Vermilion Energy Inc.
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good morning, my name is Sherin, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Vermilion Energy, Inc. Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Lorenzo Donadeo, CEO, you may begin your conference.

[Lorenzo Donadeo:]

Thank you, Sherin. Good morning ladies and gentlemen and thank you for joining us today to discuss our second quarter 2015 financial and operating results. I’m Lorenzo Donadeo, CEO of Vermilion. On the call today are Tony Marino, President and Chief Operating Officer; Curtis Hicks, Executive Vice President and CFO; and Dean Morrison, our Director of Investor Relations. Before we get started, I’d refer you to the advisory regarding forward-looking statements contained in today’s news release. These advisories described are forward-looking information, non-GAAP measures and oil and gas terms referred to today and outlined the risk factors and assumptions relative to this discussion. Earlier this morning, we announced our financial and operating results for the second quarter of 2015. These results continue to illustrate the benefit of Vermillion’s diversified asset base. During the second quarter, we generated fund flows from operations of CAD129.5 million or CAD1.18 per basic share, an increase of 7% versus the prior quarter. Quarter-over-quarter increase was attributable to higher oil prices, increased production in France, Australia and Canada and higher sales volumes in Australia. Partially offsetting these items was the prior quarter’s favorable adjustment related to a court judgment in Vermillion’s favor. Production for the second quarter averaged 51,831 BOEs per day, an increase of 3% compared to 50,386 BOEs per day in the first quarter of 2015. This increase was driven by strong drilling and workover results in France as well as additional Canadian production volumes. The increase in Canadian production resulted from successful drilling activities in the prior quarter and incremental volumes associated with the commissioning of the natural gas processing facility in Saskatchewan in first quarter. A plant maintenance shutdown at our largest gas processing facility in The Netherlands as well as continued midstream and facility restrictions in Canada negatively impacted our volumes during the second quarter. Our non-operated Corrib project in Ireland, all gas terminal systems have now been commissioned. Following minor remaining compressor maintenance, Shell, the operator for the project expects to declare all wells, facilities and transport systems, both offshore and onshore, ready for service by the end of August. During July, Shell conducted a workover and production test of the Corrib P2 well, achieving a stabilized flow rate of 107 million cubic feet per day or that’s about 17,830 BOEs per day gross. With respect to remaining regulatory approvals, the Irish Environmental Protection Agency or EPA must issue its final determination with respect to the Corrib industrial emissions license and a Ministerial Consent as required from the Department of Communications, Energy and Natural Resources prior to commencing gas production. In accordance with statutory guidelines on applicable review periods, the EPA is expected to issue its Final Determination on the emissions license on or before mid-September. Further, we now estimate that the Ministerial Consent process will be completed, and production will commence, in early-to-mid fourth quarter of 2015. Production at Corrib is expected to increase over the first six months after first gas to peak production levels estimated at approximately 58 million cubic feet per day or approximately 9,700 BOEs a day, net to Vermilion. Core production will meaningfully increase our exposure to advantageously priced European natural gas, which has been a significant focus for Vermillion given its pricing premium versus North American gas. Additionally, we were very pleased to announce the recent signing of our German Farm-In agreement with subsidiaries of Exxon Mobil and Royal Dutch Shell. The agreement, which remains subject to customary closing conditions and regulatory approval was signed on July 27 and has an anticipated closing date of January 1, 2016. The Farm-In will provide Vermillion with 50% of Exxon and Royal Dutch Shell’s participating interest in 19 onshore exploration licenses in Northwest Germany, comprising approximately 850,000 undeveloped net acres of oil and natural gas rates. In exchange, Vermilion is committing to the financial carry of Exxon and Royal Dutch Shell’s remaining 50% of the cost to drill 11 gross or 6 net exploratory wells over the next five years. At present, approximately 75 exploratory and semi-exploratory leads and prospects have been identified in the Rotliegend, Carboniferous, Triassic and Zechstein formations on these lands. Vermilion will assume operatorship of 11 of the 19 licenses during the exploration phase with Farm-in. Importantly, the agreement also grants Vermilion proportional ownership to proprietary data spanning the assets. Vermilion’s resulting partnership with incumbent operators and access to a significant dataset spanning the assets should tangibly benefit our future efforts towards successful redevelopment in the region. No existing production is being acquired by Vermilion through this deal and capital commitments under the Farm-in over five-year period will range from approximately EUR46 million to EUR75 million depending on the commitments made by other participating parties. The Farm-in provides Vermilion with a large, nearly contiguous land block in the heart of the North German Basin. This basin has produced approximately 97% of Germany's historical onshore production and it’s prospective to both oil and natural gas. This transaction aligns well with Vermilion’s objective of increasing its presence in the German market by establishing relationships with existing operators, building a meaningful land position and gaining access to proprietary data as well as leveraging the expected synergies deriving from our accumulated experience with similar assets in The Netherlands. We were also conditionally awarded four exploration blocks in northeast Croatia during the second quarter subject to the successful execution of a definitive contract between Vermilion and the Government of the Republic of Croatia. The four exploration blocks consist of approximately 2.35 million acres with a substantial portion of the acreage located amidst existing oil and natural gas production and development. The modest capital commitments on the four blocks are back-loaded. The initial five-year exploration period consists of two phases with an option to relinquish the blocks following the initial three-year phase. In addition to the initial bonus payment of EUR1.3 million, we have capital commitments of EUR7.3 million over the three-year mandatory phase, followed by an additional EUR11.6 million during the remaining two-year optional phase. Continuing with Europe, we have been extremely pleased with the operating results delivered by France and The Netherlands during the quarter. In late April, we started production from the four wells we drilled in the Champotran field in France in the first quarter of 2015. These wells contributed approximately 800 BOEs a day to our second quarter average production rate, and continue to produce at rates better than initially anticipated. These wells coupled with strong results from our workover program and the restoration of approximately 2 million cubic feet per day of shut-in natural gas at Vic Bilh drove second quarter production in France to over 12,900 BOEs a day and that’s a record for our France business unit. We have now completed three Champotran drilling programs since 2013 with a cumulative total of 13 wells at 100% success rate. These programs continue to be highly economic with rates of return in excess of 100% even at today’s oil prices. In The Netherlands, we drilled 2 or 1.9 net successful wells during the quarter in the Slootdorp concession, in the province of North Holland. Both wells encountered more natural gas pay than expected. Slootdorp-06 encountered 70 meters of net natural gas pay in the Slochteren formation of the Rotliegend group. Slootdorp-07 encountered 41 meters of net natural gas pay in two separate intervals in the Zechstein Carbonate. Gross stabilized test flow rates were 23.1 million cubic feet per day or 3,850 BOEs a day for Slootdorp-06 and 11.9 million cubic feet per day or 2,000 BOEs per day and 2.4 million cubic feet per day or 400 BOEs a day, respectively, for the lower and upper Zechstein intervals of the Slootdorp-07. Both wells are brought on production in July at a facility-restricted combined rate of 21 million cubic feet per day or 3,500 BOEs a day net. During the second quarter, we brought on Sonnega-2 and Eesveen-01 wells on production. Sonnega-2 was drilled in 2014 from an existing lease site and produces from the Vlieland formation. Eesveen-01 was drilled in 1986, but had not been previously tied in. Combined, those two wells contributed nearly 1,000 BOEs a day to the second quarter’s exit rate. We expect to bring the Diever-02 exploration well on production toward the end of the year. Diever-02 is drilled in 2014 and as previously announced, tested at a rate of over 25 million cubic feet per day, although when it was brought on production, it will be at restricted-facility rates. We completed a planned major facility inspection at the Garijp Treatment Centre in late June, which reduced production in the quarter by approximately 400 BOEs a day. The shutdown went as intended and the facility returned to service before the end of the quarter. In Germany, our partner finished drilling and completing the Burgmoor Z3a well, which we hold a 25% net working interest. This well was brought on production at the end of July at a gross rate of 5.5 million cubic feet per day. Given the current commodity price environment, our international investment opportunities and the significant flexibility offered by Canadian assets, second quarter activities in Canada were limited. We did not drill any new Cardium wells in the second quarter, however we did complete tie-in wells that were drilled in the first quarter. The 7 or 3.1 net wells we drilled in the first quarter, represented the whole of our planned 2015 Cardium drilling program. We drilled one gross or 0.5 net Mannville wells during the second quarter, followed by the 13 gross or 8.9 net wells drilled in the first quarter. In 2015, we plan to drill a total of 30 gross or 17.8 net Mannville wells. During the quarter, we also completed a significant infrastructure project that included the expansion of a compressor station as well as a construction of a 22 kilometer pipeline. The project was completed on time and under budget. The CAD35 million spent on this project in 2015 represents a significant portion of our planned Canadian capital spending for the year. The infrastructure will play a key role in supporting the continued development of our Mannville play, which remains the most economic play in our Canadian portfolio with current rates of return in excess of 100%. Vermilion’s Canadian production continues to be negatively impacted by plant capacity restrictions and interruptible service curtailments on the NGTL system with approximately 1,700 BOEs a day of production offline during the second quarter. We expect that we will have the majority of the curtailed volumes online, sometime during the third quarter for full productive capacity to be historic during the fourth quarter. In the United States, we drilled one well in our Turner Sand resource play in the eastern Powder River Basin during the second quarter. We expect to finish the completion on this well over the next few days. We’ve continued to evaluate capital investment opportunities since we announced the revised 2015 exploration and development program of CAD415 million in February of this year. As a result of these evaluations, we have decided to increase our 2015 developmental capital program by CAD70 million to CAD485 million. The majority of this increase is associated with the reinstatement of a two-well Australia side track program that we had previously deferred into 2016. The strong economics of this program coupled with the ability to forgo the deferral penalty, we grew PRRT and achieved operational efficiencies by drilling the wells outside of cyclone season resulted in our decision to proceed with the project later this year. Vermilion also intends to drill complete an additional 1.8 net Mannville condensate-rich natural gas wells and tie-in a third Mannville well. These additional wells are included in the 2015 Mannville program figures I provided earlier. We have also made modest incremental funding available for some highly economic work-over products in France and Canada. Lastly, we are also including a minor increase in forecasted capital for Ireland as we ramp up the first gas production. We remain on target to achieve our original full year 2015 production guidance of between 55,000 to 57,000 BOEs a day. Based on our mid-fourth quarter start-up for core production and only modest production contributions in 2015 from our incremental capital, we consider it more likely that annual production will come in the lower half of our guidance range. This represents year-over-year organic production growth exceeding 10% even while reducing 2015 capital spending by 30% or $200 million from 2014 levels. During the second quarter, we increased our revolving credit facilities by another $250 million to a total of $2 billion. This increase gives Vermilion additional financial flexibility in the current commodity price environment. The maturity date of our credit facility was also extended to May 2019 and is fully revolving up to that date. We are and we expect to remain in compliance with all applicable debt covenants. Taking into account the increase in our credit facility, we currently have approximately $775 million of borrowing capacity available. We were pleased to learn that Vermilion was recognized by the Great Place to Work Institute as the Best Workplace in Canada and France for the sixth consecutive year. Vermilion was also recognized for a second consecutive year as a Best Workplace in the Netherlands in 2015, after becoming eligible for ranking in 2014. We are only energy company in its category to rank on the Best Workplaces lists in Canada and the Netherlands, and the highest scoring energy company on the Best Workplaces list in France. These awards are a reflection of the strength of our corporate culture and workplace practices which are key factors in allowing us to attract and retain the high performing, highly qualified personal that support Vermilion’s success in challenging operating environments that we have today. Although it appears that crude oil prices were beginning to stabilize somewhat during the second quarter, they have once again come under significant pressure due to various macroeconomic concerns and over-supply in the market. Although the current price environment and the associated uncertainty pose significant challenges for all energy sector participants, we continue to believe that Vermilion is comparatively well-positioned versus our peers. Our commodity diversification, including our exposure to European gas, has the potential to significantly reduce the volatility of our results. That additional stability coupled with our conservative approach to financial management and the free cash flow that will be generated of our Corrib asset clearly differentiate Vermilion in the current environment. So with that, I will conclude my formal remarks. Operator, please open the floor to questions.

[Operator:]

[Operator Instructions] Your first question comes from Gordon Tait, BMO Capital Markets. Your line is open.

[Gordon Tait:]

Good morning, Lorenzo.

[Lorenzo Donadeo:]

Good morning.

[Gordon Tait:]

Just a couple of questions. Just the drilling of the Australian sidetrack wells, these have been deferred. Would these wells that you might have planned to drill next year and would it be in the next year’s budget and production numbers or are they ones that you would have just hadn’t had a commitment on at all?

[Lorenzo Donadeo:]

Yeah. Tony, do you want to…

[Tony Marino:]

Sure. Yeah. Good question, Gord. So in the early half of 2014, we made a rig commitment to drill a total of 4 sidetracks in Australia. We had originally planned to put two of those in ‘15 and two of them in ‘16. When the price drop hit, we decided that we could potentially defer the two of those sidetracks out of 2015. Since then, we’ve seen a number of advantages in going ahead and doing the ones, the two in 2015. First of all, we avoid the penalty on the rig commitment that we made. We avoid paying and not taking certain services that are ancillary to the drilling. There is certainly a much better services environment today as we get some significant savings as a result of that. And then finally, by going ahead and putting those back in to the budget for 2015, we get them - we will make certain that they won’t ever be drilled in cyclone season, which has a big expected cost and is something we’ve had to do in the past, given the relatively small size of our programs there, but we can avoid in this case. So for all those reasons, we put those wells back in to the ‘15 budget. We would plan I think, we don’t have a final capital budget of course for 2016 at this point, but we would plan I think to drill the final two sidetracks of that four sidetrack rig commitment that we made last year in the middle part of 2016. So two this year [ph] is certain and most likely the remaining two for that rig commitment in 2016.

[Gordon Tait:]

Okay. Thanks. And then just a couple of questions on your European assets, just based on the recent IP rates you’re getting from these - from your wells in the Netherlands, would you look to increase your CapEx budget there or are you limited there by the pace of that regulatory process?

[Tony Marino:]

Again, I haven’t set the capital budget for 2016, that’s something that we’re working on now and will review with our board later in the fall. I think that versus the program that we executed this year, we have the potential to have a modestly bigger program in ‘16 and I think that’s a real possibility just depending on our overall capital budget.

[Gordon Tait:]

Okay. And then I presume that the recent exploration blocks you added in Croatia, I presume that’s an extension of the Hungarian land base you’re looking at and I was just wondering do you have any early assessments of what you’re seeing there, have you got some results you can share with us?

[Tony Marino:]

Well, we don’t have any results yet, but it is an extension of the same kinds of lands that we’ve put in place in Hungary, in the Pannonian basin. We think Croatia is quite prospective. There hasn’t been very much investment there over the past few decades. We think that we can bring some new things to bear with respect to technology and the types of projects and prospects that we’d pursue. It is in the Northeastern part of the country, contiguous, because some of the blocks are contiguous with the Hungarian border. So we think it’s very prospective and it all fits favorable fiscal environment, in fact, one of the very best in our entire portfolio. So we’re very optimistic, but no results, the award has been announced by the Croatian government and we’re in the process of working on concluding the definitive contract.

[Gordon Tait:]

Okay. Thanks.

[Operator:]

[Operator Instructions] We have no further questions at this time. I turn the call over to the presenters.

[Lorenzo Donadeo:]

Okay. Well, thank you, everyone for attending our conference call this morning and thank you operator for the time today. Thank you very much.

[Operator:]

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