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Vermilion Energy Inc. Announces Results for the Year Ended December 31, 2016

February 27, 2017

CALGARY, Feb. 27, 2017 /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, 2016. 

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

  • Vermilion's 2016 annual production volumes increased by 16%, or 10% on a per-share-basis, to 63,526 boe/d, above the upper-end of our guidance range of 62,500-63,500 boe/d.  This annual production performance was achieved while reducing exploration and development ("E&D") capital spending by 50% as compared to 2015.  Production volumes for Q4 2016 decreased by 4% as compared to the prior quarter, due to natural declines, timing of capital projects and actively managed production in Canada, Netherlands and Australia. 
  • Fund flows from operations in 2016 were $510.8 million ($4.41/basic share(1)) as compared to $516.2 million ($4.71/basic share) in 2015.  Fund flows were negatively impacted by weaker commodity prices in 2016 but were largely offset by higher production.  Q4 2016 fund flows from operations of $149.6 million ($1.27/basic share) increased 6% from $141.0 million ($1.21/basic share) in Q3 2016 as a result of higher commodity prices, partially offset by lower sales volumes.  
  • E&D capital expenditures totaled $242.4 million in 2016, slightly above our guidance of $240 million
  • On a per-unit basis, annual operating and administrative ("G&A") expenses decreased by 16% and 15% respectively, year-over-year.  Profitability Enhancement Plan ("PEP") initiatives continue to deliver cost savings across our business units.  Full-year PEP savings related to capital, operating and G&A expenditures exceeded $70 million in 2016.   
  • Total proved ("1P") reserves increased 9% to 175.8(2) mmboe in 2016, while total proved plus probable ("2P") reserves increased 11% to 290.1(2) mmboe.  This represents year-over-year 1P and 2P per share reserves growth of 4% and 5%, respectively.
  • Finding and Development ("F&D")(3) and Finding, Development and Acquisition ("FD&A")(3) costs, including Future Development Capital ("FDC")(3) for 2016 on a 2P basis decreased 38% to $5.57/boe and 34% to $6.62/boe, respectively.  Our three-year F&D and FD&A costs, including FDC, on a 2P basis were $10.76/boe and $14.22/boe, respectively.  
  • Operating recycle ratio(4) (including FDC) increased to 4.9x in 2016, compared to 3.6x in 2015, as lower F&D costs more than offset the effect of lower commodity prices on netbacks.
  • Our independent GLJ 2016 Resource Assessment(5) indicates risked low, best, and high estimates for contingent resources in the Development Pending category of 120.4(5) mmboe, 198.5(5) mmboe, and 309.4(5) mmboe, representing increases of 27%, 24% and 21%, respectively, compared to our GLJ 2015 Resource Assessment(6).  The GLJ 2016 Resource Assessment also indicates risked low, best, and high estimates for contingent resources in the Development Unclarified category of 9.9(5) mmboe, 19.5(5) mmboe, and 28.7(5) mmboe.  Over 90% of our risked contingent resources reside in the Development Pending category, reflecting the high quality nature of our contingent resource base.  Prospective resources were assessed at risked low, best and high estimates of 45.2(5) mmboe, 89.5(5) mmboe, and 147.9(5) mmboe.
  • In France, we successfully executed our four-well Champotran drilling program and commenced drilling of a horizontal sidetrack well in the Vulaines field during Q4 2016, with completion and tie-in activities planned for Q1 2017.  This is our fourth successive drilling campaign at Champotran since 2013.
  • On December 19, 2016, Vermilion closed the acquisition of operated and non-operated interests in five oil and three gas producing fields from Engie E&P Deutschland GmbH, for total consideration of €32.5 million ($45.6 million), net of acquired product inventory and after closing adjustments.  Vermilion has assumed operatorship of six of the eight producing fields, representing our first operated producing properties in Germany.  The acquisition advances our objective of developing a material business unit in the country, and is complementary to the assets in our existing European portfolio.
  • In the Netherlands, we completed the Langezwaag-3 well (42% working interest) in Q4 2016 and brought it on production at a restricted rate of 7.5 mmcf/d.  During Q4 2016, we also acquired an incremental 30% working interest in the Drenthe VI production license for $28.3 million. This acquisition adds 30,000 net acres of land, including 26,000 net acres of undeveloped land and a 30% after payout interest in one well.
  • Production from Corrib averaged 62.9 mmcf/d (10,486 boe/d), net to Vermilion, in Q4 2016, representing 97% of rated plant capacity.  All six wells are available for production and demonstrating lower downtime with better-than-expected well deliverability. 
  • Vermilion entered into a farm-in agreement in Slovakia with NAFTA, Slovakia's dominant exploration and production company.  The farm-in agreement grants Vermilion a 50% working interest to jointly explore 183,000 acres on an existing license.  The Slovakia farm-in offers access to a promising land position through modest seismic and well commitments over a five-year primary agreement term. 
  • During Q4 2016, we began prorating the Premium DividendTM Component of our Premium DividendTM and Dividend Reinvestment Plan by 25%, and announced a further 25% proration starting with the January 2017 dividend payment.  We plan to increase the proration factor by a further 25% beginning with the April 2017 dividend payment, so that eligible shareholders who have elected to participate in the Premium DividendTM Component will receive a 1.5% premium on 25% of their participating shares, and the regular cash dividend on the remaining 75% of their shares.  Subject to unexpected changes in the commodity price outlook, we plan to discontinue the Premium DividendTM Component of our Premium DividendTM  and Dividend Reinvestment Plan beginning with the July 2017 dividend payment, such that there would be no further equity issuance under this program.  We also reduced the discount associated with the traditional component of our Premium DividendTM and Dividend Reinvestment Plan from 3% to 2% beginning with the January 2017 dividend.
  • Vermilion continued to be recognized for its environmental, social and governance ("ESG") initiatives in 2016.  Vermilion was one of only five oil and gas companies in the world, and the only energy company in North America, to be awarded a position on CDP's Climate "A" List.  We were also ranked 9th by Corporate Knights on the Future 40 Responsible Leaders in Canada list, the highest rated oil and gas company on the list of sustainable performers.  For more information on our ESG initiatives and performance, please see our Sustainability Report at: http://sustainability.vermilionenergy.com

 

(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 1, 2017 with an effective date of December 31, 2016 (the "2016 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 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.

(4)

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.

(5)

Vermilion retained GLJ to conduct an independent resource evaluation dated February 1, 2017 to assess contingent and prospective resources across all of the Company's key operating regions with an effective date of December 31, 2016 (the "GLJ 2016 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 25%, 26% and 26%, respectively.  There is uncertainty that it will be commercially viable to produce any portion of the resources.

(6)

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 aggregate 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. 

TM

Denotes trademark of Canaccord Genuity Capital Corporation

 

HIGHLIGHTS

     
       
 

Three Months Ended

 

Year Ended

($M except as indicated)

Dec 31,  

Sep 30,  

Dec 31,  

 

Dec 31,  

Dec 31,  

Financial

2016

2016

2015

 

2016

2015

Petroleum and natural gas sales

259,891

232,660

234,319

 

882,791

939,586

Fund flows from operations

149,582

140,974

136,441

 

510,791

516,167

 

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

1.27

1.21

1.22

 

4.41

4.71

 

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

1.25

1.19

1.21

 

4.36

4.65

Net loss

(4,032)

(14,475)

(142,080)

 

(160,051)

(217,302)

 

Net loss ($/basic share)

(0.03)

(0.12)

(1.28)

 

(1.38)

(1.98)

Capital expenditures

66,882

41,039

128,996

 

242,408

486,861

Acquisitions

78,713

10,391

6,227

 

98,524

28,897

Asset retirement obligations settled

3,327

2,066

4,921

 

9,617

11,369

Cash dividends ($/share)

0.645

0.645

0.645

 

2.580

2.580

Dividends declared

76,096

75,465

71,965

 

299,070

283,575

 

% of fund flows from operations

51%

54%

53%

 

59%

55%

Net dividends (1)

32,516

24,553

25,201

 

106,072

128,542

 

% of fund flows from operations

22%

17%

18%

 

21%

25%

Payout (1)

102,725

67,658

159,118

 

358,097

626,772

 

% of fund flows from operations

69%

48%

117%

 

70%

121%

Net debt

1,427,148

1,343,923

1,381,951

 

1,427,148

1,381,951

Ratio of net debt to annualized fund flows from operations

2.4

2.4

2.5

 

2.8

2.7

Operational

     

Production

           
 

Crude oil and condensate (bbls/d)

25,972

27,842

31,304

 

27,852

30,408

 

NGLs (bbls/d)

2,467

2,478

2,739

 

2,582

2,308

 

Natural gas (mmcf/d)

194.54

199.66

162.09

 

198.55

133.24

 

Total (boe/d)

60,863

63,596

61,058

 

63,526

54,922

Average realized prices

           
 

Crude oil, condensate and NGLs ($/bbl)

60.58

53.24

51.64

 

51.73

58.80

 

Natural gas ($/mcf)

5.47

3.98

4.55

 

4.18

4.98

Production mix (% of production)

           
 

% priced with reference to WTI

18%

19%

22%

 

19%

25%

 

% priced with reference to AECO

20%

20%

24%

 

22%

22%

 

% priced with reference to TTF and NBP

33%

32%

20%

 

30%

19%

 

% priced with reference to Dated Brent

29%

29%

34%

 

29%

34%

Netbacks ($/boe)

           
 

Operating netback(1)

31.11

27.88

28.44

 

27.06

32.09

 

Fund flows from operations netback

26.43

23.25

23.91

 

21.91

25.86

 

Operating expenses

10.54

9.05

11.50

 

9.53

11.32

Average reference prices

           
 

WTI (US $/bbl)

49.29

44.94

42.18

 

43.32

48.80

 

Edmonton Sweet index (US $/bbl)

46.18

42.06

39.72

 

40.11

44.91

 

Dated Brent (US $/bbl)

49.46

45.85

43.69

 

43.69

52.46

 

AECO ($/mmbtu)

3.09

2.32

2.46

 

2.16

2.69

 

NBP ($/mmbtu)

7.51

5.29

7.41

 

6.15

8.33

 

TTF ($/mmbtu)

7.21

5.43

7.28

 

6.00

8.23

Average foreign currency exchange rates

           
 

CDN $/US $

1.33

1.31

1.34

 

1.33

1.28

 

CDN $/Euro

1.44

1.46

1.46

 

1.47

1.42

Share information ('000s)

     

Shares outstanding - basic

118,263

117,386

111,991

 

118,263

111,991

Shares outstanding - diluted (1)

121,353

120,183

115,025

 

121,353

115,025

Weighted average shares outstanding - basic

117,840

116,814

111,393

 

115,695

109,642

Weighted average shares outstanding - diluted (1)

119,677

118,177

112,543

 

117,152

111,051

   

(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

The past three years have been a challenging time for the oil and gas industry, with oil and gas prices both hitting multi-year lows in 2016.  As a result, we took a very cautious approach last year, adjusting our capital program on several occasions to ensure that capital expenditures and cash dividends were fully funded by fund flows from operations.  We achieved this while maintaining our dividend, and also delivered strong production and 2P reserves(1) growth of 16% (10% on a per share basis) and 11% (5% on a per share basis), respectively.  We delivered these results while investing half the amount of capital compared to the prior year, and approximately one-third of the amount from two years ago.  We believe that this successful adaptation to a "lower-for-longer" world illustrates both the quality of our asset base and the competence of our personnel.  Our diversified asset base and global commodity exposure are two risk-reducing qualities that set Vermilion apart from many of our peers during the downturn. 

Vermilion has always been disciplined in the management of its balance sheet, typically operating with leverage ratios below the industry average.  We entered the commodity price downturn in a position of relative financial strength, and proactively took a number of actions in 2015 and 2016 to preserve our balance sheet.  In 2016, our payout ratio for E&D capital and cash dividends was 70% of fund flows from operations.  We have designed our 2017 and 2018 capital programs to provide for continued self-funded growth.  At the current commodity strip price, we expect fund flows from operations to exceed the combined cost of E&D expenditures and cash dividends.  In line with our conservative approach to managing our balance sheet, we have the flexibility to direct the resulting surplus cash to further debt reduction.

In early 2015 we amended our existing Dividend Reinvestment Plan ("DRIP") to include a Premium Dividend™ Component.  The Premium Dividend™ Component expanded our access to the lowest cost source of equity capital available during a period of commodity price weakness and uncertainty.  During Q4 2016, we began prorating the Premium DividendTM Component of our Premium DividendTM and Dividend Reinvestment Plan by 25%, and announced a further 25% proration starting with the January 2017 dividend payment.  We plan to increase the proration factor by a further 25% beginning with the April 2017 dividend payment, so that eligible shareholders who have elected to participate in the Premium DividendTM Component will receive the 1.5% premium on 25% of their participating shares and the regular cash dividend on the remaining 75% of their shares.  Subject to unexpected changes in the commodity price outlook, we plan to discontinue the Premium DividendTM Component beginning with the July 2017 dividend payment, such that there would be no further equity issuance under this program.  We also reduced the discount associated with the traditional component of our Premium DividendTM and Dividend Reinvestment Plan from 3% to 2% beginning with the January 2017 payment.  Our strategy aims to deliver consistent growth-and-income to our shareholders. These measures will reduce dilution, ensuring that value from future growth in production and cash flow more efficiently flows to our owners on a per-share-basis.

On a per unit basis, annual operating and G&A expenses decreased by 16% and 15% respectively, year-over-year, and are down 27% and 29% respectively over the past five years.  Since implementing our Profitability Enhancement Plan ("PEP") in November 2014, we have realized over $160 million in cost savings across our business, including over $70 million achieved in 2016.  It is our intent to embed these PEP cost reductions in our ongoing operations.  As a result, we are discontinuing our formal PEP tracking, but will continue to identify new cost saving initiatives as part of our everyday business.    

As a result of these ongoing cost reductions and capital efficiency improvements, we have been able to significantly reduce our planned capital investment program over the past several years while still growing production. The diversity of our asset base and commodity price exposures allows us to select and fund projects that will generate the highest return in a given commodity environment.  These cost and capital efficiency improvements, combined with our expanding drilling inventory, provides greater visibility to growing our free cash flow(2) (FFO less E&D Capital).  Based on current commodity strip prices, we project our 2017 and 2018 free cash flow(2) levels to be nearly three-to-four-times what they were during the 2012-to-2014 timeframe, when commodity prices were much higher.  We are now in a stronger position than we have ever been before, with a deep inventory of high return projects to underpin our self-funded growth-and-income model over the long-term.

2016 Review

We delivered 16% year-over-year production growth in 2016, above the upper-end of our guidance range of 62,500-63,500 boe/d.  This production performance was achieved while reducing our E&D capital program by 50% as compared to 2015.  In addition, despite the commodity price weakness seen in 2016, we continued to deliver strong performance across all segments of our business.  

Our latest independent reserve and resource evaluations illustrate the strong organic inventory in each of our business units.  Total 1P reserves increased 9% to 175.8(1) mmboe in 2016, while total 2P reserves increased 11% to 290.1(1) mmboe.  This represents year-over-year 1P and 2P per share reserves growth of 4% and 5%, respectively.  Operating recycle ratio(3) (including FDC) increased to 4.9x in 2016, compared to 3.6x in 2015 and 3.2x in 2014.  Despite a further deterioration in commodity prices, these increases in reserves and recycle ratio further demonstrate the improvement of our project inventory and execution over the past few years. 

In addition to growing our reserve base, we also focus on activities that will expand our resource base to support our longer-term growth profile in production and reserves.  Our independent GLJ 2016 Resource Assessment(4) indicates risked low, best, and high estimates for contingent resources in the Development Pending category of 120.4(4) mmboe, 198.5(4) mmboe, and 309.4(4) mmboe, representing increases of 27%, 24% and 21%, respectively, compared to our GLJ 2015 Resource Assessment(5).  The GLJ 2016 Resource Assessment also indicates risked low, best, and high estimates for contingent resources in the Development Unclarified category of 9.9(4) mmboe, 19.5(4) mmboe, and 28.7(4) mmboe.  Over 90% of our risked contingent resources reside in the Development Pending category, reflecting the high quality nature of our contingent resource base.  Prospective resources were assessed at risked low, best and high estimates of 45.2(4) mmboe, 89.5(4) mmboe, and 147.9(4) mmboe.

Europe

Production from Corrib averaged 62.9 mmcf/d (10,486 boe/d), net to Vermilion, in Q4 2016, representing 97% of rated plant capacity.  All six wells are now available for production.  The Corrib project has demonstrated lower-than-expected downtime and better-than-expected well deliverability thus far.  Going forward, we expect Corrib to be a significant source of fund flows for Vermilion, stemming from its relatively high-priced gas product, absence of royalties, low operating expense, low maintenance capital requirements, and lack of cash income tax for the foreseeable future.

In France, we completed a four (4.0 net) well drilling program at Champotran and commenced drilling of a horizontal sidetrack well in the Vulaines field during Q4 2016, with completion and tie-in activities planned for the latter part of Q1 2017.  This was our fourth successive drilling campaign at Champotran since 2013.   In 2017, in addition to continuing our workover and optimization activities in France, we plan to drill our first four (4.0 net) wells in the Neocomian fields in the Paris Basin. After acquiring the Neocomian fields in 2012, we have increased production by approximately 50% through workovers and artificial lift optimizations.     

In the Netherlands, we drilled two (0.9 net) wells in 2016.  The Langezwaag-3 well (42% working interest) was completed and brought on production during Q4 2016 at a restricted rate of 7.5 mmcf/d.  The Andel-6ST well (45% working interest) encountered a gas column of inadequate reservoir quality to justify completion.  The Andel-6ST well is suspended while we evaluate the potential for another sidetrack to a location where higher quality gas zones may be encountered.  During Q4 2016, we also acquired an incremental 30% working interest in the Drenthe VI production license for $28.3 million.  This acquisition further consolidates our interest in the Drenthe VI production license, adding 30,000 net acres of land, including 26,000 net acres of undeveloped land and a 30% after payout interest in one well.  In 2017, we plan to drill two (1.0 net) exploration wells and acquire 230 square kilometres of 3D seismic, representing a 50% increase in E&D capital investment compared to 2016. 

On December 19, 2016, Vermilion closed the acquisition of operated and non-operated interests in five crude oil and three natural gas producing fields from Engie E&P Deutschland GmbH, for total consideration of €32.5 million ($45.6 million), net of acquired product inventory and after closing adjustments.  The closing price was higher than the €28.3 million ($39.6 million) we estimated on December 19, 2016, primarily due to capital costs for a compression project that was installed before closing.  Vermilion has assumed operatorship of six of the eight producing fields, representing our first operated producing properties in Germany.  The acquisition advances our objective of developing a material business unit in the country, and is

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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