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Vermilion Energy Inc. Announces Results for the Three Months Ended March 31, 2016

May 6, 2016

CALGARY, May 6, 2016 /CNW/ - Vermilion Energy Inc. ("Vermilion", "We", "Our", "Us" or the "Company") (TSX, NYSE: VET) is pleased to report operating and unaudited financial results for the three months ended March 31, 2016. 

HIGHLIGHTS

  • Achieved average production of 65,389 boe/d during the first quarter of 2016, an increase of 7% as compared to 61,058 boe/d in the prior quarter, with significant increases recorded in our Irish and Canadian operations. Production increased 30% from 50,386 boe/d in the first quarter of 2015, with higher volumes from our Irish, French, Netherlands, Australian, Canadian and U.S. business units.

  • Fund flows from operations ("FFO") for Q1 2016 of $93.7 million ($0.83/basic share(1)) represented a decrease of 31% quarter-over-quarter and 22% year-over-year. The quarter-over-quarter decrease in FFO was attributable to lower commodity prices and an inventory build in Australia (due to the timing of crude liftings), partially offset by lower operating expenses from our ongoing focus on cost reduction.

  • During Q1, we announced a reduction in our 2016 E&D capital budget from $285 million to $235 million. Despite the $50 million reduction in capital investment, we still anticipate delivering nearly 10% per share production growth on a year-over-year basis. Our production guidance for 2016 remains 62,500 to 63,500 boe/d.

  • Since the initiation of first gas on December 30, 2015, Corrib has produced strongly, with robust well deliverability and minimal downtime. Net production for Q1 2016 averaged approximately 34 mmcf/d (5,650 boe/d). Five of the six wells are capable of production with the remaining well to be brought online in the third quarter of 2016 following conclusion of our offshore work program. Production remains subject to limitations on maximum pipeline operating pressures while previously-planned certification activities are conducted on the Irish distribution pipeline network. Upon completion of the recertification process, production levels at Corrib are expected to rise to an estimated peak rate of 58 mmcf/d (9,700 boe/d), net to Vermilion.

  • We continue to prioritize the strength of our balance sheet and the long-term profitability of our business through our Profitability Enhancement Program ("PEP") initiative. PEP cost savings related to capital spending, operating expenses and G&A expenditures reached nearly $90 million for full-year 2015. For 2016, we expect to deliver a further $30 to $40 million of cost reductions.

  • We redeemed the senior unsecured notes that were due February 10, 2016 by using funds from our revolving credit facility. Our revolving credit facility limit of $2.0 billion remains unchanged and we have approximately $520 million of borrowing capacity available. We were in compliance with all covenants as of March 31, 2016 and expect to remain in compliance based on commodity strip pricing.

  • Vermilion was recognized by the Great Place to Work® Institute as a Best Workplace in Canada, France, the Netherlands and Germany in 2016. Vermilion was the only energy company to rank on the Best Workplaces lists in Canada and France. The Great Place to Work awards recognize Vermilion's strong corporate culture, a key driver of Vermilion's leading long-term corporate performance.

  • Vermilion was recently ranked 9th by Corporate Knights on the Future 40 Responsible Corporate Leaders in Canada list, an improvement over last year's ranking of 15th. We are the highest rated oil and gas company on the list of top sustainability performers. This recognition reflects Vermilion's focus on financial results combined with exemplary environmental, social and governance performance. Please refer to our Sustainability Report at http://sustainability.vermilionenergy.com/ for more information about our environmental and social stewardship.

(1)   

Non-GAAP Financial Measure.  Please see the "Non-GAAP Financial Measures" section of Management's Discussion and Analysis. 

ANNUAL GENERAL MEETING WEBCAST

As Vermilion's Annual General Shareholders Meeting is being held today, May 6, 2016 at 10:00 AM MST at the Metropolitan Centre, 333 – 4th Avenue S.W., Calgary, Alberta, there will not be a first quarter conference call. In lieu of the conference call, a presentation will be given by Mr. Anthony Marino, President & Chief Executive Officer at the end of the meeting.  Questions from the public can be submitted via the webcast.

Please visit http://event.on24.com/r.htm?e=1160062&s=1&k=7AC4E39F48A74F6596F60B059A660FC5 or Vermilion's website at http://www.vermilionenergy.com/ir/eventspresentations.cfm and click on webcast under the upcoming events to view the webcast which will commence at approximately 10:15 AM MST.

HIGHLIGHTS








Three Months Ended

($M except as indicated)


Mar 31,

Dec 31,

Mar 31,

Financial


2016

2015

2015

Petroleum and natural gas sales


177,385

234,319

195,885

Fund flows from operations


93,667

136,441

120,795


Fund flows from operations ($/basic share) (1)


0.83

1.22

1.12


Fund flows from operations ($/diluted share) (1)


0.82

1.21

1.11

Net (loss) earnings


(85,848)

(142,080)

1,275


Net (loss) earnings ($/basic share)


(0.76)

(1.28)

0.01

Capital expenditures


62,773

128,996

174,311

Acquisitions


870

6,227

35

Asset retirement obligations settled


2,024

4,921

3,107

Cash dividends ($/share)


0.645

0.645

0.645

Dividends declared


72,847

71,965

69,390


% of fund flows from operations


78%

53%

57%

Net dividends (1)


24,857

25,201

48,012


% of fund flows from operations


27%

18%

40%

Payout (1)


89,654

159,118

225,430


% of fund flows from operations


96%

117%

187%


% of fund flows from operations (excluding the Corrib project) (1)


N/A

106%

173%

Net debt


1,367,063

1,381,951

1,388,603

Ratio of net debt to annualized fund flows from operations


3.6

2.5

2.9

Operational





Production






Crude oil and condensate (bbls/d)


29,199

31,304

29,514


NGLs (bbls/d)


2,672

2,739

1,706


Natural gas (mmcf/d)


201.11

162.09

115.00


Total (boe/d)


65,389

61,058

50,386

Average realized prices






Crude oil, condensate and NGLs ($/bbl)


39.35

51.64

58.25


Natural gas ($/mmbtu)


3.76

4.55

5.26

Production mix (% of production)






% priced with reference to WTI


20%

21%

28%


% priced with reference to AECO


25%

24%

20%


% priced with reference to TTF and NBP


26%

20%

18%


% priced with reference to Dated Brent


29%

35%

34%

Netbacks ($/boe)






Operating netback


21.63

28.44

31.30


Fund flows from operations netback


16.12

23.91

29.07


Operating expenses


9.58

11.50

10.56

Average reference prices






WTI (US $/bbl)


33.45

42.18

48.63


Edmonton Sweet index (US $/bbl)


29.76

39.72

41.83


Dated Brent (US $/bbl)


33.89

43.69

53.97


AECO ($/mmbtu)


1.83

2.46

2.75


TTF ($/mmbtu)


5.70

7.28

8.70

Average foreign currency exchange rates






CDN $/US $


1.37

1.34

1.24


CDN $/Euro


1.52

1.46

1.40

Share information ('000s)





Shares outstanding - basic


113,451

111,991

107,718

Shares outstanding - diluted (1)


116,491

115,025

110,761

Weighted average shares outstanding - basic


112,725

111,393

107,513

Weighted average shares outstanding - diluted (1)


114,110

112,543

109,305

(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.

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, condensate, 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

CGU           

Cash generating unit, the basis upon which Vermilion's assets are evaluated for potential impairments

DRIP          

Dividend Reinvestment Plan

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, which includes butane, propane, and ethane

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   

While oil prices have now risen from the lows reached in Q1 2016, we continue to experience significant volatility in energy commodity prices and uncertainty as to the timing of a sustained price recovery. During this period of challenging economic conditions in the energy sector, a number of companies have been forced to undertake asset sales and dividend reductions or cancellations to remain viable. At Vermilion, we have always taken a conservative approach to managing our balance sheet, historically maintaining significantly lower leverage than many of our peers. Consequently, we entered the commodity price downturn in a position of relative financial strength, allowing us to maintain an adequate balance sheet through cost and investment reductions without the need to undertake asset sale or dividend reduction measures. Our first priority remains the protection of our balance sheet, followed by protection of our dividend. We believe our Company remains well positioned on both accounts. At the same time, we have been making very capital-efficient investments in our business to continue to record strong production growth per share.

We remain committed to preserving this sustainable business model. We are basing our cost and investment structure on the current commodity price strip, ensuring that fund flows from operations exceed our cash outflows for net dividends and exploration and development ("E&D") capital expenditures. During the first quarter, we reduced our planned E&D capital budget by $50 million to enhance Vermilion's sustainability in the falling commodity price environment. The resulting $235 million E&D budget represents a decrease of over 50% from 2015 levels and more than 65% from 2014 levels. Despite this significant reduction in capital investment, we still anticipate delivering production of between 62,500 to 63,500 boe/d, reflecting year-over-year production growth of 15%, or nearly 10% on a per share basis. Production additions from Corrib plus growth in other business units made possible through significantly improved capital efficiencies have enabled this strong per share growth despite significantly lower capital investment levels.

For 2016, we intend to adhere closely to our $235 million E&D capital budget. Using recent commodity strip pricing and taking into account this planned level of spending, we expect to incur only minimal cash taxes, estimated at $10 to $20 million, and project a total payout ratio of less than 80%. Should a meaningful recovery in commodity prices occur in 2016, we expect to direct the vast majority of incremental cash flow to debt reduction rather than increasing capital spending. Conversely, if there is significant deterioration in commodity prices, we would seek to reduce our expenditures further to avoid incurring additional debt on our balance sheet.

Our international diversification provides structural pricing advantages that differentiate Vermilion from its peers. While European natural gas prices have been under pressure in 2016, they remain substantially above North American gas prices. In addition, our overseas oil production is indexed to Dated Brent, which continues to trade at a premium to WTI. Overall, the prices realized for our international production exceed those received by most North American producers and most particularly by our Canadian peers. Our price-advantaged Brent crude oil and European natural gas business units are anticipated to generate approximately 80% of Vermilion's 2016 fund flows from operations, and the majority of our 2016 capital expenditures are directed to these business units to exploit this advantage.

Vermilion's international exposure and diversified project inventory also provide flexibility to react to changing conditions and selectively allocate capital to the highest rate of return projects for a given commodity environment. This advantage is even more evident when capital availability is restricted. Since the announcement of our $235 million capital budget, we have further revised some of our planned activities including the reinstatement of a two (0.9 net) well drilling program in the Netherlands, finding investment and cost reductions elsewhere in our budget to fund the Netherlands wells.

We have included the two Netherlands wells in our 2016 capital program because of the prolific productivity of our Netherlands gas reservoirs and the premium price received for our European natural gas. We plan to drill the Langezwaag-03 (42% working interest) and Andel-6ST (45% working interest) wells during Q3 2016. If successful, we expect to bring the wells on-stream late in the third and fourth quarters of 2016, respectively. Activities in France will continue to focus on our highly-economic workover and optimization activities. In Germany, the majority of our capital in 2016 will be directed to permitting and pre-drill activities for the planned drilling of the Burgmoor Z5 well and two potential exploration prospects in 2017.

Since the initiation of first gas at Corrib in Ireland on December 30, 2015, we have experienced robust well deliverability and minimal downtime. Net production in Q1 2016 averaged approximately 34 mmcf/d (5,650 boe/d). Field production is subject to limitations on maximum pipeline operating pressures that will remain in effect until the planned recertification process for the third party sales gas distribution pipeline network is concluded. Five of the six wells are capable of producing, with the remaining well to be brought online in the third quarter of 2016 following the conclusion of our offshore work program to lay a pipeline to the sixth well. Upon completion of the recertification process, production levels at Corrib are expected to rise to an estimated peak rate of 58 mmcf/d (9,700 boe/d), net to Vermilion. Corrib remains one of the drivers of our 2016 and 2017 production growth, and is expected to be an important contributor to free cash flow(1) in this and coming years.

Following our successful sidetrack well drilled from the Wandoo A platform in Q4 2015, we are planning a two-well drilling program in Q2 2016. Offshore drilling in Australia requires a great deal of advance contracting and logistical planning, which means that full-cycle costs are minimized by maintaining funding for this project in 2016 despite current oil price weakness. Furthermore, with service costs near their lows, it is an advantageous time to drill these high-quality sidetrack wells.

In Canada, our Mannville condensate-rich gas assets performed strongly in the first quarter with average production of 13,000 boe/d, an increase of 18% percent over the prior quarter. This significant production increase resulted from the combination of both operated and non-operated drilling and completion activity, as well as the re-start of non-operated wells that were previously shut-in due to infrastructure capacity constraints. Our drilling, completion, equip and tie-in ("DCET") costs continue to improve as a result of our ongoing focus on operational and process improvements and continued service cost reductions. Our DCET costs in the Mannville averaged $3.6 million per well in the first quarter of 2016, a nearly 15% reduction as compared to our average DCET of $4.2 million per well in 2015, and approximately a 40% reduction from our cost level when we imitated this play three years ago.

Similarly, cycle times and costs continue to trend lower in our Midale light oil development in southeast Saskatchewan. Since assuming operations in 2014, we have achieved more than a 35% reduction in average drilling days per well, as well as benefitting from lower service costs. Expected DCET costs for a typical one-mile Midale horizontal well are now $1.9 million, down 35% as compared to $2.9 million in 2014. In the first quarter we drilled six (4.5 net) oil wells in the Midale, including three (3.0 net) operated wells, to prevent mineral land expiries. All three operated wells had strong oil indicators, but we have elected to leave these wells standing uncompleted. While the wells are economic to complete, we believe that net present value will be enhanced by delaying completion and tie-in until oil prices improve.

In the United States,

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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