Vermilion Energy Inc. (VET) Q1 2026 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Vermilion Q1 2026 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. This call is being recorded on May 6, 2026. I would now like to turn the call over to Dionne Hatcher, President and CEO. please go ahead.

Good morning, ladies and gentlemen. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Glamster, Vice President and CFO, Darcy Kerwin, Vice President International and HSC, Brandon Kuwait, Vice President, North America, Lara Conrad, Vice President, Business Development, and Travis Thurgoodson, Director of Investor Relations and Corporate Planning. Please refer to our advisory and forward-looking statements in our Q1 release. It describes the forward-looking information, non-gap measures, and oil and gas terms used today, and it aligns to risk factors and assumptions relevant to this discussion. I'd like to begin today with a comment on the macro environment. The first quarter of 2026 was marked by heightened geopolitical uncertainty with continuing impacts in the global energy markets today. This uncertainty underscores the critical importance of energy security. We're mainly a substantial resource base with exposure to multiple commodities, including gas production in Europe, and liquid production tied to Brent benchmarks, provides unique exposure to global prices. This diversity of production extends to our gas-weighted assets in Canada. We have strategically positioned ourselves in the oily window in the mountain to have numerous liquid-weighted zones in the deep basin. Operationally, we delivered another strong quarter, with production volumes averaging 125,600 BWs per day, exceeding the upper end of our guidance. Canadian operations contributed an average of 99,700 BWs per day. That's a 10% increase over the prior quarter. Driven by very strong deep basin performance, a new montany well is brought online ahead of schedule. International operations averaged 25,900 BWs per day. Now that's reflective of cyclone-related downtime in Australia and natural declines in our European assets, which is prior to the next German gas fall coming online in mid-year. In total, our production mix consisted of approximately 59% Canadian natural gas, 13% European natural gas, and 28% liquids, with those liquids largely priced off of Brent and WTI. Our realized oil price increased by over 20% from the prior quarter, while our European gas production achieved an average sales price of approximately $16 per MMBTU. This meant that nearly 80% of our Q1 revenue was driven by European gas and liquid production. This underscores the value of our exposure to global pricing. Market fundamentals for European gas remain very supportive, with Q2 pricing in excess of $20 per MNBQ. That is over 10 times higher than the equal pricing in Q2. The next four quarters are expected to average approximately $20 per MNBQ. Disruptions in the Strait of Hormuz have impacted global LNG flows at a time when European gas inventories are at multi-year lows, with storage levels in Germany at about 25 percent and the Netherlands at 10 percent. European countries will need to add approximately 2 PCF of gas to storage by November to meet the mandated 80% capacity levels, requiring competitive action in the LNG market. Of note, we continue to see a more positive tone from governments, recognizing Vermilion as a responsible operator with decades of experience, one who has a key role to play in their energy landscape. To further enhance our exposure to premium-priced gas markets, we recently joined the Rockies LNG Consortium to evaluate delivering a portion of Armanty gas to the Sealism's LNG project. This would complement our existing agreement on the Alliance Pipeline that connects us to the premium price Chicago hub for pricing average approximately $5 premium BTU in Q1. We'll now pass over to Larry to discuss Q1 results in more depth. Thank you, Dion.

In the quarter, Vermilion generated $232 million of funds from operations. with $135 million of E&D capital expenditures, resulting in $98 million of free cash flow. Net debt was reduced by an additional $50 million to $1.29 billion as of March 31st, bringing our total debt reduction to $770 million over the past year. The timing of a lifting in France reduced Q1 FFO as a result of timing. This reduced Q1 FFO by $10 million, but will benefit Q2 FFO by $13 million due to the increase in the dated brand contract. Debt reduction remains a priority, and we now have more visibility to our $1 billion net debt target through our recent deleveraging resulting from strong operational execution and an improving commodity price outlook. This focus on debt reduction has resulted in a 40% reduction in interest costs per BOE versus Q1 of 2025. And our cored-up asset base has driven Q1 G&A per BOE down by over 50% versus 2025. In addition to the $50 million of debt reduction this quarter, we also paid $21 million to shareholders in dividends and repurchased $5 million of shares through our NCIB. With the move higher in oil and European gas prices in March, we recognized a loss on hedges in the quarter. It is important to note that this is largely driven by non-cash losses on hedges in place for future quarters, and that the portion of our production that remains unhedged will stand to benefit from increased pricing going forward. The realized portion of hedge losses in the quarter was $15 million, And for the balance of the unrealized hedge loss to be realized, pricing would have to remain at March 31, 2026 levels for the duration of our current hedge book. For additional context, we have updated our forecast of 2026 excess free cash flow in our most recent corporate presentation. And after incorporating current prices and the current 2026 estimated realized hedge losses, Vermilion will generate double the EFCF when compared to our 2026 budget projections. On the operations front, we maintained a three-rig drilling program in the deep basin, drilling 10 wells, completing 14, and bringing on production 18 liquids-rich gas wells. several of several of these wells ranked among the best wells in alberta throughout the quarter we have now shifted our deep basin drilling to higher liquids rate wells to capitalize on favorable pricing which highlights the flexibility of our asset base and depth of inventory in the montany we drilled five completed six and brought online six liquids rich gas wells these wells were bought on ahead of schedule and with strong initial oil rates, while also coming in at a lower capital cost than we had previously guided to. We achieved another milestone. Our planned per well cost in the Maunee is now $8.2 million, down $300,000 from $8.5 million previously. In Europe, we are on track to bring the first VISA horse well online in Germany by mid-2026. Plan to spud follow-up Wells on the Balmelsen license early next year and expect to commence drilling in the Netherlands in the second half of 2026. These activities support regional energy security through reliable, lower emissions gas compared to imported alternatives. In Australia, our operations in the quarter were impacted by two cyclone events, the first consecutive direct hits ever. We are proud to say that we successfully managed all aspects of the safe shut-in of operations and evacuation of personnel, with production resuming subsequent to the quarter following necessary repairs. While production operations were shut-in, we were able to export 300,000 barrels of oil in February. During the quarter, we signed an agreement to acquire producing assets in Germany, adding approximately 1,000 BOE a day of low-declined production. weighted 85% to natural gas, which increases our European TTF-linked gas and Brent-linked oil production, enhances cash flow, and provides strategic infrastructure control. The transaction is expected to close in the second half of 2026. We also announced the award of three new concessions in the North German Basin, doubling our acreage to well over 1 million net acres. Finally, we signed an agreement to divest our remaining 60% interest in the SA7 block in Croatia for net proceeds of approximately 15 million euros or 24 million Canadian. Proceeds from this sale will primarily reduce debt with the transaction expected to close in the second half of the year. These recent steps are aligned with our strategy to reposition our asset base to further enhance long-term profitability. Operation momentum remains strong and we continue to trend toward the upper end of our full-year production guidance range without an increase to our capital budget. We will actively manage around lower ACO pricing to prioritize value over volumes and we expect Q2 2026 production to average between 123,000 and 125,000 BOE a day. With our focus on liquids-rich production, Liquids weighting is expected to increase from 28% in Q1 to approximately 31% in Q2. I will now pass it back to Dion.

Thank you, Larry. I'd also like to thank our Australia staff for their outstanding commitment over the last several months. I've been with Vermillion for 20 years, and in that timeframe, we've never experienced back-to-back cyclone events. Being hit by a Category 3 storm, followed by a Category 4 storm shortly thereafter, It was a real test for our team, and they performed exceptionally well in preparing for the storms, repairing our platform, and safely restoring production. In summary, this was another strong quarter for Vermilion. Our repositioned portfolio and focus on operational excellence has reduced our unit cost structure and delivered production above our expectations. Our controllable expenses, that is operating, transportation, G&A, and interest, was lower by 25% compared to Q1 2025. Our OPEX was down $2 per BUE, or 14%. G&A was down $2 per BUE, or over 50%. And interest was down almost $2 per BUE, or over 40%. Lower cost structure helped reduce net debt by another $50 million this quarter, bringing the total reduction to 770 million since Q1 of last year. These gains are coupled with our improving capital efficiencies. In the month, we've reduced our planned capital cost per wealth by another 300,000, improving full cycle economics under mica acid, which translates to another 60 million reduction of future capital requirements, bringing the total reduction in the last two years to over $250 million. In the deep basin, we continue to realize operational wins. We're now starting to exceed the $200 million of synergies that we estimated shortly after closing the acquisition. And in Europe, we continue to see steady production from the ostride well and advance the work to support first production from our visceral horse well, our largest discovery in Europe to date, along with other key infrastructures supporting growing German gas production over time. In closing, we've built a very large resource base of 1.3 million net acres in Canada and over 2 million net acres in Northern Europe. This long-duration asset base compared with our strong technical teams, capital allocation flexibility, and a focus on operational excellence when combined with only 153 million shares, positioned for a million to generate growing and sustainable free cash flow per share. With that, we'll now open the line for questions.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to remove your hand from the queue, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. Just a moment for your first question. And your first question comes from Jeremy McRae with BMO Capital Markets. Please go ahead.

Yeah, hi guys. I just want to understand more about Germany here, your growth plans with this new acreage potentially hold. Is there any, you know, loosening of regulations? Just can you give us a bit more of a, you know, the five-year outlook here for Germany and if it can be a much bigger part of the Vermillion portfolio?

A question, I'll just kick it off here before I pass it over to Darcy. I mean, I just want to say, I think Germany is core to us. We just spent a few weeks there and really exciting with the first Oshrig Well, as noted, continue to produce strong. And the second well, Vissal Horse, coming on here in a matter of weeks by mid-year. And so it's looking really good. And more importantly, just the size of the resource. What we've said in our investor days, our plan is to double Germany production by 2030. But the exciting thing for us is that's only 2.9 net wells of the 30 that we've identified. But with that, Darcy, maybe you want to provide some color on where we are, but also maybe the regulatory environment we're getting.

Yeah, thanks, Jeremy, for the question. I think you made reference to this new exploration land that we've acquired. So we are very excited about these three additional exploration concessions that we've gotten in Germany. It brings our total acreage to well over a million acres. This acreage, it's located in the same fairway where we've had historical success in the Netherlands and more recent success in Germany. So we're on trend with all of those discoveries. And we see potential certainly on these new concessions for additional discoveries. They've just been granted to us, so we do need some time to evaluate this new acreage and understand exactly what's there before we got into drilling targets. But, you know, we have a decade of running room, a mandatory environment. You know, I think Germany has proven to be to work in. We've had some working with both the local and the federal governments to cover these on. What we have seen in Germany specifically and more broadly across Europe is much more receptive in the importance of domestic supply. So I've always kind of enjoyed that in Germany. But again, it's continuing to improve, starting to see the security of supply and the importance of domestic production, starting to hear noises from countries like Ireland and France about the wisdom of some of their production and exploration bands and whether they should be re-looking at those sort of things. So I think the environment is much more open for what we're trying to do. And I think a recognition of that what we're doing is important to energy security in Europe.

Thanks, Darcy. Maybe I'll just kind of a bit of a follow-up there. Then is there like an M&A market here that's opening up potentially a little bit more where there could be some more deals? or maybe just describe what the M&A market looks like now, assuming normalized pricing in that.

We'll write some comments on M&A Europe.

You bet. I mean, we just recently announced our one deal of acquiring 1,000 VREs a day in Germany. What we liked about that is it's adjacent or increasing our working interest in existing assets. We do see potential, I think, Vermilion. I mean, I'm new to Vermilion, but Vermilion is not new to Germany. and has developed strong relationships with the players there. We've got a super team in Germany. And so I think you'll see us active in all deal flow as well as looking proactively. Germany, we do view as core to us, and so we'll continue to assess opportunities there.

Thanks, Laura. Okay. Thank you, guys. Thanks, Jeremy.

Next question comes from Spencer Liming with CIBC World Markets, please go ahead.

Hey, good morning, guys. Thanks for taking my question. Just kind of touching more on the regulatory environment, are you seeing, discussions are looking good, right, in terms of government policy, in terms of increasing production, but has there anything, has anything materialized in terms of fast-tracking permits, or have you heard any conversations around maybe what that might look like if the countries are looking to increase production?

Question, you You know, I can summarize maybe what Darcy said, and please jump in Darcy if you have comments. I mean, I think there's a, just like Canada in every jurisdiction, there's an established timeline and steps to assess and acquire permits in all jurisdictions. And I think the way to think about it is, you know, we're seeing the resources assigned from the government's point of view to ensure that those timelines are met and those permits are ordered in a timely manner. So what that means is, you know, we brought two wells on last fall in the Netherlands. We're going to bring our fissile horse well on mid this year. We're drilling another well here, kicking it off in the summer in the Netherlands. We've got our two German wells planned early next year, right? So it's a daisy chain of activity, and what we do is we're planners, right? So we're working on permits now that we're going to drill in 27, 28, 29. So we just get ahead of it, and what we want in all jurisdictions is stable and predictable. And so we have no issues with the rules. We just want to make sure they're followed consistently with good timelines.

And that's what we're seeing. And frankly, that works well for us.

Anything I missed there, Darcy? Okay, yeah, great. That's really good color. Oh, sorry. Darcy, did you want to go?

No, sorry. I didn't have anything to add.

Okay, yeah, no, that's great. Just a follow-up question, pivoting over now to deep basin. So you guys have obviously shown over the years in terms of bringing costs down across the Motney. And I'm just kind of curious in terms of applying those cost-saving practices to the deep basin on the acquired lands. Do you see similar ability to reduce costs across those lands over time? And what would kind of be the cadence or timeline of kind of achieving those better practices?

Thanks, Spencer. Again, Spencer, I'll kick it off here and pass it to Rand McQuaid. But, you know, hopefully the read-through, I made a comment here on the script that we're now starting to exceed the $200 million of synergies that we identified post the acquisition. And that is a combination of expense, but it's almost capital. You know, I think we showed some things on there yesterday around per-well costs coming down, you know, year over year. And with the three rigs we're running consistently in deep basin, you know, we're seeing those wins. But, I mean, Randy, over to you to build on those comments.

Yeah, it's a good, it's a fair comment. Like, you know, I think the deep basin, it's, you know, with our three rig program, we've really been able to leverage our operational scale and our dominant position in that deep basin. So we have seen costs come down as they flow through. We'll kind of work through it in the next couple quarters here. But I would say we have definitely seen costs come down and continue to work on, you know, with this continuous improvement, we expect to see, you know, further efficiencies as we continue to get more active in the program.

Thanks, Ray. All right. Thanks, guys. I'll turn it back. Thanks, Spencer.

There are no further questions at this time. I'd like to turn the call back over to Dion Hatcher for any closing remarks.

Thanks again for the call. And with that, we'll close the line. Enjoy the rest of your day.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.