Vermilion Energy Inc

TSX:VET

Earnings Call Analysis

Vermilion Energy Reports Stable Q2 2024 Performance with Operational Milestones

Vermilion Energy's Q2 2024 saw average production of 84,974 BOEs per day, meeting the high end of guidance. Despite lower realized commodity hedge gains, the company generated $237 million in fund flows and $126 million in free cash flow. Vermilion's net debt decreased by $38 million to $907 million, while significant share buybacks and dividends returned $66 million to shareholders. Key operational progress included the startup of BC Montney battery and SA-10 gas plant in Croatia. European natural gas production grew by over 15% over two years, with strong future prospects. Annual production guidance for 2024 increased to 83,000-86,000 BOEs per day with maintained capital budget.

Strong Production Performance

In the second quarter of 2024, Vermilion Energy reported an average production of 84,974 barrels of oil equivalent (BOE) per day, aligning with the upper end of their guidance of 83,000 to 85,000 BOE per day. This production level marked a year-over-year increase of 2%, and 6% on a per share basis. The increased production was primarily attributed to the early start-up of their BC Montney battery.

Financial Highlights

The company generated $237 million in fund flows and recorded $126 million in free cash flow, although this was a decline compared to the first quarter, mainly due to lower commodity hedge gains. Despite this reduction, Vermilion continued to manage its debt effectively, reducing net debt by $38 million to $907 million.

Commitment to Return of Capital

Vermilion Energy demonstrated its commitment to returning capital to shareholders by repurchasing 2.8 million shares for a total cost of $47 million in the second quarter, along with paying out approximately $19 million in dividends. This constitutes a total return of $66 million, which is 62% of the excess free cash flow for the quarter. Year-to-date, total returns have reached $121 million, or 36% of excess free cash flow, reflecting their goal of returning 50% of annual excess free cash flow to shareholders.

Strategic Operational Developments

The company achieved significant operational milestones including the commissioning of the Mica Montney battery and the SA-10 gas plant in Croatia. The new SA-10 plant is expected to bolster the company’s European gas production, which currently contributes about 40% of their corporate natural gas output. In terms of European natural gas prices, the TTF benchmark jumped to an average of $13.62 per MMBtu during the quarter, a notable 16% increase from the previous quarter.

Growth Prospects in Europe

Vermilion has ambitious growth plans in Europe, particularly with its operations in Germany and Croatia. They have seen over 15% growth in European natural gas production over the past two years. The successful drilling of their first deep gas exploration well in Germany could lead to larger follow-up opportunities if the current drilling programs prove successful.

Adjusted Production Guidance

Given their strong operational performance and expectations for production growth during the latter half of 2024, Vermilion raised its annual production guidance to a range of 83,000 to 86,000 BOE per day. The company maintained its capital budget guidance of $600 million to $625 million, showcasing confidence in their strategic investments.

Future Growth through Infrastructure Improvements

The completion of the BC Montney battery is expected to nearly double production to approximately 14,000 BOEs per day in 2025, with further expansions anticipated to reach 28,000 BOE per day. This infrastructure improvement is projected to significantly enhance their operational efficiencies, with new wells completed in a shorter time frame and at reduced costs.

Focus on Share Buybacks

Vermilion has prioritized share buybacks as a key component of its return of capital strategy. They have already repurchased and canceled 6.1 million shares this year, more than the total for the entire year of 2023, driving down their share count to 157.3 million by the end of July 2024. The company's leadership believes its shares are undervalued, and plans to continue significant buyback activities.

Conclusion and Outlook

Overall, Vermilion Energy delivered a solid performance in Q2 2024, underpinned by strong production metrics, sound financial management, and a clear strategy for growth and shareholder returns. With ongoing operational efficiencies, increased natural gas production in Europe, and a commitment to capital returns, Vermilion is well-positioned for continued success in the burgeoning energy market.

Earnings Call Transcript 2024-Q2

[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 Vermilion Energy Q2 conference call. [Operator Instructions] Thank you.

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

[Anthony Hatcher, executive]

Thank you, Sylvie. Well, good morning, ladies and gentlemen. Thank you for joining us. I'm Dion Hatcher, President and CEO of Vermilion Energy. With me today are Lars Glemser, Vice President and CFO; Darcy Kerwin, Vice President, International and HSE; Randy McQuaig, Vice President, North America; and Kyle Preston, Vice President, Investor Relations.

We'll be referencing a PowerPoint presentation to discuss our Q2 2024 results. The presentation can be found on our website under Invest with Us in Events & Presentations. Please refer to our advisory on forward-looking statements at the end of this presentation. It describes forward-looking information, non-GAAP measures and oil and gas terms used today, and it outlines the risk factors and assumptions relevant to this discussion

Production during the second quarter averaged 84,974 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 start-up of our BC Montney battery. On a year-over-year basis, production increased 2% or 6% on a per share basis. We generated $237 million of fund flows and $126 million of free cash flow, which was lower than Q1, mainly due to lower realized commodity hedge gains.

During the second quarter, we reduced net debt by a further $38 million to $907 million, and significantly increased our pace of share buybacks as we transitioned to a return of capital payout target of 50% of an annual excess free cash flow. We repurchased 2.8 million shares during Q2 for total proceeds of $47 million and also paid out approximately $19 million in dividends for a total return of $66 million or 62% of excess free cash flow for the quarter. Year-to-date, we have returned $121 million or 36% of excess free cash flow.

During the second quarter, we also achieved key operational milestones with the startup of the Mica Montney battery in British Columbia and the SA-10 gas plant in Croatia. 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 BOEs per day in Q2, reflecting scheduled maintenance on several assets during the quarter. In Croatia, we commissioned our gas plant on the SA-10 block slightly ahead of schedule. We currently have both wells on production, and they are expected to ramp up through the third quarter. The SA-10 asset will support the European gas weighting in our portfolio, which represents approximately 40% of our corporate natural gas production or over 100 million cubic feet per day. This new gas production also benefits from stronger natural gas prices in Croatia, where gas sells 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. TTF forward price is currently trading at approximately $17 for 2025, and we have approximately 44% of our European natural gas hedged at an average floor price of $17 for 2025.

We're very excited with the long-term development potential of our Germany and Croatia assets, and I'll speak more about how we expect these 2 countries to provide meaningful organic growth in the following slides.

In Germany, operations were focused on the successful discovery on our first deep gas exploration well. Testing was rescheduled to Q3, and we'll continue to prepare for tie-in operations for anticipated on-stream date of early '25. We also plan to commence drilling on the second deep gas exploration well in the upcoming weeks. The second 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 at less than $10 million on an after-tax basis.

In Croatia, as noted earlier, we completed construction of the gas plant on the SA-10 block in Q2, and then we commissioned the plant in June. 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-7 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 4.5 million 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.

Three of these 4 wells are natural gas wells, aligning with our intention to organically grow our European natural gas franchise. Testing operations on the remaining 2 wells are planned for the second half of '24, while we continue to move forward with the permitting process and evaluate the long-term development potential of the SA-7 block. These 4 new discoveries are very encouraging as they represent a 100% success rate on our inaugural SA-7 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 BOEs 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 BC Montney wells in advance of the start-up of our BC battery in late Q2. In Saskatchewan, we drilled 2 and completed 1 oil well, while in the U.S., we participated in the drilling and completion of 5 gross 0.2 net non-operated oil wells.

Construction of the BC 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. Startup of the Mica battery will allow us to nearly double our Montney production to approximately 14,000 BOEs a day in 2025 and will provide the platform for future expansion to 28,000 BOEs a day through further debottlenecking 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. Commissioning of the facility went very smooth, and the plant continues to perform very well. During the second quarter, we brought on 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-up of the battery and production is in line with our expectations for these wells. Subsequent to the quarter, we completed 5 wells on the 9 and 21 BC pad and expect to bring these wells on in late Q3 2024.

Construction of our water hub infrastructure adjacent to the 8-33 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. And our most recent wells on the 9 and 21 pad, they were completed in significantly less time than previous wells and used approximately 30% less water, resulting in approximately 15% completion cost savings or $1 million per well. We continue to drive efficiencies in our Montney operations as our activity level increases.

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

[Lars Glemser, executive]

Thank you, Dion. As Dion mentioned during the beginning of the presentation, we significantly increased our pace of share buybacks during the second quarter. As you recall, we achieved our $1 billion 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. Including these 3 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 the cumulative effect of 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 of capital framework, and Q2 2024 was the first full quarter executing under our revised ROC parameters. To date this year, we have already repurchased and cancelled 6.1 million shares, which is more than we repurchased in the full year of 2023. We have further reduced our share count to 157.3 million 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 to 86,000 BOE per day, while maintaining our capital budget guidance of $600 million to $625 million. All other financial guidance remains unchanged.

Our Q3 2024 capital program includes completing and bringing on production the 5 wells from the 9-21 pad in the BC Montney and commencing our second half 2024 drilling program in Alberta and Saskatchewan. In addition, we will commence drilling operations on the second exploration well in Germany, while we conduct further evaluation and testing of the successful exploration wells in Germany and Croatia.

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 third-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.

[Anthony Hatcher, executive]

Thank you, Lars. On closing, it was another strong quarter for Vermilion 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 priced European gas, which resulted in a corporate realized gas price of $5.69 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. As Lars mentioned, we have made significant progress on our share 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 and years to come.

Well, that concludes my prepared remarks. And with that, I would like to open it up for questions.

[Operator]

[Operator Instructions] And at this time, sir, it appears that we have no questions registered.

[Anthony Hatcher, executive]

Well, thank you, Sylvie. Thank you again for participating in our Q2 '24 results conference call. 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.