Vermilion Energy, Inc. Q3 FY2024 earnings call

• Production: Third quarter averaged 84,173 BOEs per day, up 7% on a per share basis year - over - year. - Fund flows from operations: Generated $275 million of fund flows from operations during the third quarter, or $1.76 per share, a 19% increase over prior quarter due to stronger European gas prices. - Capital expenditure: Invested $121 million of E&D capital in the third quarter, focusing on testing European wells, increasing production in Croatia and Canada. - Shareholder returns: Free cash flow for the third quarter was $154 million, with $59 million returned to shareholders. Year - to - date, $180 million returned, including $19 million in dividends and $40 million of share buybacks. Repurchased and canceled 8 million shares, reducing outstanding share count to 155 million, and reduced net debt by $73 million to $833 million. - European operations: Successfully drilled second deep gas exploration well in Germany, discovered gas; Croatia's SA - 10 block gas plant commissioned led to production increase, SA - 7 block exploration wells tested successfully. - North American operations: Third quarter North American operations averaged 53,936 BOEs per day, focused on increasing production on the new battery at Mica asset.

Production during the third quarter averaged 84,173 BOEs per day. International operations averaged 30,237 BOEs per day in Q3. North American operations averaged 53,936 BOEs per day in Q3. European operations have higher netbacks; cash flow for every BOE production in Europe is equivalent to adding three BOEs in Canada. Pure gas was the only commodity in the portfolio that increased quarter - by - quarter and year - over - year. The corporate realized gas price for the quarter was $6.57 per MCF, nearly 10 times higher than the AECO price.

• 2024 production guidance narrowed to 84 - 85,000 BOE per day from the original range of 82,000 to 86,000 BOE per day. - 2024 capital budget of $600 million to $625 million remains unchanged. - Midpoint of 2024 production guidance represents year - over - year growth of approximately 4% on a per share basis.

• European gas supply risks: Contract for gas from Russia via Ukraine expiring later this year at risk; domestic production in Europe continuing to drop; policy restrictions on Russian LNG in Europe. - North American gas price risks: Very weak AECO pricing led to partial shut - in of some Canadian gas.

Q: Good morning and thanks for taking my question. I guess the first one is just focusing on Germany there. I was hoping you'd talk towards a little bit of a potential impact on the discovery in that second exploration. Is there anything, I know it's maybe early before you're into testing, but can you talk towards what you're looking for in terms of size and depending on that size what that could mean for follow - up?

A: Thanks Dennis. I think I got most of your question there in Germany the size and potential follow - up with this recent discovery. Yes for that. So yes this the second I'll kick it off here and pass it over to Darcy but just you know high level the thing that I wanted to note is we're quite happy with this result. As a reminder we did message this as being a lower chance of success but a larger prospect we saw more gas in place. And so the fact that we're able to get a discovery here, again it just confirms the great work the team is doing on the technical side. But yes, nice to see a welcome in that we had deemed to be a lower chance success but Darcy can maybe provide some context on the size here what you think for timing and follow - up.

Q: All right. Good morning and thanks for taking my question. I guess the first one is just focusing on Germany there. I was hoping you'd talk towards a little bit of a potential impact on the discovery in that second exploration. Is there anything, I know it's maybe early before you're into testing, but can you talk towards what you're looking for in terms of size and depending on that size what that could mean for follow - up?

A: Yes thanks Dion and thanks Dennis for the question. So yes, in this Wisselshorst well that we just reached TD on. We encountered a pretty thick sand package there about 75 meters of net gas bearing sands across two zones. Preliminary estimated gas in place is potentially over 100 BCF there. Just remind you we're 30% working interest in that well. And I think you had a follow - up question around follow - up locations on this prospect. I think there may be follow - up locations immediately adjacent to this well, but there's requires a bit more work on our part to understand the results from this first well and then apply them across other leads in that area.

Q: Great. I appreciate that context. I presume that's probably more of a '26 story than '25 net - net.

A: Yes, I agree with that, Dennis. We'll do the flow testing here next similar to what we did in Osterheide. And then with that data, we'll be in a better position to provide an update in market here early next year.

Q: Thanks, Menno, for the question. It is early days on SA - 7, but what we're excited about is the four discoveries and the discovery of hydrocarbons in multiple zones. The image, I think, also gives an insight to this block is surrounded by known, proven production with lots of infrastructure. So early days give a run rate, but ranges would be -- we're already over 2,000 BOEs today with the SA - 10 block. With any success on SA - 7, I can see us getting to 5,000 above that, maybe potentially 7,000, 8,000, but it's early days. Really depends as well, gas versus oil mixture. The other thing as a reminder, we did do a partnership with an in - country company that actually owns a lot of infrastructure around us. So I think that provides good access to infrastructure that will ultimately help reduce our overall development costs. So again, 5,000 is the number that wouldn't be a big stretch from where we are today. And then as we drill more wells and get some more success, we can further refine that. As to the number of prospects, we drilled four. I know the team had identified over 20. We do this with leads and 3D seismic. So we still have a long list of additional prospects to test on this block.

A: Thanks, Menno. And then the second question is on the Euro nat gas outlook, just since it dovetails so well into all these questions. Could we just get a refresh on what you're currently seeing on the ground in terms of fundamentals and how that's impacting your appetite for acquisitions in some of those asset packages that are hanging out there? And then maybe also an update on how aggressive you'd like to get on Euro gas hedges through 2025. Thank you.

A: Thanks, Menno. Maybe I'll answer the second question first on the acquisitions. We do continue to look for, evaluate, and screen opportunities. It's been disclosed by another party that we do expect the assets that are onshore in the Netherlands to come to the market. Our understanding is mid - next year, so that's something that we continue to monitor closely. That was for the majors, and again, a significant block of gas onshore in the Netherlands, where we're the second largest operator, as you know. With respect to macro outlook, it's been really interesting. We touched on the call, how that commodity, Euro gas, is up significantly year - over - year. It's up quarter over quarter. Right now, we're selling into a market that is bouncing around $17 to $18 per MCF strip for next year. Again, it's bouncing around $17 to $18 per MCF. 2026 is in excess of $15, so quite robust pricing. A couple things, maybe the noteworthy is, first you got weather. We'll pretend to predict the weather, but we've had two very warm winters in Europe. Who knows? Maybe this is the year we get a normal winter. From a demand side, we still think LNG is robust and can continue to grow in Europe itself. You're seeing countries that are still, like Germany, for example, where they've said no to nuclear and a third of their power still comes from coal. It's early days in our view in the transition of needing to get off of coal. On the supply side, we are seeing risks to some of the volumes that have been coming into Europe. There is about a B to B and a half of gas that comes into Europe from Russia via Ukraine. That contract is set to expire later this year and there's been a lot of news flow on that outcome. I suspect, and again, there's a lot of reasons why that gas won't keep flowing, but we'll see what happens there, but that's a B and a half that's at risk. And then even LNG, like Russia still imports about two BCF a day of LNG into Europe. And Europe continues from a policy point of view to roll out new initiatives to further restrict that Russian LNG from landing in Europe. So big picture is domestic production continues to drop in Europe and Europe is really positioning themselves to needing to outbid the world for LNG. And we're seeing that with these robust prices. Maybe on the hedging side, I'll pass it over to Lars to provide a current update.

A: Yes, thanks, Dion. Menno on the hedging side, we did get to 50% here in 2024. We're actually 50% already for 2025 on European gas itself. I think there's a scenario where you potentially get up to 60%, but probably hedging on the margin for the remainder here of 2024 for 2025. 2026, we're actually 40% hedged on European gas. As Dion referenced, a strong price curve out that far, and so we've taken advantage of that. And then we've initiated a position for 2027. So the bulk of our hedging focus over the next little bit is likely more on 2026 and 2027 as opposed to 2025, just given we are 50% hedged for that period.