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Vermilion Energy Inc. Announces Results for the Three and Nine Months Ended September 30, 2016

October 31, 2016

CALGARY, Oct. 31, 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 and nine months ended September 30, 2016. 

The unaudited financial statements and management discussion and analysis for the three and nine months ended September 30, 2016, will be available on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com, on EDGAR at www.sec.gov/edgar.shtml, and on Vermilion's website at www.vermilionenergy.com.

HIGHLIGHTS

  • Average production of 63,596 boe/d during Q3 2016 decreased by 1% compared to 64,285 boe/d in the prior quarter as lower production in Canada, France and the Netherlands was largely offset by higher production volumes in Ireland and Australia. During the third quarter, we restricted gas-weighted production in Canada and oil production in Australia in an effort to optimize pricing and manage to overall corporate production targets. Vermilion expects to achieve full year production at approximately the top-end of its 2016 guidance range of 62,500 to 63,500 boe/d, representing year-over-year production growth of approximately 16% (10% on a per share basis). Q3 2016 production increased 13% from 56,280 boe/d in Q3 2015, primarily due to production from Ireland, which was not on line in the year-earlier period.

  • Fund flows from operations ("FFO") for Q3 2016 was $141.0 million ($1.21/basic share(1)), an increase of 11% quarter-over-quarter. This increase in FFO was primarily attributable to higher sales volumes in Australia, France and Ireland, and stronger AECO natural gas prices in Canada. Year-over-year, FFO increased by 9% compared to Q3 2015 as revenue from Ireland, coupled with lower operating expenses, taxes and royalties, more than offset lower commodity prices.

  • Irish production averaged 59 mmcf/d (9,879 boe/d) net to Vermilion during Q3 2016, representing an increase of 25% versus the prior quarter. Production results continued to benefit from better-than-expected well deliverability and minimal downtime. Following the conclusion of a successful offshore work campaign that included laying a flowline to the P2 well, all six wells are now available for production.

  • The two sidetrack wells drilled in Australia during Q2 2016 continued to demonstrate strong productive capability with combined production rates exceeding 4,500 bbls/d when utilized. Vermilion intends to produce these wells intermittently to meet corporate production targets while seeking to optimize ultimate recoveries and oil pricing. Following our successful 2015 and 2016 drilling campaigns, we do not expect to drill any additional wells in Australia until 2019.

  • We completed our two-well drilling campaign in the Netherlands during the quarter. Langezwaag-3 encountered 17 meters of net pay in the Zechstein-2 carbonate formation. This well is being completed and is expected to be placed on production in November, at which time an in-line production test will be conducted. Andel-6ST encountered a large gas column of inadequate reservoir quality to justify completion. Potential remains to sidetrack this well to an updip location where higher quality gas zones may be encountered. The well has been suspended to allow us to reprocess seismic data to determine the viability of the potential updip target.

  • Profitability Enhancement Plan ("PEP") initiatives continue to deliver cost savings across our business units. We estimate that full-year PEP savings related to capital, operating and administrative expenditures will exceed $60 million in 2016. Per-unit operating and G&A expenses are forecasted to decrease by 15% and 13% respectively year-over-year. As announced with our Q2 2016 results, identified cost savings allowed us to expand our 2016 capital program with only a modest change in our capital budget.

  • We began proration of the Premium DividendTM component of our Dividend Reinvestment Plan by 25% beginning with our October dividend payment. Eligible shareholders who have elected to participate in the Premium DividendTM component are now receiving the 1.5% premium on 75% of their participating shares and the regular cash dividend on the remaining 25% of their shares. We expect to increase the proration factor by a further 25% beginning with the January 2017 dividend payment. Subject to unexpected changes in the commodity price outlook, we will continue to increase the proration during 2017, by the end of which there would be no further equity issuance under the Premium DividendTM component of our Dividend Reinvestment Plan.

  • We also intend to reduce the discount associated with our traditional Dividend Reinvestment Plan from 3% to 2%, beginning with the January 2017 dividend payment.

  • Following the preliminary 2017/2018 exploration and development ("E&D") capital investment and production targets we disclosed in the prior quarter, our Board of Directors has formally approved an E&D capital budget of $295 million for 2017. We continue to target production of between 69,000 to 70,000 boe/d in 2017. The preliminary 2018 targets we announced last quarter remain unchanged at $335 million in E&D capital with corresponding production of 75,000 to 76,000 boe/d. Production at the top end of these ranges for 2017 and 2018 would deliver per share growth of approximately 6% for each year.

  • We recently announced that Vermilion was one of only five oil and gas companies in the world, and the only oil and gas company in North America, to be awarded a position on CDP's Climate "A" List. CDP (formerly Carbon Disclosure Project) is a London-based not-for-profit organization that administers a global environmental disclosure system that assists in the measurement and management of corporate environmental impacts. To achieve Climate "A" List recognition, a company must receive consistently high scores across all of CDP's scoring dimensions. Only 193 companies globally achieved Climate "A" List recognition in 2016 and only three Canadian companies were awarded a position on this year's list.

 

(1)

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

TM denotes trademark of Canaccord Genuity Capital Corporation.

 

HIGHLIGHTS



Three Months Ended


Nine Months Ended

($M except as indicated)

Sep 30,

Jun 30,

Sep 30,


Sep 30,

Sep 30,

Financial

2016

2016

2015


2016

2015

Petroleum and natural gas sales

232,660

212,855

245,051


622,900

705,267

Fund flows from operations

140,974

126,568

129,435


361,209

379,726


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

1.21

1.10

1.17


3.14

3.48


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

1.19

1.09

1.16


3.11

3.44

Net loss

(14,475)

(55,696)

(83,310)


(156,019)

(75,222)


Net loss ($/basic share)

(0.12)

(0.48)

(0.76)


(1.36)

(0.69)

Capital expenditures

41,039

71,714

93,381


175,526

357,865

Acquisitions

10,391

8,550

22,155


19,811

22,670

Asset retirement obligations settled

2,066

2,200

2,123


6,290

6,448

Cash dividends ($/share)

0.645

0.645

0.645


1.935

1.935

Dividends declared

75,465

74,662

71,244


222,974

211,610


% of fund flows from operations

54%

59%

55%


62%

56%

Net dividends (1)

24,553

24,146

26,654


73,556

103,341


% of fund flows from operations

17%

19%

21%


20%

27%

Payout (1)

67,658

98,060

122,158


255,372

467,654


% of fund flows from operations

48%

78%

94%


71%

123%

Net debt

1,343,923

1,398,950

1,363,043


1,343,923

1,363,043

Ratio of net debt to annualized fund flows from operations

2.4

2.8

2.6


2.8

2.7

Operational

Production








Crude oil and condensate (bbls/d)

27,842

28,416

30,108


28,483

30,106


NGLs (bbls/d)

2,478

2,713

2,678


2,621

2,163


Natural gas (mmcf/d)

199.66

198.93

140.97


199.90

123.51


Total (boe/d)

63,596

64,285

56,280


64,421

52,854

Average realized prices








Crude oil, condensate and NGLs ($/bbl)

53.24

53.90

56.57


48.95

61.48


Natural gas ($/mcf)

3.98

3.53

5.36


3.76

5.18

Production mix (% of production)








% priced with reference to WTI

19%

20%

24%


20%

26%


% priced with reference to AECO

20%

22%

22%


22%

21%


% priced with reference to TTF and NBP

32%

29%

20%


29%

18%


% priced with reference to Dated Brent

29%

29%

34%


29%

35%

Netbacks ($/boe)








Operating netback

27.88

27.66

32.25


25.75

33.55


Fund flows from operations netback

23.25

21.90

24.58


20.46

26.64


Operating expenses

9.05

9.02

10.99


9.21

11.25

Average reference prices








WTI (US $/bbl)

44.94

45.59

46.43


41.33

51.00


Edmonton Sweet index (US $/bbl)

42.06

42.51

43.01


38.11

46.64


Dated Brent (US $/bbl)

45.85

45.57

50.26


41.77

55.39


AECO ($/mmbtu)

2.32

1.40

2.90


1.85

2.77


NBP ($/mmbtu)

5.29

5.78

8.40


5.69

8.62


TTF ($/mmbtu)

5.43

5.61

8.48


5.58

8.52

Average foreign currency exchange rates








CDN $/US $

1.31

1.29

1.31


1.32

1.26


CDN $/Euro

1.46

1.46

1.46


1.48

1.40

Share information ('000s)

Shares outstanding - basic

117,386

116,173

110,818


117,386

110,818

Shares outstanding - diluted (1)

120,183

118,948

113,643


120,183

113,643

Weighted average shares outstanding - basic

116,814

115,366

110,293


114,975

109,052

Weighted average shares outstanding - diluted (1)

118,177

116,587

111,193


116,221

110,433

(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.

 

MESSAGE TO SHAREHOLDERS

Oil prices have increased from the lows experienced during Q1 2016, but remain less than half of what they were in mid-2014 before the downturn started.  While future prices are very difficult to accurately predict, it is possible that oversupply will persist and suppress prices for a considerable period.  We intend to continue managing our company based on the current commodity strip, maintaining a low level of financial leverage, and keeping cash uses for dividends and exploration and development ("E&D") capital investment below our internal cash generation. At the same time, we are targeting continued growth in production per share.

Whether commodity prices are high or low, we follow a consistent strategy.  This strategy is outlined in the current edition of our Corporate Presentation found on our website.  We would like to review this strategy with you in the next few paragraphs.

Our capital markets model aims to deliver consistent growth-and-income to our shareholders.  We are proud of our thirteen-year record of continuous monthly dividends.  We have increased our dividend three times during this period and have never decreased it.  Our goal is to also increase our production base on a per-share basis at organic growth rates that are appropriate to our asset base, and over the past five years this growth has accelerated.  We intend to provide both the organic growth and income components of this model within our internally-generated cash flow.

Our operating, geographic and organizational models are integral to successfully delivering this ambitious growth-and-income capital markets model.  We believe that the four model components represent an internally consistent strategy that differentiates Vermilion from our competitors. 

Our operating model provides a framework to ensure that our asset composition supports our capital markets model.  Vermilion's largely conventional and semi-conventional asset base delivers the high margins, low base decline rates and strong capital efficiencies which are required to deliver a self-funded growth-and-income model.  These characteristics are paramount as we continue to develop the deep and diversified project inventory that supports our targeted organic growth rates for the long-term.  We expect to further augment this organic inventory and growth through opportunistic and accretive acquisitions.  Prospective acquisitions are subject to disciplined tests to ensure consistency with our operating and capital markets models.  With a deep organic inventory already established, we are determined that any acquisitions will be accretive to the "organic part" of our company, and not dilutive of it. 

Vermilion's geographic model is a significant differentiator for the Company.  Since our first international acquisition in 1997, we have demonstrated our ability to successfully enter new jurisdictions and add assets to our portfolio that are aligned with our operating model.  In addition, our geographic diversification provides flexibility to allocate capital to the highest return products and projects for a given economic environment, and creates the opportunity for outsized acquisition returns in certain jurisdictions.  Our three regions (Europe, North America and Australia) all feature stable political, fiscal and regulatory regimes. 

Our organizational model features a relatively-decentralized business unit structure to effectively manage our geographic diversity.  Nonetheless, throughout our company, we maintain a consistent technical focus and emphasize the importance of our shared culture.  While capital investment selection is managed as a portfolio at the corporate level, each of our business units (with their integrated engineering, geoscience, production operations and regulatory functions) is responsible for proposing a robust set of capital projects.  Once a capital project slate has been selected at the corporate level, our business units are responsible for delivering their production, capital and operating expense targets.

Our self-funded growth-and-income model is fully aligned with the three priorities we have previously communicated to our shareholders.  First, we intend to maintain a strong balance sheet.  Second, we endeavor to protect our dividend.  Third, we seek to deliver continued production growth on a per share basis.  We believe that through disciplined execution of our strategy and adherence to these priorities, Vermilion can remain a core investment holding for our shareholders throughout the commodity price cycle.

Q3 2016 REVIEW

The third quarter was a strong one from both operational and financial perspectives.  Production was relatively flat from the previous quarter despite a 43% reduction in E&D capital expenditures.  Our cash uses for net dividends, E&D capital investment and abandonment expenditures represented 48% of fund flows.  This resulted in over $70 million of excess cash generation after payout, which we used to fund minor bolt-on acquisitions in Canada and to reduce net debt by $55 million during the quarter.

Profitability Enhancement Plan ("PEP") initiatives continue to deliver cost savings across our business. As an expansion of our PEP program, all of Vermilion's employees were requested to submit an additional five cost-reducing ideas earlier this year.  As a result of this widespread employee engagement, additional cost reductions have been achieved.  We estimate that full-year PEP savings related to capital, operating and administrative expenditures will exceed $60 million in 2016.  Per-unit operating and G&A expenses are forecasted to decrease by 15% and 13%, respectively, year-over-year.  As announced with our Q2 2016 results, identified cost savings allowed us to expand our 2016 capital program with only a modest change in our capital budget.

We began proration of the Premium DividendTM component of our Dividend Reinvestment Plan by 25% beginning with our October dividend payment.  Eligible shareholders who have elected to participate in the Premium DividendTM component are now receiving the 1.5% premium on 75% of their participating shares and the regular cash dividend on the remaining 25% of their shares.  We expect to increase the proration factor by a further 25% beginning with the January 2017 dividend payment.  Subject to unexpected changes in the commodity price outlook, we will continue to increase the proration during 2017, by the end of which there would be no further equity issuance under the Premium DividendTM component of our Dividend Reinvestment Plan.  We also intend to reduce the discount associated with our traditional Dividend Reinvestment Plan from 3% to 2%, beginning with the January 2017 dividend payment, subject to TSX approval. 

Europe

Subsequent to the third quarter, we commenced our four (4.0 net) well Champotran drilling program in France.  These wells will be completed and placed on production in early 2017.  This program follows three consecutive years of highly successful Champotran drilling campaigns, during which we have drilled 14 wells with a 100% success rate.  The wells drilled during the 2015 campaign continue to deliver strong production results with cumulative production to date approximately 17% greater than we had originally budgeted.  Activity during the third quarter in France focused on well optimizations in the Neocomian fields.  Our ongoing activities in the Neocomian have resulted in steady production growth since we acquired this asset in 2012.  In Q3 2016, oil production levels in these fields reached the highest rate since June 1995, despite not having drilled any wells since the acquisition.  We expect to drill our first wells in the Neocomian in 2017.

We completed our two-well drilling campaign in the Netherlands during the quarter.  Langezwaag-3 encountered 17 meters of net pay in the Zechstein-2 carbonate formation.  This well is being completed and is expected to be placed on production in November, at which time an in-line production test will be conducted.  Andel-6ST encountered a large gas column of inadequate reservoir quality to justify completion.  Potential remains to sidetrack this well to an updip location where higher quality gas zones may be encountered.  The well has been suspended to allow us to reprocess seismic data to determine the viability of the potential updip target.  As expected, production from our Diever-02 and Slootdorp-06/07 wells remained curtailed at the end of Q3 2016 pending final approval of our applications to increase production rates at the conclusion of the extended well test periods.  We expect the extended well tests to be completed, and the related approvals to be received, during the first half of 2017. 

In Germany, we commenced integration activities associated with the acquisition of assets from Engie E&P Deutschland GmbH that we announced in the prior quarter.   As noted, this acquisition will provide Vermilion with our first operated position in the country and is expected to close by the end of the year.  Germany remains a key area of interest for Vermilion as we advance our objective of developing a material business unit in the country. 

Irish production averaged 59 mmcf/d (9,879 boe/d) net to Vermilion during Q3 2016, representing an increase of 25% versus the prior quarter.  Production results continued to benefit from better than expected well deliverability and minimal downtime.  Following the conclusion of a successful offshore work campaign that included laying a flowline to the P2 well, all six wells are now available for production.   

North America

With our 2016 capital plan for North America predominately focused on preserving value through the drilling of operated land expiries and non-operated wells proposed by partners, third quarter capital activities in Canada were limited.  We participated in four (1.2 net) condensate-rich Mannville wells drilled by partners but did not conduct any operated drilling.  During the quarter, approximately 1,900 boe/d of natural gas weighted production remained voluntarily curtailed in response to low AECO prices.  Although the majority of the curtailed volumes would have been economic at Q3 2016 AECO prices, the production is not required to meet our corporate targets, and we believe higher anticipated winter prices will deliver more cash flow from these wells.  The majority of this curtailed production will be brought back online in Q1 2017.

During Q4 2016 we intend to drill or participate in seven (5.6 net) Mannville wells.  With the exception of one (0.6 net) well, these wells are scheduled to be brought on production in early 2017.  As announced in Q2, this activity is being largely funded by savings identified through PEP initiatives.

Australia

The two sidetrack wells drilled in Australia during Q2 2016 continued to demonstrate strong productive capability with combined production rates exceeding 4,500 bbls/d when utilized.  Vermilion intends to produce these wells intermittently to meet corporate production targets while seeking to optimize ultimate recoveries and oil pricing.  Following our successful 2015 and 2016 drilling campaigns, we do not expect to drill any additional wells in Australia until 2019.  Late in the quarter, we commenced a planned 10-day maintenance shutdown.  The scope of activities was completed as scheduled and production resumed on October 3, 2016.  We also continued to advance our Wandoo Platforms Life Extension project during the quarter.

Sustainability

We recently announced that Vermilion was one of only five oil and gas companies in the world, and the only oil and gas company in North America, to be awarded a position on CDP's Climate "A" List.  CDP (formerly Carbon Disclosure Project) is a London-based not-for-profit organization that administers a global environmental disclosure system that assists in the measurement and management of corporate environmental impacts.  To achieve Climate "A" List recognition, a company must receive consistently high scores across all of CDP's scoring dimensions.  Only 193 companies globally achieved Climate "A" List recognition in 2016, and only three Canadian companies were awarded a position on this year's list.

Vermilion has voluntarily reported emissions data to CDP for each year since 2012.  We firmly believe in the importance of measuring and understanding our current environmental impact.  This assists our effort to identify and realize opportunities to operate in an even more environmentally and socially sustainable manner in the future.

We also recently released our third annual Sustainability Report which details our efforts to generate environmental, social, and economic benefits for all stakeholders.  The report describes our approach to sustainability in our operations, and details our progress and challenges in this regard.  We are committed to providing increasingly complete information and objective assessment of our performance in this area on an annual basis.  Furthermore, we believe the integration of sustainability principles into our business strategy increases shareholder returns and reduces long-term risks to our business model.  Our 2016 Sustainability Report is available on our corporate website at www.vermilionenergy.com/sustainability.

2017 BUDGET

Following the preliminary 2017/2018 E&D capital investment and production targets we disclosed in the prior quarter, our Board of Directors has formally approved an E&D capital budget of $295 million for 2017.  We continue to target production of between 69,000 to 70,000 boe/d in 2017.  This budget funds development of high-return projects including our condensate-rich Mannville projects in Canada, continued drilling in France, favorably-priced European natural gas projects in the Netherlands, and our emerging Turner Sands play in the United States.  The preliminary targets we announced last quarter for 2018 are unchanged with E&D capital investment of $335 million and corresponding production of 75,000 to 76,000 boe/d.  Production at the top end of these ranges would represent per share growth of approximately 6% for both years, within our targeted range of 5-7% annual per share production growth.

Our 2017 E&D budget represents the third year of significantly lower capital expenditures since the current commodity price downturn started in 2014.  Despite this reduced spending level, we expect to continue delivering strong per share production growth.  Our geographic and commodity diversification allow for a high return capital program even in depressed commodity markets, and provides the flexibility to respond to changes in individual commodity markets as prices recover.

At current strip prices, Vermilion expects to fully fund 2017 E&D expenditures and cash dividends from fund flows from operations, with surplus cash generation primarily directed to debt reduction.  We maintain the operational flexibility to reduce our 2017 E&D program if commodity prices unexpectedly weaken.  Should capital availability increase during the year as a result of a meaningful and sustainable improvement in commodity prices, we do have the capability to increase E&D investment levels.  However, we would expect any potential increase to be modest and fully funded by internal cash generation under the prevailing commodity strip.

Europe

Our 2017 E&D budget for the Netherlands of $46 million represents an increase of 92% from our forecasted 2016 investment of $24 million.  We anticipate drilling three (1.5 net) exploration wells and one (0.5 net) development well, as compared to our 2016 activity of two (0.9 net) exploration wells.  Included in our budget for the Netherlands is a $10 million seismic program in our Akkrum and Zuid Friesland concessions and a major turnaround at our Garijp Treatment Centre.  

In France, we have set a 2017 E&D budget of $69 million, representing a 5% increase from our 2016 forecast of $66 million.  We intend to complete and tie-in the four (4.0 net) Champotran wells being drilled in Q4 2016 in early 2017 and continue our ongoing program of workovers and optimizations.  We also expect to drill our first four (4.0 net) wells in the Neocomian fields in the Paris Basin.  The Neocomian fields were acquired by Vermilion in 2012 and since then, we have increased production by approximately 50% through workovers and artificial lift optimizations.      

Our 2017 German capital program of $18 million represents a significant increase from the $4 million forecast for 2016.  Vermilion will assume operatorship for the drilling phase of the Burgmoor Z5 development well (0.25 net) in the Dümmersee-Uchte area, where we are a member of a four-partner consortium.  Completion, tie-in and associated production from this well is expected in mid-2018.  We also expect to invest in optimizations and other well work on the acquired Engie assets.  Lastly, we will continue to advance our permitting, studies and other activities associated with the farm-in agreement we signed in mid-2015.

Following the achievement of first gas at Corrib on December 30, 2015, and the tie-in of the P2 well during Q3 2016, a low level of capital investment is expected in 2017.

North America

We expect to invest approximately $108 million in E&D activities in Canada in 2017, representing an increase of 83% from the $59 million forecasted for 2016.  Our Canadian assets provide significant flexibility to ramp activity levels up or down in response to the prevailing commodity price environment, with a diversified project inventory that provides exposure to oil, condensate and natural gas opportunities.

Our Canadian investment program is significantly oil-weighted.  In 2017, we expect to drill or participate in 19 (11.3 net) Mannville wells as well as complete 2.5 net wells and tie-in 6.0 net wells drilled in 2016.  Our Ellerslie condensate-focused Mannville program provides particularly attractive economics in the current commodity price environment.  Our Cardium light oil program includes nine (6.0 net) wells, with five (5.0 net) of those wells being operated.  We intend to drill or participate in 13 (11.3 net) Midale light oil wells in our Southeast Saskatchewan light oil play, as well as to complete and tie-in the four operated wells we drilled earlier in 2016.

In the United States, we expect to drill and complete three (3.0 net) wells targeting the light oil Turner Sand in the Powder River B

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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