Vermilion Energy Inc. (NYSE:VET) Q4 2023 Earnings Call Transcript
Vermilion Energy Inc. (NYSE:VET) Q4 2023 Earnings Call Transcript March 7, 2024
Vermilion Energy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Vermilion Energy Q4 Conference Call. At this time, all lines are in a lesson only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, March 7, 2024. I would now like to turn the conference over to Mr. Dion Hatcher. Thank you. Please go ahead.
Dion Hatcher : Thank you. Good morning, ladies and gentlemen. Thank you for joining us. I'm Dion Hatcher, President and CEO of Vermilion Energy. With me today are Lars Glemser, Vice President and CFO; Darcy Kerwin, Vice President, International and HSE; Brandon McCue, Vice President, North America; Jenson Tan, Vice President, Business Development; and Kyle Preston, Vice President of Investor Relations. We'll be referencing a PowerPoint presentation to discuss our 2023 Q4 and year-end results. Presentation can be found on our website under Invest with Us and Events & Presentations. Please refer to our advisory on forward-looking statements at the end of the presentation. It describes forward-looking information, non-GAAP measures and oil and gas terms used today and outline risk factors and assumptions relevant to this discussion.
Production during the fourth quarter averaged 87,597 boes per day, which was at the midpoint of our Q4 guidance range of 86,000 to 89,000. This represents a 6% increase over the prior quarter, primarily driven by the Wandoo platform in Australia and Corrib Gas in Ireland, which were online for the full quarter, while the maintenance downtime in the prior quarter. Wandoo and Corrib are high-margin assets and both continue to perform quite well in Q1. We generated $372 million of fund flow and $225 million of free cash flow in Q4, which represents a 38% and 59% increase over the prior quarter, respectively. With this amount of free cash flow, we were able to reduce net debt by $164 million and returned $45 million to shareholders during the quarter comprised of $16 million in dividends and $29 million in share buybacks.
Looking at the full year results on Slide 3, we achieved the midpoint of our annual production guidance of 84,000. We achieved it despite wildfire related downtime in Western Canada and on planned maintenance downtime in Australia. Our ability to meet annual production guidance despite these issues, illustrates the strategic advantage of operating a diverse portfolio as we're able to reallocate capital to offset the production impacts in Canada and Australia. We generated over $1.1 billion of fund flow in '23. This represents the second strongest year ever for the company. Capital expenditures of $590 million was in line with guidance and resulted in free cash flow of $550 million. This free cash flow was used to fund the closing costs associated with the Corrib acquisition, asset retirement obligations were also allowing us to reduce net debt by $266 million and returned $160 million to shareholders, which represents about 30% of our free cash flow.
We exited the year with net debt under $1.1 billion, which is the lowest level in a decade and represents 0.9x our annual fund flow. This is the key milestone for the company as it aligns with our internal leverage target of 1x net debt to fund flow or less and positions us for increasing shareholder returns. Moving on to the operational updates for the quarter. Production from our North American operations averaged 54,216 boes per day in Q4, a decrease of 4% from the previous quarter due to natural declines. In the Deep Basin, we drilled and completed five wells and brought on production four Manville liquids-rich gas wells. At Mica, we drilled the initial four Montney wells on our BC lands as part of our winter drilling program in advance of the expected completion and start-up of our 8 to 33 BC battery in mid '24.
Slide 5 includes a map of our Montney position. As you can see, our land is in the oil window and the results of our first 2 BC wells validate our geological assessment and development plans. On Slide 6, you can see that 16 to 28 wells continue to produce at very strong reads, 800 boes a day per well after 11 months on production. These two wells run on production in March '23 and produced nearly 700,000 boes combined to the end of February, including over 215,000 barrels of liquids, which is mainly oil. Given the relatively shallow decline profile, we also believe this presents an opportunity for downspacing, which could add further drilling locations and is something we will be testing this year. The 11 wells we plan to drill this year will be on or offsetting the 16 to 28 pad.
We have drilled six wells on the first pad and commenced frac operations on this pad in late February. We expect these wells will be ready for production and tie in Q2 in time for the mid-year start-up of the 8 to 33 battery. We're also currently drilling the second pad, which we expect to finish in mid-Q2 and should complete fracking operations on that second pad in Q3. Slide 7 shows a picture of the new 16,000 BOPD battery being constructed in our Mica Montney lands. Construction is progressing as planned and remains on schedule for a mid-year start-up. Once operational, this battery will more than double our Montney infrastructure capacity to approximately 20,000 boes a day allows us to move forward with the growth phase of Mica asset. Production from our international operations averaged 33,381 boes per day in Q4, an increase of 29% over the previous quarter, mainly due to the full quarter of production from our Australia and Ireland operations following maintenance downtime in the prior quarter as well as increased production in the Netherlands due to new production from our 23 drilling program we brought online in the quarter.
We continue to advance our deep gas exploration plans in Germany. We commenced drilling of our first deep gas exploration well at the end of November and expect to reach total depth in the upcoming weeks. These wells were over 5,000 meters deep and typically take 100-plus days to drill. We will then move the rig to our next location where the second well of our program will be drilled during Q2. We are excited about the exploration plans in Germany, as we see this as a natural extension of the successful drilling campaigns we have executed over the past two decades in the Netherlands. We have approximately 700,000 net acres of undeveloped land in Germany located approximately 300 kilometers east of our producing fields in Northern Netherlands.
The exploration targets in Germany are on trend to our Netherlands plays, where we have drilled 29 gas wells over the past two decades with an average success rate over 70%. The Germany exploration targets are deeper and higher risk, but have a much larger resource potential than the Netherlands. We believe our land base can support a multi-year drilling campaign providing Vermilion with years of organic production growth of high-valued European gas. In Croatia, installation of the gas plant on the SA-10 block is progressing as planned and remains on schedule for startup mid-year, a 15 million day gas plant will facilitate production from the SA-10 block. We have gas behind pipe from previous discoveries. Subsequent to year-end, we commenced drilling on our first exploration well in the SA-7 block and reached total measured depth of 2,371 meters, discovered hydrocarbons in multiple zones.
We are currently evaluating the results and plan to test the well during the second quarter by commencing drilling operations on the second of four wells planned on the SA-7 block. In addition, we recently signed a formal agreement with the INA Group to jointly develop the SA-7 block. INA is a second -- sorry, INA is the largest integrated oil and gas company in Croatia, brings local expertise and access to existing infrastructure that will play a critical role to develop assets. We're excited about the future European gas potential in Germany and Croatia and look forward to providing update as the year progresses. We included our updated reserve evaluation with our Q4 release. Our 23 PDP reserves decreased by 8% from the prior year to 173 million boes, where our total proof plus probable reserves decreased by 18% from the prior year to 430 million boes.
The decrease is primarily due to dispositions, production and technical revisions, including technical revisions resulting from capital allocation decisions. It reflects the divestment of non-core assets in Saskatchewan, other non-core assets in the U.S. and also incorporates updated capital allocation decisions as a result of our asset high-grading for the past couple of years. Given the greater focus on our Mica Montney development and Germany exploration program, we have removed or divested reserves associated with undeveloped locations that are not prioritized for investment under our current plans. Assets most impacted by these capital allocation revisions are located in our U.S. and Saskatchewan operating regions. Approximately 40% of the 2P technical revisions relate to the capital allocation decisions, and therefore, some of these reserves could be recognized at a future date, if they align with our capital allocation parameters at that time.
In addition, we expect to recognize additional reserves over time from our Mica Montney and Germany exploration program, as we develop these assets. Our Montney asset is in the early stages of development and is conservatively booked today, while the potential multi-year German exploration program is largely on booked at this time. The PDP and 2P reserve life index as of December 31, 2023 is 5.6 and 14 years, respectively. Both of which are in line with our long-term average and reflect the conventional composition of our asset base. I will now pass it over to Lars to discuss our financial outlook and updated return on capital targets.
Lars Glemser: Thank you, Dion. We released our 2024 budget in early December and the execution of our capital program to date is progressing as planned. Our 2024 full year guidance remains unchanged and we are also providing Q1 production guidance of 83,000 to 85,000 boe a day. As a result of progress made on debt reduction, we are pleased to announce an acceleration of our return on capital. As you recall, we previously planned to increase our return of capital target to 50% of excess free cash flow starting April 1, but we will now apply that 50% target against full year excess FCF. To date this year, we have purchased 1.4 million shares and we plan to increase the pace of buybacks going forward to align with this increased ROC target.
We continue to believe share buybacks represent a very compelling return of capital option, which will result in the majority of our return of capital for this year going towards share buybacks. We have updated our internal forecast with the latest strip pricing and are forecasting annual FFO of approximately $1.25 billion, with resulting free cash flow of approximately $650 million. Under current strip pricing and applying our new ROC allocation target, we would expect to return approximately $250 million to shareholders through our base dividend and share buybacks, representing approximately 10% of our market cap, while continuing to reduce debt, which is also an indirect form of returning capital to shareholders. We believe this is an appropriate allocation of capital as further debt reduction will make us an even stronger and more resilient company.
Looking back on our FCF allocation over the past three years, we will have reduced debt by over $1.2 billion by the end of 2024 over the time period shown here. This is value that accrues directly to our equity shareholders. At the same time, we have increased our return of capital to shareholders each year over this time frame. We believe a 50% return of capital target is appropriate for our business as it will allow us to provide ratable, annual dividend increases and buyback shares, while also creating excess capacity on our balance sheet to be opportunistic. With that, I will pass it back to Dion.
Dion Hatcher : Thanks, Lars. Our disciplined focus on strengthening the balance sheet and high-grading asset base along with a diligent capital allocation has made Vermilion a much stronger and a much more resilient company. We ended '23 with a strong balance sheet and continued our operational momentum from the fourth quarter into 2024. Our '24 capital program is well underway, and we're very pleased with how things are progressing on our three growth initiatives in Canada, Germany and Croatia. The development of our gas prospects in Germany and Croatia will increase our exposure to premium priced European gas, but the expansion of our Montney infrastructure in Canada will set the stage for a long-term development and growth of this asset.
We're excited with Vermilion's outlook and believe that we have a robust portfolio capable of generating strong compounded returns to our shareholders through a combination of modest annual production growth, a resilient and growing base dividend and share buybacks. Well that concludes my prepared remarks. And with that, we'd like to open it up for questions.
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