Vermilion Energy Inc.
Q3 2013 Earnings Call Transcript

Published: 9 Nov 2013

[Operator:]

Good morning; my name is Candice 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. All lines have been placed on mute to prevent any background noise. After our speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Lorenzo Donadeo, you may begin your conference.

[Lorenzo Donadeo:]

Thank you, operator, and good morning, ladies and gentlemen and thank you for joining us today. I'm Lorenzo Donadeo, President and CEO of Vermilion. Joining me today are Curtis Hicks, Executive Vice President and CFO; Tony Marino, Executive Vice President and Chief Operating Officer; and Dean Morrison our Director of Investor Relations. 2013 represented another strong year of European expansion and robust operational performance. In October we closed a strategic acquisition in the Netherlands that when combined with the addition of three significant new concessions over the last year marks a significant expansion of our Netherlands' business unit. Yesterday we announced a further acquisition in Germany that symbolizes a key new country entry for us as we continue to expand our European presence. And today we released 2014 production and capital guidance and our Q3, 2013 financial and operating results where we reported average production of 41,510 BOE per day for the third quarter and record nine-month production of 41,020 BOE per day. Thus far in 2013, we have achieved organic growth across all of our business units and better than expected results from our capital program. Our strong operational performance continues to provide us with the flexibility to manage the composition of our produced volumes and has enabled us to increase guidance following both the first and second quarters. Including a minor contribution of production from our recent Netherlands acquisition, we are now expecting our 2013 average production to be at the upper end of our guidance range of 40,500 to 41,000 BOE per day. Today we also updated our 2013 capital guidance from the original $485 million to an estimated $530 million. This increase is primarily due to the foreign exchange impact of a weaker Canadian dollar than at the time of original guidance, the delay of the receipt of the rig for the Australia drill program, originally we anticipated that to occur in late 2012, which shifted expenditures into 2013 and the modest scope additions to the capital plan including an additional well in France. While the weaker Canadian dollar has driven up capital spending, it's also resulted in higher Canadian fund flows from operations from our foreign business units. As a result, assuming commodity prices remain similar to current levels, we still anticipate that we will be fully funded for net dividends and capital expenditures excluding Corrib for 2013. Supported by our continued operations strength, solid financial footing and expanding opportunity base, we're pleased to announce today that our Board of Directors has approved a 7.5% increase in our monthly cash dividend to $0.215 per share from the current level of $0.20 per share. The increase is expected to become effective for the January 2014 dividend payable in February. This marks our third increase to our monthly dividend and our second annual increase. So, as a reminder, we've never cut the dividend since it was instituted in 2003. So that's eleven years of reliable and growing dividends. Following this increase and our recent acquisitions, we remain confident we are well positioned to achieve our future growth objectives and continue to provide reliable and growing dividends to our shareholders. Our balance sheet will continue to support the execution of our capital attrition, growth and income model and fund Corrib development through to first gas production while remaining within an acceptable net debt to fund flows from operations. Speaking of Corrib, we wish to highlight that tunneling operations in Ireland were restarted on November 3, 2013. Tunneling operations had previously been suspended following an industrial accident, which resulted in a fatality at the project work site on September 8th, 2013. Various other onshore and offshore activities including umbilical lays to the offshore wells, onshore pipelining and segments outside the tunnel and construction of the TBM reception site, were not impacted by the suspension of tunneling activity and have continued to progress. The effective impact of the delay in tunneling operations cannot be fully determined at this time, as a portion of the tunneling delay may be recouped through accelerated completion of other project activities. However, based on our deterministic schedule, we believe it's prudent to revise our expectations for timing of first gas to mid 2015 from our prior expectations for startup commencing from late 2014 to early 2015. We're also revising upward our peak production estimate at Corrib from 54 million cubic feet per day, that's 9,000 BEO per day, to approximately 58 million cubic feet per day, or approximately 9,700 BOE per day, net to Vermilion following successful subsea well operations completed during the third quarter of 2013. On the back of our recent acquisitions and in view of a potential delay in timing of first gas at Corrib, we have announced a robust $555 million capital program for 2014 and we'll see a significant increase in our European-based drilling activity including wells related to both our Netherlands and Germany acquisitions. The capital plan will continue to target high margin projects focused on oil and liquids and high net backed European gas development, as well as the continued appraisal of Canadian new venture opportunities. We have also included an estimated $90 million of expenditures related to ongoing Corrib development activity. The 2014 capital program is anticipated to generate organic production growth of 4% to 6% in 2014. Combined with our recent acquisition in the Netherlands and the proposed acquisition in Germany, assuming a January 31, 2014 close, we currently anticipate 2014 average daily production of between 45,000 and 46,000 BOE per day representing annual production growth of approximately 10% to 12% as compared to 2013. As discussed in our third quarter results, our recent Netherlands acquisition is anticipated to deliver average daily production volumes of approximately 400 BOE a day in 2014. In the case of our planned German acquisition, while we are targeting closing on or before December 31st, 2013, we recognize that due to the Christmas holiday season that up to a one-month delay in closing may be potentially required to complete all acquisition steps and secure necessary approvals. So based on an average -- an estimated average, production rate of 3,000 BOE a day in 2013 and the inclusion of 11 months of production for 2014, we are guiding to a contribution of approximately 2,300 BOE per day from the German assets in 2014. For further details on the 2014 capital program, including a breakdown by country and category, I would direct your attention to this morning's news release announcing the dividend increase and 2014 guidance. Now before I get into specifics for the quarter, I'd like to provide a little more color on our recent acquisitions. On October 10th, we closed an acquisition of interest in nine operated onshore concessions and one non-operated offshore concession in the Netherlands. The assets comprised of 298,500 net acres of which 98% is undeveloped. Added to our existing position, we now have a total undeveloped land base of over 780,000 net acres in the Netherlands. We've identified several development opportunities on the assets that add to our significant inventory of investment projects in the Netherlands and enhance our position as the second largest natural gas producer in the Netherlands. We also made a key announcement yesterday when we announced an agreement to acquire a 25% interest in a four-party E&P consortium in Germany. The producing assets are comprised of four gas fields across 11 production licenses and share similar subsurface characteristics to our Netherlands assets located approximately 300 kilometers to the west. The exploration and production licenses cover 204,000 gross acres of which 85% is represented by the exploration license. The production is expected to be priced off the Netherland's TTF price less certain adjustments for quality and marketing fees. The acquisition also adds estimated proof as probable reserves as of year-end 2013 of 10.1 million BOE. The acquisition represents a key entry into this sizable market in the form of free cash flow generating, low decline assets with near-term development inventory in addition to longer term, low permeability gas prospectively. The acquisitions well aligned with our European focus and will increase our exposure to the strong fundamentals and pricing of the European natural gas market. We believe that our experience with conventional and unconventional oil and gas development coupled with new access to proprietary technical data positions us for future development and expansion opportunities in both Germany and the Greater European area. Turning our focus to the quarter, we continue to benefit from strong pricing driven by our significant exposure to oil and European gas. This strong pricing combined with steady production and disciplined execution generated quarterly fund flows from operations of $165.6 million or a $1.63 per share in the third quarter of 2013. Year-to-date fund flows from operations totaled $503.4 million, a 21% increase over the prior year. On the operations front we continue our development of the Cardium with a total of 219,155.3 net wells drilled since initiating development of the play in 2009. In 2013 we've been able to demonstrate consistent production improvement and a reduction in per section costs to the utilization of a higher percentage of long-reach wells with horizontal legs ranging from 1.5 to 2.25 miles. Since 2009 we've been able to reduce well costs from over $5 million to approximately $3 million per section through a combination of longer reach wells, optimization of frac design and fluids, utilization of multi-well pads and the renegotiation of vender service agreements. We have also successfully maintained our per unit operating costs at less than $6 per BOE for our operated Cardium production resulting in strong operating net backs of more than $65 per BOE during the quarter. Cardium production quarter-over-quarter was slightly lower in the months following spring breakup but our well performance continues to outperform our peers in the West Tembina region. Given our current drilling rate of 30 to 50 wells per year, we anticipate our Cardium drilling inventory to last five to six years. In 2013, we began development of our significant inventory of Mannville condensate rich natural gas targets in the Drayton Valley area. To date in 2013 we've drilled five or 3.2 net operated wells in the Mannville with 100% success on frac placement. One further well is planned for the remainder of 2013. The average per well rate from the five wells drilled to date in 2013 is currently 2.3 million cubic feet per day of sales gas and 340 barrel per day of condensate and NGLs, which is 77% condensate. And with 295 net sections of Mannville rights and only 10 2PN developed net locations booked; there remains significant production and resource upside to our Mannville position. We also continue to move forward prudently with the appraisal of our significant Duvernay position. To date we've amassed 321 net sections in three largely contiguous blocks spanning the breath of the liquids-rich fairway for a cost of approximately $76 million or $375 per acre. Currently we've drilled three vertical stratographic test walls, which have confirmed our expectations and placement within the liquids-rich window. We plan to spud our first horizontal well of a two-well program late in 2013. We will drill our second well and complete both wells in the first half of 2014. Our Duvernay rates generally underlie our Cardium and Mannville positions allowing for potential infrastructure, operational and timing advantages should we elect to pursue full field development of the play. Combined our Mannville and Duvernay positions provide us with exportations and development opportunities in our core Canadian operating region and have the potential to deliver a strong production and reserve growth into the latter half of the decade. Our France business unit is now on an organic growth asset having low base declines and high netbacks resulting in good capital efficiencies that generate strong free cash flow for the Company. In the first half of the year we completed a successful five-well drilling program in the Champotran field with results exceeding expectations. This has resulted in the identification of a further 22 potential drilling locations in the region. We plan to drill nine wells in France in 2014. With increased attention in capital our Netherlands business has also become an organic growth asset. Our efforts during the third quarter were focused on activities related to the recent acquisition, as well as continued preparations for a three-well 2013 Netherlands drill program, which is now anticipated to spud late in the year. With success the drilling program is anticipated to contribute to our growth in the region in 2014 and 2015. Third quarter production in the Netherlands was curtailed due to a scheduled turnaround at [Corrib] treatment center in July and the retrofitting of our Mindenmeer treatment center in September. The retro fitting of Mindenmeer was completed to ensure reliability and capacity to support upcoming drilling programs in the Sloopdorp and Opmeer concessions. Activity levels are also increasing in the Netherlands with a forecast for four to six wells in 2014 depending on timing of rig arrival for the 2013 drilling program. With our focus on growth in France and the Netherlands, we've increased our technical staff in both business units to identify and execute additional investment opportunities in each of these regions. With a greater number of dedicated technical staff, we intend to move towards turning our substantial inventory of prospects into drillable projects and sustaining France and the Netherlands as organic growth assets within our Company. Capital expenditures in Australia during the third quarter of 2013 were mainly for repairs and maintenance activity. During the first half of 2013 we drilled two side tracks off of existing wells resulting in our most successful effort yet in Australia. Both side tracks were brought on production at restricted rates in April demonstrating productive capacities in excess of 6,000 barrels per day and 3,000 barrels per day respectively. To meet current marketing agreements and provide long-term certainty to our customers, our current plan is to maintain production levels within our prior guidance of between 6,000 barrels per day and 8,000 barrels per day. We anticipate maintaining these production levels in Australia for the foreseeable future with drilling programs approximately every two years. Our next program is planned for 2015. Looking at our business today, we believe that we remain well positioned with a robust portfolio of assets capable of delivering strong operational financial performance over the next several years. We will continue to target a combination of organic growth and reliable and growing dividends for our shareholders. Our interests remain well aligned with approximately 8% of the outstanding shares held by management and Directors of the Company. Our conservative fiscal management and capital discipline leaves us well positioned to execute our growth and income model and provide superior awards to our investors. So with that, I will conclude my formal remarks and, operator, please open the floor to questions.

[Christina Lopez:]

Hi, gentlemen; I just have a number of quick questions, one with respect to Corrib with production coming on mid-2015. Would you then expect to reach peak production of 9,700 by exit of 2015 then or would it come on sooner than that?

[Tony Marino:]

Christina, the ramp up we think would be pretty fast. We'd probably hit that peak within three months.

[Christina Lopez:]

Perfect, this may be for you as well, Tony, is on the Duvernay well. What are you expecting cost on this well to -- or I guess on both of the wells that you're planning for late this year into 2014 to come in at?

[Tony Marino:]

Taken all the way through drill complete equip tie-in, including micro size at this point that we extend to run, those wells would be in the range of about $15 million gross apiece. Of course, that number is a lot higher than we would see in a development phase because of the evaluation that we're doing on the first two wells. Ultimately, we believe that we can achieve a $10 million cost or perhaps lower than that.

[Christina Lopez:]

Any indication at this point as to where you expect liquid yields to come in? I know it's very early and you just have the strat tests but just curious if you have sort of expectations at this point?

[Lorenzo Donadeo:]

Yes the land position that we have is positioned throughout the liquids-rich, the condensate rich window. The first couple of wells that we're going to drill on the locations we're planning are on the [Ebison] and what we call the Pembina blocks that we have. We'll perhaps be a little bit, just because of the location of the wells, the use of available micro size monitoring wells would be probably a little bit toward the lower end of what we would typically see in our land position but nonetheless I would expect meaningful condensate. That's just how our land is positioned. Really we have we think virtually no land that is positioned outside of the liquids-rich window.

[Curtis Hicks:]

Yes and I think, just add to that, I mean I think, as Tony stated, like we've got three vertical wells that we're going to be using as the monitoring wells and they happen to be located closer to the leaner edge of the window but we think as we get smarter on how we drill and complete these with addition of the micro size and we see ourselves moving more in the liquids-rich part of the window going forward.

[Christina Lopez:]

Well, that's actually quite helpful; thank you. One of the other questions I have is with respect to the full-year production number, getting to the top end of your guidance. With the Netherlands gas production expected to be back on stream in Q4 and given the success of your French infill drilling program and then as well as Canada getting through sort of the weather issues that always seem to plague Q3, it seems like you can easily sort of get through those numbers. Is there some sort of turnarounds or shut ins that we are not accounting for in those Q4 numbers?

[Lorenzo Donadeo:]

No, no.

[Christina Lopez:]

More than I'm not accounting for?

[Lorenzo Donadeo:]

No there really isn't any particular planned downturn that's greater than normal during Q4. All four business units are growing. In fact, I would expect all four to grow 2012 to 2013, 2013 to 2014. We do have some well deliverability and facility capacity that we're not necessarily utilizing in Q4 and this is part of our plan to produce ratable growth so it is true we'd be capable of producing at higher rates in a couple of the business units than what we are currently guiding to for Q4 or what we intend to produce in Q4. And that is really a conscious decision on our part to have ratable operational programs and production performance.

[Christina Lopez:]

And then I've got one last question before I stop monopolizing the call. With respect to your acquisition in Germany, do you see this again as a bit of a toe hold where you can then consolidate the interests in this play itself, as you've done in the past, both in France and Australia?

[Lorenzo Donadeo:]

No absolutely, this is a very strategic entry for Vermilion into Germany. We've always liked Germany. We've always had our eye on Germany. As we've stated in our releases today, it's a basin that produces probably several fold times the production in both France and the Netherlands or primarily in France, but there isn't a lot of intermediate well financed producers in Germany and we believe that over time there's opportunities there for companies our size to consolidate interest and grow the business there.

[Christina Lopez:]

Excellent, thank you.

[Travis Wood:]

Yes. Good morning, guys. You'd think this was planned with my next question but on Germany do you see any potential for some shallow oil production based on the data that you've collected through the due diligence process?

[Lorenzo Donadeo:]

Yes, Travis, there are a couple of shallower zones that have some potential in the area. It isn't the main focus of what we've sought to acquire there. I think more broadly in Germany there is the potential for us to ultimately get into oil production as well. The licenses that we have bought into there are primarily gas. They have potential in a number, gas potential in a number of horizons beyond just the ones that are producing today and there are additional exploratory prospects on the lands that we've acquired, again primarily for gas. There may be some shallower potential for oil. Generally that oil potential I think would be in other areas that we might get into in the future.

[Travis Wood:]

And can you help me understand how the data collection process works in Germany? Is part of the idea of acquiring a non-opt lower in interest stake, does that give you better access to data or are the players who are not currently active in the fields, are they able to get the same access to well data and resource data as active players?

[Lorenzo Donadeo:]

That's a good question that you ask there. Germany is quite a bit different with respect to data availability. You find in North America that this data is very readily attainable, typically at pretty low cost, by all the industry participants by potential participants here and, in fact, that's probably one thing that makes it so competitive in North America. In Europe in general and probably even more so in Germany, particularly the data is harder to get. We do see as one significant advantage of this acquisition that we do get data from this particular northwestern region in Germany more broadly. It is going to -- it gives us a start in the country, increases our focus in the country and through various potential business development activities, we would expect to start to amass more and more data over the entire country and it's a necessity to build a business there and this gives us a start in doing it. And has Germany itself, have they changed the way that data is becoming available? Is it easier than it was today than two years ago and are they -- is there anything in the works to make it more readily available?

[Travis Wood:]

And has Germany itself, have they changed the way that data is becoming available? Is it easier than it was today than two years ago and are they -- is there anything in the works to make it more readily available?

[Lorenzo Donadeo:]

To my knowledge it's no more readily available than it was two years ago and I'm not aware of any changes by the government to make it more readily available in the future. I think you have to be a participant in the industry and build that data knowledge and experience over time.

[Travis Wood:]

Okay. Great, that's all for me.

[Gordon Tait:]

Good morning. You've covered a lot of the areas where I had some questions. Maybe just one more on the German acquisition, Exxon is the operator there, so I presume that they're in control of the development of the exploration license and I was just wonder -- if that's correct I just wondered if you know what their plans are. Is it priority? Are they going to put more money into it so you can sort of see how new wells progress?

[Lorenzo Donadeo:]

Exxon Mobil is the operator. We're quite happy to be in there with them as the operator. We think they do an excellent job on the areas that are important to us, on [HSE], on good high quality assessment of the potential of the blocks. They do plan activity. We -- in fact, there's an exploratory well that will be spudded late this year, probably finished in the first part of next year. There are some provisions in these agreements to allow companies, non-operating parties, to propose activities and there are some sole, what are there called sole risk provisions in the event that some of the other parties don't want to go along with that.

[Gordon Tait:]

So you could -- it would be like going penalty or something here. You could go ahead and they would presumably have to sit on the sidelines and wait till you recoup your capital costs?

[Lorenzo Donadeo:]

Yes it's somewhat analogous to the non-consent provisions that you would see in Canada or the US. There are some variations and that's probably why they use a different term for it, this sole risk term, not necessarily penalties. It could result in a non-participating party to after that be unable to proceed with capital investment in the specific type of project or the specific area that the other parties would be going sole risk. So there is this type of provision that allows some degree of direction by the non-operating parties. All that said, we're quite happy with Exxon Mobil operating. We've got a great deal of confidence in them. It's our understanding that the four participants, the four entities participating in these licenses are quite cooperative and consult with each other a great deal in deciding what to do on the lands. So actually it's not something that we would anticipate being a major factor in our -- this type of provision. We wouldn't expect to be a major factor in our direction and participation on those lands going forward.

[Gordon Tait:]

All right thanks and then just one question on the Duvernay, you have a pretty big land position there. Even at $10 million a well, that -- those are pretty big numbers. If you intend to develop that yourself if you like the results you're getting, is it something you would look to bring partners in to help you develop?

[Lorenzo Donadeo:]

Yes I mean our view on the Duvernay, I mean we are getting more I guess positive on the play. When you look at sort of some of the recent news in terms of Encana coming out and doing a full assessment of all, of their 28 resource plays and ranking the Duvernay near the top, Chevron has done a major acquisition to consolidate in the Duvernay. Shell has had 12 rigs going in the Duvernay. There's been some great results by some of our peers in the Duvernay in terms of condensate production. So we're getting more positive on the play. Our view on it is to start and drill these initial wells and get a sense of where the opportunity lies and then over time it will give us a better assessment of how we want to go forward, whether we want to bring in a joint venture partner for part of the play, maybe sell off part of the play to fund other parts of the play that we like but the nice thing is is that we control the whole 320 odd sections and they're 100%. They are across the liquids-rich window and so I think, as we develop it and we get a better sense of what's there, then we can -- we have a lot of optionality how we move forward but there's a good chance we'll probably at some point in time consider some of those other options.

[Gordon Tait:]

All right thanks.

[Lorenzo Donadeo:]

Thank you.

[Operator:]

(Operator instructions)

[Pavan Hoskote:]

Good morning, guys.

[Lorenzo Donadeo:]

Good morning.

[Pavan Hoskote:]

I'll start off with a more general question on your international assets. Now over the last few years you've been more focused on acquisitions rather than exploration and as you look ahead into 2016, you probably have a lot more cash flow to work with, given that the Corrib project starts up, and now you've got about a million acres in Netherlands and Germany so do you see a big step up in exploration activity going forward? And if that's the case, then what does that mean for longer-term CapEx spending trends?

[Lorenzo Donadeo:]

Okay, Pavan, the profile that we put in place already, this applies to 2013, it applies to 2014. It will apply in 2015 and for a long time after that, is a ramp up of CapEx in these international units. We do it because the rates of return on the projects are very, very high and they tend to pay out pretty fast. They work quite well within our self funded growth and income model. There's a whole -- when we try to characterize these by type of activity and risk, there's actually an entire spectrum ranging from very, very low risk, development projects to extensional drilling to extensional drilling to new pool exploratory drilling. There's a large number of projects in each of these categories. We would probably be -- we're going to be directing our activities primarily to the low-risk end of the spectrum, development low risk extensional occasionally new pool exploration and in doing that we do think that, as we ramp up these programs, were going to see over the long-term a big increase in production rates from the Netherlands, fairly large increases from France and hopefully over time we will be able to develop the same type of business in Germany. So Corrib will, of course, give us a huge swing in free cash flow when it comes on but even prior to Corrib we've already embarked on a program of increased investment turning each of these business units, including Canada and to a lesser extent Australia. Australia is primarily a stable asset but turning each of them into a growth business while still generating more and more FFO and in fact over time more and more free cash flow because that's the nature of the investment projects that we have in each of those units. They are high rate of return and they fit into this free cash flow growth and income model.

[Pavan Hoskote:]

Thanks for that and maybe on somewhat of a related topic now following the acquisition in Germany you were active in about five international areas and now when you look across companies generally when companies get more diversified they eventually run into execution issues. Now, as you become a bigger Company yourself and become more diversified, do you worry about encountering some of those same issues? And, if so, how do you plan to address these issues?

[Lorenzo Donadeo:]

It's another good question that you ask there as well but the answer really is we're cognizant of the challenges that you have in running a diverse business with units in each country. We have experience that we've built up over a period of 17 years now internationally in developing individual businesses around the world and coordinating them centrally from Calgary. So first of all, I think our experience allows us to do it. Secondly, we're aware of the challenges that exist there. Thirdly, the way we're structured and we've moved even more so in this direction over the past few years, is to have in terms of operations independently functioning business units in each of those countries. Each of those business units has the technical and non-technical human resources that they need to execute their piece of the growth and income model. They've got the capabilities to identify the investment opportunities in each of the countries and this is the way that we get the maximum ultimately it becomes a question of the human creativity and that's how we maximize the creativity and the capability and the effectiveness of the people in each country by allowing them to independently run those businesses while coordinated from Calgary and this ultimately is what makes it possible. I'd point out further that a number of these businesses, France, Netherlands, Ireland and now Germany are concentrated in a very close geographic area in that European core and that makes --that has further advantages in being able to organizationally execute the model that we're following. And the final point is that, while this diversified set of operations yes is a challenge, it is in fact well worth it because of the diversification that we get in our revenue sources not being perfectly correlated with each other. The fact that we're in very high margin markets in Europe and in Australia further reducing the risk of the Company and finally, the way that it diversifies the projects slate that we have going forward to execute the growth in income model. So there are in fact a lot of advantages in going through the trouble to create this company with this kind of a diversified set of operations and exposures. Pavan, also these are actually in a number of countries, these are really leading to dominant positions that we've developed so even though it might look like they're small and absolute terms compared to what a major oil company or an integrated might have overseas, in fact in the markets we're in these are very large positions. For example, we're the number one oil producer in France with about two-thirds of the production there. We're the number two onshore natural gas producer in the Netherlands, second only to [NAM], which is an Exxon Shell JV. Of course, Corrib is going to be 95% of that country's production and 60% of its consumption when it comes on. We're number six in oil production in the Western Australia. Even in Canada we dominate the Cardium, the Mannville and prospectively the Duvernay in our own area of operation in West Pembina in the Drayton Valley area. So, to date, in each of these countries we've filled very, very strong positions despite what must -- what might look to you like a very diverse set of operations, we're able to really take advantage of them because of the way that we've built up relative to the -- built up our position relative to the local market.

[Pavan Hoskote:]

Thanks for that; it is very helpful.

[Patrick Bryden:]

Good morning, gentlemen. Just curious, in Germany obviously that represents a bit of a beachhead for you in country and I am wondering if you can maybe elaborate a little bit on a few points. Firstly, from a resource perspective what are the play types in particular that attract you as you think ahead? Secondly, can you multistage frac, those assets prospectively, and then thirdly, maybe just a quick few words on the pricing dynamics as you look ahead from potential competitive threats for other sources of gas or maybe there's opportunities in that regard as well. Thanks.

[Lorenzo Donadeo:]

Okay, first of all, in the types of the production, the existing productions from a series of conventional horizons in Germany, they're similar to reservoirs that we produce from in the Netherlands primarily in the Zechstein carbonates. There is potential in some of the -- there is production and potential in some of the sandstones as well but the existing production is all conventional. There are -- in addition, there are a number of new fault block, new pool targets. We think that we'll be drilled over time in those same rocks. We think there's potential for improved recovery over time due to increased use of compression to lower abandonment pressures and drive up recovery factors in the existing zones and there are tighter rocks. In particular, I would point to low permeability plastics in the carboniferous zone that we think are prospective. I think your second question was it about fracturing?

[Patrick Bryden:]

Yes is it possible to multi-stage fracture tighter rocks? What's the regulatory status of that?

[Lorenzo Donadeo:]

In the zones that we're producing in at present there's no need for fracturing. They're permeable. We tend to have quite conventional businesses really in all of our European countries at this point. Longer term in the other horizons a couple of other horizons, one of which I mentioned, technically I would say these are probably amenable to horizontal multi-stage fracs, potentially even the use of vertical wells in some of them with multi-stage fracs and fracturing is a challenge in every country in the world I would say practically outside of North America or at least in the big majority of the countries in Europe. It's our understanding that there is not an explicit ban on hydraulic fracturing in Germany at present. We know that it has to be carefully explained and permitted whenever it is attempted to be applied because, as you can probably guess, there are concerns I guess across the continent about fracturing so to apply it I think would take a medium to long-term effort to have the operation accepted on the individual wells where we might want to do it. In other words, it's all conventional today. There are low permeability targets and they would represent a longer-term probably educational effort.

[Patrick Bryden:]

Okay. Great and then maybe just as a follow-up to that, that pricing dynamics there you feel pretty comfortable like in the Netherlands that enjoy good pricing there on the gas side?

[Lorenzo Donadeo:]

Yes I think it's a great market. The gas in the Netherlands and in Germany is all ultimately linked to TTF, the Netherlands price, and actually the entire European market is quite well tied together without a great deal of variation in pricing throughout Western Europe. It's a strong price. There's a forward that can be hedged into. It's flat at a very high level in the range of probably $10.50 per MMBTU and we actually fundamentally think it's a very, very strong market in Europe.

[Curtis Hicks:]

Yes I mean we're quite bullish on European gas pricing, Pat, as you know. I mean you said there was a recent study done on European pricing and maybe one of your competitors that sort of the summary of some of the key points is that there's been increasing declines out of the U.K. North Sea that have really forced the import of more Russian and Norwegian gas and their market share of the European markets moved from about 42% and it's going to be moving up to about 52% of the European market supply. And, in addition to that, Russia is just entering into some new gas purchase arrangement with China where they're building a pipeline into China and they're going to be using that as leverage against Europe. When you couple that with sort of the option of landing new gas supplies into Europe using LNG, the displaced volumes you're going to have to displace are LNG cargos that are going to Asia. Those cargos are driven off of long-term pricing structures because of the investment required and the alternative [landed] price into Europe to offset the displacement in Asia would imply about a $13 an MCF landed cost into Europe. So I think the long and the short of this particular research piece was saying that pricing in Europe has got upward pressure to it. It's currently in the $10.50 range but they were saying that it could move upwards to the $13 range so we're quite bullish. We're quite happy at the $10 range but we think that there's some upside to that.

[Patrick Bryden:]

Okay. Appreciate that and then maybe just last question from me as you look at prospectively your Duvernay wells if they come in and you see what you want to see, and you turn your attention to the idea of lowering costs and trying to commercialize eventually, do you have a sense for how you think that might compete for capital versus the Cardium and your Mannville program as you see commodity prices today?

[Lorenzo Donadeo:]

Well, it will ultimately depend on the liquid yield. That's really what will drive the economics and then if we can -- depending on the liquid yield we get, the quantity yield in particular, that will really as we get smarter on that play, we'll be able to make better assessments but I think if you get in the range of probably 100 barrels a million, 70 to 100 barrels a million, I think you can drive some pretty strong returns. And then if you can optimize those returns with a joint venture structure, then I think you can really get some pretty juiced up returns that will be very, very well with some of our existing inventory.

[Patrick Bryden:]

Perfect. That's great. Thank you very much.

[Lorenzo Donadeo:]

Thank you.

[Operator:]

And we have no further questions at this time. I'll turn the call back to our presenters.

[Lorenzo Donadeo:]

Well, great. It's been a fairly long call here, so thanks, everybody, for sticking with us and thanks for participating in our conference call today. Thank you very much, operator.