Vermilion Energy Inc. Q2 FY2024 Earnings Call

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. Note that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Dion Hatcher, you may now begin your conference.

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 of International and HSE; Brandon McCue, Vice President, North America; and Kyle Preston, Vice President of 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 and Events & Presentations. Please refer to our advisory and 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 outlines 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 startup of our BC Montney battery. On a year-to-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 payout target of 50% of our annual excess free cash flow. We repurchased 2.8 million shares during Q2, for total proceeds of $47 million, and also paid 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 five successful exploration wells from Europe during the first half of the year. We'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, for gas sales at a premium to other European natural gas benchmarks. For the past two 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 the forward strip, it's 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 about the long-term development potential of our Germany and Croatia assets, and I will speak more about how we expect these two countries to provide meaningful organic growth in the following slides. In Germany, operations are focused on the successful discovery of the first deep gas exploration well. Testing was rescheduled to Q3, and we will continue to prepare for tie-in operations for the anticipated on-stream date of early 2025. 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 Tcf 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 costs to 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 previously drilled gas wells are currently ramping up production, which will increase our exposure to high-net-back European natural gas. On the SA-7 block, we drilled one exploration well, and completed two 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 four-well program, and discovered hydrocarbons across multiple zones. Three of these four wells are natural gas wells, allowing us to organically grow our European natural gas franchise. Testing operations on the remaining two wells were planned for the second half of 2024, and while we continue to move forward with the permitting process and evaluate the long-term development potential of the SA-7 block, these four new discoveries are very encouraging as they represent a 100% success rate on our inaugural SA-7 exploration campaign that 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 per 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 one and brought on production six BC Montney wells in advance with the startup of the BC Montney battery in late Q2. In Saskatchewan, we drilled two and completed one light well, while in the U.S., we participated in the drilling and completion of five 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 under the Montney asset. The start-up of the Mica battery will allow us to nearly double our Montney production to approximately 14,000 boes per day in 2025. It will provide the platform for future expansion to 28,000 boes per day through further developing 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 smoothly, and the plan continues to perform very well. During the second quarter, we brought up production six new wells on the 16-8 pad prior to the startup of the new battery. As shown on the blue line on this chart, these wells were constrained prior to the start of the battery, and production is in line with our expectations for these wells. Subsequent to the quarter, we completed five wells on the 9-21 BC pad that we expect to bring 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. On our most recent wells on the 9-21 pad, they were completed in significantly less time than previous wells using 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.

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 return of capital allocation to 50% of excess free cash flow 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 also an informal return of capital as it transfers value from debt holders to equity holders. Including these three components, we have returned over $10 per share of capital to our equity holders over the past three and a half years. The chart on the right shows the cumulative effect of share buybacks over the past three and a half 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 return of capital parameters. To date this year, we have already repurchased and canceled 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 as of 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 five 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 per day, taking into account planned turnaround activity, including a third-party turnaround deferred from Q2 2024 in Alberta. Higher downtime during this period supplies temperatures and approximately 800 boe per 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.

Thank you, Lars. While 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 supply portfolio that provides exposure to premium price European gas, which resulted in the corporate realized gas price of $5.69 this quarter, or a 4.8 times multiple to the ACO 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.

Thank you, Dion. Thank you again for participating in our Q2 2024 results conference call. Thank you.

Well, thank you, Sylvie.

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.