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Vermilion Energy Inc. Announces Results for the Year Ended December 31, 2015

February 29, 2016

CALGARY, Feb. 29, 2016 /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, 2015.

HIGHLIGHTS

  • Vermilion's annual production volumes increased by 11% in 2015 to 54,922 boe/d.  This strong production performance was achieved despite a nearly 4,000 boe/d shortfall in anticipated Corrib volumes associated with regulatory delays and a 30% decrease in exploration and development ("E&D") capital spending as compared to the prior year.
     
  • Production volumes for Q4 2015 increased by 8% as compared to the prior quarter to a record 61,058 boe/d.  Each of Vermilion's business units increased production, with the most significant increases driven by drilling successes in Canada, Australia and the Netherlands.
     
  • Fund flows from operations in 2015 was $516.2 million ($4.71/basic share(1)) as compared to $804.9 million ($7.63/basic share) in 2014.  Higher production in 2015 partially offset the impact of a 48% decrease in oil prices.  Q4 2015 fund flows from operations of $136.4 million ($1.22/basic share) was higher than the $129.4 million ($1.17/basic share) in Q3 2015 as a result of higher production volumes, realized hedging gains and lower taxes, partially offset by lower commodity pricing.
     
  • Subsequent to the end of the year, we released a $285 million E&D capital budget for 2016 that represented a decrease in spending of over 40% from 2015 levels and a decrease of nearly 60% from 2014 levels.   Since that time, we have further reduced our E&D budget by another $50 million in response to still lower commodity prices.  Our new E&D capital budget for 2016 is $235 million, with the flexibility to restore certain projects if commodity prices improve.  We still expect to deliver nearly 15% production growth year-over-year with only a modest impact expected in 2016 from this further reduction in capital.
     
  • Following the receipt of final regulatory approval, first gas production started at our Corrib project in Ireland on December 30, 2015.  Corrib is expected to provide significant high-margin production growth and generate meaningful free cash flow(1) in 2016.  To date, production has been in-line with forecasts, with well deliverability better than our expectations. Production levels at Corrib are expected to rise over a period of approximately six months to an estimated peak rate of 58 mmcf/d (9,700 boe/d), net to Vermilion.
     
  • Total proved ("1P") reserves increased 6% to 160.7(2) mmboe, while total proved plus probable ("2P") reserves also increased 6% to 260.9(2) mmboe.  This represents year-over-year 1P and 2P per share reserves growth of 2% and 1%, respectively.
     
  • Finding and Development ("F&D")(3) and Finding, Development and Acquisition ("FD&A")(3)  costs, including Future Development Capital ("FDC")(3) for 2015 on a 2P basis decreased 48% to $8.98/boe and 55% to $10.03/boe, respectively.  Similarly, our three-year F&D and FD&A, including FDC, on a 2P basis were $14.82/boe and $17.81/boe, respectively.
     
  • Recycle ratio(5) (including FDC) was 3.6x during 2015, an increase over 3.2x achieved during 2014, indicating that we were able to not only maintain but improve our high level of investment efficiency in 2015 despite the decline in commodity prices. We increased Proved Developed Producing reserves (net of production) by 25% at an average F&D cost (including FDC) of $10.67/boe generating a recycle ratio (including FDC) of 3.0x.
     
  • Our independent GLJ 2015 Resource Assessment(4) indicates low, best, and high estimates for contingent resources in the Development Pending category are 95.1 mmboe, 160.7 mmboe, and 254.7 mmboe, respectively.  Approximately 80% of our best estimate contingent resources evaluated reside in the Development Pending category, reflecting the high quality nature of our contingent resource base.
     
  • In Q4 2015 we drilled and completed a horizontal sidetrack well at the Wandoo A platform in Australia.  The well was successfully brought on production in mid-November.  We produced the well through December 31, 2015 at an average rate of approximately 3,900 boe/d.
     
  • The Diever-02 exploration well in the Netherlands (45% working interest), drilled in 2014, came on production at the end of October 2015 at a gross rate of 28.5 mmcf/d (4,750 boe/d).  Our net incremental production increase from this well is presently limited to approximately 6 mmcf/d (1,000 boe/d) due to current pipeline constraints in the multi-well system that Diever-02 produces into.
     
  • We continued to make progress in mitigating the impact of third-party plant capacity and transportation restrictions on our Canadian production volumes.  At the end of Q4, approximately 1,600 boe/d remained shut-in, pending capacity availability.
     
  • Vermilion was recently awarded two additional exploration licenses in Germany, adding approximately 110,000 net acres to our land position.
     
  • We continued to prioritize preserving the strength of our balance sheet through our Profitability Enhancement Program ("PEP") initiative.  Associated cost savings related to capital spending, operating expense and G&A expenditures reached nearly $90 million for full-year 2015.

 

 

(1)    Non-GAAP Financial Measure.  Please see the "Non-GAAP Financial Measures" section of Management's Discussion and Analysis.
(2)    Estimated proved and proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ") in a report dated February 8, 2016 with an effective date of December 31, 2015 (the "2015 GLJ Reserves Evaluation")
(3)    F&D (finding and development) and FD&A (finding, development and acquisition) costs are used as a measure of capital efficiency and are calculated by dividing the applicable capital costs for the period, including the change in undiscounted future development capital ("FDC"), by the change in the reserves, incorporating revisions and production, for the same period.
(4)    Vermilion retained GLJ to conduct an independent resource evaluation dated February 8, 2016 to assess contingent resources across all of the Company's key operating regions with an effective date of December 31, 2015 (the "GLJ 2015 Resource Assessment").  The associated chance of development for each of the low, best, and high estimate for contingent resources in the Development Pending category are 83%, 82%, and 81%, respectively. There is uncertainty that it will be commercially viable to produce any portion of the resources.
(5)    Recycle ratio is Operating Netback divided by F&D (including FDC)

 

ORGANIZATIONAL UPDATE

As announced on November 30, 2015, Mr. Lorenzo Donadeo will be retiring as Chief Executive Officer ("CEO"), effective March 1, 2016, at which time he will become Chair of the Board of Directors.  Mr. Anthony Marino, currently President and Chief Operating Officer ("COO"), will assume the role of President and CEO.  Mr. Larry Macdonald, the Board of Director's current Chair, will transition to the newly created role of Lead Independent Director.

Concurrent with those changes, Vermilion is pleased to announce the appointments of Mr. Michael Kaluza to the position of Executive Vice President and COO, and Mr. Dion Hatcher to the position of Vice President of our Canadian Business Unit.

Mr. Kaluza joined Vermilion in February 2013 as Director of our Canadian Business Unit, and was promoted to Vice President of our Canadian Business Unit in May 2014.  Mr. Kaluza has over 30 years of operations and executive management experience, and has a Bachelor of Science in Petroleum Engineering (Honors) from the Montana College of Mineral, Science and Technology.

Mr. Hatcher joined Vermilion in 2006 and has over 18 years of industry experience focused on operations engineering and project management. He has a Bachelor of Science in Mechanical Engineering (Honors) from Memorial University of Newfoundland.

Conference Call and Audio Webcast Details

Vermilion will discuss these results in a conference call to be held on Monday, February 29, 2016 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 21667130.  The replay will be available until midnight mountain time on March 7, 2016.

You may also listen to the audio webcast by clicking  http://event.on24.com/r.htm?e=1117164&s=1&k=1F2188A24FF5A3DA8F83BE1F0C213F7B or visit Vermilion's website at www.vermilionenergy.com/ir/eventspresentations.cfm.

 

HIGHLIGHTS                      
                       
      Three Months Ended   Year Ended
($M except as indicated)     Dec 31,   Sep 30,   Dec 31,   Dec 31,   Dec 31,
Financial     2015   2015   2014   2015   2014
Petroleum and natural gas sales     234,319   245,051   306,073   939,586   1,419,628
Fund flows from operations     136,441   129,435   185,528   516,167   804,865
  Fund flows from operations ($/basic share) (1)     1.22   1.17   1.73   4.71   7.63
  Fund flows from operations ($/diluted share) (1)     1.21   1.16   1.71   4.65   7.51
Net earnings (loss)     (142,080)   (83,310)   58,642   (217,302)   269,326
  Net earnings (loss) ($/basic share)     (1.28)   (0.76)   0.55   (1.98)   2.55
Capital expenditures     128,996   93,381   166,243   486,861   687,724
Acquisitions     6,227   22,155   1,652   28,897   601,865
Asset retirement obligations settled     4,921   2,123   6,247   11,369   15,956
Cash dividends ($/share)     0.645   0.645   0.645   2.580   2.580
Dividends declared     71,965   71,244   69,119   283,575   272,732
  % of fund flows from operations     53%   55%   37%   55%   34%
Net dividends (1)     25,201   26,654   48,139   128,542   193,302
  % of fund flows from operations     18%   21%   26%   25%   24%
Payout (1)     159,118   122,158   220,629   626,772   896,982
  % of fund flows from operations     117%   94%   119%   121%   111%
  % of fund flows from operations (excluding the Corrib project) (1)     106%   77%   106%   107%   99%
Net debt     1,381,951   1,363,043   1,265,650   1,381,951   1,265,650
Ratio of net debt to annualized fund flows from operations     2.5   2.6   1.7   2.7   1.6
Operational                      
Production                      
  Crude oil (bbls/d)     28,745   28,164   28,846   28,502   28,879
  NGLs (bbls/d)     5,298   4,622   2,822   4,214   2,553
  Natural gas (mmcf/d)     162.09   140.97   107.42   133.24   108.85
  Total (boe/d)     61,058   56,280   49,571   54,922   49,573
Average realized prices                      
  Crude oil and NGLs ($/bbl)     51.64   56.57   78.64   58.80   100.06
  Natural gas ($/mcf)     4.55   5.36   5.90   4.98   6.42
Production mix (% of production)                      
  % priced with reference to WTI     21%   24%   28%   25%   28%
  % priced with reference to AECO     24%   22%   20%   22%   18%
  % priced with reference to TTF     20%   20%   16%   19%   18%
  % priced with reference to Dated Brent     35%   34%   36%   34%   36%
Netbacks ($/boe)                      
  Operating netback     28.44   32.25   45.85   32.09   55.50
  Fund flows from operations netback     23.91   24.58   38.67   25.86   44.09
  Operating expenses     11.50   10.99   12.48   11.32   12.72
Average reference prices                      
  WTI (US $/bbl)     42.18   46.43   73.15   48.80   93.00
  Edmonton Sweet index (US $/bbl)     39.72   43.01   66.79   44.91   85.83
  Dated Brent (US $/bbl)     43.69   50.26   76.27   52.46   98.99
  AECO ($/mmbtu)     2.46   2.90   3.60   2.69   4.50
  TTF ($/mmbtu)     7.28   8.48   9.16   8.23   8.96
Average foreign currency exchange rates                      
  CDN $/US $     1.34   1.31   1.14   1.28   1.10
  CDN $/Euro     1.46   1.46   1.42   1.42   1.47
Share information ('000s)                      
Shares outstanding - basic     111,991   110,818   107,303   111,991   107,303
Shares outstanding - diluted (1)     115,025   113,643   110,334   115,025   110,334
Weighted average shares outstanding - basic     111,393   110,293   107,102   109,642   105,448
Weighted average shares outstanding - diluted (1)     112,543   111,193   108,646   111,051   107,187

 

(1)  The above table includes non-GAAP financial measures which may not be comparable to other companies.  Please see the
"NON-GAAP FINANCIAL MEASURES" section of Management's Discussion and Analysis.

 

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 net present value of future net revenue 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; 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; and the timing of regulatory proceedings and approvals.

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 and the Canadian Oil and Gas Evaluation Handbook.  The actual crude 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 crude 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
btu      British thermal units
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
mmbtu      million British thermal units
mmcf      million cubic feet
mmcf/d      million cubic feet per day
MWh      megawatt hour
NBP      the reference price paid for natural gas in the United Kingdom, quoted in pence per therm, at the National Balancing Point Virtual Trading Point operated by National Grid. Our production in Ireland is priced with reference to NBP.
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
CGU      Cash generating unit, the basis upon which Vermilions assets are evaluated for potential impairments
DRIP      Dividend Reinvestment Plan

 

MESSAGE TO SHAREHOLDERS

Commodity price volatility continued unabated through 2015, and it does not appear that 2016 will provide any immediate relief.  Although the current economic environment poses significant challenges for all industry participants, including Vermilion, we believe that continued adherence to our long-term strategy will enable us to emerge from this price cycle stronger than ever.

Our long-term strategy is focused on three main priorities, presented in order of importance:

 

      1)      Preserving the strength of our balance sheet;
      2)      Protecting our dividend; and
      3)      Investing to fund production growth.

 

Preserving the Strength of Our Balance Sheet

We have always been highly disciplined in the management of our balance sheet, historically maintaining leverage ratios that are significantly more conservative than most of our peers.  This has allowed us to effectively manage through prior low commodity price environments. We entered the current commodity downturn in a position of relative financial strength, and we took a number of purposeful actions throughout 2015 to preserve our balance sheet.

We have significantly reduced capital investment to support our sustainability in this price environment.  Our 2016 E&D budget is now $235 million, representing a decrease of over 50% from 2015 levels and a decrease of more than 65% from 2014 levels.  Our intent is to balance cash outlays in 2016 for net dividends and E&D capital investment with our fund flows from operations.

During 2015 we increased our credit facility capacity by $500 million to $2.0 billion and extended the term to May 2019, providing additional financial certainty.  At year-end 2015, we had $837 million of undrawn capacity which allowed us to retire the $225 million of 6.5% Senior Unsecured Notes that came due on February 10, 2016 with funds from the credit facility.  While we are continuing to assess opportunities to diversify our debt structure, our credit facility is currently our most cost-effective method of borrowing.

In early 2015 we amended our existing Dividend Reinvestment Plan ("DRIP") to include a Premium Dividend™ Component.  The Premium Dividend™ Component, when combined with our legacy Dividend Reinvestment Plan, significantly expands our access to the lowest cost source of equity capital available.  The program can be suspended or prorated at our discretion, offering considerable flexibility.  We view the implementation of the Premium Dividend™ as a short-term measure and we will actively monitor our ongoing needs and manage our continued use of each component as circumstances dictate.  In the event of a commodity price recovery, it is our intent to reduce, and ultimately eliminate, the Premium Dividend™ Component.

We have hedged a meaningful component of our natural gas production, particularly European natural gas, which remains a significantly stronger market than North American natural gas.  At present, we have 25% of our total 2016 net-of-royalty production hedged, including 44% of our anticipated natural gas volumes.

Protecting Our Dividend

We have never reduced our dividend since it was initiated in 2003.  We are constantly monitoring both our dividend and accompanying capital program, taking into consideration prevailing and expected commodity prices and equity issued under our DRIP program.  Although this commodity downturn has been more pronounced than we anticipated when it began in mid-2014, we believe that our existing dividend remains manageable with the actions we have taken to date.  We remain committed to first prioritizing our balance sheet and preserving our financial flexibility.  To safeguard our long-term sustainability, we are managing our business based on the current commodity price strip, with the objective that our funds from operations will approximately balance or exceed our cash outflows for net dividends and capital expenditures.  Should commodity conditions arise under which we can no longer expect to balance outflows and inflows over longer periods of time, we would protect our balance sheet through further modifications of our capital investment and dividend programs.

Investing to Fund Production Growth

We believe our inventory of organic growth projects is strong and each of our business units is capable of delivering production growth.  The diversity of our asset base and commodity and currency exposures allows us to select and fund projects that will generate the highest return in a given economic environment.  This advantage is even more pronounced in a low commodity price environment in which available capital fundin

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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