Vermilion Energy Inc

TSX:VET

Earnings Call Transcript 2024-Q1

[Robert Michaleski, executive]

So good afternoon, ladies and gentlemen. I'd like to begin by welcoming you to Vermilion's Annual Meeting of Shareholders. 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 an overview of the business and the strategy moving forward.

So ladies and gentlemen, the meeting will now come to order. My name is Robert Michaleski, and as Chair of the Board of Directors of Vermilion Energy, it is my responsibility and privilege to chair this Annual General Meeting of the shareholders of Vermilion.

[indiscernible] LLP, will act as Secretary of the meeting; and [indiscernible] Trust Company will act as a scrutineer. In addition to the registered shareholders, I would like to welcome to the meeting, all others present here today.

At this point, I would like to introduce the other independent directors of Vermilion who are present at the meeting today. James Kleckner Jr.; Carin Knickel; Stephen Larke; Timothy Marchant; Manjit Sharma; Myron Stadnyk and Judy Steele. William Roby is on the Board, but he is traveling to another meeting today, so unable to be here for this meeting.

I would also like to introduce the pencil members of our Executive Committee here today, Dion Hatcher, President and Chief Executive Officer; Lars Glemser, Vice President and Chief Financial Officer; Randy McQuaig, Vice President, North America; and Darcy Kerwin, Vice President, International, Health and Safety and Environment.

The notice calling this annual meeting of shareholders, along with the information circular and former proxy were mailed on March 28, 2024 to all shareholders as of the record date for this meeting, being the close of business on March 13, 2024. As part of an ongoing stewardship of the environment as a cost-saving measure for the sixth consecutive year, beneficial shareholders received a voting instruction form and a notice and access notification, which includes a link to the meeting materials consisting of the proxy statement, information circular on the 2023 annual report.

This procedure for the electronic delivery of meeting materials is known as notice and access, and as mentioned, is environmentally friendly alternative that is now used by a number of companies.

As in past years, registered shareholders and those beneficial to shareholders have previously requested to receive paper copies continue to receive a printed copy of the meeting materials and a form of proxy. I would ask that copies of all such documents to 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 to hold or represent by proxy at least 25% of our outstanding common shares. I am advised by the scrutineer that there is a quorum present. The scrutineers' report is available for inspection and I ask that be filed with the minutes of this meeting.

I hereby declare that this Annual General Meeting of shareholders of Vermilion Energy, Inc., Property convened and regularly constituted to conduct business.

Now there are very matters to be dealt with today. 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 sub-heading 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 Vermilion have been asked to move and second the motions to be brought before the meeting. All of the matters of business to be covered today will be voted on by ballot. Registered shareholders, meaning their shareholders who do not hold their shares through a broker, who have not previously submitted a form of proxy and duly appointed proxy holders should have received ballots upon registering for the meeting. If you have already voted, whether by telephone through the Internet or by completing and returning a proxy card mailed to you with the information circular, your shares will be voted in accordance with your instructions and you're not permitted to fold again by way of ballot. If there is any shareholder or proxy holder who has not received a ballot, please identify yourself to us.

The first item of business is fixing the number of directors of Vermilion Energy to be elected at [indiscernible]. May I have a motion to fix the number of directors to be elected at 10.

[Unknown Executive]

My name is [ Ivan Jeffery, ]and I'm a representative of Vermilion and shareholder. I move that the number of directors of Vermilion Energy Incorporated to be elected, fixed at 10.

[Robert Michaleski, executive]

Thanks, Ivan. May you have the motion seconded?

[Unknown Executive]

My name is [indiscernible]. I'm a representative of Vermilion and a shareholder. And I second the motion.

[Robert Michaleski, executive]

Thanks, Terry. Is there any discussion?

Voting on the election of directors will be conducted by way of ballot. The blue ballot is to be used for this matter of business. If you have not yet received on, please raise your hand. We have already completed but not -- if you have not already completed your ballot and deposit with a scrutineer, please complete the ballot now I'll sign your name clearly at the bottom of the ballot. Please raise your hand if you have a ballot to be collected, and the scrutineer will collect the ballots.

Thank you. Based on preliminary voting results for this matter, it is expected that this resolution will be carried. We will continue with the remainder of this meeting's business while the scrutineer tabulates the results of the ballot voting and advise us as to the final results prior to the termination of this meeting.

The next item of business is the election of the directors of Vermilion for the ensuring year or until the 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 [indiscernible] if a director nominee receives a greater number of votes withheld from the election of that director that votes for the election, the nominee will offer to resign. The Governance and Human Resources 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 the resignations will be accepted, except in situations where exceptional circumstances would warrant that the applicable director continue to serve as a Board member.

The Board of Directors has also adopted [indiscernible] #2, providing for advanced notice of director nominations. I have been advised that no director nominations were received by the company. And accordingly, the nominees for election as a director are the nominees set forth in the information circular for this meeting. 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. May I have a motion to nominate each of the nominees as a director of Vermilion Energy, Inc?

[Unknown Executive]

My name is [indiscernible], and I'm a representative of Vermilion and the shareholder. I nominate each of the following to act as a director for the ensuing year. Dion Hatcher, Robert Michaleski, James Kleckner Jr, Carin Knickel, Steve Larke, Timothy Marchant, William Roby, Manjit Sharma, Myron Stadnyk and Judy Steele.

[Robert Michaleski, executive]

Thanks, [indiscernible]. I will now ask to move the resolution likely those individuals nominated as directors of Vermilion Energy to serve as directors until the close of the next annual meeting of the shareholders or until their successors are duly appointed.

[Unknown Executive]

My name is [indiscernible], and I'm a representative of Vermilion and a shareholder. I move that each of the 10 persons nominated be elected as a director of Vermilion Energy, Inc. to hold office until the close of the next Annual Meeting of Shareholders or until a successor is duly elected or appointed.

[Robert Michaleski, executive]

Thanks, Jeff. May I have the motion seconded?

[Unknown Executive]

My name is Kyle Preston, and I'm a representative of Vermilion and a shareholder, and I second the motion.

[Robert Michaleski, executive]

Thanks, Kyle.

As previously stated, the directors will be elected individually and not as a slate. For a nominee to be elected as a director of Vermilion Energy, Inc., the vote 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?

Voting on the election of directors will be conducted by way of ballot. The white ballot is to be used for this matter of business. If you have not yet received one, please raise your hand. If you have not already completed your ballot deposit with scrutineer, please complete the ballot now and sign your name clearly at the bottom of the ballot. Please raise your hand if you have a ballot to be collected, and the scrutineer will collect the ballots.

Based on preliminary voting results for this matter, it is expected that this resolution will be carried. We will continue with the remainder of the meeting's business while the scrutineer tabulates and provides the results of the ballots prior to the termination of the meeting.

The next item of business is the appointment of the auditors of Vermilion. Deloitte LLP are Vermilion's current auditors and have agreed to act upon -- act as auditors of Vermilion if appointed. May I have a motion for the appointment of auditors?

[Unknown Executive]

I move that Deloitte LLP be appointed as the auditors of Vermilion to hold office until the next Annual Meeting of Shareholders.

[Robert Michaleski, executive]

Thanks, Karl. May I have the motion -- second the motion.

[Unknown Executive]

I second the motion.

[Robert Michaleski, executive]

Thanks, [indiscernible]. Is there any discussion?

Voting on the election of directors be conducted by way of ballot. The pink ballot will be used for this matter of business. If you're not very had received one, please raise your hand. If you have not already completed your ballot and [indiscernible] scrutineer, please complete your ballot now sign your name clearly at the bottom of the ballot. Please raise your hand if you have a ballot to be collected, and the scutineer will collect the ballots.

Based on preliminary voting results for this matter, it is expected that this resolution will be carried. We will continue with the remainder of this meeting's business while the scrutineer tabulates and provides the results of the ballot voting prior to the termination of the meeting.

The next item of business is the confirmation approval of bylaw #2, which as previously mentioned, requires advanced notice of director nominations. Bylaw #2 was adopted as part of Vermillion's commitment to facilitating an orderly and efficient process for shareholders' meetings as shareholders receive adequate notice and sufficient information regarding director nominees and allowing shareholders to register and inform vote.

Further information with respect to bylaw #2 as set forth in the information circular for this meeting. May I have a motion for the confirmation approval of bylaw #2.

[Unknown Executive]

I move that the ordinary resolution to confirm and approve bylaw #2 as a bylaw of the company, the full text of which is set out on Page 22 of the information circular accompanying the notice of this meeting be approved.

[Robert Michaleski, executive]

Thanks, Jeff. May I have the motion seconded?

[Unknown Executive]

I second the motion.

[Robert Michaleski, executive]

Thanks, [indiscernible]. Is there any discussion?

Voting on confirmation approval [indiscernible] will be conducted by a way a ballot. The green ballot is to be used for this matter of business. If you have not received yet received, please raise your hand. If you have not already completed your ballot deposit with [indiscernible] please complete the ballot now and sign your name clearly at the bottom of the ballot. Please raise your hand if you have a ballot to be collected.

Based on preliminary voting results for this matter, it is expected that this resolution will be carried. We will continue with the remainder of this meeting's business while the scrutineer tabulates and provides the results of the ballot voting prior to termination of the meeting.

The next item of business is the advisory vote on executive compensation. As part of Vermilion's ongoing commitment to strong corporate governance practices, we continue to hold a nonbinding advisory vote on the approach to executive compensation, commonly referred to as say-on-pay. In 2023, 93.25% of shareholders supported our say-on-pay vote. In respect to this meeting, 2 leading independent third-party proxy advisory firms, ISS and Glass Lewis, have both recommended that shareholders vote for the approval of the proposed say-on-pay vote at this meeting. May I have a motion for the [indiscernible] board.

[Unknown Executive]

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

[Robert Michaleski, executive]

May I have the motion seconded?

[Unknown Executive]

I second the motion.

[Robert Michaleski, executive]

Thanks, [indiscernible]. Is there any discussion.

Voting on the [indiscernible] advisory will be conducted by way of ballot. The yellow ballot is to be used for this matter of business. If you have not yet received them, please raise your hand. If you have not already completed a ballot deposited with the scrutineer, please complete the ballot now and sign your name clearly at the bottom of the ballot. Please raise your hand if you have -- do you have a ballot to be collected, and the scrutineer will collect the ballots.

Based on preliminary voting for this matter, it is expected that this resolution will be carried. We will continue with the remainder of the meeting's business while the scrutineer tabulates and provides the results of the ballot voting prior the termination of the meeting.

The next item of business is to table the consolidated audited financial statements of Vermilion for the year ended December 31, 2023, and the report of the auditors thereon. These financial statements were included in Vermilion's annual report, which is mailed to those shareholders who requested the financial statements, along with the notice meeting and the information circular. For your ease of reference, links to Vermilion's annual report, which includes the financial statements are available on our website under the heading Invest With Us, subheadings Reports and Filings.

Are there any questions regarding the financial statements.

I have the results of the voting on the ballot. On the matter of fixing the number of directors of Vermilion Energy at 10, I'm advised by the scrutineer [indiscernible] than the majority of the votes to the cast have been voted in favor of this resolution. Therefore, I declare that this motion is carried.

On a matter of electing directors of Vermilion Energy, Inc., I am 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 a matter of appointing Deloitte LLP as auditors of Vermilion to old office into the next Annual Meeting of Shareholders. I'm advised that the scrutineer that greater than a majority of the votes cast have been voted in favor of the resolution. Therefore, I declare that this motion is carried.

On the matter of approving the confirmation approval of bylaw #2, I'm advised by the scrutineer that greater than a majority of the votes cast have been voted in favor of this resolution. Therefore, I declare that this motion is carried.

On the matter of the approval of the Say-on-Pay advisory vote, I'm advised by the scrutineer and greater than a majority of the votes cast have been folded in favor of this resolution. Therefore, I declare that this motion is carried.

Now is there any further business? As there is no further business to be bought before this meeting, the meeting is 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 strategy moving forward. If you have any questions at the end of the presentation, microphone will be made available to you. We would like to also welcome the people who have just joined us by webcast. Questions can also be addressed from our webcast audience after the presentation is complete.

[Anthony Hatcher, executive]

Thanks, Bob. Good afternoon, everyone. On this snowy feels like winter day. We'll start with the informal part of the presentation, and we'll just take a few minutes to talk about our Q1 results and the outlook for '24 and beyond. Before we do that, I just remind you, we will be referencing a presentation that can be found on our website on Invest With Us and Events and Presentations as well, the disclaimer, the advisory information on forward-looking statements is at the end of the presentation.[indiscernible] the forward-looking information, non-GAAP measures [indiscernible], and it lines of risk factors and assumptions relevant to this discussion.

So 2024 is actually a key milestone year for the company. It was in 1994 that we were a small junior oil and gas company through the vision of our founders, Lorenzo, Claudio and Jeff that we started this company, they had a differentiated strategy to be an E&P company that 1 that grew globally through a series of acquisitions. Those acquisitions started in '97 with France. That was our first international acquisition. After that, we followed up with other acquisitions in Europe, in France as well as -- which was key in '97, but then in Australia as well as the U.S.

This global diversification has several strategic advantages. It provides Vermillion's exposure to premium price global products, which helps to provide that outsized netback. It provides us opportunity for capital-efficient often underexploited conventional assets, and it provides access to high-return international acquisition opportunities.

Vermillion is unique in this strategy. Because of this advantaged business model, we've been able to return a significant portion of our capital to the investors over the years, over $40 a share in dividends. Past 4 years have been some other challenging years in the company's history that we've taken a relentless effort on reducing debt and high-grading the asset base. We have made significant progress on these measures as we'll talk today, but we do recognize there's still more work to do.

I do believe the company is much, much better positioned today with a stronger balance sheet and a stronger asset base, we are much more resilient. I'm extremely proud of all the hard work our team has done through achieving these goals and repositioning the company for the next 30 years.

Well, the first quarter of '24 was another strong quarter for Vermilion. We delivered strong operational results, which was above the upper end of our production guidance. Those are really driven by Germany and the U.S. We generated $431 million of fund flows. We invested $190 million of A&D capital and we generated $241 million of free cash flow for the quarter. This free cash flow helped us to reduce debt by another $134 million and achieve our net debt target of $1 billion during the quarter. We finished the quarter with a net debt of $944 million, which is the lowest in over a decade.

Reaching our net debt target was a key milestone and allowed us to accelerate our return of capital strategy, and we increased our allocation to 50% of excess free cash flow. This was announced in Q4 and immediately after this announcement, we significantly increased the pace of our shareholder buybacks. We repurchased 1 million shares in the month of March, bringing the total for Q1 to 2.4 million shares. We've continued this pace into April, and we bought back another 1 million shares in the month of April as well.

In addition to delivering strong production and financial results, we've also advanced all of our key growth projects, in particular in the Montney, the [indiscernible] gas development, deep gas project in Germany and our [indiscernible] gas development. I'll expand on each of these projects in the following slides.

So starting with our international operations, production came in at 32,546 BOEs per day. In Germany, we were successfully drilled our first deep gas exploration well and discovered gas in the targeted zone. We plan to commence drilling the second well in Q2. We also made several discoveries in Croatia, where we encountered hydrocarbons in multiple zones in the first 3 of the 4 wells we've drilled to date. Investments in these programs are quite key as they're intended to support the longer-term free cash flow generation of the business, and we're excited to test the results of these wells in Germany and Croatia in the second quarter.

Also in Croatia, construction of our gas plant on the SA-10 block is nearing completion and is on schedule for midyear start-up. This will allow us to bring on 2,000 BUs a day of gas that's behind pipe that will help immediately increase our free cash flow. In Australia, we continue to see strong performance from that unit as well as strong pricing in Mondu. We generated the highest net back of our asset base with a $65 BOE net back.

Now as a reminder, we have over 700,000 net acres of land in Germany, right? We're targeting these deep gas exploration projects. And these prospects that we see, they're on trend with Netherlands. We've been in the Netherlands for almost 2 decades. We've drilled wells during that period. And we have a success rate of about 70%. So we're quite excited to apply those skills as we work on Germany. The first well, as noted was successful, [ Osterhide ], and with targeting that -- while was targeting the existing gas field, the well was drilled to a total depth of 5,000 meters where we discovered gas in the targeted zone. This is the deepest well that we've ever drilled in Germany and in Europe, for that fact, and it shows the strong operational team that we have in Europe.

We're very pleased with these initial results, and we plan to test the well in the second quarter as we're preparing for tie-in operations and getting that well on in early '25.

We'll now start planning and drilling the second well, which is [indiscernible]. Now this well is a higher risk as we're targeting a large prospect that we see on seismic. It's going to take 3 to 4 months to drill. We have a 60% working interest in the second well to help to manage the risk and capital associated with exploration drilling.

We are in the early innings in Germany, we were quite excited about the outlook and the opportunity we have in front of us. We have identified at least 9 individual prospects and many of these prospects are large enough to have multiple follow-up drilling associated with them. So with success, we see the ability to more than double our Germany business unit over time.

In Croatia, the construction of the gas plant on the SA 10 block is nearing completion. The team is currently testing that facility and conducting the pre-commissioning start-up activities in preparation for a midyear startup. On startup, this unit will add 2,000 BOEs a day of European gas, which again is exposed to premium pricing in Europe. We expected to have a net back over $50 per BOE. Initial production, as a reminder, is from the 2 successful exploration we drill -- wells we drilled before. These wells were tested at 15 million and 17 million cubic feet per day previously. So we're very excited to be nearing the point where we can get these wells on production.

Also in Croatia, we drilled 2 of our 4-well program in Q1 and subsequent to the quarter, we drilled our third well. All 3 of these wells in discrete structures have discovered hydrocarbon in multiple zones. We've had both oil and gas shows in the zones, and it looks very promising, given the thickness of some of these zones. We don't know the full extent of the development, we're still early days as we'll be testing these wells in the next quarter. But having consecutive exploratory success is very exciting on this block, and we're awaiting the test results of these files as we move into the second quarter.

Production from our North American operations averaged [indiscernible] a day in Q1. Most of that capital was allocated to the Montney development. We've drilled 13 and completed 13 wells and we brought 9 wells on production. As well in the U.S., even though we didn't have operated wells this quarter, we did participate in some non-operated wells in a formation called department. That's an oil zone. Those wells came online in the quarter and helped to grow production in our U.S. business unit quarter-over-quarter.

Construction of the BC Montney battery is progressing as per plan as well as we tighten the 6 wells on the first pad in our Montney position.

The slide on -- slide -- picture on Slide 20 shows this battery. It's a 16,000 BOE battery that we're currently constructing. It is nearing the completion and we're expected to start this unit up in late Q2. This battery will more than double our infrastructure capacity in the Montney, and we look to fill that capacity in the upcoming years. Further expansions will be required as we debottleneck this facility by adding compression.

Ultimately, we are targeting a production rate of 28,000 [indiscernible] per day on our Montney asset.

We recently tied in the first 6 wells as noted, and we're flowing those wells through our existing bottleneck infrastructure. But the early results of the wells are quite encouraging in line with the strong wells that we drilled in 2023, which you can see the results on this slide. We'll be able to produce those wells at higher rates once we were able to get our battery up and running.

In summary, these results are very positive, and we continue to validate the quality of our BC acreage in the Montney. We've also drilled the next 5 wells of our program. We'll look to frac those, complete them in the next quarter and bring them online in Q3.

On the cost side, we continue to optimize our drilling and completion activities, which has resulted in cost savings per well of 50%. This is compared to our '23 program. Our '24 program used 17% less water, which reduces cost, but it also reduces the environmental impact as well, we're further optimizing our well design and our completion activities. In addition to this, we are piloting different completion strategies, and we're also piloting tighter well spacing. We think the combination of these learnings will allow us to improve the efficiency in which we operate and develop this asset for decades to come.

In summary, it's a very key year for us in the Montney as we get the infrastructure in place, start of this next pad, and we're quite excited about the cash flow that this asset will generate for us for decades to come.

On the outlook side, we expect to see continued operational momentum as we go into Q2. We'll remain focused on these key growth projects that we've talked about earlier. That's completion of the startup of the BC Montney battery, completion and commissioning of the SA-10 gas line in Croatia as well as testing the successful wells that we drilled in Germany and Croatia. [indiscernible] intact for production, and we expect Q2 production to be in the 83,000 to 85,000 BOE day range.

Commodity prices as well continue to be supportive. And our financial outlook remains very strong. Looking at the financial forecast for 2024, we're currently forecasting approximately $1.3 billion of fund flow and free cash flow of approximately $700 million. We've also included our preliminary '25 outlook, which anticipates modest production growth and with fund flows based on backwardation and strip pricing, as well as adjusting for lower hedge gains relative to '24, we're forecasting about $1.1 billion of fund flow for 2025. But as you can see as well, those red bars will continue to reduce debt and continue to strengthen the balance sheet through '24 and '25 as we continue to reduce debt and return 50% of our capital to our investors.

With that accelerated return of capital payout target of 50% of our excess free cash flow, we would expect to have a robust share buyback program for the balance of the year. Based on the current forecast, we're projecting the return approximately 10% of our market cap to shareholders. And that will be through a combination of fixed base dividend and the share buybacks, which we're currently undertaking.

Well, we've made a lot of progress over the past few years. I'm actually very excited that we're looking at the company as we go forward. We've got a very strong balance sheet now. We've got the lowest debt to cash flow in over a decade. We continue to build operational momentum with another strong quarter in Q1. We've got strong run times in our legacy assets, and we've talked about the Australia unit, which is back online, performing quite well. And we continue to progress our key growth projects in the Montney, in Croatia and in Germany.

Our near-term return on capital framework provides investors with a growing base dividend and meaningful share buybacks, which we look to augment with modest production growth and opportunistic international acquisitions. We will continue to focus on operational excellence and executing our '24 plan while maintaining financial discipline. We believe this will set the future for profitable growth as we position the company for the next 30 years. We look forward to providing updates on these key growth projects in the months ahead.

So in closing, I would like to thank our shareholders for your continued confidence in Vermilion. Thank you to our Board of Directors. Thank you to our employees, our contractors and our service providers for helping us execute our strategy and for your contributions. Well, that concludes the prepared remarks. And with that, I'd like to open it up for questions.

[Anthony Hatcher, executive]

Question in the back? Yes, I think just over here, sir, if you wouldn't mind.

[Unknown Shareholder]

[indiscernible] shareholder with Vermilion. I've been for quite a long time. Just a general question as you see things going forward -- political environment can be a little tricky in Europe. What are your thoughts on that, especially in Germany at this point, not predictable. -- all at the moment -- so I'd appreciate some feedback on that.

Also what do you think is going to be the catalyst to improve sentiment for Vermilion because I get out there right now. Not good at all, actually. There's a tremendous amount of sentiment that's in the way of actually, the facts would say that it should be a much better performing company. It's not at this point. So those are the 2 things. I [indiscernible] comments on?

[Anthony Hatcher, executive]

Well, thank you for the questions. Let's start with the first question about Europe, and I think we would -- we've been in Europe for most of our 30 years in business, and so it's an area that we know quite well. We continue to execute programs there in all the jurisdictions. And Germany is a really interesting one. I mean, Germany was the epicenter of the crisis when the 40% of the European gas was shut off. So what we've seen, and I think you're seeing this with our capital execution is Germany has been open to working with us to -- within the regulatory framework -- help us to accelerate permits and get these wells drilled. And so we're quite excited with having this first well drilled. These are more material targets. We'll move to the second well, and we've got some runway here for multiple years for that.

So interesting enough, I think Germany is quite pragmatic around their energy sources, 30% of their energy still [indiscernible], by the way, and they're choosing not to continue to invest in nuclear and shut down the last of that nuclear plant. So that's an economy that for quite a while, has been used to consuming gas and I think a little pragmatic around the need for gas. So we're quite excited with the outlook in Germany.

On the second question around stock performance, and I think you acknowledged in slide earlier that showed the -- let's call it the fundamentals of the business, how we've been able to reduce debt by $1.2 billion over the last 3 years. We've been able to high-grade our asset base and increase our fund flows and our free cash flow accordingly. So we're quite excited about that. I mean the business is fundamentally stronger and I think performing better than it has in recent years. I believe that will translate into stock performance, but I do know the thing that I need to focus on the most is the business itself.

So there's been some headwinds. I think the overhang on the windfall tax in Europe is 1 of them, that came out retroactively late in '23, late in '22, and that was definitely an overhang in '23. That is now behind us, right? We're done with the windfall tax. And so hopefully, we can future investor meetings, that's not a topic of discussion, but clearly, that did negatively impact the settlement on the stock, regardless of the cash flows we were actually generating during those periods.

Second would be the Australia unit. I mean that unit was down last year for about 3 quarters. That's never a good thing. We are proud to say that, that unit [indiscernible] back up and running. It's been running quite smoothly for the last 3 quarters, [indiscernible] back in the company. It will generate in the order of $80 million to $100 million a year of free cash flow. And so we're quite excited about that. And I think those who were headwinds are now behind us, and both of those are successfully looking forward.

Return of capital is still fairly new. We bumped it up twice here recently. I think returning 10% of our market cap -- by the share buybacks 1 million shares a month is quite attractive, and I think we'll see benefits of that over time. So there has been some headwinds and fully acknowledge. I think the business, to your point, has improved significantly, and we have normally 300 meetings a year with investors, and we'll look to champion and tell the story of [indiscernible] business has gotten stronger. And we would look to see that translate into the stock price at the appropriate time. But again, thank you for your question.

[Unknown Shareholder]

[indiscernible]

[Anthony Hatcher, executive]

Yes. I think you're talking about the reserves. Yes, yes. I can kick that off, and there's more detail [indiscernible] comment. But just quickly there is with the asset high grade that we've talked about, we're now allocating more capital to the Montney asset. And we're quite excited, as we talk today, is how strong those wells are of the 16 to 20 pad. Like these wells come on at [indiscernible] barrels of oil. As we got the permits and the clarity on infrastructure, it's really last year, we get more certainty on the capital allocation to that asset.

The good news then is, or bad news, I guess, depending on from a reserve point of view is there's other parts of our business that won't attract capital and that those particular units were in Alberta and Saskatchewan. So as we chose to invest more in the [indiscernible] more in Germany as well, we'll be investing less in Saskatchewan in particular. We still own those lands. We still have those drilling prospects on our lands, but they get recognized separately. And then as a result of how that gets recognized, there's an impact on the business.

So that's the back story. You probably know that, but for sure, we're focused on investing in the Montney as well Germany, where those 2 assets are very much underbooked and given the early days.

Any other questions?

[Unknown Executive]

Yes, we do have a few questions on the webcast here. First 1 on the windfall tax. Just wondering A little bit more color on that and how we can be certain that this windfall tax doesn't return at some point in the future?

[Anthony Hatcher, executive]

Yes. The history of the windfall tax and it's, I think, helpful to think about why the windfall tax existed at the time. Prices in Europe, the gas prices went exponential. And in Canada, we're used to paying $2 to $3 [indiscernible] for our energy costs as a result of the tragic events in Ukraine and the restriction of gas, that market -- the gas price literally went exponential. And so gas went all the way to CAD 100. So when you think about that, like 50x higher than what we've ever seen in North America.

Governments had to respond to that and their response was tax. As you follow through, of course, again, the events in Ukraine are still ongoing, but I think the market there has normalized, gas prices in Europe are $12 to $13, are forecast to be around $14 next year, still a very robust 6 to 7x higher than what we see in Canada. And so that's an attractive place for us to deploy capital.

[indiscernible] came out late last year, and they did their follow-up analysis to respond to these extraordinary measures that were used to implement this type of retroactive tax. And the outcome of that study was same, you do not see the need for this policy go forward. And so it's since expired. Note that France actually did not implement it in '23, even though they had the option 2. So at this point, the windfall tax from the European Union is behind us, what would bring it back -- would it be the next question. Now I think it would be [indiscernible] prices, right? And we view that as right way risk. We do not want to see any tragic events anywhere in the world, but if prices were to go super high, that would be the risk and where that would be introduced to our business to remind investors, it was basically that 30% of the gas was the incremental tax. And so we still were able to produce that gas and sell that gas -- we're in around $20-plus which, again, you compare that back to Canada where it's $2 to $3. So it's done and what would bring it back with extraordinary pricing, which we don't see.

[Unknown Executive]

Okay. The next question we have relates to our Germany business unit. A number of years ago, we signed a farm-in agreement with Exxon. Do we still own that land or have we relinquished it?

[Anthony Hatcher, executive]

We still own that land. Yes. Yes. And as noted, we've got 700,000 acres of land in Germany. A lot seismic over that existing infrastructure in place, we're quite excited about the potential development in the German unit.

[Unknown Executive]

Okay. And the next question, I'll lump these together. We've got a few of these around the dividend. Do we expect to increase the dividend this year? And why don't we pay a higher dividend as opposed to buying back shares?

[Anthony Hatcher, executive]

[indiscernible], do you want to take this one? Or you want me to? You can have an opportunity here.

[Lars Glemser, executive]

Yes. Thanks for the question over the webcast there. So as a reminder, we did increase the dividend by 20% for 2024 over the 2023 level. And kind of our view is we want to maintain resilience, financial flexibility within the system. And so our approach is going to be to limit that fixed dividend, ensure that it is sustainable and continually tested against a mid-price deck, which would be $60 oil, [indiscernible] North American gas and then $10 [indiscernible] European gas. And so we want to make sure that, that fixed dividend is sustainable under that price environment.

What we are committed to is targeting the 50% return of excess free cash flow to shareholders here in 2024. I think that shareholders within this industry have gotten a lot more comfortable with the variable mechanisms in terms of returning capital. And our preference in terms of how to do that is through the share buyback. We do still think that there is room for increases in the dividend as we go forward. So what we would like to pair is ratable increases to the base dividend that are sustainable in a price environment much lower than we are at today, and then couple that with that variable return of capital to top up to that target of 50%.

So that's the approach that we're taking. We think it's a nice mix of providing a 3% yield today, reducing the share count by a pretty significant amount of being able to target that 10% of the market cap in terms of what we're returning.

[Unknown Executive]

All right. We have 1 last question here related to our Canadian operations. Can you explain why the Canadian production was down quarter-over-quarter and year-over-year?

[Anthony Hatcher, executive]

Yes, that's just timing of capital. We've talked about the Montney in particular, which is the bulk of the capital that we're investing in Canada. As noted, the battery itself will be coming on late Q2. And so there's a period here where we're drilling well, spending quite a bit of capital, but we'll see the benefits of that production in the second half of this year. So timing of capital and then you got your natural declines that are kicking in, all we're waiting to bring those new wells on, which will be very soon.

[Unknown Executive]

Right. We did have 1 more question come through. And again, related to the dividend, would we consider a special dividend to top up the base dividend?

[Anthony Hatcher, executive]

The answer is yes. But I mean, we -- at this point, when you think about capital allocation as a management team, that's where [indiscernible] and keep them on safe as we run our operations. And so when we look at the valuation of the business today and we talked about our debt's lower cash flows are higher, in the running room we have with these key growth projects, we're quite excited with the outlook. We compare that with the valuation of the company in the marketplace. And so we think it's a great allocation of capital to reduce those shares. And so that right now is the clear priority. If we found ourselves in a period of time down the road where the price of the stock was more aligned with what we see the intrinsic value of the company, well, then I think that would as other management teams have done provide the option to look at other means of capital return. At this point, we don't see that as an option on the table. But in the future, would be a good problem to have.

[Unknown Executive]

Okay. Thanks, Dion. That's all the questions we have from the webcast. So I'll open it back up to the audience if there's any more questions ?

[Unknown Shareholder]

[indiscernible]

[Anthony Hatcher, executive]

[indiscernible] I can kick it off here. And so just quickly on the windfall tax, the total expenditure of the [indiscernible] tax over 2 years was $300 million, referenced earlier, our cash flow generation in those years, $1.6 billion and $1.2 billion, and that was after the tax. So those years were very, very, I guess, strong [indiscernible] years, frankly, for cash flow generation and free cash flow generation for the company.

I think your question then is how relating those cash flows to earnings, just to clarify. So maybe I'll pass it to Lars.

[Lars Glemser, executive]

Yes. Just to summarize sort of the 2-year period that you're referencing, sir. So 2022 FFO was kind of in that $1.6 billion range as prices tempered in 2023, we're at the 1.1 level. I think what you're referencing to is we did have some noncash impairment charges go through the income statement in 2023. That did push us into a net loss position for the year. Dion touched on it earlier, but what we did in 2023 as we acknowledge the fact that now that we have sort of a runway on the B.C. side of our Montney asset, we acknowledged within our reserve bookings, but that is where a large amount of our capital is going to go over the next 5 years.

The way our reserve book works is you really have to have line of sight to capital in the next 5 years to be able to book reserves. And so what we did is we wanted to acknowledge kind of our per annum spend level here of, call it, $600 million to $700 million. And so we derecognized reserves primarily in the U.S. business unit and the Saskatchewan cash-generating unit. And so what that resulted in is less reserves, less book value from a reserve perspective and triggered the write-downs.

The other thing to keep in mind is a good chunk of those reserves and those 2 cash-generating units, they were put on in 2018. Bit of a different backdrop than what we have here today. And so a good chunk of those assets were recognized when we issued equity to do the Spartan acquisition with shares kind of in that $43 range. So kind of what you had there was a recognition of capital for a number of years coming off the books kind of all within that single year of 2023. So that was the primary driver of being in a loss position.

[Unknown Shareholder]

[indiscernible]

[Lars Glemser, executive]

I appreciate the comments, the feedback. And I think that's something that we'll take away just to make sure that we're providing the appropriate level of transparency in terms of the driver. So I do appreciate that. We will take that away. Thank you.

[Anthony Hatcher, executive]

Thanks, Lars. Just to check, I guess, Kyle, 1 here gentlemen.

[Unknown Shareholder]

[indiscernible]

[Anthony Hatcher, executive]

Yes. Thank you. So you're right. The [indiscernible] unit, which we did that acquisition just a little while ago, a very attractive acquisition in excess of [indiscernible] to increase our exposure to that asset which we've operated since late 2015 -- sorry, 2018. So it is a declining asset, declines 12% to 14% per year, generates a lot of free cash flow for us. But they're getting too technical, we do look at ways to reduce the pressure in which that reservoir produces. And so we've just finished a project in which we're implemented a refridge plant, which helps to reduce pressure, and then we've got some other additional compression projects, which helps to reduce the pressure. We see the ability of that reservoir to produce out to mid-2030s, and we'll continue to look for ways to extend that.

There are options to drill in that reservoir, but it is an offshore asset. So the cost to drill those wells are expensive. So we do contrast that. And that's the strength of Vermilion, we have these different business units to say, are we better to drill another well in core or drill an onshore well in Germany that we believe is quite attractive. But we do have opportunities at this point. We're focusing on our onshore operations to drill in Germany and Netherlands that we think are more attractive. So that's our focus there. And as that free cash flow comes out of that [indiscernible] unit, again, we'll look to redeploy a portion of that to our business to be able to grow our free cash flow for years to come. It might not be core, but the business [indiscernible] as a management team is to redeploy. And then the other 50% of excess gets returned to our investors. So does that help address the question? Yes. Great. Thank you.

Other questions? Okay.

Well, I think the refreshments are open in the back, so I encourage you to have a refreshment. And I just again want to thank everyone for attending. We do appreciate your support and confidence in the management team, and we'll continue to work very hard to better position the business and look forward to updating you again next year. So again, thank you.