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Vermilion Energy Inc. Announces Results for the Year Ended December 31, 2014

February 27, 2015

CALGARY, Feb. 27, 2015 /CNW/ - Vermilion Energy Inc. ("Vermilion", "We", "Our", "Us" or the "Company") (TSX, NYSE: VET) is pleased to report operating and audited financial results for the year ended December 31, 2014.

HIGHLIGHTS

  • Strong operational execution resulted in annual production that exceeded the top end of our guidance range following three upward revisions during the year.  Average annual production for 2014 was 49,573 boe/d, an increase of 21% as compared to 41,005 boe/d in 2013.  Production for Q4 2014 averaged 49,571 boe/d, down slightly from 49,920 boe/d in the prior quarter.  Full year Canadian production volumes grew 34% year-over-year.  Canadian production growth was attributable to a 20% increase in average production from our Cardium light oil resource play, a near tripling of Mannville condensate-rich gas production and the addition of approximately 1,900 boe/d of production (based on a late April 2014 closing) from our southeast Saskatchewan assets. In Europe, full year production growth of 8% in the Netherlands and the addition of approximately 2,500 boe/d (based on a February 2014 closing) from our Germany acquisition also contributed meaningfully.

  • Increased fund flows from operations ("FFO")(1) in 2014 by 21% to $804.9 million ($7.63/basic share), as compared to $667.5 million ($6.61/basic share) in 2013. Year-over-year growth in FFO was largely attributable to the growth in production as well as a higher liquids weighting compared to 2013, partially offset by generally weaker pricing overall.  Q4 2014 FFO was $185.5 million ($1.73/basic share) down from $197.9 million ($1.85/basic share) in the prior quarter.  The quarter-over-quarter decrease was primarily attributable to substantially lower commodity pricing during Q4 2014 compared to the prior quarter, partially offset by lower corporate income taxes and higher realized hedging gains.

  • Achieved growth in both proved ("1P") and proved plus probable ("2P") reserves in 2014.  Our independent GLJ 2014 Reserves Evaluation(2) assessed an increase of 18% in 1P reserves to 151.5(2) mmboe, while 2P reserves increased by 24% to 246.9(2) mmboe.   This represents year-over-year 1P and 2P per share reserves growth of 12% and 18%, respectively. (For additional reserves information see today's separate news release entitled "Vermilion Energy Inc. Announces 2014 Year-End Summary Reserves and Resource Information").

  • Finding and Development ("F&D") and Finding, Development and Acquisition ("FD&A") costs, including Future Development Capital ("FDC") for 2014 on a 2P basis were $17.37/boe and $22.38/boe, respectively.  Similarly, our three-year F&D and FD&A, including FDC, on a 2P basis were $19.26/boe and $20.83/boe, respectively.

  • Our independent GLJ 2014 Resource Assessment(3) indicates low, best, and high estimates for contingent resources of 103.1(3) mmboe, 293.4(3) mmboe, and 408.0(3) mmboe, an increase of 39%, 26% and 16%, respectively, compared to our GLJ 2013 Resource Assessment(4).  Prospective resources were assessed at low, best and high estimates of 308.3(3) mmboe, 601.6(3) mmboe, and 900.3(3) mmboe, an increase of 419%, 21%, and 10%, respectively versus our GLJ 2013 Resource Assessment.  Importantly, the GLJ 2014 Resource Assessment reflects a significant increase in the most conservative "Low Estimate" for both contingent resources and prospective resources in Canada, as well as incremental increases across our European asset base.  (For additional resource information please see today's separate news release entitled "Vermilion Energy Inc. Announces 2014 Year-End Summary Reserves and Resource Information").

  • During the year we realized successful entry into new asset areas in Germany, Hungary, Southeastern Saskatchewan and the United States.  Each asset addition adheres to our strategy of balanced and diversified growth, increasing our exposure to both European natural gas and light-oil development opportunities.

  • Concluded a highly successful seven (4.7 net) well drilling program in the Netherlands.  In addition, we were awarded the Ijsselmuiden exploration concession consisting of approximately 110,500 gross (66,300 net) undeveloped acres, increasing our undeveloped land base in the Netherlands to more than 800,000 net acres.  The Sonnega-2 exploration well (50% working interest), drilled in Q4 2014, encountered natural gas in the Vlieland formation and achieved a stabilized flow rate of 15.8 mmcf/d on a 52/64 inch choke with a flowing well head pressure of 1,060 psi during a seven-hour flow test(5).  This well is expected to be brought on production during Q2 2015.

  • Completed our first two (1.35 net) Duvernay horizontal appraisal wells during 2014.  Our Pembina well (35% working interest), which is located along a shared lease-line, has a 1,280 metre long horizontal leg and was brought on production subsequent to the end of the third quarter.  The raw gas rate over the first 30 days of production averaged 1.8 mmcf/d (sales gas rate of 1.6 mmcf/d after liquids shrink and plant fuel) with a hydrocarbon liquids rate of approximately 180 bbls/d (approximately 50% pentanes plus).  Our second Duvernay horizontal appraisal well (100% working interest), located in the Edson block, was brought on production late in Q4 2014.  The raw gas rate over the first 30 days of production averaged 2.9 mmcf/d (sales gas rate of 2.5 mmcf/d after liquids shrink and plant fuel) with a hydrocarbon liquids rate of approximately 145 bbls/d (approximately 40% pentanes plus).

  • Our Corrib project in Ireland has continued to progress on schedule following the completion of tunnel boring operations in May 2014.  During the remainder of 2014, project operator Shell Exploration & Production Ireland Ltd. successfully completed offshore workover and pipeline operations as well as outfitting of the 4.9 km tunnel, including installation of flow and umbilical lines, hydro-testing and dewatering, with the final weld completed in December 2014.  Grouting of the tunnel was completed subsequent to year end 2014.  Natural gas from the national sales grid was safely introduced into the processing facility in Q4 2014 as part of the commencement of operations at the plant. Remaining work includes the testing of all systems and processes required for the safe operation of the Bellanaboy gas processing terminal and the finalization of operating permits.  We anticipate first gas from Corrib in approximately mid-2015, with peak production estimated at approximately 58 mmcf/d (approximately 9,700 boe/d), net to Vermilion.

  • In response to continued weakness in commodity prices, we are revising our previous 2015 capital expenditure guidance to reflect a further reduction in planned expenditures of approximately $110 million.  This will reduce our planned 2015 capital expenditures to $415 million from the original $525 million announced in December 2014, a 40% reduction as compared to 2014.  The reduction in capital reflects both lower planned activity levels, including the deferral of our Australian drilling campaign, as well as strong results-to-date from our company-wide Profitability Enhancement Program ("PEP") which was launched in November 2014 to support Vermilion's long-term profitability.  This is the third installment of our PEP program in our 20-year history with the prior two initiatives having achieved strong results in both the 1998 industry downturn and during the financial crisis of 2008-2009.  Our PEP program ensures that our people remain acutely focused on enhancing revenues, and reducing capital costs, operating expenses and general and administrative outlays, as well as improving efficiencies to maximize profitability throughout our organization.  Despite the reduction in our capital budget, we are maintaining our previous production guidance of 55,000-57,000 boe/d.

  • Vermilion ended 2014 with a net debt-to-2014 FFO ratio of 1.6 times.  Subsequent to year-end 2014, Vermilion exercised its option to expand its available credit under its revolving credit facility to $1.75 billion, the maximum available under the existing agreement.  Following the expansion of the revolving credit facility, Vermilion has approximately $730 million of borrowing capacity available.  The facility, which matures in May 2017, is fully revolving up to the date of maturity and subject to standard form covenants (discussed in the notes to the Consolidated Financial Statements).  Vermilion expects it will continue to be in compliance with all applicable debt covenants and to maintain our current dividend of $0.215 per share per month ($2.58 per share per year).

  • Subsequent to year end 2014, Vermilion was awarded a recovery of costs resulting from an oil spill at the Ambes oil terminal in France that occurred in 2007. The French court awarded Vermilion approximately €25 million (before taxes), of which 50% is due now, with the remainder due upon conclusion of the appeal process. Based on the recent court decision and the conclusions of an expert engaged by the French court, Vermilion is confident that the award will be upheld.  

  • To preserve our financial flexibility while conservatively exercising our access to equity capital, we have amended our existing Dividend Reinvestment Plan to include a Premium Dividend™ Component.  Under the new Premium Dividend™ and Dividend Reinvestment Plan (the "Plan")(6), Eligible Shareholders who elect to participate in the Dividend Reinvestment Component can continue to reinvest their dividends in common shares at an effective 3% discount to the Average Market Price (with no broker commissions or trading costs), as in our previous Dividend Reinvestment Plan.  With the addition of a new Premium Dividend™ Component, Eligible Shareholders will also have the option to receive a premium cash payment equal to 101.5% of the reinvested dividends.  Shareholders who have not elected to participate in the Plan will continue to receive their regular dividends in the usual manner. The total cost of equity to Vermilion under each component of the Plan will be 3% and 3.5%, respectively.  The Premium Dividend™ Component, when combined with the Dividend Reinvestment Component, is expected to  increase our access to the lowest cost sources of equity capital available. We believe the Premium Dividend™  represents the most prudent approach to preserving near-term balance sheet strength and is expected to reduce cash dividends by approximately $55 million during the remainder of 2015.  We view implementation of a Premium Dividend™ as a short term measure to maintain our financial strength, and both components of our program can be suspended or prorated at the company's discretion, offering considerable flexibility.  We will actively monitor our ongoing needs and manage our continued use of each component as circumstances dictate.

  • We celebrated our 20th Anniversary as a publicly traded company in 2014.  This has been a rewarding period of growth and achievement for our company, and we are proud of our progress to date.  Most importantly, we are honored to have provided our shareholders with a compound average total return including dividends, as of December 31, 2014, of 33.6% per annum since our inception.  As of December 31, 2014, Vermilion has distributed dividends of $26.43 per share since initiating the first monthly payment in March 2003.  Vermilion has increased the dividend three times, and has never cut its dividend.  With the consistent strength of our operations, an extensive and diversified opportunity base, a strong balance sheet and continued access to capital, we are well positioned to exit the current cycle stronger than when we entered it.  We will strive to provide continued operational and financial performance, and a reliable and growing dividend stream to investors, as we proceed with our company's growth plans.
(1)      Additional GAAP Financial Measure.  Please see the "Additional and Non-GAAP Financial Measures" section of Management's Discussion and Analysis.
(2)      Estimated proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ") in a report dated February 6, 2015 with an effective date of December 31, 2014 (the "2014 GLJ Reserves Evaluation")
(3)      Vermilion retained GLJ to conduct an independent resource evaluation to assess contingent and prospective resources across all of the Company's key operating regions with an effective date of December 31, 2014 (the "GLJ 2014 Resource Assessment")
(4)      Vermilion retained GLJ to conduct an independent resource evaluation to assess contingent and prospective resources across all of the Company's key operating regions with an effective date of December 31, 2013 (the "GLJ 2013 Resource Assessment")
(5)      Test results are not necessarily indicative of long-term production performance or of ultimate recovery.

ORGANIZATIONAL CHANGES

Vermilion is pleased to announce the appointment of Mr. Kevin Reinhart and Ms. Cathy Williams to our Board of Directors effective March 2, 2015.

Mr. Reinhart brings over 20 years of oil and gas industry experience, with an extensive background in leadership, strategy and growth, finance, international activities, exploration, sustainability, corporate relations and marketing. In 2012, Mr. Reinhart was named interim President and CEO as well as Director of Nexen Inc. Following the sale of Nexen Inc. in 2013, he was promoted to the role of President and CEO (for Nexen Energy, a CNOOC Limited Company), a position he held up until his retirement in 2014.  Prior to 2012, Mr. Reinhart had held the roles of Executive Vice President and CFO (2009-2012) and Senior Vice President, Corporate Planning and Business Development (2002-2009).  Prior to 2002, Mr. Reinhart served in various capacities as a member of Nexen's executive management team including Controller, Director of Risk Management and Treasurer. From 2005 to 2010, Mr. Reinhart served as a Director of Canexus Ltd. Mr. Reinhart holds a Bachelor of Commerce degree from Saint Mary's University in Halifax. He earned his Chartered Accountant designation in 1985 and is a member of Institute of Chartered Accountants of Alberta.

Ms. Williams brings 30 years of oil and gas industry experience, with an extensive background in finance and business management. Ms. Williams is currently the Owner and Managing Director of Options Canada Ltd. (since 2007) and serves as a Board member of Enbridge Inc. (since 2007) and Chairs their Human Resources and Compensation Committee (since 2010). She was a Board member of Alberta Investment Management Corporation from 2009 to 2014 and Tim Hortons Inc. from 2009 to 2012. From 2003 to 2007, Ms. Williams held the role of Chief Financial Officer for Shell Canada Ltd., prior to which she held various positions with Shell Canada Limited, Shell Europe Oil Products, Shell Canada Oil Products and Shell International (1984 to 2003). Ms. Williams has a Bachelor of Arts degree from University of Western Ontario and a Masters in Business Administration from Queen's University.

Further, Mr. Kenneth Davidson has advised that he will not be standing for re-election to Vermilion's Board of Directors in 2015.  Mr. Davidson has been a Director since December 2005.  We wish to thank Mr. Davidson for his contribution to the Board and for his service as Chair of Vermilion's Audit Committee and as a member of the Governance and Human Resources Committee since 2007.

PREMIUM DIVIDEND™ AND DIVIDEND REINVESTMENT PLAN 

To preserve our financial flexibility and conservatively exercise our access to capital, we have amended our existing Dividend Reinvestment Plan to include a Premium Dividend™ Component.  Under the new Premium Dividend™ and Dividend Reinvestment Plan (the "Plan"), Eligible Shareholders who elect to participate in the Dividend Reinvestment Component can continue to reinvest their dividends in common shares at an effective 3% discount to the Average Market Price (with no broker commissions or trading costs), similar to our previous Dividend Reinvestment Plan (Vermilion's Amended and Restated Dividend Reinvestment Plan dated effective September 1, 2010 as amended effective February 27, 2014 (the "Previous DRIP").

With the addition of a new Premium Dividend™ Component, Eligible Shareholders will also have the option to reinvest their dividends in new common shares which will be exchanged for a premium cash payment equal to 101.5% of the reinvested dividends.  Under the Premium Dividend™ Component, shares will be issued at a 3.5% discount to the Average Market Price.  The shares will be presold at prevailing market prices by the Plan Broker (Canaccord Genuity Corporation), who will then provide participating Shareholders with a premium cash payment equal to 101.5% of their dividends, while the Plan Broker retains the balance of the discount as its fee.

Eligible Shareholders are not required to participate in the Plan.  Eligible Shareholders who have not elected to participate in the Plan will continue to receive their regular cash dividends in the usual manner.

The total cost of equity issuance to Vermilion under the Dividend Reinvestment Component and the Premium Dividend™ Component of the Plan will be 3% and 3.5%, respectively.  The Premium Dividend™ Component, when combined with the Dividend Reinvestment Component, is expected to increase our access to the lowest cost sources of equity capital available.  While the Premium Dividend™ is expected to result in a modest amount of equity issuance (estimated to be less than 1% of shares outstanding in 2015), we believe it represents the most prudent approach to preserving near-term balance sheet strength.  We expect the Premium Dividend™ to reduce cash dividends by approximately $55 million during the remainder of 2015.  We view implementation of a Premium Dividend™ as a short term measure to maintain our financial strength.  Both components of our program can be suspended or prorated at the company's discretion, offering considerable flexibility.  We will actively monitor our ongoing needs and manage our continued use of each component as circumstances dictate.

To effect the change, Vermilion's Board of Directors has approved amendments to the Previous DRIP to include a Premium Dividend™ Component.  The new Plan will allow Eligible Shareholders to elect to participate in the Plan, commencing with the March distribution, payable to Shareholders on April 15, 2015 (the "March Dividend").  The March Dividend will have a Dividend Record Date of March 31, 2015, however all Dividend Record Dates for subsequent 2015 dividend payments will be adjusted, from those previously published, to facilitate the operation of the Premium DividendTM Component of the Plan.  The amended Dividend Record Dates are now published and available on Vermilion's website at www.vermilionenergy.com (under the heading "Investor Relations" subheading "Dividends") and will be included in the applicable news release announcing the approval and declaration of any future dividend payments by Vermilion's Board of Directors.

Each component of the Plan, which is explained in greater detail in the complete Plan document available on Vermilion's corporate website at www.vermilionenergy.com (under the heading "Investor Relations" subheading "DRIP"), is subject to eligibility restrictions, applicable withholding taxes, prorating as provided for in the Plan, and other limitations on the availability of common shares to be issued or purchased in certain events. Only Canadian-resident Shareholders may participate in the Premium DividendTM Component of the Plan. The Dividend Reinvestment Component of the Plan is available to Canadian residents and non-U.S. resident foreign Shareholders who meet certain eligibility criteria as set forth in the complete Plan. U.S. resident Shareholders are not currently permitted to participate in either component of the Plan.  This is due to the requirement, under U.S. securities regulations, to maintain a continuous shelf registration for issuance of new equity to U.S. Shareholders.  At this time, Vermilion has not put in place the required shelf registration due to the  high cost of establishing and maintaining such a shelf registration.  We will continue to monitor the relative cost-benefit of such a registration as we go forward.

In order to participate in either the Premium Dividend™ Component or the Dividend Reinvestment Component, an Eligible Shareholder must enroll, or be deemed to have enrolled (in the case of the Dividend Reinvestment Component), in the Plan at least five business days prior to the relevant Dividend Record Date directly (in the case of registered Shareholders) or indirectly through the broker, investment dealer, financial institution or other nominee who holds common shares on the Eligible Shareholder's behalf.

A registered Eligible Shareholder who was enrolled in the Previous DRIP will automatically be deemed to be a participant in the Dividend Reinvestment Component of the Plan, without any further action on their part. A beneficial owner of common shares (i.e., a holder of common shares that are not registered in the beneficial owner's name but are instead held through a broker, investment dealer, financial institution or other nominee) who was validly enrolled, through the nominee holder, in the Previous DRIP should contact such nominee holder to confirm continued participation in the Dividend Reinvestment Component of the Plan.

For more information on the Plan, defined meanings for capitalized terms above, eligibility restrictions and enrollment information among other details of the Plan, please refer to the complete copy of the Plan as well as a related series of Questions and Answers available on Vermilion's website at www.vermilionenergy.com (under the heading "Investor Relations" subheading "DRIP").

™ denotes trademark of Canaccord Genuity Capital Corporation.

Conference Call and Audio Webcast Details

Vermilion will discuss these results in a conference call to be held on Monday, March 2, 2015 at 9:00 AM MST (11:00 AM EST).  To participate, you may call 1-888-231-8191 (Canada and US Toll Free) or 1-647-427-7450 (International and Toronto Area).  The conference call will also be available on replay by calling 1-855-859-2056 using conference ID number 66942576.  The replay will be available until midnight mountain time on March 9, 2015.

You may also listen to the audio webcast by clicking  http://event.on24.com/r.htm?e=925534&s=1&k=AC0268657BEFCE6AEC7F0AB205FB2A4F or visit Vermilion's website at www.vermilionenergy.com/ir/eventspresentations.cfm.

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; operational and financial performance; estimated 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; estimated contingent resources and prospective resources; exploration and development plans; acquisition and disposition plans and the timing thereof; operating and other expenses, including the payment and amount of future dividends; royalty and income tax rates; the timing of regulatory proceedings and approvals; and the timing of first commercial natural gas and the 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 position 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 and estimates of resources and associated expenditures; 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; 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; 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.

All oil and natural gas reserve information contained in this document has been prepared and presented in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities.  The actual oil and natural gas reserves and future production will be greater than or less than the estimates provided in this document.  The estimated future net revenue from the production of oil and natural gas reserves does not represent the fair market value of these reserves.

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.

Financial data contained within this document are reported in Canadian dollars, unless otherwise stated.

ABBREVIATIONS

$M    thousand dollars
$MM    million dollars
AECO    the daily average benchmark price for natural gas at the AECO 'C' hub in southeast Alberta
bbl(s)    barrel(s)
bbls/d    barrels per day
bcf    billion cubic feet
boe    barrel of oil equivalent, including: crude oil, natural gas liquids and natural gas (converted on the basis of one boe for
    six mcf of natural gas)
boe/d    barrel of oil equivalent per day
GJ    gigajoules
HH    Henry Hub, a reference price paid for natural gas in US dollars at Erath, Louisiana
mbbls    thousand barrels
mboe    thousand barrel of oil equivalent
mcf    thousand cubic feet
mcf/d    thousand cubic feet per day
mmboe    million barrel of oil equivalent
mmcf    million cubic feet
mmcf/d    million cubic feet per day
MWh    megawatt hour
NGLs    natural gas liquids
PRRT    Petroleum Resource Rent Tax, a profit based tax levied on petroleum projects in Australia
TTF    the day-ahead price for natural gas in the Netherlands, quoted in MWh of natural gas, at the Title Transfer Facility
    Virtual Trading Point operated by Dutch TSO Gas Transport Services
WTI    West Texas Intermediate, the reference price paid for crude oil of standard grade in US dollars at Cushing, Oklahoma

MESSAGE TO SHAREHOLDERS 

Dear Shareholders:

The upstream energy environment continues to be challenging following the dramatic decline in global crude oil prices that began in mid-2014.  While both West Texas Intermediate ("WTI") blend and to a greater extent Brent based crudes have realized modest rebounds from their respective lows reached in January 2015, we are in a new commodity cycle that may feature lower crude oil prices for an extended period of time.  We have always believed that our strategy, to build a global asset base with diversified commodity exposures and project fundamentals, is the best and most balanced approach to reducing risk and providing the necessary flexibility to adapt to changing commodity cycles and ensure the long-term sustainability of our Company.

Today, more than ever, we believe that our global asset base and diversified commodity exposure, particularly our growing exposure to the strong fundamentals and pricing of European natural gas markets, leaves us competitively advantaged compared to the majority of our North American peers.  In 2014 we actively expanded this exposure with our entry into Germany, a producing region with a long history of crude oil and natural gas development activity, low political risk, and strong market fundamentals.  Our Germany acquisition increased our existing European natural gas production base by nearly 50% in 2014.  Looking to mid-2015, with production forthcoming from our Corrib project in Ireland, we believe European gas may represent approximately 25% of our total oil-equivalent production and generate as much as 35% of our 2015 FFO based on recent strip pricing.  In 2016, with a full year of Corrib production and assuming constant pricing, European natural gas may generate as much as 45% of Vermilion's FFO(1).  Today's fundamentals and outlook for European natural gas markets remain robust with current prices approximately triple those in North America.  We will continue to consider further opportunities to profitably increase our European natural gas exposure.

During 2014, we realized successful entry into four new areas within our existing core regions.  As previously mentioned, in February we announced our entry into Germany, expanding our exposure to European natural gas markets and establishing a strong foundation for organic growth and possible future acquisitions.  In April, we closed the purchase of a private company with light-oil assets in Southeast Saskatchewan.  We believe we can add significant value to these assets by applying our expertise from horizontal development of our Cardium project.  The transaction established a new light-oil focused core area in Canada for organic growth and land expansion.  To that end, subsequent to the transaction, we expanded our land base by leasing an additional 15,000 net acres of undeveloped land at an average cost of $1,860 per acre.  In September, we announced a small entry into the United States with the purchase of assets located in the Powder River Basin in northeastern Wyoming for $11.1 million.  This accretive acquisition provides a significant undeveloped land block for horizontal development of a promising Turner Sand light oil target.  Finally during 2014, we announced the establishment of a significant land position in Hungary that offers potential for long-term natural gas development with minimal near-term capital commitments.

In December 2014, we announced our initial 2015 capital budget of $525 million, a 24% reduction from our 2014 capital expenditures.  In view of continued weakness in oil prices since that time,  we are now further reducing our planned capital activity levels in 2015 by an additional $110 million to $415 million, a reduction of approximately 40% as compared to 2014.  These capital budget activities include reductions in planned spending in our Canadian and French business units, and the deferral and potential cancellation of our 2015 Australian drilling program.  We are also directing considerable focus to our PEP initiative to support Vermilion's long-term and sustainable profitability.  Prior installments of PEP achieved strong results in both the 1998 industry downturn and the financial crisis of 2008-2009.  Despite the significant reduction in planned capital expenditures, we are maintaining our previous 2015 production guidance of 55,000 - 57,000 boe/d.

For 2015, our Canadian operational plans reflect a significant reduction in activity levels as we seek to preserve our financial flexibility and balance sheet strength.  While our conventional plays in Canada continue to generate strong returns, the dynamic nature of Canada's service sector and the limited expiry profile of our Canadian asset base provide significant flexibility to moderate near-term capital spending.  As a result, our 2015 Canadian capital activities will be focused predominately on only those activities required to maintain the net asset value of our existing asset base as we work with our vendors to drive down costs across our business.  Our Cardium light-oil resource play continues to generate strong rates of return in excess of 30%(2), reflecting our relatively low operating costs, continued improvements in completions design and better-than-forecasted production volumes on our two-mile extended reach horizontal wells.  Nevertheless, given limited expiries and our high level of operatorship in the play, we have the flexibility to reduce capital investment levels.  In 2015, we expect to drill or participate in only eight (3.0 net) wells, a significant reduction from previous activity levels of 30 to 50 wells per year.  Our Mannville condensate-rich conventional natural gas play remains the most economic play in our Canadian portfolio  with current rates of return in excess of 85%(2). For 2015, we anticipate drilling or participating in 28 (16.0 net) wells, up from 20 (10.6 net) wells in 2014.  Our Saskatchewan land base has limited expiries, allowing us to reduce drilling activity on these assets to five (4.1 net) wells in 2015.  In our Duvernay unconventional liquids-rich gas play, we will monitor the performance of our two appraisal wells that we drilled in 2014.  We have deferred further Duvernay drilling activities to beyond 2015.

In France, we have maintained plans for our four-well drilling program at Champotran during Q1 2015 as after-tax rates of return remain robust at more than 100%(2).  The remainder of our capital expenditures in France will target highly economic workovers and optimization projects, as well as infrastructure and facilities maintenance.  We continue to anticipate that a portion of our 4 mmcf/d of shut-in natural gas production at Vic Bilh will be back on-stream by mid-2015.  In the Netherlands, we are planning for a three (2.4 net) well drilling campaign that is expected to begin in Q2 2015.  The fundamentals and pricing for European gas remain robust, and we will continue to focus significant attention on identifying profitable opportunities to increase our exposure to this market.  In Germany, our operating partner is planning a one (0.25 net) well program.  In Ireland, our Corrib project has continued to progress on schedule following the completion of tunnel boring operations in May 2014.  During 2014, project operator Shell Exploration & Production Ireland Ltd. successfully completed offshore workover and pipeline operations as well as outfitting of the 4.9 km tunnel, including installation of flow and umbilical lines, hydro-testing and dewatering, with the final weld completed in December.  Grouting of the tunnel was concluded in January 2015.  Natural gas from the national sales grid was safely introduced into the processing facility in November 2014 as part of the commissioning process for the gas plant.  Remaining work includes the completion of gas plant commissioning activities and the finalization of operating permits.  We anticipate first gas from Corrib in approximately mid-2015, with peak production estimated at approximately 58 mmcf/d (approximately 9,700 boe/d), net to Vermilion.

In spite of the challenges posed by the current business environment, we continue to believe that Vermilion is situated for long-term, diversified growth.  We remain confident that the assets in our portfolio can support organic growth for years to come, and in the current environment, we also find ourselves well positioned to take advantage of potential acquisition activity in both North American and international markets.  Our long-term focus on the creation of real value through our technical capabilities, combined with our conservative financial approach and patience, should allow us to compete and transact for the benefit of our existing shareholders if suitable opportunities arise.

Our balance sheet remains a source of strength.  We have recently exercised our option to expand our credit facilities to $1.75 billion, giving us approximately $730 million of available capacity on our bank line.  In a further step to preserve our financial flexibility and conservatively exercise our access to capital, we have also announced an amendment to our existing DRIP to include a Premium Dividend™ Component.  The Premium Dividend™ Component, when combined with our continuing Dividend Reinvestment Component, is expected to increase our access, at the election of shareholders, to the lowest cost sources of equity capital available.  While the Premium Dividend™ is expected to result in a modest amount of equity issuance, we believe it represents the most prudent approach to preserving near-term balance sheet strength.  We view implementation of a Premium Dividend™ as a short-term measure to maintain our financial flexibility while we continue to lower our unit costs and await further clarity on the direction of commodity prices.  Both components of our program can be turned off at the company's discretion, offering considerable flexibility.  We will actively monitor our ongoing needs and manage our continued use of each component as circumstances dictate.

In 2014, we celebrated Vermilion's 20th anniversary as a publicly traded company.  It was a demanding, but also a tremendously rewarding, twenty years during which we have experienced previous commodity cycles that were not wholly unlike today's.  Over the years, we have witnessed significant change and encountered many challenges to the industry, and we are particularly proud of our demonstrated ability to effectively navigate those challenges to the benefit of our shareholders.  The recent decline in crude prices creates yet another opportunity for us to demonstrate the sustainability of our business model and the advantages of our diversified portfolio.  Vermilion's relative performance during this period has once again demonstrated the stable and defensive nature of our business, our strong positioning within the industry, and our shareholders' continued confidence in our ability to prosper.

Reflecting on Vermilion's record, we are pleased that our previous efforts have resulted in a compound average total return including dividends, as of December 31, 2014, of 33.6% per annum since inception. We are also proud of the consistency of those returns over longer periods.  Over the last  three, five, ten and 15 calendar-year periods, we have reliably delivered double-digit compound average total returns of 12.3%, 16.2%, 14.7% and 21.6%, respectively.

The management and directors of Vermilion continue to hold approximately 6% of the outstanding shares and remain committed to delivering superior rewards to all stakeholders.  Continuing to be acknowledged for excellence in our business practices, Vermilion was recognized for the fifth consecutive year by the Great Place to Work® Institute in both Canada and France in 2014.  In Canada, Vermilion was ranked 5th Best Workplace in its category for 2014.  More than 300 Canadian companies participated in the survey and Vermilion was the only energy company in Canada to be recognized as a Best Workplace.  In France, Vermilion received a special award for corporate social responsibility and was ranked 13th Best Workplace in its category for 2014.  Vermilion's Netherlands business unit became eligible to participate in the competition for the first time in 2014 and was ranked 10th Best Workplace in its category, the highest score of any energy company in the survey.  Vermilion was ranked second out of 13 in our peer group by the Carbon Disclosure Project (CDP) for our disclosure in 2014, our inaugural year of participation, with  Vermilion scoring 87 out of 100 (10 points higher than any peer group company achieved in its inaugural year of participation).

(1)   The above discussion includes additional GAAP and non-GAAP measures which may not be comparable to other companies.  Please see the "ADDITIONAL AND NON-GAAP FINANCIAL MEASURES" section of Management's Discussion and Analysis.
(2)  Economics calculated using the following commodity price deck assumptions: $55/bbl WTI; $60/bbl Dated Brent; $2.75/mmbtu AECO; US$3.00/mmbtu Nymex; $9.00/mmbtu Title Transfer Facility (Netherlands); CAD/USD 1.20; CAD/EUR 1.40

HIGHLIGHTS

        Three Months Ended     Year Ended
($M except as indicated)       Dec 31,   Sep 30,     Dec 31,     Dec 31,   Dec 31,
Financial       2014   2014     2013     2014   2013
Petroleum and natural gas sales       306,073   344,688     325,108     1,419,628   1,273,835
Fund flows from operations (1)       185,528   197,898     163,660     804,865   667,526
  Fund flows from operations ($/basic share)       1.73   1.85     1.61     7.63   6.61
  Fund flows from operations ($/diluted share)       1.71   1.83     1.58     7.51   6.51
Net earnings       58,642   53,903     101,510     269,326   327,641
  Net earnings ($/basic share)       0.55   0.50     1.00     2.55   3.24
Capital expenditures       166,243   190,033     148,478     687,724   542,726
Acquisitions       1,652   40,847     29,103     601,865   36,689
Asset retirement obligations settled       6,247   4,677     5,426     15,956   11,922
Cash dividends ($/share)       0.645   0.645     0.600     2.580   2.400
Dividends declared       69,119   68,896     61,208     272,732   242,599
  % of fund flows from operations       37%   35%     37%     34%   36%
Net dividends (1)       48,139   48,480     42,433     193,302   170,308
Vermilion Energy Inc.
3500, 520 3rd Avenue SW
Calgary, Alberta T2P 0R3
Phone: 1-403-269-4884
Fax: 1-403-476-8100
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