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Vermilion Energy Inc. Announces Results for the Three and Six Months Ended June 30, 2020

July 27, 2020

CALGARY, AB, July 27, 2020 /CNW/ - Vermilion Energy Inc. ("Vermilion", "We", "Our", "Us" or the "Company") (TSX, NYSE: VET) is pleased to report operating and condensed financial results for the three and six months ended June 30, 2020.

The unaudited interim financial statements and management discussion and analysis for the three and six months ended June 30, 2020 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

  • Fund flows from operations ("FFO") in Q2 2020 was $82 million ($0.52/basic share(1)), a decrease of 52% from the prior quarter. The decrease is primarily due to significantly lower commodity prices as a result of the impact of the COVID-19 pandemic combined with the OPEC+ oil price war that ensued in early March. Lower commodity price impacts were partially offset by higher production and hedging gains, including a $25 million gain from unwinding our USD-to-EUR cross currency interest rate swap.

  • Q2 2020 production averaged 100,366 boe/d, representing a 3% increase from the prior quarter. The increase was driven by production growth in Canada, the United States and Australia, partially offset by lower production in France due to COVID-19-related curtailments.

  • Production from our European business units averaged 25,173 boe/d in Q2 2020, a decrease of 13% or approximately 3,700 boe/d from the prior quarter. The decrease was primarily due to the curtailment of approximately 3,000 bbl/d of oil production in France due to the temporary shutdown of the Total-operated Grandpuits refinery during the COVID-19 confinement period.

  • Production from our North American business units averaged 69,895 boe/d in Q2 2020, an increase of 9% or approximately 5,700 boe/d from the prior quarter. The increase was driven by new well contributions from our active Q1 2020 drilling programs in Canada and the United States. Both our Canadian and United States business units achieved record quarterly production during Q2 2020. Despite highly volatile North American oil pricing in Q2 2020, we did not experience any material shut-ins due to uneconomic production.

  • In Australia, production averaged 5,299 bbl/d in Q2 2020, an increase of 31% quarter-over-quarter as production was fully restored on two wells that were temporarily offline in the prior quarter to install electric submersible pumps.

  • On May 25, 2020, Vermilion's Board of Directors appointed Lorenzo Donadeo as Executive Chairman and Curtis Hicks as President following the departure of Anthony Marino as President and Chief Executive Officer. Mr. Donadeo is one of the co-founders of Vermilion and has served as Chairman of the Board since March 1, 2016. Prior to this Mr. Donadeo was the Chief Executive Officer of Vermilion from 2003 to 2016. Mr. Hicks was previously the CFO of Vermilion from 2003 to 2018.

  • In lieu of filling the role of Chief Executive Officer, Vermilion re-established an Executive Committee consisting of a minimum of five senior executives from within the Company with a mandate to review and approve key organizational, financial, operational and strategic decisions.

  • In June 2020, Vermilion received a rating of "AA" on a scale of AAA (leader) to CCC (laggard) in the MSCI ESG Ratings(2) assessment, which reflects exposure to industry-specific ESG risks and the ability to manage those risks. This consistent rating from 2019 continues to reflect Vermilion's commitment to improving company ESG performance and enhanced disclosure on topics relevant to MSCI's detailed assessment process.

(1)

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



(2)

The use by Vermilion Energy Inc of any MSCI ESG Research LLC or its affiliates ("MSCI") data, and the use of MSCI logos, trademarks, service marks or index names herein, do not constitute a sponsorship, endorsement, recommendation, or promotion of Vermilion by MSCI. MSCI services and data are the property of MSCI or its information providers, and are provided 'as-is' and without warranty. MSCI names and logos are trademarks or service marks of MSCI.

 


($M except as indicated)

Q2 2020

Q1 2020

Q2 2019

YTD 2020

YTD 2019

Financial






Petroleum and natural gas sales

193,013


328,314


428,043


521,327


909,126

Fund flows from operations

81,852


170,225


222,738


252,077


476,310

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

0.52


1.09


1.44


1.60


3.10

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

0.52


1.09


1.42


1.60


3.07

Net earnings (loss)

(71,290)


(1,318,504)


2,004


(1,389,794)


41,551

    Net earnings (loss) ($/basic share)

(0.45)


(8.42)


0.01


(8.83)


0.27

Capital expenditures

42,274


233,704


92,607


275,978


294,660

Acquisitions

2,932


11,337


8,623


14,269


24,650

Asset retirement obligations settled

970


3,732


4,907


4,702


8,504

Cash dividends ($/share)


0.575


0.690


0.575


1.380

Dividends declared


90,067


106,884


90,067


212,433

    % of fund flows from operations

—%


53%


48%


36%


45%

Net dividends (1)


82,422


98,111


81,790


196,556

    % of fund flows from operations

—%


48%


44%


32%


41%

Payout (1)

42,612


319,858


195,625


362,470


499,720

    % of fund flows from operations

52%


188%


88%


144%


105%

Net debt

2,161,442


2,155,623


1,950,509


2,161,442


1,950,509

Net debt to four quarter trailing fund flows from operations

3.16


2.61


1.91


3.16


1.91

Operational

Production






    Crude oil and condensate (bbls/d)

45,041


44,881


48,964


44,961


49,072

    NGLs (bbls/d)

9,588


8,022


8,107


8,805


8,002

    Natural gas (mmcf/d)

274.42


265.51


275.60


269.96


276.77

    Total (boe/d)

100,366


97,154


103,003


98,760


103,203

Average realized prices






    Crude oil and condensate ($/bbl)

34.90


58.66


79.46


47.20


76.36

    NGLs ($/bbl)

8.94


8.92


11.25


8.94


16.76

    Natural gas ($/mcf)

1.85


2.94


3.09


2.39


4.09

Production mix (% of production)






    % priced with reference to WTI

41%


39%


38%


40%


37%

    % priced with reference to Dated Brent

14%


17%


18%


16%


19%

    % priced with reference to AECO

29%


27%


26%


28%


26%

    % priced with reference to TTF and NBP

16%


17%


18%


16%


18%

Netbacks ($/boe)






    Operating netback (1)

12.49


22.02


29.62


17.25


30.57

    Fund flows from operations netback

9.08


18.85


24.15


13.96


25.46

    Operating expenses

11.00


13.41


11.04


12.21


11.99

    General and administration expenses

1.88


1.47


1.70


1.67


1.54

Average reference prices






    WTI (US $/bbl)

27.85


46.17


59.81


37.01


57.36

    Edmonton Sweet index (US $/bbl)

21.71


38.59


55.19


30.15


52.62

    Saskatchewan LSB index (US $/bbl)

21.60


38.41


55.54


30.01


53.19

    Dated Brent (US $/bbl)

29.20


50.26


68.82


39.73


66.01

    AECO ($/mcf)

1.99


2.03


1.03


2.01


1.83

    NBP ($/mcf)

2.26


4.32


5.44


3.31


6.89

    TTF ($/mcf)

2.39


4.23


5.75


3.32


6.94

Average foreign currency exchange rates






    CDN $/US $

1.39


1.34


1.34


1.37


1.33

    CDN $/Euro

1.53


1.48


1.50


1.50


1.51

Share information ('000s)

Shares outstanding - basic

158,307


157,020


155,032


158,307


155,032

Shares outstanding - diluted (1)

164,090


160,425


158,633


164,090


158,633

Weighted average shares outstanding - basic

158,189


156,562


154,795


157,375


153,855

Weighted average shares outstanding - diluted (1)

158,189


156,562


156,844


157,375


155,335

(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 the accompanying Management's Discussion and Analysis.

 

Message to Shareholders

The second quarter of 2020 was an extremely challenging period for the oil and gas sector. Demand destruction caused by the COVID-19 pandemic resulted in unprecedented negative oil prices for the WTI benchmark as global inventories swelled. Despite these challenges, we were able to manage our business effectively through this cycle, with relatively little operational impact from COVID-19. We successfully adapted our work procedures to ensure operational safety and business continuity in all of our operating regions, and to-date we have not had any confirmed cases of COVID-19 amongst our staff, with only minor production impacts related to the pandemic. We believe this is a reflection of the commitment to Vermilion of our skilled and dedicated staff.

We delivered strong operational results in Q2 2020. Production averaged 100,366 boe/d representing a 3% increase from the prior quarter. Most of this increase came from our North American business units where we benefited from new production coming online following an active and successful Q1 2020 drilling program. Both our Canadian and United States business units achieved record quarterly production during Q2 2020. This growth in North American production volumes more than offset approximately 3,000 bbl/d of curtailed oil production in France that was temporarily shut-in due to a local refinery being offline during the COVID-19 confinement period. The refinery has recently restarted and we are in the process of restoring our production in France.

As a result of the lower commodity prices during Q2 2020, FFO decreased 52% quarter-over-quarter to $82 million ($0.52/basic share(1)). However, with minimal capital investment of $42 million, we generated approximately $40 million of free cash flow and achieved a total payout ratio of 52%, including reclamation and abandonment spending. We ended the second quarter with net debt of $2.2 billion and approximately $350 million of liquidity on our covenant-based credit facility. Our facility is termed out until May 2024 and we remain in compliance on all debt covenants. Capital activity for the balance of the year will be minimal and focused predominantly on maintenance activity.

During the quarter, we also made several leadership changes in an effort to realign the Company with Vermilion's long-standing core business principles, which are based on a conservative, long-term focus on balance sheet strength and capital discipline to generate strong returns. The five core principles include: maintaining a strong balance sheet with low leverage; managing a total payout ratio of less than 100%; consistently delivering results that meet or exceed expectations, protecting equity to minimize dilution; and maintaining a strong corporate culture. These principles were implemented when Vermilion started paying a distribution as an energy trust in 2003 and have served the Company well over its history.

Along with the change in leadership we have also re-established an Executive Committee, which is a management structure that was successfully utilized by Vermilion in the past. This management structure has proved to be a highly collaborative decision-making model that draws upon the collective knowledge, experience, business acumen and skills of the senior management team.

As we move forward, our first priority will be to ensure the continued health and safety of our employees and business continuity as we navigate through COVID-19. With the cost reductions we have made to-date, our business is free cash flow positive in the current commodity price environment. Our top financial priority at this time is debt reduction with an ultimate target of achieving a debt-to-cash flow ratio of less than 1.5x. Achieving this target will not happen overnight, and we will take a long-term, patient approach to managing the business and improving the balance sheet.

We recently kicked-off our 2021 capital budget process with this long-term view in the fore. Our plans for the rest of this year and next will be guided by our core business principles, focusing on free cash flow generation and debt reduction rather than top-line production growth. In due course, we will review our shareholder return policy to determine the appropriate time to reinstate a dividend and/or buyback shares. We are proud to have delivered over $40 per share in dividends to our shareholders over the past 17 years and we believe returning capital to shareholders is a key component in generating long-term shareholder returns. Although we do not expect the road ahead to be without challenges, we believe our renewed focus on these core business principles will help guide Vermilion through these difficult times and position the Company for long-term value creation.

Q2 2020 Operations Review

Europe

Production from our European business units averaged 25,173 boe/d in Q2 2020, a decrease of 13% or approximately 3,700 boe/d from the prior quarter. The decrease was primarily due to the curtailment of approximately 3,000 bbl/d of oil production in France due to the temporary shutdown of the Total-operated Grandpuits refinery during the COVID-19 confinement period. Natural decline and minor unplanned downtime in Ireland accounted for the balance of the decrease.

The Grandpuits refinery resumed operations in mid-June and we are in the process of restoring our curtailed production in France, along with resuming our 2020 workover program which was put on hold during the COVID-19 confinement period. In the Netherlands, we recently received the final production permit for the Weststellingwerf (0.5 net) well and expect to bring this well on production during the second half of 2020. During the second quarter we deferred a planned turnaround in Ireland due to the COVID-19 restrictions and now plan to complete this turnaround in Q3 2020, which will result in the Corrib project being offline for approximately three weeks.

North America

Production from our North American business units averaged 69,895 boe/d in Q2 2020, an increase of 9% or approximately 5,700 boe/d from the prior quarter. The increase was due to new well contributions from our active Q1 2020 drilling programs in Canada and the United States. In Canada, we brought five (5.0 net) wells on production in Alberta and eleven (5.5 net) wells on production in Saskatchewan during the second quarter. In the United States, we completed and brought on production the remaining six (6.0 net) wells of our nine (8.9 net) well program. Despite highly volatile North American oil pricing in Q2 2020, we did not experience any material shut-ins of uneconomic production.

During the quarter, we focused on various cost-saving initiatives across the Canadian and United States business units and have identified many capital, operating and general and administrative efficiencies to-date. In the United States, we were able to reduce completion costs of the final six wells by approximately 15% from the first three (2.9 net) wells due to increased operational efficiencies, as well as the utilization of multi-well pads. We have completed our North American drilling program for 2020 and will focus on maintenance activities for the balance of the year. As a result, we expect production from both business units to decline over the second half of the year as no new well drilling activity is planned.

Australia

In Australia, production averaged 5,299 bbl/d in Q2 2020, an increase of 31% quarter-over-quarter as production was fully restored on two wells that were temporarily offline in the prior quarter to install electric submersible pumps. Production also benefited from the absence of cyclone activity in the quarter, which caused several days of unplanned downtime in Q1 2020. We continued to realize strong pricing for our Wandoo crude due to its low sulphur content, averaging a premium of C$21 per barrel above Dated Brent during Q2 2020. The demand for this blend of crude has increased under the new IMO 2020 regulations, which require marine vessels to either install sulphur scrubbers or run low sulphur fuel oil.

Commodity Hedging

Vermilion hedges to manage commodity price exposures and increase the stability of our cash flows. In aggregate, as of July 24, 2020, we have 50% of our expected net-of-royalty production hedged for the second half of 2020. With respect to individual commodity products, we have hedged 87% of our European natural gas production, 27% of our oil production, and 69% of our North American natural gas volumes for the second half of 2020, respectively. Please refer to the Hedging section of our website under Invest With Us for further details.

Sustainability

In June 2020, Vermilion received a rating of "AA" on a scale of AAA (leader) to CCC (laggard) in the MSCI ESG Ratings(2) assessment, which reflects exposure to industry-specific ESG risks and the ability to manage those risks. MSCI ESG Research provides in-depth research, ratings and analysis of the ESG-related business practices of thousands of companies worldwide. This consistent rating from 2019 continues to reflect Vermilion's commitment to improving company ESG performance and enhanced disclosure on topics relevant to MSCI's detailed assessment process.

Organizational Update

On May 25, 2020, Vermilion announced that Anthony Marino stepped down as President and Chief Executive Officer and as a director of the Company, effective immediately. In conjunction with Mr. Marino's departure, the Board also announced the appointments of Lorenzo Donadeo as Executive Chairman and the Curtis Hicks as President.

Mr. Donadeo has 39 years of experience in the oil and gas industry. He was a co-founder of Vermilion in 1994 and has served as Chairman of the Board since March 1, 2016. From 2014 to 2016, Mr. Donadeo served as the Chief Executive Officer. From 2003 to 2014, he served as President and Chief Executive Officer and from 1996 to 2003 he served as Vermilion's Executive Vice President and Chief Operating Officer. Mr. Donadeo has a Bachelor of Science degree in Mechanical Engineering (with distinction) from the University of Alberta.

Mr. Hicks has 37 years of experience in the oil and gas industry. Most recently, he was Executive Vice-President and Chief Financial Officer of Vermilion from 2003 to 2018 and was a key contributor to Vermilion's success and culture during his tenure. Mr. Hicks is a Chartered Professional Accountant and has a Bachelor of Commerce degree (with distinction) from the University of Saskatchewan.

Vermilion has a philosophy of staff development and internal promotion. In line with this approach, we are pleased to announce that Darcy Kerwin, currently Managing Director for our Ireland Business Unit (IBU), will be returning to Canada to take the role of Vice President, Strategic Planning, effective September 1, 2020. Mr. Kerwin has over 23 years of industry experience, with a focus on engineering and production operations in North America, West Africa, Australia, and Europe. Prior to joining Vermilion, Mr. Kerwin held a variety of engineering and project management roles with Chevron in Canada, Houston and Nigeria. In 2005, Mr. Kerwin joined Vermilion as the Interim General Manager of our Australia Business Unit (ABU). After his assignment in Australia, he spent five years in the France Business Unit (FBU), leading facilities engineering and asset integrity functions before returning to Canada in 2011 as the Facilities Engineering Manager. Mr. Kerwin returned to France in March 2014 as the Managing Director, FBU and for the last two and a half years, he has been successfully leading the IBU as Managing Director.

Ryan Carty, currently Operations Manager, Australia Business Unit, has been promoted to the position of Managing Director, IBU, also effective September 1, 2020. Mr. Carty has over 18 years of engineering and operations experience, working in positions with increasing leadership responsibility at BHP, ENI, Chevron and Origin Energy, prior to joining Vermilion in 2014. As Operations Manager in Australia, Mr. Carty has been responsible for the management of the Wandoo operation, including production, health, safety and environment, and overseeing all aspects of capital and operating activity. We look forward to Mr. Carty's leadership in further advancing Vermilion's track record as a community partner and responsible operator of essential domestic natural gas production in Ireland.

(Signed "Lorenzo Donadeo")

Lorenzo Donadeo
Executive Chairman
July 24, 2020

(Signed "Curtis Hicks")

Curtis Hicks
President
July 24, 2020

(1)

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



(2)

The use by Vermilion Energy Inc of any MSCI ESG Research LLC or its affiliates ("MSCI") data, and the use of MSCI logos, trademarks, service marks or index names herein, do not constitute a sponsorship, endorsement, recommendation, or promotion of Vermilion by MSCI. MSCI services and data are the property of MSCI or its information providers, and are provided 'as-is' and without warranty. MSCI names and logos are trademarks or service marks of MSCI.

Management's Discussion and Analysis and Consolidated Financial Statements

To view Vermilion's Management's Discussion and Analysis and Interim Condensed Consolidated Financial Statements for the periods ended June 30, 2020 and 2019, please refer to SEDAR (www.sedar.com

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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