Vermilion Energy Inc. (VET) Q3 2026 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Vermillion Q3 2026 conference call. At this time, all lines are in listen-only mode, and 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 Wednesday, November 4th, 2026. I would now like to turn the conference call over to Mr. Dionne Hatcher, President and CEO. Please go ahead.

Thank you. Good morning, ladies and gentlemen. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Lempster, Vice President and CFO, Darcy Kerwin, Vice President of International and HSE, Randy McQuaid, Vice President of North America, Laura Conrad, Vice President of Business Development, and Travis Thorgerson, Director of Investor Relations and Corporate Planning. Please refer to the advisory on forward-looking statements in our Q3 release. It describes the 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. We are delivering on our plan to structurally improve our accessory cash flow, with operational momentum continuing to build as we progress the key milestones communicated during our investor day. The rate of change in profitability is being reflected in operational results and outlook, with improvements to our capital efficiencies, base declines, and controllable cost structure. Our diversified portfolio is benefiting from elevated pricing for European gas, Canadian condensate, and debt-dated Brent oil. A combination of delivering on production and cost targets while benefiting from higher prices has enabled accelerated debt reduction and increased shareholder returns. This quarter was focused on the execution of planned maintenance activities, which were completed on schedule and without incident, as well as the continued integration of the recently acquired German assets. Land maintenance work, like this water's turnaround in Ireland, demonstrates for Millen's commitment to safety and operational excellence. Maintenance work complete and production restored for Millen expects European gas of approximately 100 million cubic feet per day in Q4. Looking beyond the quarter, Vermillion is also pleased to announce our 2027 budget, headlined by the E&D capital of $675 to $725 million and associated production guidance of $122,000 to $126,000 BUEs per day. The 2027 program builds on the company's operational momentum with increased drilling activity across the international business, a three-rig program in the Deep Basin, and continued advancement of the Mike and Montany development. This production guidance represents approximately 2% absolute and 5% per share growth of 2026. Important to note, the 2027 budget includes approximately $150 million of capital that is forecast to add production starting in 2028. This project represents an important step in our five-year plan. Our strategic infrastructure investment in Germany includes a debolonecking pipeline to increase production from our business horse Discovery Well. As the deliverability of this well far exceeded our expectations, this project is planned to start construction in early 2027 and is expected to increase gross capacity to approximately 17 million cubic feet per day by the end of 2027. We are also investing in Australia, Rwanda Crude would sell for premium to Brent pricing. Offers strong returns. We will execute a two-well campaign, utilizing a rig that is part of an industry multi-well program in order to reduce our rig mobilization costs. The most cost-efficient timing of the rig results in production from the Australia Drilling Program commencing in early 2028. As these projects are completed, Vermilion expects the 2028 E&D capital to return towards the 2026 levels in the low $600 million range. Finally, the 2027 budget is consistent with our sustaining or stayed flat capital estimate of $565 million. In 2027, we are forecast to deliver production growth, even though only $550 of the $700 million of capital adds volumes in 2027. We remain confident in our ability to meet or exceed the multi-wheel production and capital objectives established under Investor Day. Our plan factored in the Strategic International Capital Program in 2027 to increase exposure to European gas and Brent oil. At current commodity prices, our 2026 accessory cash flow forecast is over 60% higher than our initial forecast for the year. As we look to 2027, our accessory cash flow forecast will be over 20% higher than 2026, even with the higher capital program in 2027. Our accessory cash flow estimate for the five-year period has increased to $1.9 billion. The estimate factors in the 2026 operational outperformance and price, gives the 2027 budget and strip price, then reverts back to the investor day conservative price assumptions for 2028 to 2030. That's an increase of $200 million one year in to our five-year plans. With the strength in our underlying business, we also announced our plan to increase the 2027 base dividend by 4%, to $0.56 per share annually. This represents a six consecutive year of dividend increases, aligning with our commitment to sustainable, rateable dividend growth. For millions, dividend pay remains among the lowest in the Canadian E&P sector at sub-10% of our fund flows, offering capacity for years of future increases. We'll now pass it to Lars to discuss the quarter and add some additional detail on the 20th-27th budget.

Thank you, Dion.

In the third quarter, Brimley generated fund flows from operations of $237 million on E&D capital expenditures of $146 million, resulting in free cash flow of over $90 million. This cash flow supported increased shareholder returns and further debt reduction in the quarter. Following the increase in our return of capital target to 40 to 60 percent of EFCF announced with Q2 results, we paid $21 million in dividends and repurchased $20 million of shares during the quarter, twice the value repurchased through the first half of the year. Through the first nine months of 2026, Vermillion has returned $92 million to shareholders, while reducing net debt by nearly $180 million. This represents $1.76 per basic share of combined debt reduction and shareholder returns year-to-date, which we expect will increase with a strong financial outlook for Q4. During the quarter, we continue to advance key operational initiatives across our international portfolio. In Germany, we closed the previously announced acquisition of producing assets and brought the Vista Horsewell on production in July. Together, production from Visahorse and the Acquired Assets position our German business for production of approximately 7,500 BOE per day in the fourth quarter, which is a 25% increase compared to Q1 of this year. Overall, European gas production in the quarter was impacted by planned turnaround activity in Ireland and non-operated downtime in Germany, which temporarily reduced production to 81 million cubic feet per day. All of the required work was completed safely and on schedule, and production has been fully restored, positioning us for fourth quarter European gas production of approximately 100 million cubic feet per day. Subsequent to the quarter, we sputted a well in the Netherlands, with first production expected in the first half of 2027. In Canada, by reallocating capital within the portfolio, we were able to add five net wells in 2026, while managing to the midpoint of our corporate E&D capital guidance. Across our Canadian business, unit operating expenses are down approximately 10% year-over-year, driven by realized synergies and our continued focus on operational excellence. In the Deep Basin, we had multiple wells rank amongst the most prolific in Alberta during the quarter, including one well that produced 12.6 million cubic feet per day of natural gas and over 400 barrels per day of condensate in the month of August. This well was the second highest producing new gas well in the province that month, and the outsized condensate production drove exceptional well economics. We also set a new industry benchmark by drilling an upper Manville well to nearly 7,800 metres, representing the longest upper Manville well drilled by any operator. Deep basin production was temporarily lower in the corridor due to planned third-party maintenance and the timing of drilling activity. We also elected to defer several new well start-ups and restrict gas production to align with expected higher pricing later in Q4. In the Motney, we brought a four-well pad on production in Alberta, piloting a new completion approach to reduce sand and water recovery. Subsequent to the quarter, we established a new drilling pace benchmark on a pad that will be completed and brought online in the coming months. Vermilion remains focused on translating these operating improvements into repeatable reductions to our $8.2 million per well deset cost. The wells brought on production this quarter have been impacted by third-party downtime that has extended into the fourth quarter, but have otherwise produced in line with expectations when capacity has been available. Looking forward, we expect production to average 121,000 BOE per day in the fourth quarter, which will result in full-year 2026 production of 122,400 BOE per day on E&D capital expenditures of $620 million. Annual production is above the original midpoint of guidance, despite unplanned Australia downtime. And shut-ins and deferrals of Canadian gas wells to optimize profitability. We expect to see production growing through Q4 to align with typically higher pricing. As Dion noted, we released our 2027 budget this morning with E&D capital of $675 to $725 million, supporting production guidance of $122,000 to $126,000 BOE per day. Our Canadian investment is broadly unchanged from 2026. The increase in our 27 budget is concentrated in European gas and Brent oil international projects that support production beyond 2027. In our international operations, we plan to invest approximately $315 million in 2027, a roughly 50% increase compared to our 26 budget. This capital will be focused on advancing high-value European natural gas opportunities, as well as drilling in Australia. In Germany, we plan to drill two follow-up wells at Wieselhorst, Wieselhorst with spud planned for the first half of the year. We'll drill these wells, two wells back-to-back, using the same rake, and we expect cost savings of approximately 20%, along with a 30% improvement in cycle time compared to previous drilling programs. We will also continue development of key infrastructure, including a connection to the broader gas distribution network to support higher production from the discovery at Visahorse. In the Netherlands, we plan to drill two wells targeting larger structures than those pursued in recent drilling programs. And in Australia, we plan to commence a two-well drilling program in the second half of 2027. Aligning with a broader industry drilling program, which will help reduce mobilization and demobilization costs. Based on the currently planned timing of rig availability, we expect drilling to take place late in the year with production to come online in early 2028. We'll also continue to fund economic workover and optimization projects across the international portfolio. We expect European gas production in 2027 to be in line with 2026, as natural declines at Cora are offset primarily by year-over-year growth in Germany. With a successful 2027 VISA horse drilling program, we expect European gas production to increase by mid-2028, as production from new discoveries is brought online and the de-bottlenecking pipeline from the VISA horse discovery well is completed. In Canada, we plan to invest $385 million in our liquids-rich gas business. In the deep basin, we will target high-return wells across our asset base, with a focus on condensate-rich prospects to capture strong pricing. We expect minimal infrastructure requirements, with drill capital primarily directed to proven developments, while continuing with strategic investments to further strengthen our depth of inventory. In the Montney, we are allocating capital to drilling activity and expanding owned infrastructure, while growing production 10% year-over-year, all within MICA's cash flows. Finally, we noted in the budget release the revised timing of third-party gas processing infrastructure in northeast British Columbia, which is expected to shift our 28,000 BOE per day Montney target production rate to early 2029 from mid-2028. In the interim, we are redirecting capital to high-return, deep-basin locations that use existing infrastructure. Exercising the flexibility we have within our portfolio keeps us on track for the production growth and excess free cash flow commitments outlined at our 2025 Investor Day. This is a clear demonstration of the strength of Vermilion's diversified approach that offers enhanced optionality for capital allocation. Once the Motney reaches its target production rate, which requires $45 million of infrastructure and 28 wells to drill between 2027 and 2028, we expect annual drilling to moderate to approximately 8 wells to maintain production, with no material infrastructure requirements going forward. I will now pass it back to Dion.

Thank you, Lars. In summary, Vermilion delivered another strong quarter and made significant progress executing our five-year plan. The 2027 budget builds on that momentum and sets the stage for growth. We're making the investments that will structurally improve our business with improved capital efficiencies, lower basic lines, and lower unit costs. Improving business fundamentals in combination with higher production is forecast to deliver per share excess free cash flow growth. Following the close of the largest cash acquisition in the company's history, Vermillion has reduced net debt by approximately $900 million, while growing production per share by 50%. Today, our outlook is even stronger, with fourth quarter fund flows forecast to be significantly higher than Q3, supported by higher European gas and overall liquid volumes, as well as elevated European gas prices. Looking ahead, European gas fundamentals remain constructive, with inventories entering the winter season significantly below historical averages, and Europe increasingly reliant on LNG imports to balance the market. These dynamics are expected to support European gas prices through 2027, with the recent run-up in prices, the current TTF strip for the balance of 2026 is in excess of $40 Canadian per MMBTU and in excess of $30 per MMBTU for the full year of 2027. Building on our decades of expertise and extensive land position, we have allocated more capital to Europe to ensure we provide responsibly produced, secure energy for the countries that we operate in. While commodity prices will fluctuate, our focus remains on the factors we can control. With operational tailwinds and commodity prices for support, the company is very well positioned to continue generating sustainable free cash flow and shareholder value. With that, we'll now open the line for questions.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will then hear a prompt that your hand has been raised. Did you wish to decline from the polling process? Please press the star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. And your first question comes from Amir Arif from ATB Cormark. Please go ahead.

Thanks. Good morning, guys. Congrats on a good quarter. A few quick asset questions for you here. Starting with Germany, the next two wells that you are drilling, they seem to be in the thicker part of the discovery. Are you expecting better production at all out of these two wells? I just wanted to confirm the timing. I know that you've got the tea bottle project ongoing. I think that's what allows for production to grow in mid-2028. I'm just wondering when the production adds from the two wells being drilled next year will come on.

Great. Thanks, Amir. I'll pass it over to Darcy to just walk you through that, but the summary level would be the pipeline, the Vissel Horse pipeline. That's the one that noted on the call will kick off construction in early 27 and be on production late 27, and then the two Vissel Horse wells will be on by mid-2028. But Darcy, do you want to walk us through what you think of those next prospects? Any other details?

Yeah, thanks, Amir, for the question. I'll kind of step back, maybe give a bit of a broader view of Germany and Vissell's horse area. Kind of in the immediate term, on a gross basis, we expect kind of three to five million cubic feet a day from that first Vissell's horse discovery. Well, that's certainly not indicative of the... The first step of getting past that restriction is we will build a new 12-inch sales pipeline for this initial well. We're well along here. We've ordered pipe. We've ordered long lead items. We've recently selected the construction contractor that we'll use. So we do plan to break ground on that project in Q1-27, and as Dion said, we expect the start-up of this pipeline late in 2027, so that increases the takeaway capacity for the original visceral source well to kind of that 15 to 17 million cubic feet a day, which matches the on-site processing facility there. If I step away from Vissell Source just for a second, I just wanted to provide a production update on the deep gas well that we brought on at Osterheide, a well that we had originally forecast with restricted rates when we drilled it. This well has produced... A little over 8.5 million cubic feet per day since it started up, and our production in August recently here was over 13 million cubic feet a day, so that's been the highest month of production since we started up the well in 2025, allowing us certainly to capitalize on the stronger than expected local demand in the network there and really capitalize on that high gas price environment. It's worth pointing out that this well, since it started up, has generated over $65 million of free cash flow. And when I compare the Osterheide well with the Vissel Source Discovery well, that Vissel Source well is two and a half times the size of this Osterheide well. So that initial Vissel Source well will be quite impactful once these sales restrictions have been removed with the pipeline. If I go back to the Vistle Source area, I'm focusing on the new wells. We are planning two follow-up wells on that same exploration license where we made the discovery at Vistle Source Z1A. Lease construction is going to start right away here in November, and then we expect the rig move is scheduled for later in Q1. We would expect those wells to be drilled and into well testing early Q4 of next year, and then that puts us on schedule for first gas from those two wells mid-2028. You know, from a production point of view, these next two wells won't have that same restriction as Z1A had. They'll both tie into the higher capacity sales network in the area, rather than the kind of local distribution network that we use for Z1A. We would expect production from these two wells starting at 28 at a rate of about 15 to 17 million cubic feet again. Would that be per well, or is that a combined? Sorry, for the stats that can... That's a combined from those two wells limited by the gas processing installation on that particular surface.

Okay. I appreciate that call. Just moving over to the Netherlands, the two wells you're going to drill there. I know you mentioned you're chasing larger targets. Will these carry a higher exploration risk, or are they more development-type wells, similar to what you used to drill in the past?

Well, thanks, Amir. I'll pass it back to Darcy. Sorry, just to close the German, there's a lot of good color there. The only thing I would add to that is, you know, and maybe we've talked about this before, but you know, that Vista Horse well, the one that Darcy mentioned two and a half times, the Osrod well, you know, that's over 60 Bs of gas recoverable, and when we look at the Zant 2 and Zant 3, maybe that's where you're going with the thickness. You know, we do put those in our plan as risked wells, and so, you know, that means we're, you know, we're forecasting results that are less than the discovery well, even though we're about a thousand, you know, a kilometer away from the first well. So anyway, potentially some upside there. You've got to drill the wells, of course, but sure it's nice to be drilling those wells, offsetting a really large discovery well. With that, some good things happened in the Netherlands, and Bersi, back to you.

Yeah, so, Amir, in the Netherlands, as we said, we're currently drilling a well here with two more wells planned in 2027. Yeah, you correctly pointed out that those wells are potentially larger than some of the wells we've been drilling recently in the Netherlands. I wouldn't necessarily read through to that that they are higher risk opportunities. They are opportunities where we're stepping out a little bit. Further from a surface point of view from our existing areas, and we had kind of limited ourselves from a permitting point of view to drilling more wells in the heart of our operations. The wells we're drilling next year are still off existing pads, but they do allow us to reach what we think are. Larger prospects than we've seen in the last couple of years, but I think similar risk levels than the drilling you've seen from us in the Netherlands in the last five years, certainly.

Thanks, Darcy. I mean, to summarize that, Amir, what we're really excited about is we've got the well we're drilling in the Netherlands and two more next year, and then the two wells that Darcy walked through the Bisseur. So, you know, we've got a five-well program. Over the next, you know, mid-nominally four quarters, and if you think about the EORs on those wells, you know, they're 20 to 40 Bs, and so with five wells and some larger structures, you know, we're pretty excited about, you know, converging on the budget results, if not better, given the quality of the target. So we look forward to reporting more as we get into the second half of next year.

Yeah, that should be good drilling coming up. And then just shifting over to Australia, the two wells you're going to drill in late 27 with production adds in 28. Will those offset production declines, or is it enough, or two wells enough to sort of get that field level production to grow into 28?

Got it. So are you referring to the Australia? Australia, yeah. Yeah, quick answer there, and Darcy, jump in.

But yeah, as a reminder, we drill in Australia every two to four years.

You know, with commodity prices, the way they are, data Brent in particular, and the premium you get, it's quite attractive. You know, we had foreshadowed this during the investor day back in December that 2027 was likely to be a higher capital year. And so adding those Australia drills gets you from the low 600s to the 700 midpoint of our guidance. To your point, they're high-rate wells, and so these wells are typically 1,000 barrels. We do choke them, and then we're able to hold the platform flat for, you know, two to four years, depending on the restrictions and the quality of the wells. It's infill drilling. Again, we've drilled lots of wells on that platform and quite excited to have a hot rig that's going to be in the area to execute the program as well. But, sir, Darcy, anything we missed there on those particular wells?

Yeah, I think those two particular wells, we look at 2028, you certainly will see some growth over the rates that we've seen in 2026 and 2027. And, you know, part... Certainly, as a result of those two wells, but also, you know, getting back to normal operations at Wondu, as you know, we've been impacted by two cyclones this year that took us offline for quite some time. So, yeah, I think you should expect to see some pretty good growth in Australia in 28 versus 27, sir.

I appreciate the call, but it's a fact to put some numbers around. Is there a way over 4,000 barrels a day at the fuel level, even if you're choking back to wells? Would that be fair in 28?

Yeah, those are fair numbers. We're going to exit the year at around 3,000 Australia to Dursey's point with some of the maintenance work behind us planned through the year and the wells ramping up. Without those wells, your run rate is over 3,000. You'll drill the wells and then we'll be 4,000 to 5,000, I think, is how you would think about it. A mirror, and again, some of that, you know, with pricing, the way it is, the premiums on that crude, we've got the flexibility with volumes behind pipe there to be five, and that'll be a game day decision.

Okay, sounds good. One final question, just in the Motney, I know you talked about a new completion approach to reduce the sound and water recovery. Can you just provide a little more color? Are you changing the completion approach, or is it more in terms of the flowback timing and style?

Yeah, I'll pass it to Randy here. Kind of the read-through is the team's done a great job, as you know, taking costs down by 25%, and we thought it interesting to flow through some examples of things that teams are doing to continue to find ways to take those costs down. But, you know, Randy, maybe any more colour on those pilots and where you think it's going?

Yeah, so thanks. So yeah, I think, you know, when we looked at it, we kind of trialed a soak time period here where we let the well soak before bringing them flow back after we fracked. We certainly did see less frack sand recovery and less load fluid water recovery. So I think from our standpoint, you know, we need to do a bit more analysis on it. But I think, you know, to Dion's point, we're continually trialing different deset techniques and completion techniques and also operation techniques. As we sort of kind of level this thing out to get it up to peak production and understand that. So, you know, we see there's savings for sure in both the capital side and our OPEC side with this trial. And we just need to analyze a little bit more to understand if this is the new go-forward plan.

It may be super quick on the drilling pace. I know a couple of records there, but just...

Yeah, we're very excited with kind of the work we've done here. You know, Lars noted it in there that we had a pace setter well here in our last drilling program. So we'll continue with that. We hopefully want to be able to follow that up with the next two trials we're doing in the 27 program. But with that, I think where we do see, we quote 8.2 million DSA, we do have line of sight to get this down to 8 million, and that's really what we're striving towards, and then obviously never stopping beyond that. Thanks, Randy.

Appreciate the additional details. Thanks, guys.

Thanks for the questions.

Thank you. And there are no further questions at this time. I will turn the call back over to Mr. Dion Hatcher.

Thank you, everyone, for participating in the call. Enjoy the rest of your day.

Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.