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Edited Transcript of VET.TO earnings conference call or presentation 6-Mar-20 4:00pm GMT

Q4 2019 Vermilion Energy Inc Earnings Call

Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Vermilion Energy Inc earnings conference call or presentation Friday, March 6, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Iwanicki

Vermilion Energy Inc. - Director Marketing

* Anthony William Marino

Vermilion Energy Inc. - President, CEO & Non-Independent Director

* Lars William Glemser

Vermilion Energy Inc. - VP & CFO

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Conference Call Participants

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* Asit Kumar Sen

BofA Merrill Lynch, Research Division - Research Analyst

* Dennis Fong

Canaccord Genuity Corp., Research Division - Exploration and Production Analyst

* Greg M. Pardy

RBC Capital Markets, Research Division - MD & Co-Head Global Energy Research

* Jeremy McCrea

Raymond James Ltd., Research Division - Director & Equity Research Analyst

* Josef I. Schachter

Schachter Energy Research Services Inc. - Author & President

* Michael Paul Dunn

Stifel Nicolaus Canada Inc., Research Division - Director of Institutional Research

* Chris Varcoe

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Vermilion Energy Inc. Year-End 2019 Earnings Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Anthony Marino, President and CEO of Vermilion. Thank you. Please go ahead.

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [2]

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Good morning, ladies and gentlemen. Thank you for joining us. I'm Tony Marino, President and CEO of Vermilion Energy. With me today are Mike Kaluza, Executive Vice President and COO; Lars Glemser, Vice President and CFO; Kyle Preston, Vice President of Investor Relations; and other members of our management team who may be called on during the Q&A session.

We will be referring to a PowerPoint presentation to discuss our fourth quarter 2019 financial and operating results and year-end reserves update. The presentation can be found on our website under Invest With Us and Events & Presentations.

Slides 2 and 3 in the presentation refer to our advisory on forward-looking statements. These advisories describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion.

Let me start off with our dividend. Slide 4, dividend reduction. Our Board of Directors has approved a 50% reduction in our monthly dividend to $0.115 per share in response to the recent weakness in commodity prices resulting from the outbreak of the novel coronavirus, also known as COVID-19.

We didn't take this decision lightly. It has been an extremely challenging environment ever since the oil price crashed in the second half of 2014. Throughout this period, we have maintained focus on profitability by grinding costs out of all phases of our business, ranging from field operations to financing expense, upgrading our capital project slate and adapting our capital markets model to focus even more acutely on returning capital to shareholders. We have been unique among our traditional competitor group in maintaining our dividend while still providing a moderate level of growth.

We have paid a monthly dividend or distribution in the trust era for the past 205 consecutive months, returning over $40 per share of dividends over this period. Despite the energy downturn, we put more production reserves and free cash flow behind each share, while employing dramatically lower capital budgets. We're proud of this record of returning capital to shareholders, while still providing per share growth. This model has kept us disciplined in a capital-intensive industry and has put substantial cash back in the hands of investors.

However, the emergence of COVID-19 is an unanticipated event that has dramatically altered individual business and government behavior and has already had a substantial negative impact on global economic growth and commodity prices. As we consider today's economic and commodity outlook, we believe it is unlikely that we would achieve fully funded status for our previous dividend at a reasonable level of capital expenditures. Therefore, we have determined that a reduction to our dividend is the most prudent course at this time. The revised dividend will be effective for the March dividend payable on April 15, 2020.

Slide 5, total payout ratio. At the commodity forward strip as of March 4, we estimate a 2020 payout ratio of 99%, including previously declared dividends for January and February. On a pro forma basis, annualizing the revised dividend, our 2020 total payout ratio would be approximately 94%. Excess cash generated beyond dividend, CapEx and ARO requirements will be allocated towards debt reduction, while retaining the option of buying back shares through our NCIB program in an improved macroeconomic environment.

Slide 6, dividend funding analysis. On this slide, we show a waterfall chart for fund flows from operations. The bars represent the evolution of our 2020 FFO estimates, including the major commodity price drivers of changes in forecasted FFO. The dash lines represent our combined CapEx, dividend and ARO outflows under our previous dividend and under our revised dividend. The first bar on the left represents our FFO estimate at the time of our budget release at the end of last October.

As you can see, our $450 million capital program and $0.23 monthly dividend were funded at $55 WTI, which was approximately the oil price at that time. As we started 2020, oil prices moved higher, partially offset by lower gas prices. And our funding status continued to improve to an overfunded position, as represented by the FFO bar as of January 6. In that environment, we were confident in our ability to fund our capital program and pay our monthly dividend of $0.23, while still generating excess cash to reduce debt.

Today, we have a different picture following COVID-19. Oil prices have declined by more than $20 per barrel from the peak we saw earlier in the year, and natural gas prices have also further weakened since that time. It's not our belief that COVID-19 significantly alters the long-term prospects for the oil and gas industry. And ultimately, we expect a recovery and resumption of a positive trend for commodity prices. However, we do think the recovery in oil prices that we began to experience in 2020 will be pushed back for an unknown period.

As you can see in the last FFO bar on the right side of the slide, at today's prices, we would be unable to fund our combined 2020 capital budget and previous dividend amount, represented by the upper dash line. However, with the revised dividend, represented by the lower dash line, we are fully funded at the forward strip.

Lastly, stacked on top of the final FFO bar, we also show sensitivities at $50 and $55 WTI for the rest of 2020, which would place us in an overfunded position with our revised dividend.

We were always clear in stating that we would reevaluate the dividend in the event of a structural change in commodity prices that could affect our ability to self-fund. Furthermore, our philosophy is to prioritize balance sheet strength over other objectives, including either growth or dividends. This is why we've made the decision to reduce our monthly dividend by 50% to ensure that we maintain a strong balance sheet and position the company for long-term value creation. Should we experience an even more pronounced and protracted commodity downturn due to COVID-19 or any other cause, we'll be attentive to all forms of cash outlays, focusing first on capital investment levels to protect the financial position of the company.

Now we'll move on to our Q4 and full year 2019 results. Slide 7, Q4 and full year 2019 review. During 2019, Vermilion generated record cash flow, production and reserves despite a continued environment of challenging commodity prices. We recorded FFO of $908 million in 2019 on a capital program of $523 million, which translated to free cash flow generation of $385 million, the highest in our history. The resulting 2019 total payout ratio, including dividends and asset retirement obligations, was 103%. In Q4 2019, we generated $216 million of FFO, which was in line with the previous quarter despite an inventory build in Australia due to the timing of crude liftings.

We delivered record production of 100,357 BOE/d in 2019, representing year-over-year growth of 15% or 5% on a per share basis. We achieved these results despite several unexpected operational challenges during the year, including a third-party refinery outage in France and uncharacteristic weather-driven delays in Canada.

Net debt in 2019 increased modestly to $2 billion. However, the net debt to trailing FFO ratio improved to 2.2x compared to 2.3x in 2018. In addition to an improving leverage profile, we also enhanced the quality of our balance sheet over the past year.

We recently received commitments to renew our covenant-based credit facility for 4 years with a new maturity date of May 31, 2024. In addition, in June 2019, we executed a cross-currency interest rate swap on our 2025 USD 300 million long-term senior notes, converting our 5.625% interest cost on these notes to 3.275% for the remainder of their term. As a result of these initiatives, our pretax cost of debt today is approximately 3.2% with a weighted average remaining term of 4.4 years.

Slide 8, Europe and Australia Q4 highlights. Our most notable activity in Europe during the fourth quarter was in the Netherlands, where we successfully drilled and completed the Weststellingwerf well, 0.5 net, representing our first drilling activity in that country since 2017. The well flowed at an initial gross rate of 14.7 million cubic feet per day and is expected to be brought on production during 2020.

In Germany, Q4 2019 production averaged 3,400 BOE/d, an increase of 3% from the prior quarter. The increase was primarily due to improved uptime on our operated oil and natural gas assets and partially offset by unplanned downtime on our nonoperated oil assets. Following the successful drilling of the Burgmoor Z5 well, 46% working interest in 2019, our partner group in this license has agreed to a tie-in plan, which should allow for production early next year.

In CEE, we tied in the Mh-21, 0.3 net; and Battonya E-09, 1.0 net, wells in Hungary, drilled in the second and third quarters of 2019, respectively. The wells were brought on production mid-way through the fourth quarter of 2019 at restricted rates of approximately 600 BOE/d net for the 2 wells combined.

In Australia, we continued to benefit from strong pricing in our Wandoo crude, realizing an average premium of USD 6 per barrel over Dated Brent over the course of 2019. The strong relative pricing has continued in 2020, with our next cargo contracted at a premium of USD 24 per barrel over Dated Brent.

Slide 9, North America Q4 highlights. In Canada, production averaged 58,600 BOE/d in Q4 2019, up slightly from the prior quarter. Strong results from new well completions in the quarter more than offset natural decline. During the quarter, we drilled one of our best ever condensate-rich Lower Mannville wells in Drayton Valley, Alberta, achieving an IP30 rate of approximately 1,900 BOE/d, 60% liquids.

In Ferrier, we drilled a liquids-rich Upper Mannville well, which delivered an IP30 rate of approximately 1,800 BOE/d, 15% liquids. We are currently in the midst of a very active Q1 2020 drilling campaign in Canada, with rig activity in the quarter peaking at 6 rigs in Saskatchewan and 4 rigs in Alberta. We plan to complete the majority of our 2020 Canadian drilling program in the first quarter of the year in order to avoid potential delays from an extended spring breakup season or unseasonably wet summer weather.

In the United States, Q4 2019 production averaged 5,700 BOE/d, representing an increase of 15% from the prior quarter. The increase was primarily due to a full quarter of contribution from the 4 wells we brought on production during the third quarter of 2019. These wells continue to perform in line with our type curves, achieving an average IP90 rate of approximately 450 BOE/d. We also began drilling 2 1.98 wells in December 2019, for which drilling finished in January 2020 and are currently undergoing completion.

We have 2 rigs operating in our Hilight field in the Powder River Basin. Similar to our Canadian business unit, we plan to execute a front-end-weighted capital program in the United States, completing our 12-well, 11.9 net, 2020 drilling program in the first half of the year.

Slide 10 and 11, 2019 reserves highlights. Proved plus probable reserves increased by 3% year-over-year to 501.2 million barrels of oil equivalent. The large majority of our new reserve additions were through organic activities, as we continue to enhance a recovery factor on existing assets and advanced resources to reserves in a number of our operating areas. We converted 36.8 million barrels of oil equivalent of previously booked resources into 2P reserves in 2019.

Looking at some of the reserve metrics on Slide 11. We replaced 120% of 2P reserves organically and added these new reserves at an organic F&D cost of $9.93 per BOE, including FDC, resulting in an operating recycle ratio of 3x and funds flow recycle ratio of 2.5x. Our F&D costs have been below $10 per BOE for the past 3 years, 3-year average F&D of $9.38 per BOE, including FDC, while growing our liquids weighting. Driven by a capital-efficient project slate and a continued focus on cost improvements, our 3-year organic operating recycle ratio stands at 3.2x.

Before we open the line to questions, I'll return to where we started this call. Our dividend has been and remains a very important feature of our company. While our goal was to never reduce the dividend, we have always predicated its level on fundamental economic sustainability and maintaining our financial strength.

Despite 5 years of L-shaped recovery since the commodity crash in mid-2014, we were able to take enough unit cost out of our company to bring payout ratios down to approximately 100%, while still phasing out our DRIP programs. However, after the pronounced decline in the commodity markets and the economic uncertainty caused by coronavirus, we were no longer confident in our ability to internally fund the dividend at its previous level. Hence, we took the bitter pill of reducing our dividend by 50%.

We believe in returning capital to the owners of Vermilion. We believe returning capital has a host of advantages in our integrated operating and capital market strategy. We will now go forward with our new monthly dividend based on the same principles as before, continuing to develop efficiencies in our operations, maximizing free cash flow and providing a meaningful income stream to our shareholders.

That concludes my formal comments. We're happy to address questions. Operator, would you please open the phone line?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Dennis Fong of Canaccord Genuity.

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Dennis Fong, Canaccord Genuity Corp., Research Division - Exploration and Production Analyst [2]

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I've got a couple here. The first is just in terms of your current leverage position, obviously, kind of just given the oil price pullback just outside of your range. Can you kind of reiterate what the target is that you've kind of focused on here? I know you talked towards some of the abilities or the levers that you guys can pull towards moving towards that if we kind of stay in a protracted oil price environment similar to this one. And then I've got a second.

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [3]

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Yes. Well, first of all, our projected debt to FFO at the end of the year under the strip is about 2.9x cash flow, and our target is 1.5x debt to cash flow or FFO. It's our intent to self-fund. And under the strip we ran at the end of the day on Wednesday, we were at that level. Keep in mind that when we quoted the 99% number, that includes 2 months of dividends in January and February at a higher level. So under the prices that we had as of the end of the day on Wednesday, that would give us a payout ratio on a pro forma basis for the new dividend level of 94%. We do intend to remain self-funded, and we'll be looking closely at commodity prices, not reacting to any single day event. We do think, as I mentioned in the opening remarks, we do think that this, in the short to medium term, does qualify as a structural change in the market. And therefore, we made the response on the dividend because of that assessment that we had made.

We'll -- we're not going to make any further changes today to the -- to our outlays. We will be seeking to reduce cost where we can on the operating side of our business. With respect to the $450 million capital program that we have for the year, if we have continued additional weakness as we have seen in the last couple of days in the commodity, we would react on the capital program side. And I had a question about this earlier today, what the magnitude of that change could be. We haven't made any decisions. I think we'll complete our Q1 program. The -- we've always pointed out that the growth component of our budget for 2020 rates comes to about 5% of our CapEx. There's about another 5% that is devoted toward projects that have impacts beyond 2020. So our stay-flat CapEx for the year is about $410 million, and we would consider reductions in the capital program at that level or perhaps into the range of 15% of the capital program. We'd make that decision, I think, after completing the Q1 program and in time in the post-breakup period for us to adjust activity in Q2 and beyond. So Dennis, did that get your question there?

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Dennis Fong, Canaccord Genuity Corp., Research Division - Exploration and Production Analyst [4]

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Yes, no, for sure. And then my second question is maybe shifting gears here to European natural gas pricing. Obviously, there's some near-term weakness there. And how should we be thinking about -- and there's still relative strength as we look further out down the curve. How should we be thinking about your hedging policy longer term? And how are you guys trying to kind of, we'll call it, moderate the risk around '21 and '22 volumes currently?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [5]

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Okay. Yes, Dennis, I'm going to start off on this answer, and then I'll turn it over to -- in a minute to Adam Iwanicki, who is our Risk Manager and Marketing Director for the company. So the first comment is that -- and this is a part that I want Adam to cover in greater detail later. We do have a weak market in Europe, particularly for this winter and summer. The forward curve for European gas is in significant contango as you go into winter 2021. It's much higher for next summer than it is today and continues into contango as you go into the next winter. The forward curve, in our view, is reasonably reflective of the fundamentals of that market. It's -- European gas has a more active set of both novelty sellers, but also buyers who hedge into that market. And so you get a different market structure that has allowed for contango that does not exist in the oil markets where the -- really it's primarily -- the hedgers are primarily the sellers. And that's a market structure feature that has probably restricted the longer-term prices in oil.

So what this means is that as we hedge for the out years, we can do that still at quite strong prices for European gas, prices that do ensure a lot of free cash flow and strong project economics. We're in a very strong hedge position for this year on European gas. It's outlined in our IR deck on the website, these hedge percentages for European gas, and it's a whole variety of 2-way, 3-way contracts with some swaps, total about 78% of our expected production for 2020 and about 50% of our production for 2021. The hedge position continues on into 2022 and 2023. With the curve that exists, we are willing to further hedge into that curve, and I think you will see us doing that.

The European gas forward curve is a hedging advantage that we have that's not available to most of the other independent E&Ps and it is something that we take advantage of to lock down a portion of the cash flows for the -- not only for the current year, but for the later year period. I do want to turn it to Adam for a minute just to discuss the fundamentals and our view of the market.

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Adam Iwanicki, Vermilion Energy Inc. - Director Marketing [6]

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Sure. The current price weakness in Europe is really the confluence of a few factors. We've had 2 consecutively warm winters in Europe and warm winter in all of the Northern Hemisphere. And then LNG supply growth globally has outpaced LNG demand growth, namely in the Asian markets. And so LNG has been seeking a home, that home is Europe. This is not stable or a situation that can continue into the future. If you look at LNG economics out of the U.S. Gulf Coast, the arbitrage is right at the variable cost right now. And so to get more LNG to these markets, prices just have to go up. And this is where we see improving price conditions going out into '21, into '22 and further '23. But as Tony said, we have a 50% hedge level for 2021; 2022, we're about 25%. The curve still does allow us to lock in very good economics for our gas production. And so we will continue to hedge.

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Operator [7]

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Your next question comes from Asit Sen of Bank of America.

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Asit Kumar Sen, BofA Merrill Lynch, Research Division - Research Analyst [8]

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Tony, on the capital flexibility, just wanted to make sure I got the 2 numbers right. Your sustaining CapEx, you mentioned $410 million. And then you mentioned you could potentially trim up to 15% if commodity prices weaken. Did I get those numbers right? So essentially getting back to sustaining CapEx would be what you're thinking about?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [9]

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We haven't made a decision on reducing capital. We're going to look at the development of the markets and coronavirus and overall economic situation while we complete the Q1 program. But your understanding of it is correct. I'll -- maybe just to elaborate a little bit on the terminology, we estimate our stay-flat CapEx cutting the growth CapEx and some longer-term expenditures at about $410 million. We haven't made any decisions on a reduction in the capital program, but I think if we are to do that, we would think in terms of reductions in the 5% to 10% to 15% range for the annual capital program. It is possible to bring down capital further than that.

We'll have a little bit over half of our capital employed in Q1 with this strategy of front-loading. We did that in part to get some cost advantages on a bigger program. We did it because it's more efficient in terms of timing to generate more production for the year. And we did it to reduce risk in the capital program, risk that confronted us before like weather delays due to kind of a shifting wet season in North America in general and Alberta in particular. So we have capability to go deeper if we needed to than 15%. But the scenarios that we're modeling would put us between this roughly 5% to 15% level at this point.

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Asit Kumar Sen, BofA Merrill Lynch, Research Division - Research Analyst [10]

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Great. Tony, that's very helpful. And again, a more difficult question. But when you're thinking through trimming CapEx, I know it's not easy to do, but could you kind of speak to potential areas you could revisit first to trim the drilling program?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [11]

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Yes, we'd be looking at some of the later year drilling that is a -- that wasn't initiated in Q1. A portion of this would be in North America. And there are some European projects that could be delayed as well. And we'll look for other general efficiencies in the program. I mean I feel we do have quite an efficient capital budget as it stands. Nonetheless, it's been our history for -- ever since the oil price crash and even before that to grind costs out of our system, and capital has been a key part of that. We're not going to stop trying to find just those cost efficiencies today. So it'd be a combination, but those would be the main drilling areas, I would say, that would be candidates.

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Operator [12]

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Your next question comes from Josef Schachter of Schachter Energy Research.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [13]

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I have a few questions. You mentioned that your front-end load is about $200 million with that $450 million in the first quarter. You drilled 176 wells last year gross. How many do you see drilling in 2020 if you go with the $450 million budget?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [14]

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Yes, Josef, thank you for the question. We'd be a little bit over 50% employment of the annual CapEx in Q1. So it would be more than the $200 million. I think our total is 55% that we're projecting for Q1. I can only give it to you in terms of net wells, but we project 116 net for 2020 currently.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [15]

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So the gross, that might be -- given comparison to the last year, bumping it up by about 10% gets the difference between gross and net over the last year or so?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [16]

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Josef, that sounds accurate, and I guess, that would put us in the range of 130 gross. It seems like a reasonable estimate. I apologize, just don't have that one at my fingertips.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [17]

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No problem. Now going to the spend of the money that you have for the rest of the year. Last year, you were able to spend in -- for the year $38.5 million on acquisitions and $9.2 million in the fourth quarter. In terms of drilling versus buying, given the problems out there in the industry with a lot of distressed assets, are you finding that the -- in terms of the areas that you operate in Canada or Germany where the chances of being able to be a buyer versus direct spend might be advantageous? Are you looking at things in that ilk?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [18]

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Yes. With respect to acquisitions, we discussed in a few different forums that we're actually pretty unlikely to be an acquirer in Canada, and I think that would apply to North America as a whole. We feel like we've been through the property set that would be reasonably available within our operating core areas. We don't see the particular asset set of any meaningful size that would likely to be available that we think would be kind of a quality addition to our portfolio, and we're quite deep in our inventory already. In general, a slightly different set of reasons, perhaps the same thing applies in Wyoming. We don't think there's anything really dealable at a reasonable price adjacent to our core operating area. And we like our position geologically exactly where it's at within the basin there, also with quite large and probably expanding inventories, we work the asset more.

So no, I don't think it's very likely. I mean in general, probably even quite low cost and real high rate of return M&A, we would, I'd say, from this point forward, there's always a collection of very, very small land additions that could potentially be made. But I would say that even at the very low cost and high rate of return M&A, we would probably -- if we did it, we'd probably seek to fund it out of the E&D budget, just keeping a really strict focus on how much total CapEx we would be using.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [19]

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One more from me. If we had recovery in commodity prices, let's say, Q4, we're back over $60, you'll probably generate $200 million for the quarter. So the dividend is $53 million. You might have $50 million for CapEx left in your budget. Would the extra funds go only to paying down debt? Or if you saw comfort in the $60 environment post the virus resolving, would you also activate the NCIB? Or is that a 2021 prospect?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [20]

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Yes, with the set of numbers that you've laid out, $50 million of excess free cash, meaning cash beyond dividends, I'm not -- we'd have to check and see what price scenario that would be ended up -- that would end up being tied to. But I think that the direction of that magnitude of excess free cash would be debt reduction. At this point, it's our intent, given the uncertainty that's developed in the economy over the past month, to take that excess cash really and just use it to retire debt. In different macro environments, we have the option to employ the NCIB. We're not going to do that at this time because of the focus that we have on the balance sheet and really the great degree of economic uncertainty that the virus has created. So yes, for the time being, it's all earmarked to debt reduction. It would -- the lowest priority use of additional cash flow on the totem pole would be for capital increases. I don't think we're going to do that.

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Operator [21]

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Your next question comes from Jeremy McCrea of Raymond James.

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Jeremy McCrea, Raymond James Ltd., Research Division - Director & Equity Research Analyst [22]

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Just given the volatility and all the discussions and the questions here so far and where you want your leverage ratios to be, I just want to kind of get some more insight into the Board discussion on why the dividend wasn't a bigger cut. Why you wouldn't take the opportunity to do more -- pay down more debt, maybe even cut the CapEx just to get ahead of this volatility that we all kind of see is coming here?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [23]

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Okay. Well, yes, Jeremy, on the question of -- take the first one on the question of why not an earlier reduction in the dividend, maybe I could use the slides that we have in the deck to run through maybe a longer-term view of this first and then a shorter-term view second. So I'll start with Slide 5, the kind of total uses chart that we have. This incorporates dividends split historically into DRIP and cash and CapEx, but it also includes our expenses for ARO retirement. So it's the full uses of cash for those 3 purposes. If you look at the first half of the decade, the payout ratios were in excess of 100%. The sea change -- the first sea change, I would say, in the industry occurred in 2014 with the reduction in commodity prices. We reacted and it took a bit of time to pull down -- further pull down the cost structure of the company. And a lot of this work had been going on even prior to the oil price crash, and the work was to move up the learning curve in the programs that we had to reduce cost and improve the productivity of the completions. It was a big changeover in the project slate. Certainly, post mid-'14, and especially once we got into 2015, we were assisted by oil service cost reductions, which have persisted throughout this period. Through doing all those things and trying to enhance as well the cash flow profile of the company, over the second half of the decade, we were able to get the payout ratio down very close to 100%. We didn't quite get there in '19, we were at 103%. We were determined to bring it down further.

And as we're going to get to in a second, we'll show you the projections that we had for 2020. But to create white space on that plot versus our uses and use it to, first and foremost, bring down debt levels. So the company made a tremendous shift to the overall change in the sector, getting those ratios down just about to 100%, not quite. And another thing that we had to execute during this period, really just another change in the market and something we thought was justified as the stock price got lower toward the end of this period was the elimination of the DRIP, wanting to make sure that we got to a pay-as-you-go basis or better with the -- for the total uses for dividends and CapEx. So we had believed that we were well on the path to doing this and had a dividend that was sustainable in the kind of macro environment that we thought would occur.

This is where I want to shift to the next slide to look at the shorter-term thought process that we had, and this is shown on Slide 6. So at the time we released that budget, we were about balanced at the commodity prices that existed. We -- I would say, we generally had a moderately constructed view of oil prices. There's a whole range of positives and negatives that we try to take into account that may occur -- that might have occurred in the oil market. They generally tended towards the positive side, and we did develop FFO that was over the line that we had at the time of the budget with the prior dividend. We had a forecast that we put out when we came back at the beginning of the new year in 2020, represented in the middle of the chart for January 6. We have that white space developing, and we continue to think that, that was a reasonable oil price and would have the potential as well over time to improve.

And what we had said throughout this period and really going back a number of years was that we would continue to pay the dividend as long as we assessed it to be economically sustainable. We said if there was a structural change in commodity conditions that we didn't feel we could compensate for with higher level of cost reduction in the company, such that we could not self-fund the capital program and dividends, that's when we would make a reduction to it. As coronavirus began to have its impact in the economy and especially in the oil market, we actually watched it very, very closely from a technical standpoint in January when we first heard about it and into a full month of February. We're not virologists and we're not epidemiologists, but we made an assessment that the virus was at higher lethality than the flu, but not as contagious -- less lethal than SARS, but more contagious. And we certainly initially did not think that we would have quite the behavioral change that has occurred at so many different levels in society over the world. It's now awfully clear to us -- and this really has hit home in the last 1.5 weeks. You can see it in the trading action in the commodities, you can see it in the trading action in equities in general. You can see it in equities in the sector. And you can see it in our stock that the -- it's a much more severe reaction than we would have expected in January or the beginning part of February.

So we think that there is a huge amount of uncertainty associated with this virus. And it's not only on a kind of a scientific basis about what its health impacts will be, but an enormous amount of economic uncertainty that it introduces. And as a result, we have made the move to cut the dividend in half. And from here, we're going -- yes. Just one more sentence on. Jeremy, just one more sentence on this. So we're going to watch the prices from here, and we're prepared to react further, that's why the discussion that we had earlier about the potential for capital reductions.

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Jeremy McCrea, Raymond James Ltd., Research Division - Director & Equity Research Analyst [24]

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Okay. I guess I was just -- why wouldn't you have cut it, say, 70% or that now as opposed to -- like just given how quickly your leverage ratios have gone up to -- I think you said 2.9x at the current strip, like, versus your target. So the payout is back down to 100%, great, but the leverage ratios seem like they've gone up almost too much here where you almost have to put the payout closer to, say, 85% or 90% just to pay down the -- get the balance sheet a little bit fixed sooner, I guess?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [25]

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Yes. I'm going to start with that, and then I'm going to turn it to Lars to discuss the composition of our balance sheet. But the pricing change has been very, very rapid. It changes a lot every day. And we can't say with any certainty if today's price is appropriate, if Wednesday's price was appropriate, if the price we had a week ago was appropriate. The market is very sensitive, and we're going to take the time to see what a little more extended oil market reaction is rather than -- we could -- rather than pegging it on any single day's price. We can evaluate it at the strip on any day, but we're not necessarily going to change the dividend based on what it is on a single day. So with that, I want to turn it to Lars to discuss the quality of the balance sheet.

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Lars William Glemser, Vermilion Energy Inc. - VP & CFO [26]

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Yes. Thanks, Tony. And Jeremy, we've discussed this in the past. And I think it's important to look at the construct of the balance sheet. So first off, we do have the U.S. senior notes that are termed out to 2025. What we just announced today as well was a 1-year extension of the $2.1 billion covenant-based credit facility to May 31, 2024. Something that we look at as well in markets like these is that debt-to-FFO. We also look at the credit metrics. So we have 3 financial covenants on that credit facility in terms of senior debt not to exceed 3.5x. We're 1.57 at year-end '19. And then on total debt not to exceed 4x, 1.94. I would call those 2 the most stringent of the covenants that we have to meet year-end 2020. To put that 2.9x into perspective, that would translate into about 1 -- just under 1.9x on that senior debt versus 3.5x and then about 2.3x on the total debt relative to the 4x. So we are looking at things on a debt-to-FFO as well as debt-to-EBITDA perspective.

I think the other important part of it is liquidity that we were able to maintain. You are correct in terms of not a lot of incremental cash flow to pay down debt at March 4 strip pricing, but at the same time, not a lot of absolute debt being added to the balance sheet as well. So those ratio is going up to that 2.9x is really a -- fundamentally caused by the underlying cash flows depreciating. But importantly, we are targeting that 100%, which results in very little to no absolute debt being added.

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Operator [27]

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Your next question comes from Greg Pardy of RBC Capital Markets.

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Greg M. Pardy, RBC Capital Markets, Research Division - MD & Co-Head Global Energy Research [28]

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I mean, Tony, just to be clear, smart in terms of addressing the dividend. I think you've kind of answered it in terms of evaluating the capital program and dividend in the context of oil market conditions. It's kind of full stop there. But just wanted to ask 2 quick ones. One is, just operationally, you alluded to a pretty big premium, I think, you're getting on your Australian barrels right now. Just curious how that's looking in the context of IMO 2020. And then I just had a follow-up question on cash taxes.

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [29]

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Yes, I'll turn the one to -- question to Adam Iwanicki. Thanks, Greg.

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Adam Iwanicki, Vermilion Energy Inc. - Director Marketing [30]

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So we did participate in very strong IMO-related low-sulfur fuel oil pricing, and that's basically what our Wandoo crude is pricing off of, most of the fuel oil in Singapore, very strong over the first quarter. The majority of this production is tied to a 1-year sales contract to some Japanese refinery buyers. And so we can't actually disclose all the details -- the economic details of that commercial arrangement, but they are protected at a higher price level.

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Greg M. Pardy, RBC Capital Markets, Research Division - MD & Co-Head Global Energy Research [31]

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Okay. So a significant premium to Brent continues to [delay]?

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Adam Iwanicki, Vermilion Energy Inc. - Director Marketing [32]

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Yes, yes.

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Greg M. Pardy, RBC Capital Markets, Research Division - MD & Co-Head Global Energy Research [33]

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Okay. Okay, great. And then just the other thing is, I mean, the cash taxes were, I guess, a lot lower than we were expecting in the fourth quarter. Can we still use just that rule of thumb of 6% to 8% of pretaxes as a reasonable proxy for cash taxes for modeling purposes this year?

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Lars William Glemser, Vermilion Energy Inc. - VP & CFO [34]

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Yes, thanks for the question, Lars here. I think that's a fair range to use. I think that as the commodity price environment depreciates, I would be comfortable sort of referencing a range of 5% to 6%. I think that 6% to 8% is when you get into a 50-plus environment. So in the world that we are in right now for 2020, 5% to 6% is the right way to think about it on an overall corporate basis.

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Operator [35]

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Your next question comes from Mike Dunn of Stifel FirstEnergy.

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Michael Paul Dunn, Stifel Nicolaus Canada Inc., Research Division - Director of Institutional Research [36]

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My questions have been answered. That's all from me.

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Operator [37]

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Your next question comes from Chris Varcoe of the Calgary Herald.

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Chris Varcoe, [38]

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Several of my questions have been answered, but I'm just wanting to be clear. What will be the trigger for you to make a decision if you decide to cut capital spending sometime later in the year?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [39]

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Okay. Yes, we're going to watch this commodity price after the extremely high volatility we've had over the past couple of weeks. And I think that we'll be monitoring it through the end of Q1 as we complete that part of the capital program. And I think, with each of the upcoming quarters, we'll be making a decision about whether or not we stick with the entire remainder of the program.

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Chris Varcoe, [40]

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And just as we're sitting here, looking at oil at $42, and obviously, you talked about the instability, do you view this situation similar to the price downturn of 2015, 2016? Or do you view this in a different light, which requires a different kind of response?

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [41]

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Yes, that's a very thoughtful question. Sometimes you can only view these things in retrospect. I think they are, though, very, very different events. The one that began in mid-'14, with hindsight, it's clear what led to it. You had a big technological change. You had an enormous amount of that capital that was available to the industry to be employed in this new technology of horizontal wells in ultra-tight reservoirs using multi-stage fracs. And it was impossible for OPEC -- I mean, Saudi Arabia in particular, to continue to accommodate that increase in U.S. production by restricting their own output. And that big supply event even in -- even as we were having increasing demand all the time led to a very long-term change in prices. Nobody knows for sure. We try to understand all the fundamentals that we can, but it's going to be impossible for us to be exactly right about it.

But we did feel that the oil market was coming back into balance, and that's after we had kind of a failed rally that began early in '16 and ended in the fourth quarter of '18. There was another smaller failed rally in 2019. We were in the midst, I felt, of a little bit more sustainable rally at the end of '19 and the early part of 2020, really largely restoring balance in the market with just a little bit of kind of probability of continued assistance from OPEC while demand was continuing to grow. And that was even after you had the negative impacts from the trade war. So what we've observed in 2020 is, in a sense, it's even more uncertain, because it's such a rapid adjustment to demand, probably impossible, and this is what the commodity markets are indicating, probably impossible for OPEC to take enough supply or supply out fast enough to get to the point of having even inventories, so we're definitely having an inventory build. And that's negative for the market, especially for the front end of the market.

It's hard to say what the duration of it will be. I would -- my own guess would put it kind of in the medium term. I think of it as setting back the oil price position, to me, at least a year, maybe it's 2 years, hopefully not more than that, from the improving position that we were previously in. I don't think it is probably going to make a permanent change in the likely price. I mean it may actually restrict supply development further as less capital is provided to the industry, given the volatility of the product price and the impact that it will have on the whole industry's cash flows. I don't know if it'll have a longer-term impact on demand. I think if you get at least a few years out, it will be on the previous growth trend. So it's just a very different event. It's very uncertain about its overall economic impact. There are macro risks that exist that could be -- that could come to the fore that were kind of latent in the world economy. That creates a greater risk. We don't even know technically or in health terms what the real progress or significance of the disease is going to be. So I think it's quite uncertain, and it's really about how long it pushes back that return to what would otherwise have been the fundamentals. So in this sense, it's just different in several ways from the one that we had in -- that began in mid-'14.

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Operator [42]

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There are no further questions at this time. I will turn the call back over to Anthony for any -- for closing remarks.

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Anthony William Marino, Vermilion Energy Inc. - President, CEO & Non-Independent Director [43]

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Okay. So thank you for participating in our Q4 2019 conference call. As has been our previous practice, our Q1 2020 call will be preempted by our AGM presentation on April 28. Thanks again.

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Operator [44]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.