Vermilion
Vermilion
Vermilion

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  • Vision - To be recognized as the best high dividend oil & gas producer using a value driven growth strategy.  
  • Mission - To consistently deliver superior rewards to investors, employees, partners & the communities in which we operate.
  • Core Values - Excellence, Trust, Respect and Responsibility

The information contained in news releases posted to this website was accurate at the time of posting, but may be superseded by subsequent news releases.

Vermilion Energy Inc. Announces Third Quarter Results for the Three and Nine Months Ended September 30, 2012

November 1, 2012

CALGARY, Nov. 1, 2012 /CNW/ - Vermilion Energy Inc. ("Vermilion" or the "Company") (TSX - VET) is pleased to report interim operating and unaudited financial results for the three and nine months ended September 30, 2012.

HIGHLIGHTS

  • Recorded average production of 36,546 boe/d during the third quarter of 2012, compared to 39,168 boe/d in the second quarter of 2012 and 34,676 boe/d in the third quarter of 2011.  Year-over-year production growth of five percent was attributable to higher volumes from Vermilion's Canadian-based Cardium development program and Vermilion's acquisition of certain working interests in France in January 2012.  Quarter-over-quarter declines resulted from lower Cardium related activity levels due to breakup, the shut-in of some of our Canadian dry gas production and approximately two weeks of planned downtime in Australia to accommodate platform maintenance activities.  With the Company's continued focus on predominately crude-based production growth, Vermilion's consolidated production is now approximately two-thirds weighted to oil and liquids with the largest gains occurring in Canada where oil and liquids now account for 59% of average production as compared to 45% in the third quarter of 2011. In addition to this oil and liquids weighting, approximately 15% of our production is royalty free, high netback gas in the Netherlands.

  • Generated fund flows from operations of $137.1 million ($1.39 per share) in the third quarter of 2012, as compared to $127.8 million ($1.30 per share) in the second quarter of 2012 and $116.4 million ($1.29 per share) in the third quarter of 2011.  The increase in fund flows from operations for the third quarter of 2012 as compared to both the second quarter of 2012 and the third quarter of 2011 was primarily the result of an increase in crude oil sales in both France and Australia as well as continued strength in Vermilion's realized pricing.

  • Vermilion continues to experience strong operational performance in all of its operating regions, providing the Company with flexibility to manage the composition of its produced volumes to maximize profitability while achieving annualized production in the upper part of our guidance range of 37,000 to 38,000 boe/d.  As a result, Vermilion plans to manage its Canadian-based dry natural gas production to reduce exposure to weak North American natural gas pricing. The Company currently intends to bring on or cycle this production, as appropriate, to meet lessee obligations and to take advantage of higher seasonal pricing that may develop.

  • Vermilion currently anticipates full year capital expenditures for 2012 of approximately $465 million, subject to variability with respect to timing of the Company's Australian drilling activities.  The Company currently expects to provide initial 2013 planned production and capital guidance in mid-November.

  • Vermilion continues to benefit from its exposure to Brent-based crude oil and European natural gas production.  Vermilion's Brent-based crude volumes represent approximately 43% of consolidated production or 68% of total crude production and currently receives a premium, on average, to the quoted Dated Brent reference price. Given the challenged market for Canadian-based crude production in 2012, the Company's exposure to Brent-based crude production has provided Vermilion with an average US$25 to US$40 per barrel advantage relative to the Company's Canadian-based peers.  Vermilion's European natural gas pricing has also remained strong with Netherlands natural gas production, which is approximately 15% of our oil-equivalent production, having received an average price of $9.58 per mcf to date in 2012.  This compares to average AECO index pricing for Canadian-based natural gas production of $2.11 per mcf during the first nine months of 2012.

  • Vermilion's strong record of drilling success continued with results from two wells in the Netherlands.  The Eernewoude-2 development well (93% working interest) was drilled and tested during the third quarter at an initial test rate of 25 mmcf/d1, combining rates from individual tests of three zones. The Company also completed testing of the Vinkega-2 development well (42% working interest), which was drilled in the second quarter and has now tested at approximately 30 mmcf/d2, combining rates from individual tests of two zones. Vermilion plans to tie-in both wells during 2013.

  • Continued to grow production in the Company's Cardium light oil play as we continue with long-term development of our extensive and high-quality Cardium assets in the West Pembina field. Vermilion has increased Cardium related production from approximately 1,000 boe/d in 2010 to approximately 7,700 boe/d during the third quarter of 2012.

  • During the third quarter of 2012, Vermilion announced that the Company had invested a total of $84 million since early 2011 to acquire 408.5 net sections of undeveloped lands in Canada with exposure to emerging resource plays. These lands include 227 net sections in the Duvernay trend. To date, Vermilion has drilled, cored and completed a Diagnostic Fracture Injection Test (DFIT) on one vertical appraisal well in the Duvernay with encouraging results. The Company currently plans to core, log and DFIT an additional two Duvernay vertical wells, with drilling activities on the first of these prior to year end 2012. A significant portion of Vermilion's Duvernay rights are located across two large contiguous land blocks in the greater Drayton Valley region and lie directly beneath the Company's current Cardium development. Should Vermilion's Duvernay position ultimately prove suitable for full scale commercial development, this co-location of assets will enable the utilization of Vermilion's extensive oil and gas processing infrastructure in the region bestowing significant timing, operational and infrastructure advantages.  In addition to its Cardium and Duvernay rights in the region, the Company also has a large inventory of more conventional, Manville based liquids-rich gas development opportunities including the Ellerslie, Notikewin and Fahler. With the addition of the Duvernay, Vermilion now has significant exposure to three distinct development opportunities in this core operating region that have potential to deliver growth for the Company well into the second half of the decade.

  • On October 16, 2012, the tunnel boring machine that will be used to drill beneath Sruwaddacon Bay for installation of the onshore gas pipeline at  Corrib was delivered to the Aughoose launch site. The Company currently expects tunneling operations to commence prior to the end of 2012 with first gas at Corrib anticipated to occur in late 2014.

1     Eernewoude-2 test rate reflects combined production test results from three separate producing zones including: Slochteren Sandstone which tested at an average rate of approximately 8,950 mcf/d over four hours on a 24/64 choke and a flowing well head pressure of approximately 199 Bar; Ten Boer Sandstone was tested at (28/64)/(32/64)/(36/64) chokes with average rates of approximately 9,880/11,820/13,465 mcf/d/ over separate three hour periods at flowing well head pressures of approximately 159/147/133 Bar, respectively; Akkrum Sandstone was tested using 24/64 and 36/64 chokes resulting in average rates of approximately 3,770 and 4,475 mcf/d over separate three hour periods at flowing well head pressures of approximately 80 and 40 Bar, respectively. Test results are not necessarily indicative of long-term performance or of ultimate recovery.
   
2        Vinkega-2 test rate reflects combined production test results from two separate producing zones including: Slochtgeren Sandstone which tested at an average rate of approximately 22,380 mcf/d over four hours on a 40/64 choke and a flowing well head pressure of approximately 163 Bar; Vlieland Sandstone which tested at an average rate of approximately 4,850 mcf/d over six hours on a 36/64 choke and a flowing well head pressure of approximately 49 Bar. Test results are not necessarily indicative of long-term performance or of ultimate recovery.

Conference Call and Audio Webcast Details

Vermilion will discuss these results in a conference call to be held on Thursday, November 1, 2012 at 9:00 AM MST (11:00 AM EST).  To participate, you may call toll free 1-877-407-9205 (North America) or 1-201-689-8054 (International).  The conference call will also be available on replay by calling 1-877-660-6853 (North America) or 1-201-612-7415 (International) using conference ID number 400685.  The replay will be available until midnight eastern time on November 8, 2012.

You may also listen to the audio webcast by clicking www.investorcalendar.com/IC/CEPage.asp?ID=169764 or visit Vermilion's website at www.vermilionenergy.com/ir/eventspresentations.cfm.

ABBREVIATIONS

bbl(s)  barrel(s)
mbbls  thousand barrels
bbls/d  barrels per day
mcf  thousand cubic feet
mmcf  million cubic feet
bcf  billion cubic feet
mcf/d  thousand cubic feet per day
mmcf/d  million cubic feet per day
boe  barrel of oil equivalent of natural gas, natural gas liquids and crude oil on the basis of one boe for six mcf of natural gas
mboe  thousand barrel of oil equivalent
mmboe  million barrel of oil equivalent
boe/d  barrel of oil equivalent per day
NGLs  natural gas liquids
WTI  West Texas Intermediate, the reference price paid for crude oil of standard grade in U.S. dollars at Cushing, Oklahoma
AECO  the daily average benchmark price for natural gas at the AECO 'C' hub in southeast Alberta
$M  thousand dollars
$MM  million dollars
PRRT  Petroleum Resource Rent Tax, a profit based tax levied on petroleum projects in Australia
GAAP  Canadian Generally Accepted Accounting Principles or, alternatively, IFRS
IFRS  International Financial Reporting Standards or, alternatively, GAAP

DISCLAIMER

Certain statements included or incorporated by reference in this document may constitute forward looking statements or financial outlooks under applicable securities legislation.  Such forward looking statements or information typically contain statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", or similar words suggesting future outcomes or statements regarding an outlook.  Forward looking statements or information in this document may include, but are not limited to:

  • capital expenditures;
  • business strategies and objectives;
  • reserve quantities and the discounted present value of future net cash flows from such reserves;
  • petroleum and natural gas sales;
  • future production levels (including the timing thereof) and rates of average annual production growth;
  • exploration plans;
  • development plans;
  • acquisition and disposition plans and the timing thereof;
  • operating and other expenses, including the payment of future dividends;
  • royalty rates;
  • the timing of regulatory proceedings and approvals;
  • the timing of first commercial natural gas from the Corrib field; and
  • estimate of Vermilion's share of the expected natural gas production from the Corrib field.

Such forward looking statements or information are based on a number of assumptions all or any of which may prove to be incorrect.  In addition to any other assumptions identified in this document, assumptions have been made regarding, among other things:

  • the ability of Vermilion to obtain equipment, services and supplies in a timely manner to carry out its activities in Canada and internationally;
  • the ability of Vermilion to market crude oil, natural gas liquids and natural gas successfully to current and new customers;
  • the timing and costs of pipeline and storage facility construction and expansion and the ability to secure adequate product transportation;
  • the timely receipt of required regulatory approvals;
  • the ability of Vermilion to obtain financing on acceptable terms;
  • foreign currency exchange rates and interest rates;
  • future crude oil, natural gas liquids and natural gas prices; and
  • Management's expectations relating to the timing and results of exploration and development activities.

Although Vermilion believes that the expectations reflected in such forward looking statements or information are reasonable, undue reliance should not be placed on forward looking statements because Vermilion can give no assurance that such expectations will prove to be correct.  Financial outlooks are provided for the purpose of understanding Vermilion's financial strength and business objectives and the information may not be appropriate for other purposes. Forward looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by Vermilion and described in the forward looking statements or information.  These risks and uncertainties include but are not limited to:

  • the ability of management to execute its business plan;
  • the risks of the oil and gas industry, both domestically and internationally, such as operational risks in exploring for, developing and producing crude oil, natural gas liquids and natural gas;
  • risks and uncertainties involving geology of crude oil, natural gas liquids and natural gas deposits;
  • risks inherent in Vermilion's marketing operations, including credit risk;
  • the uncertainty of reserves estimates and reserves life;
  • the uncertainty of estimates and projections relating to production and associated expenditures;
  • potential delays or changes in plans with respect to exploration or development projects or capital expenditures;
  • Vermilion's ability to enter into or renew leases on acceptable terms;
  • fluctuations in crude oil, natural gas liquids and natural gas prices, foreign currency exchange rates and interest rates;
  • health, safety and environmental risks;
  • uncertainties as to the availability and cost of financing;
  • the ability of Vermilion to add production and reserves through exploration and development activities;
  • general economic and business conditions;
  • the possibility that government policies or laws may change or governmental approvals may be delayed or withheld;
  • uncertainty in amounts and timing of royalty payments;
  • risks associated with existing and potential future law suits and regulatory actions against Vermilion; and
  • other risks and uncertainties described elsewhere in this document or in Vermilion's other filings with Canadian securities regulatory authorities.

The forward looking statements or information contained in this document are made as of the date hereof and Vermilion undertakes no obligation to update publicly or revise any forward looking statements or information, whether as a result of new information, future events or otherwise, unless required by applicable securities laws.

Natural gas volumes have been converted on the basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.  Barrels of oil equivalent (boe) may be misleading, particularly if used in isolation.  A boe conversion ratio of six thousand cubic feet to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.


HIGHLIGHTS
             
 
($M except as indicated) Three Months Ended     Nine Months Ended
  Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
Financial 2012  2012  2011      2012  2011 
Petroleum and natural gas sales 284,838  246,544  248,361      841,870  756,398 
Fund flows from operations 1 137,094  127,775  116,369      415,991  337,453 
  Fund flows from operations ($/basic share) 1.39  1.30  1.29      4.26  3.75 
  Fund flows from operations ($/diluted share) 1.37  1.28  1.27      4.21  3.70 
Net earnings 30,798  37,816  64,442      133,708  173,064 
  Net earnings per share ($/basic share) 0.31  0.39  0.71      1.37  1.92 
Capital expenditures 106,255  94,888  134,781      295,503  338,529 
Acquisitions, including acquired working capital deficiencies 1     110,282  38,101 
Asset retirement obligations settled 1,968  2,581  4,269      5,315  15,512 
Cash dividends ($/share) 0.57  0.57  0.57      1.71  1.71 
Dividends declared 56,196  55,962  51,612      167,282  153,975 
  Less: Issuance of shares pursuant to the dividend reinvestment plan (17,251) (18,781) (15,219)     (53,590) (42,279)
  Net dividends 1 38,945  37,181  36,393      113,692  111,696 
  % of fund flows from operations, gross 41% 44% 44%     40% 46%
  % of fund flows from operations, net 28% 29% 31%     27% 33%
Total net dividends, capital expenditures and asset retirement obligations 147,168  134,650  175,443      414,510  465,737 
settled 1              
  % of fund flows from operations 107% 105% 151%     100% 138%
  % of fund flows from operations (excluding the Corrib project) 94% 93% 130%     89% 120%
Net debt 1 549,491  524,610  467,367      549,491  467,367 
Operational
Production              
  Crude oil (bbls/d) 23,047  24,658  20,464      24,062  20,602 
  NGLs (bbls/d) 1,245  1,405  1,369      1,341  1,369 
  Natural gas (mcf/d) 73,524  78,629  77,056      77,502  76,442 
  Total (boe/d) 36,546  39,168  34,676      38,320  34,711 
Production pricing              
  % priced with reference to WTI 23% 23% 17%     23% 15%
  % priced with reference to AECO 16% 18% 21%     17% 21%
  % priced with reference to Dated Brent 61% 59% 62%     60% 64%
Average selling price              
  Crude oil and NGLs ($/bbl) 100.70  100.07  100.71      102.32  104.26 
  Natural gas ($/mcf) 6.12  5.79  6.50      5.89  6.28 
Netbacks ($/boe) 1              
  Operating netback 55.02  53.88  49.85      54.87  50.35 
  Fund flows netback 38.66  39.40  36.46      39.44  35.62 
  Operating expenses 13.27  12.41  13.57      12.78  12.86 
Average reference prices              
  WTI (US$/bbl) 92.22  93.49  89.76      96.21  95.48 
  Dated Brent (US$/bbl) 109.61  108.19  113.46      112.10  111.93 
  AECO ($/mcf) 2.28  1.90  3.66      2.11  3.76 
Average foreign currency exchange rates              
  CDN $/US $ 0.99  1.01  0.98      1.00  0.98 
  CDN $/Euro 1.25  1.30  1.39      1.28  1.37 
Share information ('000s)
Shares outstanding              
  Basic shares outstanding 98,729  98,330  90,675      98,729  90,675 
  Diluted shares outstanding 1 101,149  101,249  92,815      101,149  92,815 
Weighted average shares outstanding              
  Basic shares outstanding 98,523  97,937  90,492      97,704  89,955 
  Diluted shares outstanding 99,748  99,923  91,710      98,848  91,241 

The above table includes non-GAAP measures which may not be comparable to other companies.  Please see the "Non-GAAP Measures" section of Management's Discussion and Analysis.

OPERATIONAL REVIEW AND OUTLOOK

Vermilion's operations continued to perform above expectations during the third quarter of 2012. Furthermore, the Company's strong relative realized pricing, resulting from its global commodity exposure and oil leveraged production bias, continues to support consistently strong fund flows from operations.  Even after shutting-in some of our Canadian dry gas production and downtime in Australia due to planned maintenance activities, Vermilion's year-to-date production remains 10% above production volumes during the same nine month period in 2011.

Vermilion's global commodity exposure continues to distinguish the Company from other North American producers with approximately 43% of year-to-date production comprised of Brent-based crude and a further 15% comprised of high netback, royalty free Netherlands natural gas production which has realized a price of $9.58 per mcf during the first nine months of 2012.  The Company's leverage to global commodity markets, through its diversified international operations, places Vermilion in a strong competitive position relative to North America based producers who are faced with significantly higher exposure to volatile differentials and increasing price uncertainty with respect to their North American natural gas and crude production.  Vermilion expects realized pricing for North American natural gas and crude production will remain at significant discounts to pricing the Company receives for its international production for the foreseeable future.  

During the third quarter of 2012, Canadian-based crude differentials remained relatively wide with Edmonton Sweet crude pricing at US$7.21 below the average price for West Texas Intermediate (WTI) of US$92.22, which itself was priced at an average discount to Dated Brent of more than US$17 during the quarter.  On the positive side, the AECO natural gas reference price improved by approximately 20% during the quarter to $2.28 per mcf, however it remained significantly below Vermilion's average price for European based natural gas production of nearly $9.50 per mcf. These pricing dynamics have impacted many of Vermilion's Canadian peers and although Vermilion is not immune to these price effects, the Company's netbacks remain robust as a result of its exposure to Dated Brent-based pricing for its production in France and Australia and the continued strength of natural gas pricing in Europe. 

Vermilion continues to experience strong operational performance in all of its operating regions. This provides the Company with flexibility to manage the composition of its produced volumes to maximize profitability while achieving annualized production in the upper part of our guidance range of 37,000 to 38,000 boe/d.  As a result, Vermilion plans to manage its Canadian-based dry natural gas production to reduce exposure to weak North American natural gas pricing. The Company currently intends to bring on or cycle this production, as appropriate, to meet lessee obligations and to take advantage of higher seasonal pricing that may develop.

Vermilion currently anticipates full year capital expenditures for 2012 of approximately $465 million, subject to variability with respect to timing of the Company's Australian drilling activities.  The Company currently expects to provide initial 2013 planned production and capital guidance in mid-November.

During the remainder of 2012, the Company's Canadian investment activities will continue to focus primarily on development of the Cardium light oil play.  Vermilion's well performance remains consistent and continues to outpace that of other operators in the West Pembina region.  The Company remains on target to achieve average costs of between $3.5 and $3.7 million per well and has exceeded this target on a 'per section' basis after accounting for several longer reach wells drilled in 2012.  Transportation costs also continue to decrease as Vermilion ties-in and processes greater volumes through its newly constructed oil processing facility.  At the end of the third quarter of 2012, Vermilion had drilled or participated in approximately 102.8 net wells, 90.8 of which were on production.   With an identified inventory at the beginning of 2012 of approximately 300 additional economic prospects in the West Pembina region, Vermilion has a drilling inventory that is expected to last at least six years at an expected drilling rate of 40 to 60 wells per year.  That inventory may grow as Vermilion achieves continuous improvement in costs and productivity in this resource play, and seeks to consolidate existing land positions within the West Pembina operating region. A further 120 prospects have been identified on Vermilion's legacy acreage which are viewed as having marginal economics in the current environment but could be drilled in future years if technological improvements, costs or commodity prices change sufficiently to improve the economics of these prospects.

Vermilion experienced lower volumes in Australia during the third quarter of 2012 resulting from approximately two weeks of planned downtime for annual maintenance. Vermilion plans to sustain annual average production at between 6,000 and 8,000 boe/d over the next few years with two-to-three well drilling campaigns conducted approximately every other year. Wandoo remains a key asset for Vermilion generating strong fund flows from operations.  Production at Wandoo attracts pricing at a meaningful premium to the Dated Brent index for crude oil with no transportation costs as a result of production being inventoried and sold directly into tankers from the platform.

In January 2012 Vermilion announced that it had closed the previously announced acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins in France. The assets are expected to average approximately 2,200 boe/d of production in 2012, weighted 86% to high quality Brent-based crude, and add an estimated 6.7 million boe1 of proved plus probable reserves (96% crude oil).  Vermilion paid approximately $106 million at closing of the acquisition, resulting in a cost of approximately $48,000 per flowing boe and $15.80 per boe of proved plus probable reserves as evaluated by GLJ.  The acquisition added to Vermilion's existing France asset base and is well aligned with the Company's strategic objective to maintain and consolidate its core operating areas and to increase its operating control where feasible. The acquired assets further strengthen Vermilion's position as the leading oil producer in France, and with a weighting toward high quality oil, are expected to continue to provide robust netbacks in the current commodity price environment. During the third quarter, Vermilion initiated its first workover program in the Vic Bihl field since taking over operatorship after the acquisition, with the first five workovers generating an initial incremental rate of over 500 bbls/d. The Company has identified numerous other areas in the acquired assets where we can reduce the current cost structure and increase production over time through optimized production operations, waterflood management and exploitation of infill development opportunities.

Vermilion's strong record of drilling success continued with results from two wells in the Netherlands.  The Eernewoude-2 development well (93% working interest) was drilled and tested during the third quarter at an initial test rate of 25 mmcf/d2, combining rates from individual tests of three zones. The Company also completed testing of the Vinkega-2 development well (42% working interest), which was drilled in the second quarter and has now tested at approximately 30 mmcf/d3, combining rates from individual tests of two zones. Vermilion plans to tie-in both wells during 2013.  Vermilion also continues to evaluate facilities, infrastructure and permitting requirements associated with potential production additions in 2013 from the Langezwaag-1 (42% working interest) well which was drilled during the 2011 drilling campaign. Looking forward, Vermilion intends to maintain a rolling inventory of projects such that each year will involve a combination of new wells and the tie-in of prior successes.

In Ireland, the Corrib partners have received all key approvals enabling preparation and construction of the tunnelling site for the onshore pipeline. On January 22, 2012, the period for appeals of the regulatory permits related to the project expired with no appeals remaining outstanding. This effectively brought the regulatory approval phase of the project to a close and enabled the start of the construction phase.  On October 16, 2012, the tunnel boring machine (TBM) was delivered to the Aughoose launch site.  The TBM will be used to drill beneath Sruwaddacon Bay for installation of the onshore gas pipeline at Corrib. Shell E&P Ireland Ltd., the project operator, is expected to initiate tunneling operations prior to the end of 2012. With five wells currently drilled, tested and ready for production, and construction of related pipelines and facilities largely complete, the Corrib project is anticipated to ultimately deliver approximately 55 mmcf/d (9,000 boe/d) of net production at high netbacks. First gas production is currently projected for late 2014 based on a deterministic project schedule.

Beginning in late 2010, the Company launched its New Growth Initiative forming two teams of senior technical professionals focused on the identification and capture of positions in Canada and Europe to provide exposure to unconventional shale oil and natural gas opportunities.  To date, the Company has invested $84 million to acquire a total of 408.5 net sections of undeveloped lands in Canada with exposure to emerging resource opportunities.  As a result of these acquisitions, the Company now holds several large and contiguous land blocks on Canadian resource plays, including two contiguous positions on the Duvernay totalling 190 net sections.  During the second and third quarters of 2012, Vermilion re-entered, cored, logged and completed a  Diagnostic Fracture Injection Test (DFIT) on an existing vertical wellbore in one of the blocks to assist in its appraisal of the Duvernay resource play. The Company currently plans to core, log and DFIT an additional two Duvernay vertical wells, with drilling activities on the first of these anticipated prior to year end 2012. A significant portion of Vermilion's Duvernay rights lie directly beneath the Company's current Cardium development in the greater Drayton Valley area. Should Vermilion's Duvernay position ultimately prove suitable for full scale commercial development, this co-location of assets will enable the utilization of Vermilion's extensive oil and gas processing infrastructure in the region bestowing significant timing, operational and infrastructure advantages. In addition to its Cardium and Duvernay rights in the region, the Company also has a large inventory of more conventional, Manville based liquids-rich gas development opportunities including the Ellerslie, Notikewin and Fahler. With the addition of the Duvernay, Vermilion now has significant exposure to three distinct development opportunities in this core operating region that have potential to deliver growth for the Company well into the second half of the decade.

Vermilion remains positioned to deliver strong operational and financial performance over the next several years.  The Company anticipates growing production by approximately 35% to 50,000 boe/d in 2015 through the continued development of its significant portfolio of organic growth opportunities.  Combined with an anticipated 50% growth in fund flows from operations over that same period based on current commodity prices, Vermilion remains confident of its ability to maintain a stable dividend for investors with the potential for dividend growth over time.  Near term development will continue to focus on high netback oil and European natural gas opportunities, including light oil production growth from the Cardium play in Western Canada and continued development of high netback natural gas prospects in the Netherlands. Vermilion anticipates Corrib will provide strong production and cash flow growth for the Company in 2015.  Beyond 2015, growth is anticipated to come from the development of new and emerging resource plays in Canada and Europe supported by relatively stable production in Australia, France and Ireland that is expected to deliver the fund flows to fund these new growth opportunities.

The Company's conservative fiscal management and limited use of equity to finance its growth objectives should allow future growth on a per share basis. The management and directors of Vermilion continue to control approximately 8% of Vermilion's outstanding shares and remain committed to delivering superior returns to all stakeholders.  Further, the Company continues to be recognized for excellence in its business practices.  In the first quarter of 2012, Vermilion achieved a "hat trick" by being recognized for the third consecutive year by the Great Place to Work® Institute in both Canada and France as one of the 25 best workplaces in each country. In a capital intensive business, we believe that our people are our most leveraging resource and we are honored by this recognition.

1      Estimated proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ") in a report dated October 14, 2011 with an effective date of December 31, 2011.
2  Eernewoude-2 test rate reflects combined production test results from three separate producing zones including: Slochteren Sandstone which tested at an average rate of approximately 8,950 mcf/d over four hours on a 24/64 choke and a flowing well head pressure of approximately 199 Bar; Ten Boer Sandstone was tested at (28/64)/(32/64)/(36/64) chokes with average rates of approximately 9,880/11,820/13,465 mcf/d/ over separate three hour periods at flowing well head pressures of approximately 159/147/133 Bar, respectively; Akkrum Sandstone was tested using 24/64 and 36/64 chokes resulting in average rates of approximately 3,770 and 4,475 mcf/d over separate three hour periods at flowing well head pressures of approximately 80 and 40 Bar, respectively. Test results are not necessarily indicative of long-term performance or of ultimate recovery.
3    Vinkega-2 test rate reflects combined production test results from two separate producing zones including: Slochtgeren Sandstone which tested at an average rate of approximately 22,380 mcf/d over four hours on a 40/64 choke and a flowing well head pressure of approximately 163 Bar; Vlieland Sandstone which tested at an average rate of approximately 4,850 mcf/d over six hours on a 36/64 choke and a flowing well head pressure of approximately 49 Bar. Test results are not necessarily indicative of long-term performance or of ultimate recovery.

MANAGEMENT'S DISCUSSION AND ANALYSIS 

The following is Management's Discussion and Analysis ("MD&A"), dated October 31, 2012, of Vermilion Energy Inc.'s ("Vermilion" or the "Company") operating and financial results as at and for the three and nine months ended September 30, 2012 compared with the corresponding periods in the prior year.

This discussion should be read in conjunction with the unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2012 and the audited consolidated financial statements for the year ended December 31, 2011 and 2010, together with accompanying notes.  Additional information relating to Vermilion, including its Annual Information Form, is available on SEDAR at www.sedar.com or on Vermilion's website at www.vermilionenergy.com.

The unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2012 and comparative information have been prepared in Canadian dollars, except where another currency has been indicated, and in accordance with IAS 34, "Interim financial reporting", as issued by the International Accounting Standards Board.

NON-GAAP MEASURES

This report includes non-GAAP measures as further described herein.  These non-GAAP measures do not have standardized meanings prescribed by International Financial Reporting Standards ("IFRS" or, alternatively, "GAAP") and therefore may not be comparable with the calculations of similar measures for other entities.

"Fund flows from operations" represents cash flows from operating activities before changes in non-cash operating working capital and asset retirement obligations settled.  Management considers fund flows from operations and fund flows from operations per share to be key measures as they demonstrate Vermilion's ability to generate the cash necessary to pay dividends, repay debt, fund asset retirement obligations and make capital investments.  Management believes that by excluding the temporary impact of changes in non-cash operating working capital, fund flows from operations provides a useful measure of Vermilion's ability to generate cash that is not subject to short-term movements in non-cash operating working capital.

"Fund flows from operations (excluding the Corrib project)" represents fund flows from operations excluding transportation expense related to the Corrib project.  Transportation expense related to the Corrib project pertains to a ship or pay agreement. As there is a ceiling on the total payments due in relation to the associated pipeline, these expenses essentially represent a prepayment for future pipeline transportation services.  Management believes that by excluding expenses related to the Corrib project, fund flows from operations (excluding the Corrib project) provides a useful measure of Vermilion's ability to generate cash from current production.

The most directly comparable GAAP measure to fund flows from operations and fund flows from operations (excluding the Corrib project) is cash flows from operating activities.

Cash flows from operating activities as presented in Vermilion's consolidated statements of cash flows are reconciled to fund flows from operations and fund flows from operations (excluding the Corrib project) as follows:

    Three Months Ended   % change     Nine Months Ended   % change
    Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M) 2012 2012  2011   Q2/12 Q3/11     2012  2011    2011 
Cash flows from operating activities 148,301  123,485  99,906            396,673  288,453     
Changes in non-cash operating working capital (13,175) 1,709  12,194            14,003  33,488     
Asset retirement obligations settled 1,968  2,581  4,269            5,315  15,512     
Fund flows from operations 137,094  127,775  116,369    7% 18%     415,991  337,453    23%
Transportation expense related to the Corrib project 1,899  1,974  2,253            5,874  6,721     
Fund flows from operations
(excluding the Corrib project)
138,993  129,749  118,622    7% 17%     421,865  344,174    23%

"Acquisitions, including acquired working capital deficiencies" are property acquisitions as presented in Vermilion's consolidated statements of cash flows, plus any working capital deficiencies acquired as a result of those acquisitions.  Management considers acquired working capital deficiencies to be an important element of a property acquisition.

Property acquisitions as presented in Vermilion's consolidated statements of cash flows are reconciled to acquisitions, including acquired working capital deficiencies as follows:

        Nine Months Ended
        Sept 30, Sept 30,
($M)     2012  2011 
Property acquisitions     106,184  38,101 
Acquired working capital deficiencies     4,098 
Acquisitions, including acquired working capital deficiencies     110,282  38,101 

"Cash dividends per share" represents cash dividends declared per share by Vermilion.

"Net dividends" are dividends declared less proceeds received by Vermilion for the issuance of shares pursuant to the dividend reinvestment plan, both as presented in Vermilion's consolidated statements of changes in shareholders' equity.  Dividends both before and after the dividend reinvestment plan are reviewed by management and are also assessed as a percentage of fund flows from operations to analyze the amount of cash that is generated by Vermilion which is being used to fund dividends.  Dividends declared is the most directly comparable GAAP measure to net dividends.

"Total net dividends, capital expenditures and asset retirement obligations settled" are net dividends plus the following amounts from Vermilion's consolidated statements of cash flows:  drilling and development, exploration and evaluation, and asset retirement obligations settled.

"Total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project)" are total net dividends, capital expenditures and asset retirement obligations settled excluding drilling and development and asset retirement obligations settled relating to the Corrib project.

Total net dividends, capital expenditures and asset retirement obligation settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reviewed by management and are assessed as a percentage of fund flows from operations and fund flows from operations (excluding the Corrib project) to analyze the amount of cash that is generated by Vermilion that is available to repay debt and fund potential future acquisitions.

Dividends declared, total net dividends, capital expenditures and asset retirement obligations settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reconciled to their most directly comparable GAAP measures as follows:

    Three Months Ended     Nine Months Ended
    Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2012 2012  2011     2012  2011 
Dividends declared 56,196  55,962  51,612      167,282  153,975 
Issuance of shares pursuant to the dividend reinvestment plan (17,251) (18,781) (15,219)     (53,590) (42,279)
Net dividends 38,945  37,181  36,393      113,692  111,696 
Drilling and development 96,212  77,956  89,332      262,064  281,749 
Exploration and evaluation 10,043  16,932  45,449      33,439  56,780 
Asset retirement obligations settled 1,968  2,581  4,269      5,315  15,512 
Total net dividends, capital expenditures and asset retirement obligations settled 147,168  134,650  175,443      414,510  465,737 
Capital expenditures and asset retirement obligations settled related to the Corrib project (17,164) (13,928) (21,686)     (40,574) (54,391)
Total net dividends, capital expenditures and asset retirement obligations settle (excluding the Corrib project) 130,004  120,722  153,757      373,936  411,346 

"Net debt" is the sum of long-term debt and working capital as presented in Vermilion's consolidated balance sheets.  Net debt is used by management to analyze the financial position and leverage of Vermilion.  The most directly comparable GAAP measure is long-term debt.

Long-term debt as presented in Vermilion's consolidated balance sheets is reconciled to net debt as follows:

  As At
  Sept 30, Dec 31,
($M) 2012  2011 
Long-term debt 492,669  373,436 
Current liabilities 442,376  491,184 
Current assets (385,554) (435,659)
Net debt 549,491  428,961 

"Netbacks" are per barrel of oil equivalent and per mcf measures used in operational and capital allocation decisions.

"Diluted shares outstanding" is the sum of shares outstanding at the period end plus outstanding awards under Vermilion's equity based compensation plan, based on current estimates of future performance factors and forfeitures. The most directly comparable GAAP measure is shares outstanding.

Shares outstanding is reconciled to diluted shares outstanding as follows:

  As At
  Sept 30, June 30, Sept 30,
('000s of shares) 2012  2012  2011 
Shares outstanding 98,729  98,330  90,675 
Potential shares issuable pursuant to the equity based compensation plan 2,420  2,919  2,140 
Diluted shares outstanding 101,149  101,249  92,815 

OPERATIONAL ACTIVITIES  

Canada

In Canada, Vermilion participated in the drilling of 16 wells (11.5 net) during the third quarter of 2012.  These wells included 14 (10.7 net) operated  Cardium horizontal wells and two (0.8 net) non-operated Cardium wells.  At the end of the third quarter of 2012, 83 operated (73.2 net) Cardium wells were on production and 54 (17.6 net) non-operated wells were on production.  Drilling and completion activities picked up late in the quarter following wet ground conditions in July and August that hampered the movement of equipment.

France

In France, Vermilion's third quarter activities were focused on workovers at Vic Bihl, the Company's first workovers in that field since obtaining operatorship as part of the acquisition in January of 2012. The workover program has resulted the first five workovers generating an initial incremental rate of over 500 bbls/d. Vermilion continues to work toward full integration of the acquired assets and realization of further future optimization, workover and infill drilling opportunities.

Netherlands

In the Netherlands, third quarter operating activities included testing of the Vinkega-2 development well (42% working interest), which was drilled during the second quarter of 2012 and has now tested at approximately 30 mmcf/d1, combining results from multiple zones. Further, Vermilion drilled the Eernewoude-2 development well (93% working interest) during the third quarter of 2012 and has achieved an initial test of 25 mmcf/d2, combining results from multiple zones. Both wells are anticipated to be brought on production toward the end of 2013 at restricted rates. Additional operating activities were focused on ongoing facility maintenance and permitting activities in preparation for a 2013 drilling campaign. Vermilion also continues to evaluate facilities, infrastructure and permitting requirements associated with potential production additions in 2013 from the Langezwaag-1 (42% working interest) well which was drilled during the 2011 drilling campaign.

1   Vinkega-2 test rate reflects combined production test results from two separate producing zones including: Slochtgeren Sandstone which tested at an average rate of approximately 22,380 mcf/d over four hours on a 40/64 choke and a flowing well head pressure of approximately 163 Bar; Vlieland Sandstone which tested at an average rate of approximately 4,850 mcf/d over six hours on a 36/64 choke and a flowing well head pressure of approximately 49 Bar. Test results are not necessarily indicative of long-term performance or of ultimate recovery.
2  Eernewoude-2 test rate reflects combined production test results from three separate producing zones including: Slochteren Sandstone which tested at an average rate of approximately 8,950 mcf/d over four hours on a 24/64 choke and a flowing well head pressure of approximately 199 Bar; Ten Boer Sandstone was tested at (28/64)/(32/64)/(36/64) chokes with average rates of approximately 9,880/11,820/13,465 mcf/d/ over separate three hour periods at flowing well head pressures of approximately 159/147/133 Bar, respectively; Akkrum Sandstone was tested using 24/64 and 36/64 chokes resulting in average rates of approximately 3,770 and 4,475 mcf/d over separate three hour periods at flowing well head pressures of approximately 80 and 40 Bar, respectively. Test results are not necessarily indicative of long-term performance or of ultimate recovery.

Australia

Vermilion continued preparations and permitting activities in anticipation of initiating a two to three well drilling campaign in late 2012.  Due to the anticipated timing of the drilling campaign in late 2012, production from the wells is not currently expected to occur until 2013. Vermilion also completed annual platform maintenance in the third quarter of 2012 that resulted in approximately two weeks of planned downtime.

PRODUCTION

    Three Months Ended   % change       Nine Months Ended   % change  
    Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
    2012  2012  2011    Q2/12 Q3/11     2012  2011    2011 
Canada                        
  Crude oil & NGLs (bbls/d) 8,526  9,078  5,831    (6%) 46%     8,825  5,378    64%
  Natural gas (mmcf/d) 35.54  41.32  42.94    (14%) (17%)     39.55  43.17    (8%)
  Total (boe/d) 14,449  15,965  12,987    (9%) 11%     15,417  12,573    23%
  % of consolidated 40% 40% 38%           40% 36%    
France                        
  Crude oil (bbls/d) 9,767  9,931  7,946    (2%) 23%     9,989  8,208    22%
  Natural gas (mmcf/d) 3.39  3.57  0.97    (5%) 249%     3.48  0.96    263%
  Total (boe/d) 10,333  10,526  8,108    (2%) 27%     10,569  8,368    26%
  % of consolidated 28% 27% 23%           28% 24%    
Netherlands                        
  NGLs (bbls/d) 41  84  64    (51%) (36%)     66  55    20%
  Natural gas (mmcf/d) 34.59  33.74  33.15    3% 4%     34.47  32.31    7%
  Total (boe/d) 5,806  5,707  5,589    2% 4%     5,811  5,440    7%
  % of consolidated 16% 15% 16%           15% 16%    
Australia                        
  Crude oil (bbls/d) 5,958  6,970  7,992    (15%) (25%)     6,523  8,330    (22%)
  % of consolidated 16% 18% 23%           17% 24%    
Consolidated                        
  Crude oil & NGLs (bbls/d) 24,292  26,063  21,833    (7%) 11%     25,403  21,971    16%
  % of consolidated 66% 67% 63%           66% 63%    
  Natural gas (mmcf/d) 73.52  78.63  77.06    (6%) (5%)     77.50  76.44    1%
  % of consolidated 34% 33% 37%           34% 37%    
  Total (boe/d) 36,546  39,168  34,676    (7%) 5%     38,320  34,711    10%

Canadian production of 14,449 boe/d during the third quarter of 2012 represented a 9% decrease from production of 15,965 boe/d in the second quarter of 2012, but an increase of 11% over third quarter of 2011 production of 12,987 boe/d.  The year-over-year increase in Vermilion's Canadian production was mainly attributable to Cardium production growth. The quarter-over-quarter decrease resulted from shutting in some dry gas production and reduced Cardium activity due to wet ground conditions which inhibited the movement of equipment in July and August. Production results continue to illustrate the low risk, dependable nature of planned production additions associated with Vermilion's Cardium program. At the end of the third quarter of 2012, Vermilion's high netback oil and liquids production represented approximately 59% of total Canadian production as compared to 45% at the end of the third quarter of 2011.

Production in France averaged 10,333 boe/d in the third quarter of 2012, a slight decrease from second quarter of 2012 production of 10,526 boe/d.  The modest decrease was attributable to natural production declines that were partially offset by optimization and workover activities during the quarter.  On a year-over-year basis production has grown by 27%, largely attributable to incremental production volumes associated with Vermilion's acquisition of certain working interests in the Paris and Aquitaine basins in January of 2012. Following the acquisition, Vermilion's France production remains 95% weighted toward Brent crude.

Average production volumes of 5,806 boe/d in the Netherlands during the third quarter of 2012 were nearly flat to second quarter of 2012 production of 5,707 boe/d, and third quarter 2011 production of 5,589 boe/d.  Incremental production from the Rotliegend zone of the Vinkega-1 discovery well, brought on production in December 2011, and from De Hoeve-1, brought on in May 2012, have largely offset natural production declines in the Netherlands and the suspension in late 2011 of production from the Vlieland zone of the Vinkega-1 well to facilitate production of the Rotliegend.

Australia production averaged 5,958 boe/d during the third quarter of 2012, compared to 6,970 boe/d in the second quarter of 2012 and 7,992 boe/d in the third quarter of 2011.  The quarter-over-quarter decrease in production was largely the result of planned downtime of approximately two weeks for annual platform maintenance. Year-over-year production was lower as a result of natural production declines with no new wells drilled since late 2010.  The Company's next drilling campaign is scheduled to begin in December of 2012 and is expected to result in increased production volumes in the first quarter of 2013.  Vermilion plans to sustain annual average production between 6,000 and 8,000 boe/d over the next few years with two to three well drilling campaigns conducted approximately every other year.

FINANCIAL REVIEW

During the three months ended September 30, 2012, Vermilion generated fund flows from operations of $137.1 million compared to $127.8 million for the three months ended June 30, 2012 and $116.4 million for the three months ended September 30, 2011.  The increase in fund flows from operations for the third quarter of 2012 as compared to both the second quarter of 2012 and the third quarter of 2011 was primarily the result of an increase in crude oil sales volumes in both France and Australia.  Cash flows from operating activities, a GAAP measure, increased for the third quarter of 2012 as compared to the same period in the previous year as a result of the increase in fund flows from operations and timing differences pertaining to working capital.

During the nine months ended September 30, 2012, Vermilion generated fund flows from operations of $416.0 million compared to $337.5 million for the same period in 2011.  The year-over-year increase in fund flows from operations resulted primarily from higher average production in Canada, France and the Netherlands, in addition to lower PRRT in Australia.  Cash flows from operating activities increased year-over-year as a result of the increase in fund flows from operations, reduced asset retirement obligations settled, and timing differences pertaining to working capital.

Vermilion's net debt was $549.5 million at September 30, 2012 (December 31, 2011 - $429.0 million) representing approximately 1.0 times annualized fund flows from operations.  The increase in net debt was the result of the $106.1 million acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins in France.  Long-term debt increased to $492.7 million at September 30, 2012 (December 31, 2011 - $373.4 million) as a result of current year to date capital expenditures, including the continued development of the Cardium resource play and the acquisitions of additional undeveloped acreage in Canada, as well as the aforementioned acquisition in France.

For the nine months ended September 30, 2012, total net dividends, capital expenditures and asset retirement obligations settled (excluding capital expenditures and asset retirement obligations settled on the Corrib project) expressed as a percentage of fund flows from operations were 89% (nine months ended September 30, 2011 - 120%).  The year-over-year decrease in this ratio relates primarily to improved fund flows from operations and lower capital expenditures.

COMMODITY PRICES

  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
  2012 2012  2011   Q2/12 Q3/11     2012  2011    2011 
Average reference prices                        
WTI (US$/bbl) 92.22  93.49  89.76    (1%) 3%     96.21  95.48    1%
Edmonton Sweet index (US$/bbl) 85.01  83.29  93.97    2% (10%)     86.94  96.77    (10%)
Dated Brent (US$/bbl) 109.61  108.19  113.46    1% (3%)     112.10  111.93   
AECO ($/mcf) 2.28  1.90  3.66    20% (38%)     2.11  3.76    (44%)
Netherlands oil-linked gas price ($/mcf) 9.56  9.94  9.78    (4%) (2%)     9.89  9.41    5%
Netherlands oil-linked gas price (€/mcf) 7.68  7.67  7.07    9%     7.70  6.84    13%
Average realized prices ($/boe)                        
Canada 53.61  51.58  51.81    4% 3%     53.67  51.71    4%
France 104.95  104.15  108.40    1% (3%)     106.00  105.67   
Netherlands 56.88  57.88  58.11    (2%) (2%)     57.95  55.54    4%
Australia 114.44  129.94  102.98    (12%) 11%     117.40  112.14    5%
Consolidated 80.35  76.04  77.85    6% 3%     79.83  79.82   
Production mix (% of production)                        
% priced with reference to WTI 23% 23% 17%           23% 15%    
% priced with reference to AECO 16% 18% 21%           17% 21%    
% priced with reference to Dated Brent 61% 59% 62%           60% 64%    

Reference prices

Overall, crude oil prices remained relatively consistent during the third quarter of 2012 as compared to the second quarter of 2012.  WTI and the Edmonton Sweet index continued to trade at a significant discount to Dated Brent due to increased production in North America and the subsequent increase in inventories at Cushing, Oklahoma.

The AECO reference price increased 20% from the second quarter of 2012 to the third quarter of 2012 due in part to increased demand in natural gas for power generation during the summer.  However, the AECO reference price was 38% lower compared to the same quarter in the previous year due in part to the excess supply of natural gas in North America and continued high levels of inventory.

The Netherlands realized gas price remained relatively consistent quarter-over-quarter.

Realized pricing

The realized price of Vermilion's crude oil in Canada is directly linked to WTI but is subject to market conditions in Western Canada.  These market conditions can result in fluctuations in the pricing differential, as reflected by the Edmonton Sweet index price.  The realized price of Vermilion's NGLs in Canada is based on differentials to product specific trading hubs in the U.S.  The realized price of Vermilion's natural gas in Canada is based on the AECO spot price in Alberta.

Vermilion's crude oil in France and Australia is priced with reference to Dated Brent.

The price of Vermilion's natural gas in the Netherlands is based on pricing established by GasTerra, a statutory entity which purchases all natural gas produced by Vermilion in the Netherlands.  The oil-linked natural gas price in the Netherlands is calculated using a trailing average of Dated Brent and the natural gas prices from European trading hubs.

Average realized prices in Vermilion's international jurisdictions will differ from their corresponding average reference prices due to a number of factors including the timing of the sale of production, differences in the quality of production and point of settlement.  In Canada, average realized prices are impacted by the production mix of crude oil, NGLs and natural gas. The quarter-over-quarter increase in the average realized price for Canada was due to an increase in the percentage of crude oil and NGLs production in Canada, from 57% for the second quarter of 2012 to 59% for the third quarter of 2012, coupled with the increase in the AECO reference price for natural gas.

On a consolidated basis, for the three months ended September 30, 2012, crude oil and NGL production represented approximately 66% of total production (three months ended September 30, 2011 - 63%).  Production priced with reference to crude oil (WTI and Dated Brent) represented approximately 84% of total production for the three months ended September 30, 2012 (three months ended September 30, 2011, 79%).

CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS

  Three Months Ended     Nine Months Ended
By category Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2012 2012 2011     2012  2011 
Land 7,666  31,713  35,041      46,046  50,246 
Seismic 2,653  1,327  2,090      4,779  5,963 
Drilling and completion 55,320  28,309  62,412      138,487  153,379 
Production equipment and facilities 34,691  26,718  28,049      86,164  104,205 
Recompletions 2,956  1,403  3,399      7,004  14,390 
Other 2,969  5,418  3,790      13,023  10,346 
Capital expenditures 106,255  94,888  134,781      295,503  338,529 
Property acquisitions     106,184  38,101 
Total capital expenditures and property acquisitions 106,255  94,888  134,781      401,687  376,630 
               
  Three Months Ended     Nine Months Ended
By classification Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2012 2012 2011     2012  2011 
Drilling and development 96,212  77,956  89,332      262,064  281,749 
Exploration and evaluation 10,043  16,932  45,449      33,439  56,780 
Capital expenditures 106,255  94,888  134,781      295,503  338,529 
Property acquisitions     106,184  38,101 
Total capital expenditures and property acquisitions 106,255  94,888  134,781      401,687  376,630 
               
  Three Months Ended     Nine Months Ended
By country Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2012 2012 2011     2012  2011 
Canada 63,701  55,456  92,993      191,139  254,306 
France 10,416  10,281  8,806      132,539  44,871 
Netherlands 5,257  5,379  8,707      13,206  19,843 
Australia 9,721  9,867  2,549      24,132  9,448 
Ireland 17,160  13,905  21,726      40,671  48,162 

Capital expenditures for the third quarter of 2012 increased from the second quarter of 2012 primarily as a result of increased activity in Canada and Ireland.  The increase in capital expenditures in Canada resulted mainly from more wells being drilled, completed, and tied-in in the third quarter as compared to the second quarter. Vermilion participated in the drilling of 16 (11.5 net) wells during the third quarter as compared to the drilling of 10 (6.7 net) wells in the second quarter. This increase in Canada was partially offset by a reduction in land acquisitions in the third quarter.  The increase in capital expenditures in Ireland resulted from ocean bottom seismic studies and preliminary tunneling activities.

Capital expenditures for the third quarter of 2012 decreased as compared to the same period in the previous year.  This decrease was primarily a result of a reduction in Canadian land acquisitions.

On a year to date basis, capital expenditures were lower in 2012 as compared to 2011.  This decrease was primarily the result of reduced expenditures in Canada and Ireland, partially offset by higher expenditures in Australia.  The decrease in expenditures in Canada was primarily the result of lower facilities expenditures, including the absence of costs relating to the construction of a 15,000 bbls/d oil processing facility that occurred in 2011, reduced land acquisitions and well tie-in activity.  The decrease in Ireland was primarily the result of reduced facilities expenditures.  The decreases in Canada and Ireland were partially offset by an increase in capital expenditures in Australia, which resulted primarily from facility maintenance and preliminary spending for the Australian drilling campaign.

The increase in property acquisitions in 2012 was primarily due to the January 2012 acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins in France.  Vermilion paid $106.1 million upon closing of the acquisition.

PETROLEUM AND NATURAL GAS SALES

  Three Months Ended   % change     Nine Months Ended   % change
By product Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe and per mcf) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011
Crude oil & NGLs 243,471  205,126  202,303    19% 20%     716,888  625,348    15%
Per boe 100.70  100.07  100.71    1%     102.32  104.26    (2%)
Natural gas 41,367  41,418  46,058    (10%)     124,982  131,050    (5%)
Per mcf 6.12  5.79  6.50    6% (6%)     5.89  6.28    (6%)
Petroleum and natural gas sales 284,838  246,544  248,361    16% 15%     841,870  756,398    11%
Per boe 80.35  76.04  77.85    6% 3%     79.83  79.82   
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011
Canada 71,268  74,932  61,903    (5%) 15%     226,726  177,512    28%
Per boe 53.61  51.58  51.81    4% 3%     53.67  51.71    4%
France 102,369  94,828  80,845    8% 27%     300,708  241,383    25%
Per boe 104.95  104.15  108.40    1% (3%)     106.00  105.67   
Netherlands 30,386  30,062  29,883    1% 2%     92,268  82,474    12%
Per boe 56.88  57.88  58.11    (2%) (2%)     57.95  55.54    4%
Australia 80,815  46,722  75,730    73% 7%     222,168  255,029    (13%)
Per boe 114.44  129.94  102.98    (12%) 11%     117.40  112.14    5%

Vermilion's consolidated petroleum and natural gas sales for the three months ended September 30, 2012 increased relative to the three months ended June 30, 2012 by $38.3 million.  This increase was primarily the result of higher crude oil sales volumes in Australia and France, partially offset by lower natural gas sales volumes in Canada.

Consolidated petroleum and natural gas sales for the three months ended September 30, 2012 were higher than the comparable period in 2011 by $36.5 million.  This increase was primarily the result of overall higher crude oil sales volumes, partially offset by a year-over-year decrease in natural gas sales volumes in Canada and a decrease in the Edmonton Sweet index and Dated Brent reference prices.

Consolidated petroleum and natural gas sales for the nine months ended September 30, 2012 were higher than the comparable period in 2011 by $85.5 million.  The increase was primarily attributable to higher crude oil sales volumes, resulting in part from increased Cardium crude oil production in Canada and additional production from Vermilion's January 2012 acquisition in France.  These increases were partially offset by a decrease in both the realized prices for crude oil and natural gas in Canada.

CRUDE OIL INVENTORY

Vermilion carries an inventory of crude oil in France and Australia, which is a result of timing differences between production and sales.  Crude oil inventories decreased in the third quarter of 2012 versus the second quarter of 2012 due to a decrease in both France's and Australia's inventory of 24,806 bbls and 158,029 bbls, respectively.

The following table summarizes the changes in Vermilion's crude oil inventory positions:

  Three Months Ended     Nine Months Ended
  Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
(bbls) 2012  2012  2011      2012  2011 
France              
   Opening crude oil inventory 270,801  223,421  215,132      186,955  158,229 
   Crude oil production 898,599  903,750  731,009      2,736,893  2,240,796 
   Crude oil sales (923,405) (856,370) (736,504)     (2,677,853) (2,189,388)
   Closing crude oil inventory 245,995  270,801  209,637      245,995  209,637 
Australia              
   Opening crude oil inventory 274,878  208  62,397      221,898  172,199 
   Crude oil production 548,144  634,245  735,365      1,787,323  2,274,131 
   Crude oil sales (706,173) (359,575) (626,026)     (1,892,372) (2,274,594)
   Closing crude oil inventory 116,849  274,878  171,736      116,849  171,736 
               

DERIVATIVE INSTRUMENTS

  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Realized loss on derivative instruments 1,869  3,591  7,793    (48%) (76%)     11,178  22,185    (50%)
Per boe 0.53  1.11  2.44    (52%) (78%)     1.06  2.34    (55%)

The realized loss on derivative instruments was lower in the third quarter of 2012 as compared to both the second quarter of 2012 and the third quarter of 2011 due to weaker crude oil prices relative to the ceiling on certain derivative instruments pertaining to 2012.  In the current quarter, crude oil prices were lower than the ceiling price of Vermilion's derivative instruments and as such the realized loss related entirely to premiums paid on funded collars and put options.

The nature of Vermilion's operations results in exposure to fluctuations in commodity prices, interest rates and foreign currency exchange rates.  Vermilion monitors and, when appropriate, uses derivative financial instruments to manage its exposure to these fluctuations.  All transactions of this nature entered into by Vermilion are related to an underlying financial position or to future crude oil and natural gas production. Vermilion does not use derivative financial instruments for speculative purposes.  Vermilion has elected not to designate any of its price risk management activities as accounting hedges and thus accounts for changes in fair value in net earnings at each reporting period.  During the normal course of business, Vermilion may enter into fixed price arrangements to sell a portion of its production or purchase commodities for operational use.  Vermilion does not apply fair value accounting on these contracts as they were entered into and continue to be held for the sale of production or operational use in accordance with the Company's expected requirements.  Vermilion does not obtain collateral or other security to support its financial derivatives as management reviews the creditworthiness of its counterparties prior to entering into derivative contracts.

The following table summarizes Vermilion's outstanding financial derivative positions as at September 30, 2012:

         
Risk Management Funded Cost (US $/bbl)   bbls/d Strike Price(s) US $/bbl
Collar - WTI        
January 2012 to December 2012 1.00    250  82.00 - 119.45
July 2012 to December 2012 1.00    500  78.00 - 104.15
July 2012 to December 2012 1.00    500  82.00 -   99.35
July 2012 to December 2012 1.00    500  82.00 - 115.10
October 2012 to December 2012 0.50    500  85.00 - 138.25
January 2013 to March 2013   250  85.00 - 109.52
April 2013 to June 2013   250  88.00 - 109.43
Swap - WTI        
October 2012 to December 2012   750  90.84 
January 2013 to June 2013 1   500  100.85 
January 2013 to June 2013 1   500  101.50 
Collar - DATED BRENT        
January 2012 to December 2012 1.00    1,000  82.00 - 113.40
January 2012 to December 2012 1.00    500  82.00 - 115.50
January 2012 to December 2012 1.00    500  82.00 - 130.75
July 2012 to December 2012 1.00    1,000  82.00 - 126.05
July 2012 to December 2012 1.00    1,000  82.00 - 126.55
October 2012 to December 2012 1.00    500  92.00 - 134.25
October 2012 to December 2012 1.00    500  97.00 - 132.20
January 2013 to March 2013 1.00    250  95.00 - 132.15
January 2013 to March 2013   300  98.00 - 128.50
January 2013 to June 2013   1,000  90.00 - 103.65
January 2013 to June 2013   1,000  90.00 - 106.90
January 2013 to December 2013   500  95.00 - 107.35
January 2013 to December 2013   500  95.00 - 109.90
January 2013 to December 2013   1,000  97.00 - 107.65
January 2013 to December 2013   500  95.00 - 106.50
January 2013 to December 2013   1,000  97.00 - 106.15
July 2013 to December 2013   500  95.00 - 109.10
Put - DATED BRENT        
January 2012 to December 2012 4.46    600  83.00 
January 2012 to December 2012 4.90    600  83.00 
January 2012 to December 2012 4.49    600  83.00 
January 2012 to December 2012 4.39    600  83.00 
January 2012 to December 2012 3.65    500  83.00 
SWAP - DATED BRENT        
October 2012 to December 2012   750  103.85 

1 The counterparty to the swap has the option on June 28, 2013 to extend the swap to December 31, 2013 at the contracted volume and price.

An up to date listing of outstanding financial derivative positions is available on Vermilion's website at www.vermilionenergy.com/ir/hedging.cfm.

ROYALTIES

  Three Months Ended   % change     Nine Months Ended   % change
By product Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe and per mcf) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011
Crude oil & NGLs 12,087  13,242  12,675    (9%) (5%)     39,570  36,712    8%
Per boe 5.00  6.46  6.31    (23%) (21%)     5.65  6.12    (8%)
Natural gas 276  89  808    210% (66%)     576  2,518    (77%)
Per mcf 0.04  0.01  0.11    300% (64%)     0.03  0.12    (75%)
Royalties 12,363  13,331  13,483    (7%) (8%)     40,146  39,230    2%
Per boe 3.49  4.11  4.23    (15%) (17%)     3.81  4.14    (8%)
% of petroleum and natural gas sales 4.3% 5.4% 5.4%           4.8% 5.2%    
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011
Canada 7,081  8,216  8,351    (14%) (15%)     24,266  24,804    (2%)
Per boe 5.33  5.66  6.99    (6%) (24%)     5.74  7.23    (21%)
% of petroleum and natural gas sales 9.9% 11.0% 13.5%           10.7% 14.0%    
France 5,282  5,115  5,132    3% 3%     15,880  14,426    10%
Per boe 5.42  5.62  6.88    (4%) (21%)     5.60  6.32    (11%)
% of petroleum and natural gas sales 5.2% 5.4% 6.3%           5.3% 6.0%    

In Canada, royalties as a percentage of sales for the three months ended September 30, 2012 was 9.9% as compared to 13.5% for the comparative period of the prior year and 11.0% for the prior quarter.  Low natural gas pricing in 2012 has resulted in minimal natural gas royalties. Crude oil and NGL royalties as a percentage of sales decreased for the current quarter to 10.9% from 16.4% for the third quarter of 2011 due to lower royalty rates levied on initial production volumes from Vermilion's horizontal Cardium wells.  As Vermilion's production mix has continued to shift towards these types of wells, the Company's crude oil and NGL royalty expense as a percentage of sales has declined.  Crude oil and NGL royalties as a percentage of sales for the third quarter of 2012 at 10.9% decreased slightly from the prior quarter at 12.3% reflecting additional wells being put on production that benefit from this royalty incentive.

In France, the primary portion of the royalties levied is based on units of production and therefore is not subject to changes in commodity prices.  France royalties as a percentage of sales for the three and nine months ended September 30, 2012 decreased to 5.2% and 5.3%, respectively, as compared to 6.3% and 6.0% for the same periods of the previous year due to a weakening Euro.  Royalties as a percent of revenue for the third quarter of 2012 were relatively consistent with the rate of 5.4% for the prior quarter.

Production in the Netherlands and Australia is not subject to royalties.

OPERATING EXPENSE

  Three Months Ended   % change     Nine Months Ended   % change
By product Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe and per mcf) 2012 2012 2011   Q2/12 Q3/11     2012  2011  2011
Crude oil & NGLs 36,889  28,645  32,190    29% 15%     102,400  90,199    14%
Per boe 15.26  13.97  16.03    9% (5%)     14.62  15.04    (3%)
Natural gas 10,141  11,580  11,098    (12%) (9%)     32,408  31,672    2%
Per mcf 1.50  1.62  1.57    (7%) (4%)     1.53  1.52    1%
Operating 47,030  40,225  43,288    17% 9%     134,808  121,871    11%
Per boe 13.27  12.41  13.57    7% (2%)     12.78  12.86    (1%)
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011  2011
Canada 13,420  13,217  13,473    2%     40,904  39,503    4%
Per boe 10.10  9.10  11.28    11% (10%)     9.68  11.51    (16%)
France 12,351  13,755  14,281    (10%) (14%)     41,208  35,541    16%
Per boe 12.66  15.11  19.15    (16%) (34%)     14.53  15.56    (7%)
Netherlands 3,870  5,457  3,991    (29%) (3%)     13,436  12,346    9%
Per boe 7.24  10.51  7.76    (31%) (7%)     8.44  8.31    2%
Australia 17,389  7,796  11,543    123% 51%     39,260  34,481    14%
Per boe 24.62  21.68  15.70    14% 57%     20.75  15.16    37%

In Canada, third quarter operating expense of $13.4 million was consistent with the $13.2 million for the second quarter of 2012 and the $13.5 million for the third quarter of 2011.  On a year to date basis, Canadian operating expense increased slightly to $40.9 million for the nine months ended September 30, 2012 from $39.5 million for the same period in the prior year due to higher volumes.  On a per boe basis, quarter-over-quarter operating expenses increased due to slightly lower volumes.  Operating costs per boe for the three months ended September 30, 2012, as compared to the same period in the prior year, decreased by $1.18 as a result of higher Canadian volumes driven by the Cardium program.  Similarly, for the year to date period ended September 30, 2012, operating costs per boe decreased by $1.83 due to significantly higher production volumes.

In France, third quarter operating expense of $12.4 million was lower than both the second quarter expense of $13.8 million and the third quarter of 2011 expense of $14.3 million due to the timing of downhole intervention work.  Lower expenditures resulted in decreased costs per boe for the current quarter versus the previous quarter and versus the same quarter of the prior year.  For the nine months ended September 30, 2012 operating costs increased to $41.2 million versus $35.5 million for the corresponding period in the prior year due to the acquisition of producing properties in the first quarter of 2012.  The increased volumes associated with this acquisition resulted in operating costs per boe decreasing to $14.53 for the nine months ended September 30, 2012 from $15.56 per boe for the same period in the prior year.

In the Netherlands, operating expense for the three months ended September 30, 2012 of $3.9 million decreased from $5.5 million in the prior quarter and was consistent with the $4.0 million for the same quarter of the prior year.  The quarter-over-quarter decrease is associated with a scheduled $1.3 million maintenance program at the Harlingen natural gas treatment centre that occurred during the second quarter of 2012.  For the nine months ended September 30, 2012 operating expense increased to $13.4 million versus $12.3 million for the same period of the prior year primarily as a result of higher electricity usage related to the Vikega-2 well.   Operating expense per boe for the three and nine months ended September 30, 2012 was consistent with the same periods of the prior year.  Quarter-over-quarter operating costs per boe decreased due to lower expenditures and slightly higher production.

In Australia, third quarter operating expense increased to $17.4 million from the previous quarter's expense of $7.8 million due to a reduction in crude oil inventory associated with shipment timing.  A decrease in crude oil inventory results in the release of production costs that are carried on the balance sheet until the product is sold.  Operating costs were further increased quarter-over-quarter as the platform ran on diesel for more days during the third quarter as compared to the second quarter.  Decreased production volumes quarter-over-quarter contributed to the quarter-over-quarter increase in operating expense per boe.  For the three and nine month periods ended September 30, 2012 operating expenses on both a spend and on a per boe basis was higher than comparable periods of the prior year due to increased maintenance costs coupled with a decrease in volumes.

TRANSPORTATION EXPENSE

  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Canada 2,005  2,350  1,641    (15%) 22%     6,399  4,627    38%
Per boe 1.51  1.62  1.37    (7%) 10%     1.51  1.35    12%
France 1,840  1,894  2,567    (3%) (28%)     6,382  7,163    (11%)
Per boe 1.89  2.08  3.44    (9%) (45%)     2.25  3.14    (28%)
Ireland 1,899  1,974  2,253    (4%) (16%)     5,874  6,721    (13%)
Transportation 5,744  6,218  6,461    (8%) (11%)     18,655  18,511    1%
Per boe 1.62  1.92  2.03    (16%) (20%)     1.77  1.95    (9%)

Consolidated transportation expense for the three months ended September 30, 2012 was lower than the three months ended June 30, 2012.  This decrease was primarily the result of lower transportation costs in Canada due to the absence of pipeline downtime, which increased trucking costs in the second quarter of 2012.

Transportation expense for France for the three and nine months ended September 30, 2012 was lower than for the same periods in the prior year primarily as a result of a reduced number of Aquitaine shipments due to the usage of higher volume cargo vessels.  This decrease in expense in France was offset by an increase in transportation expense in Canada for both the three and nine months ended September 30, 2012 as compared to the same periods in the prior year due to higher produced volumes.

Transportation expense for Ireland pertains to the amount due under a ship or pay agreement related to the Corrib project.  However, as there is a ceiling on the total payments due in relation to the associated pipeline, these expenses essentially represent a prepayment for future pipeline transportation services.

OTHER EXPENSE

  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Other (income) expense (277) 585  786    (147%) (135%)     8,291  1,942    327%
Per boe (0.08) 0.18  0.25    (144%) (132%)     0.79  0.20    295%

For the nine months ended September 30, 2012, other expense was comprised primarily of $8.5 million relating to transfer taxes paid to regulatory authorities in France pursuant to the acquisition, in the first quarter of 2012, of certain working interests in six producing fields located in the Paris and Aquitaine basins in France.

GENERAL AND ADMINISTRATION EXPENSE

  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
General and administration 12,669  12,068  11,375    5% 11%     34,885  34,830   
Per boe 3.57  3.72  3.57    (4%)     3.31  3.68    (10%)

General and administration expense for the third quarter of 2012 was higher than the expense for both the previous quarter and the third quarter of the prior year largely due to the timing of expenditures.  General and administration expense for the nine months ended September 30, 2012 is consistent with the prior year.

EQUITY BASED COMPENSATION EXPENSE

  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Equity based compensation 8,704  9,861  7,609    (12%) 14%     28,620  22,517    27%
Per boe 2.46  3.04  2.39    (19%) 3%     2.71  2.38    14%

Equity based compensation expense relates to non-cash compensation expense attributable to long-term incentives granted to directors, officers and employees under the Vermilion Incentive Plan (VIP). The expense is recognized over the vesting period based on the grant date fair value of awards, adjusted for the ultimate number of awards that actually vest as determined by the Company's achievement of a number of performance conditions.

Equity based compensation expense for the three months ended September 30, 2012 was lower than the prior quarter due to the timing of the forfeiture of awards and the granting of new awards.  The expense for the three and nine months ended September 30, 2012 was higher than the expense for the same periods in 2011 as the expense in the current periods reflected the revision of performance condition assumptions in the fourth quarter of 2011.

INTEREST EXPENSE

  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Interest expense 7,229  6,600  6,659    10% 9%     19,930  18,602    7%
Per boe 2.04  2.04  2.09    (2%)     1.89  1.96    (4%)

Interest expense increased during the three months ended September 30, 2012 as compared to both the three months ended June 30, 2012 and September 30, 2011, primarily due to increased borrowings under Vermilion's revolving credit facility.  Interest expense increased during the nine months ended September 30, 2012 as compared to same period in the prior year as the 6.5% senior unsecured notes, issued in February of 2011, were outstanding for all of 2012.

DEPLETION AND DEPRECIATION, ACCRETION, IMPAIRMENTS AND GAIN ON ACQUISITION

  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Depletion and depreciation 76,941  76,512  60,516    1% 27%     229,301  171,813    33%
Per boe 21.70  23.60  18.97    (8%) 14%     21.74  18.13    20%
Accretion 5,891  5,792  5,378    2% 10%     16,921  16,096    5%
Per boe 1.66  1.79  1.69    (7%) (2%)     1.60  1.70    (6%)
Impairments       65,800    100%
Per boe       6.24    100%
Gain on acquisition       (45,309)   (100%)
Per boe       (4.30)   (100%)

Depletion and depreciation expense was relatively consistent for the three months ended September 30, 2012 as compared to the three months ended June 30, 2012.  Depletion and depreciation expense was higher in the three and nine months ended September 30, 2012 compared to the same periods in the prior year, primarily due to the result of higher finding, development and acquisition costs incurred, which resulted from increased liquids development in Canada, and the acquisition of six producing fields in France in 2012.

Accretion expense increased in the three months ended September 30, 2012 as compared to both the three months ended June 30, 2012 and September 30, 2011. The higher accretion expense was due to an increase in asset retirement obligations resulting from additional obligations recognized on newly drilled and acquired wells.

The impairment losses in the nine months ended September 30, 2012 relate to impairment losses recorded on Vermilion's conventional deep gas and shallow coal bed methane natural gas plays.  These impairment charges, recorded in the first quarter of 2012, were the result of significant declines in the forward pricing assumptions for natural gas in Canada.

Gain on acquisition in the nine months ended September 30, 2012 relates to Vermilion's acquisition of certain working interests in the Paris and Aquitaine basins in France.  The gain arose as a result of the increase in the fair value of the acquired petroleum and natural gas reserves from the time when the acquisition was negotiated to the acquisition date.  The increase resulted from a change in the underlying commodity price forecasts used to determine the fair value of the acquired reserves.

TAXES

  Three Months Ended   % change     Nine Months Ended   % change
By classification Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Current taxes before PRRT 38,784  29,225  24,599    33% 58%     100,373  86,573    16%
Per boe 10.94  9.01  7.71    21% 42%     9.52  9.14    4%
PRRT 22,743  8,460  18,281    169% 24%     58,472  77,534    (25%)
Per boe 6.42  2.61  5.73    146% 12%     5.54  8.18    (32%)
Current taxes 61,527  37,685  42,880    63% 43%     158,845  164,107    (3%)
Per boe 17.36  11.62  13.44    49% 29%     15.06  17.32    (13%)
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/12 vs. Q3/12 vs.     Sept 30, Sept 30,   2012 vs.
($M except per boe) 2012 2012 2011   Q2/12 Q3/11     2012  2011    2011 
Canada 36  845  467    (96%) (92%)     1,323  1,291    2%
Per boe 0.03  0.58  0.39    (95%) (92%)     0.31  0.38    (18%)
France 21,051  15,725  13,696    34% 54%     49,671  48,226    3%
Per boe 21.58  17.27  18.36    25% 18%     17.51  21.11    (17%)
Netherlands 9,614  5,875  2,571    64% 274%     24,546  11,718    109%
Per boe 18.00  11.31  5.00    59% 260%     15.42  7.89    95%
Australia 30,826  15,240  26,146    102% 18%     83,305  102,872    (19%)
Per boe 43.66  42.38  35.56    3% 23%     44.02  45.23    (3%)

Vermilion pays current taxes in France, the Netherlands and Australia.  Corporate income taxes in France and the Netherlands apply to taxable income after eligible deductions at a rate of approximately 34% and 45%, respectively.  As a function of the impact of Vermilion's Canadian tax pools, the Company does not presently pay current taxes in Canada. The Canadian segment includes holding companies that pay current taxes in foreign jurisdictions.

In Australia, current taxes include both corporate income taxes and PRRT.  Corporate income taxes are applied at a rate of approximately 30% on taxable income after eligible deductions, which include PRRT.  PRRT is a profit based tax applied at a rate of 40% on sales less eligible expenditures, which includes operating expenses and capital expenditures.

Current taxes before PRRT for the three and nine months ended September 30, 2012 were higher as compared to the same periods in the prior year.  These year-over-year increases were attributable to higher taxable income associated with generally higher production volumes and an increase in taxes in the Netherlands.  Current taxes were higher in the Netherlands in 2012 as compared to 2011 as a result of the absence of a tax incentive, which allowed Vermilion to accelerate the rate of depreciation on certain assets.

PRRT increased in the three months ended September 30, 2012 as compared to both the three months ended June 30, 2012 and September 30, 2011 primarily as a result of higher sales volumes.  PRRT as a percentage of operating income for the Australia segment for the nine months ended September 30, 2012 was 32% as compared to 37% for the nine months ended September 30, 2011.  This decrease was primarily the result of the impact of higher capital expenditures on PRRT in the current year versus the same period in the prior year.

FOREIGN EXCHANGE

  Three Months Ended     Nine Months Ended
  Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M except per boe) 2012 2012 2011     2012  2011 
Unrealized foreign exchange loss (gain) 6,740  16,730  1,260      18,223  (13,952)
Per boe 1.89  5.16  0.39      1.73  (1.47)
Realized foreign exchange (gain) loss (410) (755) 670      (345) 228 
Per boe (0.11) (0.23) 0.21      (0.03) 0.02 
Foreign exchange loss (gain) 6,330  15,975  1,930      17,878  (13,724)
Per boe 1.78  4.93  0.60      1.70  (1.45)

As a result of Vermilion's international operations, Vermilion conducts business in currencies other than the Canadian dollar and has monetary assets and liabilities (including cash, receivables, payables, derivative assets and liabilities, and intercompany loans) denominated in such currencies.  Vermilion's exposure to foreign currencies include the U.S. Dollar, the Euro and the Australian Dollar.

Foreign exchange gains and losses are comprised of both unrealized and realized amounts.  Unrealized foreign exchange gains and losses are the result of translating monetary assets and liabilities held in non-functional currencies to the respective functional currencies of Vermilion and its subsidiaries.  Realized gains and losses are the result of foreign exchange fluctuations on transactions conducted in non-functional currencies.

In the three months ended September 30, 2012, the unrealized foreign exchange loss primarily resulted from the impact of the appreciation of the Canadian dollar against the Euro and the resultant impact on Euro denominated loans made by Vermilion to its subsidiaries, offset partially by the impact of the appreciation of the Canadian dollar against the U.S. Dollar on the U.S. Dollar denominated amount due pursuant to the Corrib acquisition.

NET EARNINGS

For the three and nine months ended September 30, 2012, Vermilion had net earnings of $30.8 million or $0.31 per share and $133.7 million or $1.37 per share, respectively (three and nine months ended September 30, 2011, net earnings of $64.4 million or $0.71 per share and $173.1 million or $1.92 per share, respectively).

The decrease in net earnings for the three months and nine months ended September 30, 2012 as compared to the same periods in the prior year was due to higher foreign exchange losses, other expense and depletion and depreciation.  For the three months ended September 30, 2012, there were additional decreases in net earnings resulting from higher unrealized losses on derivative instruments and current taxes, offset by higher sold volumes in Canada, France and the Netherlands.

SUMMARY OF RESULTS

    Three Months Ended
    Sept 30, Jun 30, Mar 31, Dec 31, Sept 30, Jun 30, Mar 31, Dec 31,
($M except per share) 2012  2012  2012  2011  2011  2011  2011  2010 
Petroleum and natural gas sales 284,838  246,544  310,488  275,172  248,361  278,297  229,740  216,426 
Net earnings (loss) 30,798  37,816  65,094  (30,243) 64,442  81,429  27,193  (21,809)
Net earnings (loss) per share                
  Basic 0.31  0.39  0.67  (0.32) 0.71  0.90  0.30  (0.25)
  Diluted 0.31  0.38  0.66  (0.32) 0.70  0.89  0.30  (0.25)

The fluctuations in Vermilion's petroleum and natural gas sales and net earnings (loss) from quarter-to-quarter are primarily caused by variations in sales volumes, petroleum and natural gas prices and the impact of royalties and tax legislation in the jurisdictions in which Vermilion operates.  In addition, petroleum and natural gas prices may impact gains and losses on derivative instruments and may result in impairment charges or the reversal of impairment charges incurred in previous periods.

LIQUIDITY AND CAPITAL RESOURCES

Vermilion's net debt as at September 30, 2012 was $549.5 million compared to $429.0 million as at December 31, 2011.  

Long-term debt was comprised of the following balances as at September 30, 2012 and December 31, 2011: 

  As At
  Sept 30, Dec 31,
($M) 2012  2011 
Revolving credit facility 270,653  152,086 
Senior unsecured notes 222,016  221,350 
Total long-term debt 492,669  373,436 

Revolving Credit Facility

At September 30, 2012, Vermilion had in place a bank revolving credit facility totalling $950 million, of which approximately $270.7 million was drawn.  The facility, which matures in May of 2015, is fully revolving up to the date of maturity.  The amount available to Vermilion under this facility is reduced by outstanding letters of credit associated with Vermilion's operations totalling $10.8 million as at September 30, 2012 (December 31, 2011 - $3.7 million).

As at September 30, 2012, Vermilion was in compliance with its financial covenants.

Senior Unsecured Notes

On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par.  The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016.  As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.

Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date.  Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date.  The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.

ASSET RETIREMENT OBLIGATIONS

As at September 30, 2012, Vermilion's asset retirement obligations were $371.0 million compared to $310.5 million as at December 31, 2011.

The increase in asset retirement obligations is largely attributable to accretion, an overall decrease in the discount rates applied to the obligations, additions from wells drilled in 2012 and liabilities acquired pursuant to the acquisition in France during the first quarter of 2012.

DIVIDENDS

  Three Months
Ended
    Nine Months
Ended
Year Ended
  Sept 30,     Sept 30, Dec 31,
($M) 2012      2012  2011 
Cash flows from operating activities 148,301      396,673  447,092 
Net earnings 30,798      133,708  142,821 
Dividends declared 56,196      167,282  207,846 
Excess of cash flows from operating activities over dividends declared 92,105      229,391  239,246 
(Shortfall) of net earnings over dividends declared (25,398)     (33,574) (65,025)

Vermilion maintained monthly dividends at $0.19 per share and declared dividends totalling $167.3 million for the nine months ended September 30, 2012.

Excess cash flows from operating activities over dividends declared are used to fund capital expenditures, asset retirement obligations and debt repayments.

Vermilion's policy with respect to dividends is to be conservative and retain a low ratio of dividends to fund flows from operations.  During low price commodity cycles, Vermilion will initially maintain dividends and allow the ratio to rise.  Should low commodity price cycles remain for an extended period of time, Vermilion will evaluate the necessity to change the level of dividends, taking into consideration capital development requirements, debt levels and acquisition opportunities.

Following Vermilion's conversion to a trust in January 2003 the distribution remained at $0.17 per unit per month until it was increased to $0.19 per unit per month in December 2007.  Effective September 1, 2010, Vermilion converted to a dividend paying corporation and dividends have remained at $0.19 per share per month.

Over the next three years, the Corrib, Cardium and other exploration and development activities will require a significant capital investment by Vermilion.  Although Vermilion currently expects to be able to maintain its current dividend, Vermilion's fund flows from operations may not be sufficient during this period to fund cash dividends, capital expenditures and asset retirement obligations.  Vermilion will evaluate its ability to finance any shortfalls with debt, an issuance of equity or by reducing some or all categories of expenditures to ensure that total expenditures do not exceed available funds.

SHAREHOLDERS' EQUITY

During the nine months ended September 30, 2012, Vermilion issued 2,299,123 shares pursuant to the dividend reinvestment plan and Vermilion's equity based compensation programs.  Shareholders' capital increased by $94.7 million as a result of the issuance of those shares.

As at September 30, 2012, there were 98,729,258 shares outstanding.  As at October 31, 2012, there were 98,873,567 shares outstanding.

CORRIB PROJECT

Vermilion holds an 18.5% non-operating interest in the offshore Corrib gas field located off the northwest coast of Ireland.  Production from Corrib is expected to increase Vermilion's volumes by approximately 55 mmcf/d (9,000 boe/d) once the field reaches peak production.  Vermilion acquired its 18.5% working interest in the project on July 30, 2009.  The project comprises five ready to produce offshore wells, both offshore and onshore pipeline segments as well as a significant natural gas processing facility.  At the time of the acquisition most of the key components of the project, with the exception of the onshore pipeline, were either complete or in the latter stages of development.  Vermilion's interest was acquired for cash consideration of $136.8 million with subsequent capital expenditures to September 30, 2012 of $284.5 million, primarily related to completion of the natural gas processing facility, sub-surface well work, and permitting and preparations for construction of the onshore pipeline.  Furthermore, pursuant to the terms of the acquisition agreement, Vermilion will make an additional payment to the vendor of US$135 million at the end of 2012.  In 2011, approvals and permissions were granted for the onshore gas pipeline and construction has commenced with tunnelling expected to begin prior to the end of 2012.  Vermilion expects to continue significant capital investment on this project over the next two years and currently expects to achieve initial gas production from this field in late 2014.

RISK MANAGEMENT

Vermilion is exposed to various market and operational risks.

For a detailed discussion of these risks, please see Vermilion's Annual Report for the year ended December 31, 2011, which is available on SEDAR at www.sedar.com or on the Company's website at www.vermilionenergy.com.

CRITICAL ACCOUNTING ESTIMATES

Vermilion's financial and operating results contain estimates made by management in the following areas:

i.       Capital expenditures are based on estimates of projects in various stages of completion;
ii.       Sales, royalties, operating expenses, and current taxes include accruals based on estimates of management;
iii.       Fair value of derivative instruments are based on estimates that are subject to the fluctuation of commodity prices and foreign exchange rates;
iv.       Depletion and depreciation are based on estimates of crude oil, natural gas liquids and natural gas reserves that Vermilion expects to recover in the future;
v.       Asset retirement obligations are based on estimates of future costs and the timing of expenditures;
vi.       The recoverable amount of capital assets and exploration and evaluation assets are based on estimates that Vermilion expects to realize in future periods; and
vii.       Equity based compensation expense is determined using accepted fair value approaches which rely on historical data and certain estimates made by management.

OFF BALANCE SHEET ARRANGEMENTS

Vermilion has certain lease agreements that are entered into in the normal course of operations.  All leases are operating leases and accordingly no asset or liability value has been assigned to the consolidated balance sheet as at September 30, 2012.

Vermilion has not entered into any guarantee or off balance sheet arrangements that would materially impact Vermilion's financial position or results of operations.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change in Vermilion's internal control over financial reporting that occurred during the period covered by this MD&A that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Unless otherwise noted, as of January 1, 2013, Vermilion will be required to adopt the following standards and amendments as issued by the IASB.  The adoption of the following standards are not expected to have a material impact on Vermilion's consolidated financial statements:

IFRS 9 "Financial Instruments"
As of January 1, 2015, Vermilion will be required to adopt IFRS 9, as part of the first phase of the IASB's project to replace IAS 39, "Financial Instruments: Recognition and Measurement". The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value.

IFRS 10 "Consolidated Financial Statements"
IFRS 10 replaces Standing Interpretations Committee 12, "Consolidation - Special Purpose Entities" and the consolidation requirements of IAS 27 "Consolidated and Separate Financial Statements".  The new standard replaces the existing risk and rewards based approaches and establishes control as the determining factor when determining whether an interest in another entity should be included in the consolidated financial statements.

IFRS 11 "Joint Arrangements"
IFRS 11 replaces IAS 31 "Interests in Joint Ventures".  The new standard focuses on the rights and obligations of an arrangement, rather than its legal form.  The standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to be equity accounted.

IFRS 12 "Disclosure of Interests in Other Entities"
IFRS 12 provides comprehensive disclosure requirements on interests in other entities, including joint arrangements, associates, and special purpose vehicles.  The new disclosures are intended to assist financial statement users in evaluating the nature, risks and financial effects of an entity's interest in subsidiaries and joint arrangements.

IFRS 13 "Fair Value Measurement"
IFRS 13 provides a common definition of fair value within IFRS.  The new standard provides measurement and disclosure guidance and applies when another IFRS requires or permits an item to be measured at fair value, with limited exceptions.

NETBACKS

The following table includes segmented financial statement information on a per unit basis.  Natural gas sales volumes have been converted on a basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.

  Three Months
Ended Sept 30,
2012
  Nine Months
Ended Sept 30,
2012
    Three Months
Ended Sept 30,
2011
  Nine Months
Ended Sept 30,
2011
  Oil & NGLs Natural Gas Total   Oil & NGLs Natural Gas Total     Total   Total
  $/bbl $/mcf $/boe   $/bbl $/mcf $/boe     $/boe   $/boe
Canada                        
Price 80.37  2.52  53.61    83.66  2.25  53.67      51.81    51.71 
Realized hedging loss (0.35) (0.21)   (0.55) (0.32)     (0.16)   (0.35)
Royalties (8.79) (0.06) (5.33)   (9.90) (0.03) (5.74)     (6.99)   (7.23)
Transportation (1.92) (0.15) (1.51)   (1.94) (0.16) (1.51)     (1.37)   (1.35)
Operating (10.48) (1.59) (10.10)   (10.04) (1.53) (9.68)     (11.28)   (11.51)
Operating netback 58.83  0.72  36.46    61.23  0.53  36.42      32.01    31.27 
France                        
Price 107.49  9.96  104.95    108.53  10.58  106.00      108.40    105.67 
Realized hedging loss (1.47) (1.39)   (3.46) (3.27)     (4.46)   (4.15)
Royalties (5.63) (0.28) (5.42)   (5.84) (0.25) (5.60)     (6.88)   (6.32)
Transportation (1.99) (1.89)   (2.38) (2.25)     (3.44)   (3.14)
Operating (12.21) (3.44) (12.66)   (14.51) (2.45) (14.53)     (19.15)   (15.56)
Operating netback 86.19  6.24  83.59    82.34  7.88  80.35      74.47    76.50 
Netherlands                        
Price 94.66  9.44  56.88    99.63  9.58  57.95      58.11    55.54 
Operating (1.22) (7.24)   (1.42) (8.44)     (7.76)   (8.31)
Operating netback 94.66  8.22  49.64    99.63  8.16  49.51      50.35    47.23 
Australia                        
Price 114.44  114.44    117.40  117.40      102.98    112.14 
Realized hedging loss (0.33) (0.33)   (0.30) (0.30)     (5.82)   (5.06)
Operating (24.62) (24.62)   (20.75) (20.75)     (15.70)   (15.16)
PRRT 1 (32.21) (32.21)   (30.90) (30.90)     (24.86)   (34.09)
Operating netback 57.28  57.28    65.45  65.45      56.60    57.83 
Total Company                        
Price 100.70  6.12  80.35    102.32  5.89  79.83      77.85    79.82 
Realized hedging loss (0.77) (0.53)   (1.60) (1.06)     (2.44)   (2.34)
Royalties (5.00) (0.04) (3.49)   (5.65) (0.03) (3.81)     (4.23)   (4.14)
Transportation (1.38) (0.35) (1.62)   (1.58) (0.36) (1.77)     (2.03)   (1.95)
Operating (15.26) (1.50) (13.27)   (14.62) (1.53) (12.78)     (13.57)   (12.86)
PRRT 1 (9.41) (6.42)   (8.35) (5.54)     (5.73)   (8.18)
Operating netback 68.88  4.23  55.02    70.52  3.97  54.87      49.85    50.35 
General and administration     (3.57)       (3.31)     (3.57)   (3.68)
Interest expense     (2.04)       (1.89)     (2.09)   (1.96)
Realized foreign exchange gain (loss) 0.11        0.03      (0.21)   (0.02)
Other income (expense) 0.08        (0.74)     0.19    0.07 
Current income taxes 1     (10.94)       (9.52)     (7.71)   (9.14)
Fund flows netback     38.66        39.44      36.46    35.62 
Accretion     (1.66)       (1.60)     (1.69)   (1.70)
Depletion and depreciation     (21.70)       (21.74)     (18.97)   (18.13)
Impairments           (6.24)      
Gain on acquisition           4.30       
Deferred taxes     0.76        2.92      (0.94)   2.95 
Unrealized other expense       (0.05)     (0.44)   (0.27)
Unrealized foreign exchange (loss) gain (1.89)       (1.73)     (0.39)   1.47 
Unrealized (loss) gain on derivative instruments (3.02)       0.09      8.54    0.71 
Equity based compensation     (2.46)       (2.71)     (2.39)   (2.38)
Earnings netback     8.69        12.68      20.18    18.27 

1 Vermilion considers Australian PRRT to be an operating item and accordingly has included PRRT in the calculation of operating netbacks.  Current income taxes presented above excludes PRRT.

CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)

    September 30, December 31,
  Note   2012    2011 
ASSETS          
Current          
Cash and cash equivalents     223,445    234,507 
Accounts receivable     135,771    176,820 
Crude oil inventory     12,700    13,885 
Derivative instruments     1,104    186 
Prepaid expenses     12,534    10,261 
      385,554    435,659 
           
Deferred taxes     192,414    175,545 
Exploration and evaluation assets 4   122,018    92,301 
Capital assets 3   2,199,431    2,031,682 
      2,899,417    2,735,187 
           
LIABILITIES          
Current          
Accounts payable and accrued liabilities     230,322    297,756 
Dividends payable 7   18,759    18,322 
Derivative instruments     10,297    11,568 
Income taxes payable     52,670    36,407 
Amount due pursuant to acquisition     130,328    127,131 
      442,376    491,184 
           
Derivative instruments     2,001    767 
Long-term debt 6   492,669    373,436 
Asset retirement obligations 5   371,023    310,531 
Deferred taxes     232,894    227,668 
      1,540,963    1,403,586 
           
SHAREHOLDERS' EQUITY          
Shareholders' capital 7   1,462,878    1,368,145 
Contributed surplus     51,096    56,468 
Accumulated other comprehensive loss     (55,170)   (33,387)
Deficit     (100,350)   (59,625)
      1,358,454    1,331,601 
      2,899,417    2,735,187 
           

CONSOLIDATED STATEMENTS OF NET EARNINGS AND COMPREHENSIVE INCOME
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)

      Three Months Ended   Nine Months Ended
      Sept 30,   Sept 30,   Sept 30,   Sept 30,
  Note   2012    2011    2012    2011 
REVENUE                  
Petroleum and natural gas sales     284,838    248,361    841,870    756,398 
Royalties     (12,363)   (13,483)   (40,146)   (39,230)
Petroleum and natural gas revenue     272,475    234,878    801,724    717,168 
                   
EXPENSES                  
Operating     47,030    43,288    134,808    121,871 
Transportation     5,744    6,461    18,655    18,511 
Equity based compensation 8   8,704    7,609    28,620    22,517 
Loss (gain) on derivative instruments     12,590    (19,454)   10,223    15,460 
Interest expense     7,229    6,659    19,930    18,602 
General and administration     12,669    11,375    34,885    34,830 
Foreign exchange loss (gain)     6,330    1,930    17,878    (13,724)
Other (income) expense 2   (277)   786    8,291    1,942 
Accretion 5   5,891    5,378    16,921    16,096 
Depletion and depreciation 3, 4   76,941    60,516    229,301    171,813 
Impairments 3       65,800   
Gain on acquisition 2       (45,309)  
      182,851    124,548    540,003    407,918 
EARNINGS BEFORE INCOME TAXES     89,624    110,330    261,721    309,250 
                   
INCOME TAXES                  
Deferred     (2,701)   3,008    (30,832)   (27,921)
Current     61,527    42,880    158,845    164,107 
      58,826    45,888    128,013    136,186 
                   
NET EARNINGS     30,798    64,442    133,708    173,064 
                   
OTHER COMPREHENSIVE (LOSS) INCOME                  
Currency translation adjustments     (12,753)   (4,577)   (21,783)   17,174 
COMPREHENSIVE INCOME     18,045    59,865    111,925    190,238 
                   
NET EARNINGS PER SHARE                  
Basic         0.31    0.71    1.37    1.92 
Diluted     0.31    0.70    1.35    1.90 
                   
WEIGHTED AVERAGE SHARES OUTSTANDING ('000s)                  
Basic     98,523    90,492    97,704    89,955 
Diluted     99,748    91,710    98,848    91,241 
                   

CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)

      Three Months Ended   Nine Months Ended
      Sept 30,   Sept 30,   Sept 30,   Sept 30,
  Note   2012    2011    2012    2011 
OPERATING                  
Net earnings     30,798    64,442    133,708    173,064 
Adjustments:                  
      Accretion 5   5,891    5,378    16,921    16,096 
      Depletion and depreciation 3, 4   76,941    60,516    229,301    171,813 
      Impairments 3       65,800   
      Gain on acquisition 2       (45,309)  
      Unrealized loss (gain) on derivative instruments     10,721    (27,247)   (955)   (6,725)
      Equity based compensation 8   8,704    7,609    28,620    22,517 
      Unrealized foreign exchange loss (gain)     6,740    1,260    18,223    (13,952)
      Unrealized other expense       1,403    514    2,561 
      Deferred taxes     (2,701)   3,008    (30,832)   (27,921)
Asset retirement obligations settled 5   (1,968)   (4,269)   (5,315)   (15,512)
Changes in non-cash operating working capital     13,175    (12,194)   (14,003)   (33,488)
Cash flows from operating activities     148,301    99,906    396,673    288,453 
                   
INVESTING                  
Drilling and development 3   (96,212)   (89,332)   (262,064)   (281,749)
Exploration and evaluation 4   (10,043)   (45,449)   (33,439)   (56,780)
Property acquisitions 2, 3       (106,184)   (38,101)
Changes in non-cash investing working capital     28,376    23,322    (1,408)   9,921 
Cash flows used in investing activities     (77,879)   (111,459)   (403,095)   (366,709)
                   
FINANCING                  
Increase (decrease) in long-term debt     40,350    40,655    117,124    (114,000)
Issuance of senior unsecured notes           220,561 
Issuance of shares pursuant to the dividend reinvestment plan 7     15,219    36,339    42,279 
Cash dividends     (38,869)   (51,545)   (149,594)   (153,657)
Cash flows from (used in) financing activities     1,481    4,329    3,869    (4,817)
Foreign exchange (loss) gain on cash held in foreign currencies     (5,931)   2,658    (8,509)   5,369 
                   
Net change in cash and cash equivalents     65,972    (4,566)   (11,062)   (77,704)
Cash and cash equivalents, beginning of period     157,473    87,617    234,507    160,755 
Cash and cash equivalents, end of period     223,445    83,051    223,445    83,051 
                   
Supplementary information for operating activities - cash payments                  
   Interest paid     11,775    10,063    25,701    16,558 
   Income taxes paid     38,871    61,328    142,582    168,948 
                   

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)

            Accumulated      
              Other   Total
    Shareholders' Contributed Comprehensive Retained Shareholders'
  Note Capital Surplus   Loss Earnings Equity
Balances as at January 1, 2011     1,025,770    40,726    (31,577)   10,983    1,045,902 
Net earnings           173,064    173,064 
Currency translation adjustments         17,174      17,174 
Equity based compensation expense       21,731        21,731 
Dividends declared           (153,975)   (153,975)
Issuance of shares pursuant to the dividend reinvestment plan 7   42,279          42,279 
Vesting of equity based awards 7, 8   22,139    (22,139)      
Share-settled dividends on vested equity based awards 7, 8   5,583        (5,583)  
Shares issued for bonus plan 7   786          786 
Balances as at September 30, 2011     1,096,557    40,318    (14,403)   24,489    1,146,961 
                       
            Accumulated      
              Other   Total
    Shareholders' Contributed Comprehensive   Shareholders'
  Note Capital Surplus   Loss Deficit Equity
Balances as at January 1, 2012     1,368,145    56,468    (33,387)   (59,625)   1,331,601 
Net earnings           133,708    133,708 
Currency translation adjustments         (21,783)     (21,783)
Equity based compensation expense       27,984        27,984 
Dividends declared 7         (167,282)   (167,282)
Issuance of shares pursuant to the dividend reinvestment plan 7   53,590          53,590 
Vesting of equity based awards 7, 8   33,356    (33,356)      
Share-settled dividends on vested equity based awards 7, 8   7,151        (7,151)  
Shares issued for bonus plan 7   636          636 
Balances as at September 30, 2012     1,462,878    51,096    (55,170)   (100,350)   1,358,454 

DESCRIPTION OF EQUITY RESERVES

Shareholders' capital
Represents the recognized amount for common shares when issued, net of equity issuance costs and deferred taxes.

Contributed surplus
Represents the recognized value of employee awards which are settled in shares. Once vested, the value of the awards is transferred to shareholders' capital.

Accumulated other comprehensive loss
Represents the cumulative income and expenses which are not recorded immediately in net earnings and are accumulated until an event triggers recognition in net earnings. The current balance consists of currency translation adjustments resulting from translating financial statements of subsidiaries with a foreign functional currency to Canadian dollars at period end rates.

Retained earnings (deficit)
Represents the cumulative net earnings less distributed earnings of Vermilion Energy Inc.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)

1. BASIS OF PRESENTATION

Vermilion Energy Inc. (the "Company" or "Vermilion") is a corporation governed by the laws of the Province of Alberta and is actively engaged in the business of crude oil and natural gas exploration, development, acquisition and production.

These condensed consolidated interim financial statements are in compliance with IAS 34, "Interim financial reporting" and have been prepared using the same accounting policies and methods of computation as Vermilion's consolidated financial statements for the year ended December 31, 2011.  Accounting pronouncements that have been issued but have not yet been adopted are discussed in Note 3 of Vermilion's consolidated financial statements for the year ended December 31, 2011.  These condensed consolidated interim financial statements should be read in conjunction with Vermilion's consolidated financial statements for the year ended December 31, 2011, which are contained within Vermilion's Annual Report for the year ended December 31, 2011 and are available on SEDAR at www.sedar.com or on Vermilion's website at www.vermilionenergy.com.

These condensed consolidated interim financial statements were approved and authorized for issuance by the Board of Directors of Vermilion on October 31, 2012.

2. BUSINESS COMBINATION

On January 19, 2012, Vermilion acquired, through its wholly owned subsidiaries, working interests in six producing fields located in the Paris and Aquitaine basins in France, for total consideration of $106.1 million before closing adjustments. The acquired working interests expanded Vermilion's existing interests and was a natural addition to the previous France asset base and is well aligned with Vermilion's strategic objective to maintain and consolidate the Company's core operating areas to own and operate 100% of its assets.

The acquired assets include land, wells, facilities, and inventory located in the Company's core producing fields in France. The fair value of the acquired identifiable assets and liabilities assumed at the date of acquisition was $151.4 million.  A gain of $45.3 million was recognized as a result of an increase in the fair value of the acquired petroleum and natural gas reserves from the time when the acquisition was negotiated to the acquisition date.  The increase resulted from a change in the underlying commodity price forecasts used to determine the fair value of the acquired reserves.

The acquisition has been accounted for as a business combination with the fair value of the assets acquired and liabilities assumed at the date of acquisition summarized as follows:

($M) Consideration
Cash paid to vendor   106,115 
Total consideration   106,115 
     
($M) Allocation of Consideration
Petroleum and natural gas assets   206,191 
Asset retirement obligations assumed   (27,518)
Deferred tax liabilities   (23,151)
Acquired working capital deficiencies   (4,098)
Net assets acquired   151,424 
Gain on acquisition   (45,309)
Net assets acquired, net of gain on acquisition   106,115 

Transfer taxes associated with this acquisition totalling $8.5 million have been excluded from the consideration and have been recognized as an expense in the nine months ended September 30, 2012, within "Other expense" in the consolidated statements of net earnings and comprehensive income.

The results of operations from the assets acquired have been included in Vermilion's condensed consolidated interim financial statements beginning January 19, 2012, which contributed revenues of $77.1 million and operating income of $68.0 million for the nine months ended September 30, 2012. Had the acquisition occurred on January 1, 2012, management estimates that consolidated revenues would have increased by an additional $6.6 million and consolidated operating income would have increased by $4.8 million for the nine months ended September 30, 2012.  In determining the pro-forma amounts, management has assumed that the fair value adjustments, determined provisionally, that arose at the date of acquisition would have been the same if the acquisition had occurred on January 1, 2012. It is impracticable to derive all amounts necessary to determine the increase to net earnings from the acquired working interests as operations were immediately merged with Vermilion's operations.

3. CAPITAL ASSETS

The following table reconciles the change in Vermilion's capital assets:

  Petroleum and Furniture and   Total
($M) Natural Gas Assets Office Equipment   Capital Assets
Balance at January 1, 2011   1,802,422    17,130    1,819,552 
Additions   408,810    2,417    411,227 
Property acquisitions   50,878      50,878 
Borrowing costs capitalized   9,923      9,923 
Changes in estimate for asset retirement obligations   45,267      45,267 
Depletion and depreciation   (228,562)   (4,414)   (232,976)
Impairments   (64,400)     (64,400)
Effect of movements in foreign exchange rates   (7,727)   (62)   (7,789)
Balance at December 31, 2011   2,016,611    15,071    2,031,682 
Additions   359,169    2,971    362,140 
Property acquisitions   106,184      106,184 
Borrowing costs capitalized   7,515      7,515 
Changes in estimate for asset retirement obligations   30,183      30,183 
Depletion and depreciation 1   (219,635)   (3,492)   (223,127)
Impairments   (65,800)     (65,800)
Effect of movements in foreign exchange rates   (49,201)   (145)   (49,346)
Balance at September 30, 2012   2,185,026    14,405    2,199,431 

1 Depletion and depreciation above excludes depletion recorded as a component of crude oil inventory.

Vermilion has not identified indicators of impairment or impairment reversal for any CGU's for the three months ended September 30, 2012 and therefore has not performed impairment testing calculations.

At March 31, 2012 and December 31, 2011, Vermilion performed assessments as to whether any cash generating units ("CGU") had indicators of impairment.  When indicators of impairment are identified, Vermilion assesses the recoverable amount of each CGU based on the estimated fair value less costs to sell as at the reporting date.  The estimated fair value takes into account the most recent commodity price forecasts, expected production and estimated costs of development. For the three months ended March 31, 2012, Vermilion recorded an impairment charge of $65.8 million related to conventional deep gas and shallow coal bed methane natural gas plays. The impairment charges were as a result of declines in the price forecasts for natural gas in Canada which decreased the expected cash flows from the CGU's.

Benchmark prices used in the March 31, 2012 calculations of recoverable amounts were determined by multiplying the mix of oil, natural gas and NGLs inherent in the reserves of the conventional deep natural gas and shallow coal bed methane CGUs by the price forecasts for each year.  The blended price per barrel of oil equivalent (BOE) was:

Canada $/BOE
2012  27.01 
2013  33.46 
2014  35.78 
2015  38.23 
2016  40.68 
2017  43.13 
2018  45.61 
2019  46.53 
2020  47.51 
2021  48.44 
Average increase thereafter 2.0%

4. EXPLORATION AND EVALUATION ASSETS 

The following table reconciles the change in Vermilion's exploration and evaluation assets:

($M) Exploration and Evaluation Assets
Balance at January 1, 2011   17,157 
Additions   79,553 
Depreciation   (3,732)
Effect of movements in foreign exchange rates   (677)
Balance at December 31, 2011   92,301 
Additions   33,439 
Depreciation   (2,613)
Effect of movements in foreign exchange rates   (1,109)
Balance at September 30, 2012   122,018 

5. ASSET RETIREMENT OBLIGATIONS

The following table reconciles the change in Vermilion's asset retirement obligations:

($M) Asset Retirement Obligations
Balance at January 1, 2011     267,389 
Additional obligations recognized     8,612 
Changes in estimates for existing obligations     (4,364)
Obligations settled     (23,071)
Accretion     21,889 
Changes in discount rates     41,019 
Effect of movements in foreign exchange rates     (943)
Balance at December 31, 2011     310,531 
Additional obligations recognized     31,874 
Obligations settled     (5,315)
Accretion     16,921 
Changes in discount rates     25,827 
Effect of movements in foreign exchange rates     (8,815)
Balance at September 30, 2012     371,023 

6. LONG-TERM DEBT

The following table summarizes Vermilion's outstanding long-term debt:

  As At
($M) Sept 30, 2012 Dec 31, 2011
Revolving credit facility   270,653    152,086 
Senior unsecured notes   222,016    221,350 
Total long-term debt   492,669    373,436 

Revolving Credit Facility

At September 30, 2012, Vermilion had in place a bank revolving credit facility totalling $950 million, of which approximately $270.7 million was drawn.  The facility, which matures in May of 2015, is fully revolving up to the date of maturity.  The amount available to Vermilion under this facility is reduced by outstanding letters of credit associated with Vermilion's operations totalling $10.8 million as at September 30, 2012 (December 31, 2011 - $3.7 million).

As at September 30, 2012, Vermilion was in compliance with its financial covenants.

Senior Unsecured Notes

On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par.  The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016.  As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.

Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date.  Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date.  The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.

7. SHAREHOLDERS' CAPITAL

The following tables reconcile the change in Vermilion's shareholders' capital:

Shareholders' Capital Number of Shares   Amount ($M)
Balance as at January 1, 2011   88,998,242    1,025,770 
Issuance of shares, net of deferred taxes   5,370,000    254,786 
Issuance of shares pursuant to the dividend reinvestment plan   1,323,482    59,081 
Vesting of equity based awards   608,073    22,139 
Share-settled dividends on vested equity based awards   114,487    5,583 
Shares issued for bonus plan   15,851    786 
Balance as at December 31, 2011   96,430,135    1,368,145 
Issuance of shares pursuant to the dividend reinvestment plan   1,224,609    53,590 
Vesting of equity based awards   904,210    33,356 
Share-settled dividends on vested equity based awards   157,137    7,151 
Shares issued for bonus plan   13,167    636 
Balance as at September 30, 2012   98,729,258    1,462,878 

Dividends declared to shareholders for the nine months ended September 30, 2012 were $167.3 million.

Subsequent to the end of the period and prior to the condensed consolidated interim financial statements being authorized for issue on October 31, 2012, Vermilion declared dividends totalling $18.8 million or $0.19 per share.

8. EQUITY BASED COMPENSATION PLAN

The following table summarizes the number of awards outstanding under the Vermilion Incentive Plan ("VIP"):

Number of Awards 2012    2011 
Opening balance 1,750,055    1,683,776 
Granted 649,860    566,425 
Vested (596,423)   (434,150)
Forfeited (140,158)   (65,996)
Closing balance 1,663,334    1,750,055 

The fair value of a VIP award is determined on the grant date at the closing price of Vermilion's common shares on the Toronto Stock Exchange, adjusted by the estimated performance factor that will ultimately be achieved.  Dividends, which notionally accrue to the awards during the vesting period, are not included in the determination of grant date fair values.  For the nine months ended September 30, 2012, the awards granted had a weighted average fair value of $60.08 (2011 - $47.05).

9. SEGMENTED INFORMATION

Vermilion's chief operating decision maker measures financial performance of the business by assessing operating income, a profit or loss measure defined by Vermilion as oil and gas sales to external customers less royalties and production costs, which include realized losses on derivative instruments, transportation expense and operating expense.  Expenses that are assessed by the chief operating decision maker on a consolidated basis are excluded from the determination of operating income.  The following amounts include transactions between segments, which are recorded at fair value at the date of recognition.

  Three Months Ended Sept 30, 2012
($M) Canada   France   Netherlands   Australia   Ireland   Total
Drilling and development 53,658    10,416    5,257    9,721    17,160    96,212 
Exploration and evaluation 10,043            10,043 
                       
Operating Income (Loss)                      
Oil and gas sales to external customers 71,268    102,369    30,386    80,815      284,838 
Royalties (7,081)   (5,282)         (12,363)
Revenue from external customers 64,187    97,087    30,386    80,815      272,475 
Realized loss on derivative instruments (274)   (1,360)     (235)     (1,869)
Transportation expense (2,005)   (1,840)       (1,899)   (5,744)
Operating expense (13,420)   (12,351)   (3,870)   (17,389)     (47,030)
Operating income (loss) 48,488    81,536    26,516    63,191    (1,899)   217,832 
                       
Corporate income taxes 36    21,051    9,614    8,083      38,784 
PRRT       22,743      22,743 
Current income taxes 36    21,051    9,614    30,826      61,527 
                       
                       
  Three Months Ended Sept 30, 2011
($M) Canada   France   Netherlands   Australia   Ireland   Total
Drilling and development 55,838    8,623    596    2,549    21,726    89,332 
Exploration and evaluation 37,155    183    8,111        45,449 
                       
Operating Income (Loss)                      
Oil and gas sales to external customers 61,903    80,845    29,883    75,730      248,361 
Royalties (8,351)   (5,132)         (13,483)
Revenue from external customers 53,552    75,713    29,883    75,730      234,878 
Realized loss on derivative instruments (186)   (3,327)     (4,280)     (7,793)
Transportation expense (1,641)   (2,567)       (2,253)   (6,461)
Operating expense (13,473)   (14,281)   (3,991)   (11,543)     (43,288)
Operating income (loss) 38,252    55,538    25,892    59,907    (2,253)   177,336 
                       
Corporate income taxes 467    13,696    2,571    7,865      24,599 
PRRT       18,281      18,281 
Current income taxes 467    13,696    2,571    26,146      42,880 
                       
                       
    Nine Months Ended September 30, 2012
($M) Canada France Netherlands Australia Ireland Total
Total assets 1,270,547    674,355    138,630    286,960    528,925    2,899,417 
Drilling and development 157,680    26,424    13,157    24,132    40,671    262,064 
Exploration and evaluation 33,390      49        33,439 
                         
Operating Income (Loss)                      
Oil and gas sales to external customers 226,726    300,708    92,268    222,168      841,870 
Royalties (24,266)   (15,880)         (40,146)
Revenue from external customers 202,460    284,828    92,268    222,168      801,724 
Realized loss on derivative instruments (1,335)   (9,274)     (569)     (11,178)
Transportation expense (6,399)   (6,382)       (5,874)   (18,655)
Operating expense (40,904)   (41,208)   (13,436)   (39,260)     (134,808)
Operating income (loss) 153,822    227,964    78,832    182,339    (5,874)   637,083 
                       
Corporate income taxes 1,323    49,671    24,546    24,833      100,373 
PRRT       58,472      58,472 
Current income taxes 1,323    49,671    24,546    83,305      158,845 
                       
                       
    Nine Months Ended September 30, 2011
($M) Canada France Netherlands Australia Ireland Total
Total assets 1,101,924    555,024    141,667    268,525    500,952    2,568,092 
Drilling and development 171,290    41,117    11,732    9,448    48,162    281,749 
Exploration and evaluation 44,915    3,754    8,111        56,780 
                       
Operating Income (Loss)                      
Oil and gas sales to external customers 177,512    241,383    82,474    255,029      756,398 
Royalties (24,804)   (14,426)         (39,230)
Revenue from external customers 152,708    226,957    82,474    255,029      717,168 
Realized loss on derivative instruments (1,207)   (9,472)     (11,506)     (22,185)
Transportation expense (4,627)   (7,163)       (6,721)   (18,511)
Operating expense (39,503)   (35,541)   (12,346)   (34,481)     (121,871)
Operating income (loss) 107,371    174,781    70,128    209,042    (6,721)   554,601 
                       
Corporate income taxes 1,291    48,226    11,718    25,338      86,573 
PRRT       77,534      77,534 
Current income taxes 1,291    48,226    11,718    102,872      164,107 
                       
                       

Reconciliation of operating income to net earnings

  Three Months Ended   Nine Months Ended
($M) Sept 30, 2012 Sept 30, 2011   Sept 30, 2012 Sept 30, 2011
Operating income 217,832  177,336    637,083  554,601 
Equity based compensation   (8,704) (7,609)   (28,620) (22,517)
Unrealized (loss) gain on derivative instruments (10,721) 27,247    955  6,725 
Interest expense (7,229) (6,659)   (19,930) (18,602)
General and administration (12,669) (11,375)   (34,885) (34,830)
Foreign exchange (loss) gain (6,330) (1,930)   (17,878) 13,724 
Other income (expense) 277  (786)   (8,291) (1,942)
Accretion (5,891) (5,378)   (16,921) (16,096)
Depletion and depreciation (76,941) (60,516)   (229,301) (171,813)
Impairments   (65,800)
Gain on acquisition   45,309 
Earnings before income taxes 89,624  110,330    261,721  309,250 
Income taxes (58,826) (45,888)   (128,013) (136,186)
Net earnings 30,798  64,442    133,708  173,064 

10. CAPITAL DISCLOSURES

The following table calculates Vermilion's ratio of net debt to annualized fund flows from operations:

  Three Months Ended   Nine Months Ended
($M except as indicated) Sept 30, 2012 Sept 30, 2011   Sept 30, 2012 Sept 30, 2011
Long-term debt 492,669  409,096    492,669  409,096 
Current liabilities 442,376  333,817    442,376  333,817 
Current assets (385,554) (275,546)   (385,554) (275,546)
Net debt [1] 549,491  467,367    549,491  467,367 
           
Cash flows from operating activities 148,301  99,906    396,673  288,453 
Changes in non-cash operating working capital (13,175) 12,194    14,003  33,488 
Asset retirement obligations settled 1,968  4,269    5,315  15,512 
Fund flows from operations 137,094  116,369    415,991  337,453 
Annualized fund flows from operations [2] 548,376  465,476    554,655  449,937 
           
Ratio of net debt to annualized fund flows from operations ([1] ÷ [2]) 1.0  1.0    1.0  1.0 

The ratio of net debt to annualized fund flows from operations was 1.0 for all periods presented.

Vermilion is subject to certain externally imposed capital requirements under its revolving credit facility.  During the periods covered by these condensed consolidated interim financial statements, Vermilion continued to comply with these requirements.

11. FINANCIAL INSTRUMENTS

Market risk:
Vermilion's financial instruments are exposed to currency risk related to changes in foreign currency denominated financial instruments and commodity price risk related to outstanding derivative positions.  The following table summarizes what the impact on comprehensive income before tax would be for the nine months ended September 30, 2012 given changes in the relevant risk variables that Vermilion considers were reasonably possible at the balance sheet date.  The impact on comprehensive income before tax associated with changes in these risk variables for assets and liabilities that are not considered financial instruments are excluded from this analysis.  This analysis does not attempt to reflect any interdependencies between the relevant risk variables.

 
 
Risk ($M)


Description of change in risk variable
September 30, 2012
Before tax effect on comprehensive income
Increase (decrease)
Currency risk - Euro to Canadian
 
Increase in strength of the Canadian dollar against the
Euro by 5% over the relevant closing rates on September 30, 2012
  (5,751)
   
 
 
Decrease in strength of the Canadian dollar against the
Euro by 5% over the relevant closing rates on September 30, 2012
  5,751 
   
Currency risk - US $ to Canadian
 
Increase in strength of the Canadian dollar against the
US$ by 5% over the relevant closing rates on September 30, 2012
  1,703 
   
 
 
Decrease in strength of the Canadian dollar against the
US$ by 5% over the relevant closing rates on September 30, 2012
  (1,703)
   
Currency risk - AUD $ to Canadian
 
Increase in strength of the Canadian dollar against the
AUD$ by 5% over the relevant closing rates on September 30, 2012
  (1,421)
   
 
 
Decrease in strength of the Canadian dollar against the
AUD$ by 5% over the relevant closing rates on September 30, 2012
  1,421 
   
Commodity price risk
 
Increase in relevant oil reference price within option pricing models used to determine the fair value of financial derivative positions by US$5.00/bbl at September 30, 2012   (9,497)
   
 
 
Decrease in relevant oil reference price within option pricing models used to determine the fair value of financial derivative positions by US$5.00/bbl at September 30, 2012   9,039 
   

SOURCE: Vermilion Energy Inc.

PDF available at: http://www.vermilionenergy.com/files/historical-press-releases/2012/2012-11-01 - Third Quarter Results.pdf

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