Vermilion Energy Inc.
Q3 2016 Earnings Call Transcript

Published: 31 Oct 2016

[Operator:]

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Vermilion Energy Inc. Third Quarter Results Conference Call. [Operator Instructions] Thank you. Mr. Anthony Marino, President and CEO, you may begin your conference.

[Anthony Marino:]

Good morning, ladies and gentlemen, and thank you for joining us. I am Tony Marino, President and CEO of Vermilion. With me today are Mike Kaluza, Executive Vice President and COO; Curtis Hicks, Executive Vice President and CFO; and Kyle Preston, our Director of Investor Relations. I would first like to refer to the advisory regarding forward-looking statements contained in today's news release. These advisories describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today, and outline the risk factors and assumptions relevant to this discussion. This morning, I would like to provide you with an overview of our third quarter results, including some key highlights from the quarter, and then discuss our 2017 exploration and development capital budget, which we also release this morning. Third quarter production of 62,596 boe/d was in line with the second quarter, as higher production volumes in Ireland and Australia largely offset lower production in Canada, France, and the Netherlands. For full year 2016, we expect to achieve production at the top end of our guidance range of 62,500 to 63,500 boe/d. During the third quarter, we curtailed approximately 1,900 boe/d of natural gas weighted production in Canada. While the vast majority of this gas would have been economic to produce the third quarter prices, the volumes were not required to meet our corporate targets and we believe that by reactivating this production at higher winter prices we can generate more cash flow. We expect to bring the majority of this curtailed production back online in Q1 2017. We have also restricted oil production from our new wells in Australia as part of this effort to manage to our overall corporate production targets and to optimize pricing. Our third quarter fund flows from operations increased 11% quarter-over-quarter to CAD141 million or CAD1.21 per basic share. The increase was driven largely by higher sales volumes in Australia, France, and Ireland, as well as stronger aeco gas prices compared to Q2. Cash uses or payout during the quarter for net dividends, E&D CapEx, and abandonment expenditures represented just 48% of funds flow from operations. This allowed us to fund minor bolt-on acquisitions in Canada in our Cardium and Mannville projects, and at the same time reduce our net debt by CAD55 million from the prior quarter. Our net debt to annualized FFO improved to 2.4 times in the quarter compared to 2.8 times in the prior quarter. Our profitability enhancement plan or PEP initiatives continue to deliver cost savings across all business units. We estimate the full year PEP savings related to capital, operating, and administrative expenditures will now exceed CAD60 million in 2016. As a result, per unit operating and G&A expenditures for 2016 are forecasted to decrease by 15% and 13% respectively year-over-year. Beginning with our October dividend payment, we began proration of our premium dividend program, or P DRIP, reducing the allowable portion of participating shares by 25%. In this morning's release, we announced our intention to increase the proration to 50% starting with the January 2017 dividend payment. Unless there are unexpected changes in the commodity price outlook, we intend to continue increasing the level of proration during 2017, such that there would be no further equity issuances under the P DRIP by the end of 2017. In addition, we plan to reduce the discount associated with our traditional DRIP from 3% to 2% starting with the January 2017 dividend payment after receiving TSX approval of this change. I would now like to share some highlights from the third quarter. First, Corrib performance. Corrib volumes increased 25% quarter-over-quarter after production reached plant capacity at the end of June. Volumes continue to benefit from better-than-expected well deliverability and minimal downtime, and these strong run times have continued through the month of October. During the third quarter, a successful offshore work program was conducted which included tying in the P2 well. All six wells are now available for production, and we expect to maintain peak production levels until approximately the end of 2017. Corrib production is not burdened with royalties or cash taxes, has low operating expense, and is expected to have low maintenance CapEx requirements. When combined with the high European natural gas price, these attributes mean that this project is a very efficient generator of free cash flow, and we therefore expect Corrib to make a significant contribution to our free cash flow profile in the years ahead. Second, Netherlands drilling campaign. We drove 2 gross, 0.9 net expiration wells in the Netherlands for the quarter. The first well, Langezwaag-03, encountered 17 meters of net pay in the Zechstein-2 carbonate formation. We expect to complete the well and place it on production in November, at which time we will perform an in-line production test. The second well, the Andel-6 sidetrack, encountered a large gas column that did not have adequate reservoir quality to justify completion. There is potential to sidetrack this well to an updip location where higher gas quality zones may be present. We have suspended the well while we do additional seismic analysis to determine the viability of the updip target. Incorporating the results of these two wells, we have achieved a 67% average success rate in our exploration-focused Netherlands drilling program since 2009, with a number of our most successful wells coming on production at rates of 20 million cubic feet a day or greater. Third, our Australia well performance. Following our successful 2-well sidetrack drilling campaign completed in Q2 2016, we've produced the new wells intermittently at restricted rates during the third quarter, achieving combined productivity exceeding 4,500 barrels of oil per day when the wells were on production. Fourth, CDP recognition and 2016 sustainability report. We were pleased to announce last week that Vermillion has been awarded a position on the CDP climate A list. CDP, formally titled the Carbon Disclosure Project, is a London-based not-for-profit organization, which administers a global environmental disclosure system for the measurement and management of corporate environmental impacts. We are 1 of only 193 companies globally to achieve climate A list recognition in 2016, and one of only five oil and gas companies in the world to be included on the list. Only three Canadian companies across all sectors were included on the climate A list. We also announced the release of our third annual sustainability report, which details our efforts to generate environmental, social, and economic benefits for all stakeholders. We are committed to providing increasingly complete information and an objective assessment of our performance in these areas on an annual basis. Our 2016 sustainability report is available on our corporate website. Shifting to our 2017 budget, our Board of Directors has approved an E&D CapEx program of CAD295 million for 2017. With this capital investment program, we expect production of between 69,000 and 70,000 Boe/d in 2017. Both the CapEx and production guidance are unchanged from the targets we announced earlier. Our preliminary 2018 targets also remain unchanged, with E&D capital investment of CAD335 million and corresponding production of 75,000 to 76,000 Boe/d. Production at the top end of our guidance ranges would deliver per share production growth of approximately 6% in both 2017 and 2018. At current strip prices, we expect to fully fund our 2017 E&D capital investment program and cash dividends from fund flows from operations. Europe

[Operator:]

[Operator Instructions] Your first question comes from Travis Wood from National Bank Financial. Your line is open.

[Travis Wood:]

Good morning, guys. I think in the past you’ve budgeted the Netherlands program on the exploration side to be about a 30% chance of success or so. And given the last few years of development and that success changed as you look out as you budget 2017? That's the first question. The second question is from the Miacomian field, is there any risk attached to that? Or is this just a pure development field similar to what you've done in the Paris basin in the past?

[Anthony Marino:]

Travis, thank you. I will take the first question about the Netherlands. I would say the success rates in the Netherlands have gradually been improving over time. We really budget for these things at a lower success rate than we’ve actually been achieving. I think the cumulative – as I've mentioned in the introduction, the cumulative success rate is about 67%. I believe the last few years we’ve run at a bit higher rate than that. I do think that the success rates may well improve over time. The more wells we drill there, the more we get used to the understanding the seismic signatures. It's all a very geophysically driven set of exploration projects there and I think that we just move up the learning curve as we continue the exploration on our lands there. And for the second question, I'll turn that over to Mike Kaluza.

[Mike Kaluza:]

Sure, thanks. On the Miacomian, that's a pretty established field and today we've just been doing the optimizations and workovers and having good results and now we're ready to do some drilling. It is definitely development play; we're looking at about a 90% chance of success on drilling those wells, so it's mostly just infill near step out, so pretty low-risk project.

[Travis Wood:]

Okay perfect and similar crude characteristics of the Paris basin from Champotran?

[Anthony Marino:]

It does have similar crude characteristics to Champotran.

[Travis Wood:]

Okay. Thank you.

[Operator:]

[Operator Instructions] We do not have any questions over the phone at this time. I'll turn the call over to the presenters.

[Anthony Marino:]

Thank you for participating in our conference call. We look forward to speaking with you again at our fourth quarter and year end conference call in February.

[Operator:]

This concludes today's conference call. You may now disconnect.