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Vermilion Energy Inc. Announces Results for the Three Months and Year Ended December 31, 2017

March 1, 2018

CALGARY, March 1, 2018 /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 three months and year ended December 31, 2017. 

The audited financial statements and management discussion and analysis for the three months and year ended December 31, 2017, 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

  • Vermilion's 2017 annual production volumes increased by 7%, or 3% on a per-share-basis, to 68,021 boe/d.  Production reached a record level of 72,821 boe/d during Q4 2017, up 8% from the prior quarter on continued growth in Canada and the Netherlands, and resumption of operations at Corrib in mid-October, following unplanned downtime in late Q3 and early Q4 2017.

  • Fund flows from operations ("FFO") in 2017 were $603 million ($5.00/basic share(1)) compared to $511 million ($4.41/basic share) in 2016.  Higher production volumes and higher commodity prices contributed to the year-over-year increase in FFO.  Q4 2017 FFO was $181 million ($1.49/basic share), representing an increase of 38% from the previous quarter as a result of higher sales volumes and commodity pricing.

  • Capital expenditures in 2017 were $320 million, resulting in $282 million of free cash flow(1), which was more than sufficient to fund our dividend and enable further debt reduction.  As a result, we achieved a total payout ratio of 88% in 2017 and reduced our trailing net debt-to-FFO ratio to 2.3x, or 1.9x based on Q4 2017 annualized FFO, as compared to a trailing ratio of 2.8x in 2016.

  • The Board of Directors has approved a 7% increase to the monthly dividend to $0.23 per share from $0.215 per share, effective with the April 2018 dividend to be paid on May 15, 2018.

  • Production in the Netherlands increased to 9,381 boe/d in Q4 2017 following the amendment of permit restrictions on two key pools and an inline test on the Eesveen-02 well drilled in the prior quarter.  This represents a 59% increase over the prior quarter.

  • In Ireland, production from Corrib averaged 56 mmcf/d (9,372 boe/d) in Q4 2017, a 15% increase from Q3 2017.  As reported in the Q3 2017 release, Corrib had an unplanned 31-day downtime period following a plant turnaround that commenced in early September and extended through October 10th.  This downtime reduced Vermilion's Q4 2017 production by approximately 1,200 boe/d and annual production by approximately 900 boe/d.

  • In Hungary, we were awarded a license in December 2017 for the Békéssámson concession for a 4-year term.  Located adjacent to our existing South Battonya concession in southeast Hungary, the Békéssámson concession covers 330,700 net acres (100% working interest) and more than doubles the size of our total land position in the country.  Subsequent to year-end, we drilled and tested our first exploratory well (100% working interest) in the South Battonya concession.  The Mh-Ny-07 natural gas well tested at a rate of 5.8 mmcf/d(2) and is expected to be brought on production mid-2018.  This marks the drilling of our first well in the Central and Eastern Europe Business Unit.

  • In Canada, we drilled or participated in six (4.0 net) Mannville wells in Q4 2017, successfully concluding our 2017 program.  Canadian production averaged 32,923 boe/d in Q4 2017, representing a 5% increase from the previous quarter and another quarterly record for the business unit.  Subsequent to the end of the year, we announced and closed an acquisition of a private southeast Saskatchewan producer.  The acquisition added over 1,000 bbl/d of high netback 40° API oil and 42,600 net acres of land straddling the Saskatchewan and Manitoba border, near Vermilion's existing operations in southeast Saskatchewan. 

  • As a result of the southeast Saskatchewan acquisition announced in Q1 2018, we increased our 2018 capital guidance to $325 million (from $315 million previously) and increased our full-year 2018 production guidance to a range of between 75,000 - 77,500 boe/d (from 74,500 - 76,500 boe/d previously).

  • Total proved ("1P") reserves increased 0.5% to 176.6(3) mmboe in 2017, while total proved plus probable ("2P") reserves increased 3% to 298.5(3) mmboe.  We replaced 103% and 134% of production at the 1P and 2P levels respectively in 2017.

  • Finding and Development ("F&D")(4) and Finding, Development and Acquisition ("FD&A")(4) costs, including Future Development Capital ("FDC")(4) for 2017 on a 2P basis was $10.57/boe and $11.24/boe, respectively.  Our three-year F&D and FD&A costs, including FDC, on a 2P basis were $8.23/boe and $8.87/boe, respectively.  Operating recycle ratio(5) (including FDC) was 2.8x in 2017.

  • Increased Proved Developed Producing ("PDP") reserves by 1.3% to 123.8 mmboe at an average F&D cost (including FDC) of $12.41/boe resulting in a PDP Operating Recycle Ratio(4) (including FDC) of 2.4x.  PDP reserves represent 70% of 1P reserves.

  • Our independent GLJ 2017 Resource Assessment(6) indicates risked low, best, and high estimates for contingent resources in the Development Pending category of 107.3(6) mmboe, 176.7(6) mmboe, and 253.6(6) mmboe, respectively.  The GLJ 2017 Resource Assessment also indicates risked low, best, and high estimates for contingent resources in the Development Unclarified category of 7.5(6) mmboe, 32.8(6) mmboe, and 46.1(6) mmboe.  Over 80% of our risked contingent resources reside in the Development Pending category.  Prospective resources were assessed at risked low, best and high estimates of 51.5(6) mmboe, 153.4(6) mmboe, and 260.4(6) mmboe.  Our contingent and prospective resource bases remain a source of reserve additions, with 20.5 mmboe of contingent resources and 1.7 mmboe of prospective resources converted to 2P reserves during 2017.

  • In February 2018, Vermilion received the Finance and Sustainability Initiative's ("FSI") award for Best Sustainability Report in the Non-Renewable Resources - Oil and Gas category for 2018, relating to our 2016 Sustainability Report.  Our 2017 Sustainability Report is available on our corporate website at: http://sustainability.vermilionenergy.com

  • Vermilion ranked fourth within the oil and gas sector, and among the top quartile of companies in the S&P/TSX Composite Index in the Globe and Mail Board Games for 2017.  These external recognitions are a reflection of Vermilion's commitment to fostering leading governance and sustainability practices.

(1)

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



(2)

Mh-Ny-07 well tested gas at a rate of 5.8 mmcf/d over the final two hours of a 22 hour test period at a stabilized wellhead pressure of 1,065 psi on a 0.55 inch diameter choke and a shut-in wellhead pressure of 1,305 psi.  No water production was observed during testing.  The well logged 21 feet of net gas pay with an average porosity of 31% from an Upper Miocene Pannonian sandstone occurring within a gross measured depth interval of 3,438-3,465 feet.



(3)

Estimated proved and proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ") in a report dated February 1, 2018 with an effective date of December 31, 2017 (the "2017 GLJ Reserves Evaluation")



(4)

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 expenditures 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.



(5)

Operating Recycle Ratio is a measure of capital efficiency calculated by dividing the Operating Netback by the cost of adding reserves (F&D cost).  Operating Netback is calculated as sales less royalties, operating expense, transportation costs, PRRT and realized hedging gains and losses presented on a per unit basis.



(6)

Vermilion retained GLJ to conduct an independent resource evaluation dated February 1, 2018 to assess contingent and prospective resources across all of the Company's key operating regions with an effective date of December 31, 2017 (the "GLJ 2017 Resource Assessment").  The aggregate associated chance of development for each of the low, best and high estimate for contingent resources in the Development Pending category are 84%, 83% and 82%, respectively.  The aggregate associated chance of commerciality for each of the low, best and high estimate for prospective resources in the Prospect category are 56%, 46% and 47%, respectively.  There is uncertainty that it will be commercially viable to produce any portion of the resources.

 

HIGHLIGHTS


Three Months Ended


Year Ended

($M except as indicated)

Dec 31, 2017


Sep 30, 2017


Dec 31, 2016


Dec 31, 2017


Dec 31, 2016

Financial










Petroleum and natural gas sales

317,341


248,505


259,891


1,098,838


882,791

Fund flows from operations

181,253


130,755


149,582


602,565


510,791


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

1.49


1.08


1.27


5.00


4.41


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

1.47


1.07


1.25


4.92


4.36

Net (loss) earnings

8,645


(39,191)


(4,032)


62,258


(160,051)


Net (loss) earnings ($/basic share)

0.07


(0.32)


(0.03)


0.52


(1.38)

Capital expenditures

74,303


91,382


66,882


320,449


242,408

Acquisitions

3,048


20,976


78,713


27,637


98,524

Asset retirement obligations settled

3,216


1,749


3,327


9,334


9,617

Cash dividends ($/share)

0.645


0.645


0.645


2.580


2.580

Dividends declared

78,653


78,293


76,096


311,397


299,070


% of fund flows from operations

43%


60%


51%


52%


59%

Net dividends (1)

56,836


54,364


32,516


200,904


106,072


% of fund flows from operations

31%


42%


22%


33%


21%

Payout (1)

134,355


147,495


102,725


530,687


358,097


% of fund flows from operations

74%


113%


69%


88%


70%

Net debt

1,371,790


1,370,995


1,427,148


1,371,790


1,427,148

Ratio of net debt to annualized fund flows from operations

1.9


2.6


2.4


2.3


2.8

Operational










Production











Crude oil and condensate (bbls/d)

27,830


27,687


25,972


27,721


27,852


NGLs (bbls/d)

5,279


4,947


2,467


4,194


2,582


Natural gas (mmcf/d)

238.27


208.63


194.54


216.64


198.55


Total (boe/d)

72,821


67,403


60,863


68,021


63,526

Average realized prices











Crude oil and condensate ($/bbl)

74.12


61.47


64.51


67.00


55.42


NGLs ($/bbl)

29.28


23.96


18.13


25.00


11.70


Natural gas ($/mcf)

5.23


4.01


5.47


4.91


4.18

Production mix (% of production)











% priced with reference to WTI

21%


22%


18%


20%


19%


% priced with reference to AECO

25%


26%


20%


25%


22%


% priced with reference to TTF and NBP

30%


26%


33%


29%


30%


% priced with reference to Dated Brent

24%


26%


29%


26%


29%

Netbacks ($/boe)











Operating netback (1)

30.77


26.06


31.11


29.24


27.06


Fund flows from operations netback

27.13


20.87


26.43


24.34


21.91


Operating expenses

9.76


9.87


10.54


9.79


9.53

Average reference prices







WTI (US $/bbl)

55.40


48.20


49.29


50.95


43.32


Edmonton Sweet index (US $/bbl)

54.26


45.32


46.18


48.49


40.11


Dated Brent (US $/bbl)

61.39


52.08


49.46


54.27


43.69


AECO ($/mmbtu)

1.69


1.45


3.09


2.16


2.16


NBP ($/mmbtu)

8.70


6.78


7.51


7.49


6.15


TTF ($/mmbtu)

8.36


6.93


7.21


7.43


6.00

Average foreign currency exchange rates











CDN $/US $

1.27


1.25


1.33


1.30


1.33


CDN $/Euro

1.50


1.47


1.44


1.46


1.47

Share information ('000s)









Shares outstanding - basic

122,119


121,585


118,263


122,119


118,263

Shares outstanding - diluted (1)

125,140


124,453


121,353


125,140


121,353

Weighted average shares outstanding - basic

121,858


121,280


117,840


120,582


115,695

Weighted average shares outstanding - diluted (1)

123,450


122,485


119,677


122,408


117,152

(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

We delivered 7% annual production growth in 2017, coming in at the lower end of our revised guidance range of 68,000 - 69,000 boe/d.  Production growth in Canada, the US, Ireland and Germany more than offset lower production in France, Netherlands and Australia.  Permitting delays significantly reduced Netherlands production volumes in 2017, while an unplanned 31-day downtime period at Corrib late in Q3 2017 reduced annual corporate production by approximately 900 boe/d.  Production at Corrib resumed on October 11th, while Netherlands production recovered to near record levels during the fourth quarter following the receipt of permits on several pools.

Despite the unplanned downtime at Corrib and the permitting delays in the Netherlands, we achieved our broader corporate goal of delivering self-funded growth and income to shareholders.  We delivered this in a commodity price environment with WTI oil prices ranging from the low US$40's to a high of US$60/bbl at the end of the year, and AECO gas prices ranging from over $3/mcf at the beginning of the year to negative daily prices on several occasions over the summer months.  Even with this volatility, fund flows from operations ("FFO") increased 18% year-over-year to $603 million in 2017, and free cash flow(1) (FCF) was up 5% year-over-year to $282 million.  This FCF was more than sufficient to fund our dividend while enabling further debt reduction.  As a result of this strong FFO and FCF profile, we achieved a total payout ratio(1) of 88% in 2017 and reduced our trailing net debt-to-FFO ratio to 2.3x in 2017, or 1.9x based on Q4 2017 annualized FFO, as compared to a trailing ratio of 2.8x in 2016.

Global commodity prices have recovered in recent months with underlying fundamentals stronger than they have been in a long time.  Global oil supply and demand levels are moving back into a more balanced position, while European gas prices remain strong.  Unfortunately, western Canadian natural gas and heavy oil prices continue to be pressured due to various egress issues, resulting in steeply discounted pricing relative to global prices.  Fortunately for Vermilion, we do not have any exposure to Canadian heavy oil.  The majority of our production of both oil and gas comes from outside of North America and benefits from higher global prices.  Based on our current 2018 guidance, we project that 60% of our total oil production is referenced to Brent, while 57% of our total natural gas production is price referenced to European price benchmarks.

We are pleased to announce that our Board of Directors has approved a 7% increase to the monthly dividend to $0.23 per share from $0.215 per share, effective with the April 2018 dividend to be paid on May 15, 2018.  This represents our fourth dividend increase since initiating a monthly dividend in 2003.  We remain focused on and committed to our self-funded growth and income model.  Based on the midpoint of our 2018 guidance, we are targeting 11% year-over-year production growth, or 8% on a per-share basis, which would translate to significant FFO and FCF growth based on the current commodity strip.  FCF growth is our ultimate goal as we believe this is the true measure of value creation for any business.  At current strip prices, we expect to fully fund our 2018 exploration and development ("E&D") capital expenditures and cash dividends from fund flows from operations.

Q4 2017 Review

Vermilion's Q4 2017 production increased 8% from the prior quarter to an average of 72,821 boe/d.  This increase was primarily driven by continued growth in Canada and the Netherlands, and the resumption of operations at the Corrib plant in Ireland following unplanned downtime in late Q3 and early Q4 2017.  Q4 2017 production growth was partially restrained by cold weather impacts in Canada, a force majeure event on a third-party gas gathering system in our Turner Sands play in Wyoming, and minor maintenance activities in Germany and Australia.

Fund flows from operations in Q4 2017 was $181 million ($1.49/basic share(1)), representing an increase of 38% from the previous quarter as a result of higher sales volumes and commodity pricing.  FFO was more than sufficient to cover our Q4 2017 capital expenditures of $74 million and cash dividends of $57 million, resulting in a payout ratio of 74% (including Asset Retirement Obligations Settled) and surplus cash of approximately $50 million during the quarter.

Europe

Production in the Netherlands increased to 9,381 boe/d in Q4 2017, following the amendment of permit restrictions on two key pools and an inline test on the Eesveen-02 well drilled in the prior quarter.  This represents a 59% increase over the prior quarter.  The test rate from the Eesveen-2 well (60% working interest) was limited to approximately 10 mmcf/d net during the test period.  In addition to the strong production performance, we also completed a 315 square kilometre 3D seismic survey in the Akkrum exploration licence and the South Friesland III production licence, our first new data acquisition since entering the Netherlands in 2004.

In France, Q4 2017 production averaged 11,215 boe/d, an increase of 3% from the prior quarter.  The increase was primarily due to better well uptime compared to the prior period and ongoing well optimization.  Activity during Q4 2017 was focused on well workovers and preparing for our 2018 drilling campaign.  We accelerated part of our 2018 program, commencing the drilling on two (2.0 net) of the four (4.0 net) planned Neocomian wells.  All remaining Neocomian wells are expected to be drilled in Q1 2018, along with the drilling of our planned three (3.0 net) Champotran wells.  In December 2017, the French parliament approved the proposed Climate Plan which prohibits the issuance of new oil and gas exploration concessions and limiting the renewal of existing production concessions beyond 2040.  Upon review of the final details included in the new legislation, we conclude that we do not expect these new laws to have a material impact on our future production profile.

In Ireland, production from Corrib averaged 56 mmcf/d (9,372 boe/d) in Q4 2017, a 15% increase from Q3 2017.  As reported in our Q3 2017 release, Corrib had an unplanned 31-day downtime period following a plant turnaround during September and October 2017.  This downtime reduced Vermilion's Q4 2017 production by approximately 1,200 boe/d and annual production by approximately 900 boe/d.  We continue to work closely with Canada Pension Plan Investment Board ("CPPIB") and Shell on the transition of ownership and operations from Shell to CPPIB and Vermilion, and anticipate closing the transaction in the first half of 2018.

In Germany, production in Q4 2017 averaged 4,180 boe/d, a decrease of 5% from the previous quarter.  The decrease was primarily due to a temporary shut-in of one well in December for a SCADA installation.  The well is expected to be brought back on production in Q1 2018.  Our activity in Germany continues to focus on well workover and optimization projects on our operated assets and planning activities related to the Burgmoor Z5 well to be drilled in early 2019.

In Hungary, we were awarded a license in December 2017 for the Békéssámson concession for a 4-year term.  Located adjacent to our existing South Battonya concession in southeast Hungary, the Békéssámson concession covers 330,700 net acres (100% working interest) and more than doubles the size of our total land position in the country.  Subsequent to year-end, we drilled and tested our first exploratory well (100% working interest) in the South Battonya concession.  The Mh-Ny-07 natural gas well tested at a rate of 5.8 mmcf/d(2) and is expected to be brought on production mid-2018.  This marks the drilling of our first well in the Central and Eastern Europe Business Unit.

North America

In Canada, we drilled or participated in six (4.0 net) Mannville w

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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