startup of the Mica battery will allow us to nearly double our Montney production to approximately 14,000 BUs a day in 2025 and will provide the platform for future expansion to 28,000 BUs a day through further development of 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. Commission in the facility went very smooth and the plant continues to perform very well. During the Q2, we brought up production 6 new wells on the 16 to 28 pad prior to the start up of 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.

Speaker 1

Subsequent to the quarter, we completed 5 wells on the 921 BC pad and expect to bring these wells on in late Q3, 2024. Construction of our water hub infrastructure adjacent to the 833 battery was also completed subsequent to the quarter. The start up of this water hub is expected to allow for up to 55% recycling of our water needs and reduce capital costs by approximately $650,000 per well. Our most recent wells on the 9 of 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 $1,000,000 per well. We continue to drive efficiencies in our Montney operations as our activity level increases.

Speaker 1

I will now pass it over to Lars to discuss shareholder returns and outlook.

Speaker 2

Thank you, Dion. As Dion mentioned during the beginning of the presentation, we significantly increased our pace of share buybacks during the Q2. As you recall, we achieved our 1,000,000,000 dollars 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.

Speaker 2

Including these three components, we have returned over $10 per share of capital to our equity holders over the past 3.5 years. The chart on the right shows a cumulative effect share buybacks over the past 3.5 years. The achievement of our debt target in Q1 of this year marked a pivotal change in our return to capital framework. And Q2 2024 was the 1st full quarter executing under our revised ROC parameters. To date this year, we have already repurchased and canceled 6,100,000 shares, which is more than we repurchased in the full year of 2023.

Speaker 2

We have further reduced our share count to 157,300,000 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 Boe per day while maintaining our capital budget guidance of $600,000,000 to $625,000,000 All other financial guidance remains unchanged. Our Q3 2024 capital program includes completing and bringing on production the 5 wells from the 9 to 21 pad in the BC Montney and commencing for second half twenty twenty four drilling program in Alberta and Saskatchewan. In addition, we will commence drilling operations on the 2nd exploration well in Germany, while we conduct further evaluation and testing of the successful exploration wells in Germany and Croatia.

Speaker 2

We expect Q3, 2024 production to be in the range of 83,000 to 85,000 BOE a day, taking into account planned turnaround activity, including a 3rd 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.

Speaker 1

Thank you, Larrus. Well, in closing, it was another strong quarter over 1,000,000 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 5 point $6.9 this quarter or a 4.8 times 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. I look forward to providing an update at a later date.

Speaker 1

As Lars mentioned, we have made significant progress on our Assure 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 years to come. Well, that concludes my prepared remarks. And with that, I'd like to open it up for questions.

Operator

Thank And at this time, sir, it appears that we have no questions registered.

Speaker 1

Thank you, Sylvie. Thank you again for participating in our Q2 'twenty four results conference call.

Speaker 2

Thank you.

Operator

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.

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