Vermilion Energy Inc. (VET) Q2 2026 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Vermilion Q2 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 the operator. This call is being recorded on July 30, 2026. I would now like to turn the conference over to Dionne Hatcher, President and CEO. Please go ahead.

Thank you. Good morning, ladies and gentlemen. I'm Dionne Hatcher, President and CEO of Vermilion Energy. With me today are Lars Glemster, Vice President and CFO, Darcy Kerwin, Vice President, International and HSE, Brandon McQuaid, Vice President, North President, Business Development, and Travis Thorganson, Director of Investor Relations. refer to the advisory and forward-looking statements in our Q2 release. It describes forward-looking information, non-gap measures, and oil and gas terms used today, and it aligns the risk factors and assumptions relevant to this discussion. The second quarter of 2026 was another strong quarter for Vermillion, with production averaging 125,800 BUEs per day, exceeding the top end of our guidance range. As the results across our portfolio continue to support performance that is trending ahead of our five-year plan that we communicated during our investor day and December performance in mind, and with significant progress in debt reduction, we have increased our return of capital target, and a range of 40% to 60% of excess free cash flow, up from 40% previously. Production performance is driven by record output at Mike and Montney, continued strong execution in the Deep Basin, and the stage restart of production in Australia, following the back-to-back cyclones earlier this year. Based on operational performance year-to-date, we have increased our full-year production guidance, now 121 to 123,000 bees per day, while maintaining our E&D capital budget range of $600 to $630 million. Our E&D capital expenditures and operating expenses are weighted towards the second half of the year, and we expect full-year cost to be within the stated guidance ranges for these items. In the Montany, strong performance from the most recent BC 6-well pad at 8 to 35 drove quarterly production at Mica up to 18,000 buoys per day. The pad achieved an IP90 of more than 950 buoys per day per well, comprised of $3 million a day of natural gas, and 470 barrels per day of oil and NGLs, with decent costs reduced to $8.2 million per well. These results continue to support the quality, the repeatability, and the improving capital efficiency of our Montany inventory. In the deep basin, activity was moderated through spring breakup. The program continues to outperform budget expectations. It has been the primary driver of corporate production outperformance for the first half of the year. In Europe, following the quarter end, we achieved another important milestone in our German deep gas Exploration Program, with the Vissel Horse Well being brought on to production in July. This represents first production from the largest discovery vermilions made in Europe to date. I would like to take this opportunity to thank our teams for their commitment to safe operations during the many steps required to bring this well in production. We are excited about the next steps, de-bottlenaking the production with a new sales pipeline, as well as drilling the next two wells on this license in 2027. Elsewhere, the Osterheide well continues to perform in line with prior quarter rates, with a cumulative free cash flow of $43 million since startup. We expect production growth in Germany to be driven by our deep gas exploration program, reaching 10,000 BUs per day by 2030, and given the significant resource, continuing to grow into the next decade. Also in Germany, we close the previously announced Voltan acquisition following quarter end. The transaction adds approximately 1,000 views per day of production, weighted 85% to natural gas, as well as ownership of key infrastructure around the Osterhide well. Adding production from this horse and these acquired assets is particularly impactful with the recent rally in European gas prices, currently over $25 per MMBTU through winter 2026. 2026. European storage levels are well below average for this time of year, and the current pace of refilling is not sufficient to reach the 80% target for winter. We plan to increase our domestic gas production through development of infrastructure, as well as exploration and development across our significant land base in both Germany and the Netherlands. A growing prospect list of high-return, capital-efficient targets per million is well-positioned to grow our production and free cash flow while providing our communities with a reliable source of energy. In Australia, production operations have gone to safely resume following repair work completed during the quarter. Our next export is planned for the third quarter and we expect to return to more regular exports. Our five-year plan continues to progress well. Operational execution across the portfolio combined with the first production from this force and continued success in the Deep Basin and Montney reinforces our confidence in the ability to generate growing pre-cash flow. Before I pass it to Lars to further discuss these results, I want to take a moment and acknowledge the challenges faced by some of our employees, contractors, and their families that are impacted by the fires in southern France. Our thoughts are with you and we hope the situation continues to improve in the upcoming days. Thank you, Dion.

In the second quarter, Vermilion generated fund flows from operations of $231 million on E&D capital expenditures of $110 million, resulting in free cash flow of over $120 million. Capital allocation remains focused on disciplined investment, continued balance sheet improvement, and shareholder returns. During the quarter, net debt was reduced by approximately $70 million to $1.22 billion. As of June 30, 30th, 2026, net debt to trailing four-quarter fund flows from operations was 1.3 times. Over the past five quarters, Vermillion has reduced debt by approximately $840 million, accelerating progress toward our $1 billion net debt target and significantly strengthening the balance sheet. This continued deleveraging has also reduced structural financing costs, with unit interest expense declining approximately 35% from the prior year. and we are on track to reduce full-year interest expense by $30 million from 2025. Reflecting this progress, as well as improved visibility to future cash flow and confidence in the sustainability of the business, we have enhanced our return-to-capital framework. Vermillion now intends to return 40% to 60% of excess free cash flow to shareholders, compared to the previous target of 40%. This framework continues to be supported by our base dividend and ongoing share repurchase program. Subsequent to the quarter, we announced the renewal of our NCIB out to July 2027. During the quarter, we returned approximately $26 million to shareholders through dividends of $21 million and $5 million of share repurchases. With the increased return of capital target, we expect the pace of share buybacks to increase. Turning to commodity risk management, Vermillion recognized a gain on hedging during the quarter as a realized loss of $57 million was more than offset by unrealized mark-to-market gains of $174 million on our hedge portfolio. These unrealized gains reflect changes in forward commodity prices relative to our hedge position at March 31, 2026. Our percentage of production hedged will decrease in the second half of 2026 relative to the second quarter levels, which increases our exposure to current elevated commodity prices. Operationally, Canadian production averaged 99,605 BOE per day during the quarter, which included record production from MICA. We continued to actively manage eco-exposure and prioritize profitability over production during periods of weaker natural gas pricing. We maintained strong well performance and continued to shift deep basin activity toward liquids-rich opportunities in the Rock Creek, Knighton, and Ellerslie. Several of our wells in Canada, in both the Deep Basin and Mawnee, ranked among the most prolific wells brought online during the quarter. In Europe, in addition to our work getting VissoHorse online and preparing for follow-up drilling, our activity this quarter focused on workovers, maintenance programs, and preparation for drilling activities in the Netherlands during the second half of 2026. These activities, together with production from VissoHorse and Osterheide, support the continued development of our European gas platform. Looking ahead, we expect third-quarter production to average between 116,000 and 118,000 BOE per day, reflecting planned maintenance activities in Ireland, Germany, and Canada. This is consistent with our assumptions at the time of the budget release. We expect Q4 production to be approximately 122,000 BOE per day, with European gas production back in line with first-half levels. For the full year, production guidance has been increased to $121,000 to $123,000 BOE per day, while E&D capital expenditure guidance remains unchanged at $600 million to $630 million. Both operating expenses and capital expenditures are expected to be weighted toward the second half of the year, as Dion previously noted. The increased production guidance reflects our strong operational performance year-to-date, which has more than offset the impact of back-to-back cyclones in Australia earlier this year. We are confident in the ability of the company to continue to deliver on our investor day outlook. I will now pass it back to Dion.

Thank you, learners. In summary, Vermillion delivered another strong quarter and made significant progress executing our five-year plan. Production exceeded the top end of our guidance range, free cash flow totaled $122 million, and net debt was reduced by another $70 million. These results reflect the strength of our asset base, quality of our teams, and our disciplined approach to capital allocation. $10 per million continues to focus on what we can control. As a result, we're seeing structural improvements in the business through stronger capital efficiency, improving wealth performance, and our full cycle margins. Production at VICA, continued deep-based net performance, and the successful restart of WANDU supported strong results across the portfolio. In Europe, we achieved first production from Vista Horse, marking another important milestone, executing our long-term European gas growth. Lastly, our balance sheet continues to strengthen with approximately $840 million of debt reduction achieved over the past five quarters. As leverage declines and visibility to grow and free cash will continue to improve, we are increasing our shareholder return framework. to target 40% to 60% of excess free cash flow. Looking forward, operational momentum remains strong. Production performance for the first half of 26 has allowed us to increase annual guidance without increasing capital expending. Ported by a repositioned portfolio, growing European gas exposure, a strengthening balance sheet, and a disminent capital allocation framework, we believe Vermillion is well-positioned to continue generating sustainable free cash flow and shareholder value.

With that, we want to open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Menno Hulsfoth with TD Cohen. Please go ahead, Menno.

Thanks, and good morning, everyone. I'll start with the question on the higher-level operational setup through the middle of next year, and you did touch on this to some degree in your opening remarks. I understand that you can't provide guidance for 2027, but beyond turnarounds this quarter, Is there any significant downtime or other considerations we should be aware of between now and the middle of next year? And then what could the, and I think you did guide Q4, but what could the exit rate look like for this year?

Ben, thanks for that. A couple of comments. To your point, I think the turnarounds that we're planning for and executing here in this quarter, I mean, Ireland's a great example. That is a five-year cycle on that turnaround. And so that would be very unique, but something we plan for on that key asset. Looking out from now into mid-2027, yeah, the answer is no. We don't see any key downtime, you know, not yet. So quick answer is no. The setup, we're quite excited. So if you look at the exit rate, Lars referenced this, you know, we're back to 122 or better. If you reference back to European gas, what does that mean for a business? the first half, we were 95 to 100 million a day. Again, hopefully we're on the higher end of that range as we exit this year. So we'll get these turnarounds behind us and I think have a strong Q4 and that really is a good setup going into 2027.

Terrific. And then second question is on the Germany drilling program. Can you maybe just remind us of how you manage the risk on these larger wells, including the two that will get drilled next year. I understand there's the farm down component, but maybe you could just remind us of the broader risk mitigation strategy and maybe also the math on the out-of-pocket cost of vermilion in the event of a dry hole, because if I recall, it's significantly lower than the actual well cost. Thank you.

Thanks, Ben. A lot of good questions there. First of all, I think it comes down to the I think the quality of the team and the G&G and the science and the decades that we have, multiple decades of working on these structures in Europe, this particular formation of the Rotteligan, again, is something we've been drilling for decades. Second, I would say we're in a proven fairway. When you look at some of those maps where we're drilling these structures, it is not uncommon. There's multiple, let's call it a handful of structures that have cumulatively produced over TCF. So if you're going to find big oil, big gas, start drilling in areas where there's been big gas found. So, you know, we're excited about the setup as to how we look at the risk reward, let's call it, versus economically. You know, if you think about the drill these wells at 50 million CAD, our target rate is 30 BCF recoverable. Fizzle horse, of course, is twice that. But if you spend $50 million in the success case, and that gives you the drill, the test, the on-lease gas plant, the pipeline, for $50 million and you get 30 piece of gas, that's $1.50 in MCF. If you assume gas prices are $13, and of course, they're more than double that now, but if at $13, the NPV per well is $60 million, right? And you can see with Osterhide, like it's been on for a year and it's doomed over $40 million of free cash flow and the well hasn't started to decline yet. So the success case, I think, is pretty, hopefully, straightforward. The failure case is, you know, we drill the well, we don't like what we see, we get off of the well. It's less than $15 million, okay? So the $50 million is the all-in success case. The dry oak case, let's call it, is sub-15, so one-five. The final point is commercially. You know, when we drilled Viscicorse, we knew that it was a very large structure, but but also we viewed that one as a little more higher risk but it was big and so commercially we did use a farm in to provide a promote and with that curry it effectively meant the after-tax drive whole cost was zero right or less than zero maybe so you know that's another quiver in our in our strategy here is we can use farm ins they're good prospects we're going to drill these prospects but if someone wants to come in and leverage some of the great work we've done you commercially, we can further reduce our risk. So hopefully that gives you, right from, hey, we're looking for big targets in the period where, in the area where big gas has been found, we've got a team that's been doing this for decades, we've done all the technology and reprocessed seismic, and then the failure case is sub-15, and then commercially, we can further mitigate that failure case with a promoter, Kari.

For the rundown, Dionne, I'll pass it back.

Thank you. Your next question comes from Greg Party with RBC Capital Market. Please go ahead, Greg.

Yeah, thanks. I want to stay just maybe on the back of Menno's question, maybe just to stay with Germany for a minute. And just in terms of the next two exploration wells that you have planned for early next year, I'm just wondering how far away those might be from Whistlehorse. And then in addition to that, maybe just any potential deep bottlenecking opportunities that you would have in that area, maybe just increased rates and what's required to accomplish those questions.

I'm going to pass it over to Darcy and just talk about the location of the next two whistlehorse wells and some of the steps, as noted, for the deep bottlenecking of the gas.

Yeah, great. Thanks for that. To answer your first question, those next two wells are located on a common pad, so they'll be drilled together on one pad. That location is kind of between one and two recovery wells as the crow flies. In terms of de-bottlenecking the first vessel source well that we brought online, we are in the process of permitting, acquiring a sales pipeline for that well. we expect that that pipeline end of next year and then we we do for the new the next two new wells you'll have a plan for an initial gas plant on that one site to to capture their production we have the opportunity to twin that gas plant on that site if we have strong results there and then that sales pipeline that we're building for business lots of opportunity to de-bottle back So de-bottleneck that area kind of next year with this sales pipeline and then hopefully a new gas plant.

Yeah, so summarize there, that sales line, it's a 12-inch piece of pipe. I think all the materials order, we're going to flatten that well up and get an opening of the infrastructure that Darcy mentioned. In fact, you're able to double to go from 17 to 34 million a day with the amount of gas we've got behind pipe.

But the first step, Greg, to your point, as Darcy mentioned, is getting that 12-inch pipe in the ground, and we're well on our route to do that. okay terrific yeah no thanks for that and maybe just staying with europe and maybe just moving into the netherlands and you know in the past uh you'd probably drilled you know potentially smaller prospects now you're i what i understand is you're drilling make perhaps fewer but bigger prospects could you is that is that am i thinking about that the right way and just any color around that would be great yeah i'll pass it back to darcy but i think you can just unwind the clock little in the investor day Jeff McDonald would have talked a lot about this and the plot that we that he was emphasizing is you know these these targets are two

and a half to three times bigger than what we were targeting before but Darcy you want to you want to build on that yeah sure thank you in the Netherlands I think if we look back and at the last ten years as you said the prospects we were drilling were getting smaller that was really driven by an effort from the permitting side to stay drilling on existing leases in existing areas and we've you know we've been continuously pursuing drilling locations outside of those areas to access some of these bigger bigger pools and and the drilling that we have planned for later this year as well as next year kind of is on the back of that where we are stepping out a little bit further from our existing operations and able to access bigger pools again in that area. So permitting for wells planned this year, we're ready to go once we have the rig available. Towards the end of September, then wells for 27 and 28 are in the midst of permitting in 27 and 100 into 28 in these bigger pools.

Yeah, team's done a great work, again, on the pruning, but also the technical side, building on Darcy's commas to bring these larger structures forward. We're quite excited to allocate capital there.

All right, thank you very much, both of you.

Great, thanks, Greg.

As a reminder, if you wish to ask a question, please press star 1.

Your next question comes from Dennis Fong with CIBCWM. please go ahead hi good morning and thanks for taking my questions um sorry to keep uh focusing on on germany here um obviously a lot of kind of exciting things there um i was hoping to dig into uh the recent concessions that you've uh been awarded and how specifically you're thinking about uh balancing we'll call it um step outs or follow-up drilling like things that you're doing at the Bommelsen license versus we'll call it little e exploration work to again further build out the depth of inventory that you have out in Germany especially with the winning of these new concessions.

I can give you a good summary there and you know the team's done a great job with the land we currently have which is obviously a big number over a million net acres identifying those nine structures and we see up to 30 wells on those structures and we're excited to now develop this horse but also test some of those additional six structures in the upcoming years to build on that you know deals like the one we closed but also the new concessions and other half-million net acres you know the team will do let's call it more of that study g&g work relatively low cost pulling a lot of data but we'll spend the next two three years really defining the prospectivity maturing prospectivity then you would look at the next couple years after that to think about you know drill commitments and those kind of things so really we see this with the defined inventory that we've got let's call it a decade at a risk space things like this new concession is really extending that runway even further and I think you know as we're having this conversation a couple years from now Dennis we'll be able to start to point to things on the map right right now it's a lot of land in the fairway that we like we're going I've spent a year or two just doing the G&G work to mature what we expect to be some prospects on that. But it's just really building on that decade that we've got in front of us. So you're going to see us test some new structures in the upcoming years, as well as develop the VISA horse.

Okay, great. I appreciate that color and context there, Dion. My next question focuses a little bit more on the balance sheet and allocation of free cash, allocation to shareholders. So, obviously, you've continued to deliver, and this is kind of a nice bump up in terms of directing 40% to 60% of excess free cash towards shareholder returns. Can you talk towards kind of what kind of drives you to maybe a 40% versus a 60%? Is that more commodity or kind of value that you see in the shares? And then how do you think about the confidence that you build in terms of allocating more and more free cash to shareholders, especially just given as you improved, obviously, depth of inventory across the asset base and then continue to execute across the various assets, whether it be in Canada or in Europe or Australia? All right, Lars can't wait to answer that question.

We're going to pass it over to him. No, thanks, Dennis. And I'll just try to give a little bit of context in terms of how we arise at the decision to move to 40% to 60%. So maybe two key data points that we look at. Obviously, the first one is just the status of the business today in terms of where we've taken the balance sheet, the quality of inventory. But maybe what I'll spend a bit more time on is just the rate of change of how we've gotten here. And so I made the comment in my remarks, we've reduced net debt by $840 million over the past 15 months. So a lot of progress there made in a short period of time. And you think back to 15 months as well, you know, we had just closed the Westbrook acquisition, consolidated into a 1.2 million acre deep basin position. We still had some infrastructure spend in the Montney to execute on, some key pads to deliver on as well. And we were still trying to quantify what we had in Germany. And so you fast forward 15 months to the end of the second quarter here. And I think a lot of boxes have been checked and in a very short period of time. And so those are the type of things that we want to look at. It's sort of structurally, are we executing on the plan within the business? As we look back, we said, you know what, we are more comfortable increasing that return of capital. You'll recall when we did the Westbrook acquisition, we reduced or temporarily reduced the return of capital from 50% to 40%. So with those boxes checked, happy to move to the 40% to 60%. Now, one thing that we are going to continue to maintain here is flexibility within that 40% to 60%. And so you think back to the second quarter here, lots of volatility, whether it was commodity price-wise, share price-wise. And so we want to maintain flexibility in terms of how we allocate capital over the longer term. But with this announcement today, we are looking to increase what we're allocating to shareholder returns. And maybe just the last point I'll make, Dennis, if you go back to the Investor Day last December, we laid out a framework of what we wanted to achieve here over the five-year plan in terms of end of 2030. I think we are well into that plan, delivering on that plan. And we've been able to increase our guidance here in 2026 on the production side, maintain the capital as well. And so we are looking at this from a long-term perspective in terms of allocating that capital. Maybe just lastly, you asked about Australia as well in terms of how we think about allocating capital. We continue to evaluate the prospect of drilling in Australia in 2027 with where oil prices are. we are leaning towards that being the right decision. So as we foreshadowed in our investor day, that would push capital for 2027 into that $700 million range, something that we'll manage within this framework. So anyways, I'll maybe stop there, Dennis, just to see if there's any follow-up.

Yeah, just appreciate that color there, Lars. I guess that was kind of a little bit of a lead into my follow-up question is kind of how to think about 27 CapEx. And then, again, as you see that kind of free cash flow rate of change in the second half of next year, as you round out effectively Motney drilling and then I guess now this Australia program, does that help drive more comfort in maybe moving up that targeted range if the balance sheet improves and so forth? or is there going to be a balance in terms of where you want to really drive down net debt even further for whatever reason on a go-forward basis?

I think you framed it very appropriately there. As we get into the second half of 2027 and then let's call it the later three years of the five-year plan that we laid out, capital comes back into that 600 to 630 million dollar range as the business grows towards that 130 000 barrels a day and so the reason that we are able to keep capital within that range grow production are for the reasons that you referenced their money infrastructure spend starts to come down we start to get some gas behind pipe in germany online we get the australia drill behind us as well. And so those will be the type of things that we look at. And I think with the flexibility we have in the framework now, we don't necessarily need to wait for those inflection points to buy back shares. If we want to be a bit more aggressive leading up to that, we have the capability within the framework here.

The vice versa is also true in terms of togging within that 40 to 60 percent maybe just to build on laris's uh comments there because he invented laris would have presented the slide it's in our deck that shows you know how would that 1.7 billion of excess free cash flow potentially be allocated over that five-year time frame and if you look at that plot you know it shows the net debt getting down midpoint around 750 million shows the dividend of course lots of runway there and then on share buybacks right we showed a range But, I mean, share count was coming down about 30%, right? Now, that, of course, would have been based on a $12 stock price, but that was based on $70 oil. That was based on $13 TTF. So, to summarize this, Larry's points there as the business fundamentals continue to improve, there's a return of capital, there's more free cash on the system. We're looking forward to returning more of that. And, again, I think the IR Day five-year plan is a good summary of what this business can deliver at reasonable commodity prices, i.e., $70 oil. it's a big number, $1.7 billion of excess recash over five years.

I appreciate the call for both of you. I'll turn it back. Thanks, Dennis.

There are no further questions at this time. I will now turn the call over to Dion Hatcher for closing remarks. Please continue.

Thank you again for participating in our Q2 conference call. Enjoy the rest of your day.

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