Vermilion Energy Inc. press release
Vermilion Energy Inc. Announces Results for the Three and Nine Months Ended September 30, 2022
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, AB , Nov. 9, 2022 /CNW/ - Vermilion Energy Inc. ("Vermilion", "We", "Our", "Us" or the "Company") (TSX: VET) (NYSE: VET) is pleased to report operating and condensed financial results for the three and nine months ended September 30, 2022.
The unaudited interim financial statements and management discussion and analysis for the three and nine months ended September 30, 2022 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
Q3 2022 fund flows from operations ("FFO") (1) was $508 million ( $3.10 /basic share) (2) , an increase of 12% from the prior quarter, driven by higher European natural gas prices. Free cash flow ("FCF") (3) was $324 million ( $1.98 /basic share) (4) , a decrease of 5%, due to higher capital expenditures primarily related to the offshore drilling campaign in Australia . Cash flow from operating activities was $448 million in Q3 2022, including the impact from asset retirement obligations settled and changes in non-cash operating working capital. Pro forma Q3 2022 FFO and FCF incorporating the incremental 36.5% ownership in Corrib was $611 million ( $3.73 /basic share) and $426 million ( $2.60 /basic share), respectively. As a reminder, all FCF from the Corrib acquisition accrues to Vermilion as at January 1, 2022 and will be netted off the final purchase price at the time of closing, which we now expect to occur in Q1 2023 due to administrative delays. Net earnings were $271 million ( $1.65 /basic share) for the quarter ended September 30, 2022 . Long-term debt and net debt (5) were $1.4 billion at September 30, 2022 , resulting in a net debt to trailing FFO ratio (6) of 0.8 times, which is at the lowest level in over ten years. Cash flow used in investing activities totaled $168 million in the third quarter of 2022, including exploration and development ("E&D") capital expenditures (7) of $184 million . In early July 2022 , we announced the approval of a normal course issuer bid ("NCIB") for the purchase of up to 16 million common shares, representing approximately 10% of Vermilion's public float as at June 22, 2022 . To date, we have repurchased 2.3 million common shares for $72 million . In conjunction with our Q3 2022 release, we announced a quarterly cash dividend of $0.08 CDN per share, payable on January 16, 2023 to shareholders of record on December 30, 2022 . Including dividends and share buybacks, we returned $85 million to shareholders in Q3 2022, representing 26% of Q3 2022 FCF. Production in Q3 2022 averaged 84,237 boe/d (8) a decrease of 1% from the previous quarter, primarily due to fire-related downtime in France and third-party downtime in Canada . Production from our International operations averaged 27,095 boe/d (8) in Q3 2022, an increase of 1% from the prior quarter, primarily due to higher production in Australia and Germany , which more than offset fire-related downtime in France and natural decline in the other jurisdictions. In Australia , we successfully drilled the B17 and B18 wells into oil-bearing formations in the Wandoo field. The wells have produced over 300,000 barrels cumulative to date and generated approximately $30 million of operating cash flow, recovering 40% of the invested capital in the first two months on production. Production from our North American operations averaged 57,142 boe/d (8) in Q3 2022, a decrease of 2% from the prior quarter, primarily due to third-party downtime in Canada and delayed start-up of our Turner wells in the United States . During the quarter, we completed the 6-well Montney pad that was drilled in Q2 2022 and are in the process of finishing construction of the initial build-out of the facility and bringing these wells on production. Late in the third quarter, the European Union ("EU") announced the approval of a temporary windfall tax measure aimed at EU companies with activities in the hydrocarbon sector. Based on preliminary information currently available, we estimate Vermilion's exposure to the EU windfall tax could be in the range of $250 to $350 million for 2022.
| ($M except as indicated) | Q3 2022 | Q2 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | Financial | | | | | | | Petroleum and natural gas sales | 964,678 | 858,844 | 538,530 | 2,633,701 | 1,313,846 | | Cash flows from operating activities | 447,608 | 530,364 | 211,548 | 1,319,025 | 584,101 | | Fund flows from operations (1) | 507,876 | 452,901 | 262,696 | 1,350,645 | 597,689 | | Fund flows from operations ($/basic share) (2) | 3.10 | 2.75 | 1.62 | 8.25 | 3.72 | | Fund flows from operations ($/diluted share) (2) | 3.01 | 2.68 | 1.59 | 8.01 | 3.65 | | Net earnings (loss) | 271,079 | 362,621 | (147,130) | 917,654 | 804,108 | | Net (loss) earnings ($/basic share) | 1.65 | 2.20 | (0.91) | 5.61 | 5.00 | | Cash flows used in investing activities | 168,275 | 612,634 | 162,930 | 891,239 | 334,827 | | Capital expenditures (7) | 184,015 | 113,153 | 66,450 | 382,512 | 228,989 | | Acquisitions | 6,220 | 522,223 | 94,420 | 535,155 | 107,332 | | Asset retirement obligations settled | 10,386 | 4,300 | 5,142 | 21,006 | 15,486 | | Cash dividends ($/share) | 0.08 | 0.06 | — | 0.20 | — | | Dividends declared | 13,031 | 9,913 | — | 32,711 | — | | % of fund flows from operations (9) | 3 % | 2 % | — % | 2 % | — % | | Payout (10) | 207,432 | 127,366 | 71,592 | 436,229 | 244,475 | | % of fund flows from operations (10) | 41 % | 28 % | 27 % | 32 % | 41 % | | Free cash flow (3) | 323,861 | 339,748 | 196,246 | 968,133 | 368,700 | | Long-term debt | 1,409,507 | 1,527,217 | 1,760,342 | 1,409,507 | 1,760,342 | | Net debt (5) | 1,412,052 | 1,588,668 | 1,778,052 | 1,412,052 | 1,778,052 | | Net debt to four quarter trailing fund flows from operations (6) | 0.8 | 1.1 | 2.4 | 0.8 | 2.4 | | Operational | | | | | | | Production (8) | | | | | | | Crude oil and condensate (bbls/d) | 37,315 | 36,783 | 38,777 | 37,064 | 38,777 | | NGLs (bbls/d) | 7,901 | 8,113 | 8,068 | 8,117 | 8,279 | | Natural gas (mmcf/d) | 234.12 | 239.83 | 226.73 | 239.51 | 232.12 | | Total (boe/d) | 84,237 | 84,868 | 84,633 | 85,099 | 85,742 | | Average realized prices | | | | | | | Crude oil and condensate ($/bbl) | 123.02 | 138.55 | 87.05 | 127.34 | 79.40 | | NGLs ($/bbl) | 44.64 | 51.86 | 35.55 | 47.82 | 30.03 | | Natural gas ($/mcf) | 24.68 | 16.50 | 9.20 | 19.50 | 6.63 | | Production mix (% of production) | | | | | | | % priced with reference to WTI | 38 % | 39 % | 39 % | 38 % | 38 % | | % priced with reference to Dated Brent | 17 % | 16 % | 18 % | 17 % | 18 % | | % priced with reference to AECO | 30 % | 29 % | 28 % | 29 % | 29 % | | % priced with reference to TTF and NBP | 15 % | 16 % | 15 % | 16 % | 15 % | | Netbacks ($/boe) | | | | | | | Operating netback (11) | 78.42 | 72.57 | 36.17 | 70.20 | 29.30 | | Fund flows from operations ($/boe) (12) | 67.07 | 58.82 | 33.27 | 58.86 | 25.75 | | Operating expenses | 16.64 | 14.89 | 13.21 | 15.37 | 12.93 | | General and administration expenses | 1.90 | 2.04 | 1.56 | 1.93 | 1.53 | | Average reference prices | | | | | | | WTI (US $/bbl) | 91.56 | 108.41 | 70.56 | 98.09 | 64.82 | | Dated Brent (US $/bbl) | 100.85 | 113.78 | 73.47 | 105.35 | 67.73 | | AECO ($/mcf) | 4.16 | 7.24 | 3.60 | 5.38 | 3.28 | | TTF ($/mcf) | 75.56 | 38.08 | 20.65 | 51.64 | 13.27 | | Share information ('000s) | | | | | | | Shares outstanding - basic | 162,883 | 165,222 | 161,985 | 162,883 | 161,985 | | Shares outstanding - diluted (13) | 168,574 | 170,969 | 169,012 | 168,574 | 169,012 | | Weighted average shares outstanding - basic | 163,947 | 164,518 | 161,957 | 163,619 | 160,809 | | Weighted average shares outstanding - diluted (13) | 168,494 | 169,169 | 164,991 | 168,658 | 163,693 |
| (1) | Fund flows from operations (FFO) is a total of segments measure comparable to net earnings that is comprised of sales excluding royalties, transportation, operating, G&A, corporate income tax, PRRT, interest expense, realized loss on derivatives, realized foreign exchange gain (loss), and realized other income. The measure is used to assess the contribution of each business unit to Vermilion's ability to generate income necessary to pay dividends, repay debt, fund asset retirement obligations, and make capital investments. FFO does not have a standardized meaning under IFRS and therefore may not be comparable to similar measures provided by other issuers. More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (2) | Fund flows from operations per share (basic and diluted) are supplementary financial measures and are not a standardized financial measures under IFRS, and therefore may not be comparable to similar measures disclosed by other issuers. They are calculated using FFO (a total of segments measure) and basic/diluted shares outstanding. The measure is used to assess the contribution per share of each business unit. More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (3) | Free cash flow (FCF) is a non-GAAP financial measure comparable to cash flows from operating activities and is comprised of FFO less drilling and development and exploration and evaluation expenditures. More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (4) | Free cash flow per basic share is a non-GAAP supplementary financial measure and is not a standardized financial measure under IFRS and may not be comparable to similar measures disclosed by other issuers. It is calculated using FCF and basic shares outstanding. | | | | | (5) | Net debt is a capital management measure comparable to long-term debt and is comprised of long-term debt (excluding unrealized foreign exchange on swapped USD borrowings) plus adjusted working capital (defined as current assets less current liabilities, excluding current derivatives and current lease liabilities). More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (6) | Net debt to trailing FFO is a supplementary financial measure and is not a standardized financial measure under IFRS. It may not be comparable to similar measures disclosed by other issuers and is calculated using net debt (capital management measure) and FFO (total of segment measure). The measure is used to assess the ability to repay debt. Information in this document is included by reference; refer to the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (7) | Capital expenditures is a non-GAAP financial measure that is the sum of drilling and development costs and exploration and evaluation costs from the Consolidated Statements of Cash Flows. More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (8) | Please refer to Supplemental Table 4 "Production" of the accompanying Management's Discussion and Analysis for disclosure by product type. | | | | | (9) | Dividends % of FFO is a supplementary financial measure that is not standardized under IFRS and may not be comparable to similar measures disclosed by other issuers, calculated as dividends divided by FFO. The ratio is used by management as a metric to assess the cash distributed to shareholders. Reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (10) | Payout and payout % of FFO are a non-GAAP financial measure and a non-GAAP ratio respectively that are not standardized under IFRS and may not be comparable to similar measures disclosed by other issuers. Payout is comparable to dividends declared and is comprised of dividends declared plus drilling and development costs, exploration and evaluation costs, and asset retirement obligations settled, while the ratio is calculated as payout divided by FFO. More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (11) | Operating netback is a non-GAAP financial measure comparable to net earnings and is comprised of sales less royalties, operating expense, transportation costs, PRRT, and realized hedging gains and losses. More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (12) | Fund flows from operations per boe is a supplementary financial measure that is not standardized under IFRS and may not be comparable to similar measures disclosed by other issuers, calculated as FFO by boe production. Fund flows from operations per boe is used by management to assess the profitability of our business units and Vermilion as a whole. More information and a reconciliation to primary financial statement measures can be found in the "Non-GAAP and Other Specified Financial Measures" section of this document. | | | | | (13) | Diluted shares outstanding represent the sum of shares outstanding at the period end plus outstanding awards under the VIP, based on current estimates of future performance factors and forfeiture rates. | | | |
Message to Shareholders
Energy security and inflation have become focal points for many countries and citizens around the world, especially in Europe , where the energy security situation is a result of policy decisions over multiple years and has been exacerbated by the ongoing and unfortunate conflict in Ukraine . During the third quarter, European natural gas prices reached an all-time high in excess of $120 /mmbtu (TTF) in late August following various supply disruptions and growing concerns regarding Europe's ability to meet winter energy demand. Prior to 2022, Europe relied on Russia for approximately 40% of its gas supply, but Russian imports have significantly decreased in recent months as key infrastructure was taken off-line. Damage to the Nord Stream 1 gas pipeline in the Baltic Sea in late September removed approximately 6 Bcf/d of capacity, in addition to other supply losses throughout the year.
Despite various supply challenges, Europe managed to source enough gas over the summer months to essentially fill storage ahead of the winter heating season, albeit at very high prices and with less global competition due to lower LNG demand from Asia as a result of COVID lockdown policies in China . With storage essentially full, Europe is expected to have enough gas to meet demand this winter, assuming average weather conditions; however, refilling storage next year will be more difficult with Nord Stream 1 offline and Chinese demand potentially returning to pre-COVID levels. Looking further out, we expect Europe to become increasingly dependent on LNG to meet its natural gas needs, which will require direct competition with Asia , where LNG demand is expected to increase substantially over the coming decade. There is very limited new LNG supply coming online over the next few years, and new projects require significant capital underpinned by long-term contracts. Given this global LNG backdrop and the underlying supply and demand fundamentals in Europe , we expect LNG and European natural gas prices to remain elevated for the foreseeable future.
The prospect for higher energy costs and the resulting impact on European households and the economy has become a front and centre concern for all stakeholders in Europe . Over the past several months there have been various policy ideas debated on how to contain energy prices in Europe , ranging from voluntary demand reduction to price caps to windfall taxes. Vermilion has been actively engaged with government officials in the countries where we operate to identify opportunities where we can contribute to domestic gas needs. Vermilion has been operating in Europe for over 25 years and we are a reliable and responsible producer of indigenous natural gas in the region. We believe natural gas is an important energy source that should be produced locally where possible to ensure security of supply. Producing countries that provide predictable and reliable fiscal and regulatory frameworks can benefit from the direct and indirect employment, tax and royalty revenues, lower full-cycle emissions, and added energy security that comes with domestic production. With approximately 3.8 million net acres of undeveloped land in prospective basins across Europe , and the ability to accelerate drilling, we believe there is an opportunity to increase gas production with government support and the appropriate regulatory frameworks in place.
Late in the third quarter, the European Union ("EU") announced several proposals in an attempt to address high energy costs. One of the proposals, which was subsequently approved, is a temporary windfall tax measure aimed at EU companies with activities in the hydrocarbon sector. This windfall tax, which is referred to as a solidarity contribution in the EU regulation, is calculated as a percentage of earnings above a baseline level of 120% of the average of taxable earnings of a subject company between 2018 and 2021. Certain implementation details are the responsibility of EU Member States (countries), including the applicable tax rate (the EU regulation specifies a minimum rate of 33%) and whether this windfall tax will apply retroactively to 2022, prospectively to 2023, or to both 2022 and 2023. We do not believe a windfall tax is an appropriate solution as it will not incentivize new domestic supply nor reduce consumption, and it may ultimately result in higher natural gas prices in Europe . We are working with government officials in the countries where we operate to express our concerns and work collaboratively to achieve an equitable implementation under the relevant circumstances. Based on preliminary information currently available, we estimate Vermilion's exposure to the EU windfall tax could be in the range of $250 to $350 million for 2022. As the windfall tax legislation was not substantively enacted by September 30, 2022 and there is significant uncertainty on associated implementation details, no provisions for this measure are included in our Q3 2022 results.
Despite political headwinds during the quarter, we delivered another quarter with strong financial results. Q3 2022 production of 84,237 boe/d was in line with the prior quarter. Oil prices weakened in the third quarter, however European gas prices nearly doubled in Q3 2022 compared to the prior quarter which contributed to record quarterly FFO of $508 million , a 12% increase over the prior quarter. Capital spending increased to $184 million in the third quarter primarily related to the offshore Australia drilling campaign which was delayed from the previous quarter, resulting in FCF of $324 million . Pro forma Q3 2022 FFO and FCF incorporating the incremental 36.5% ownership in Corrib was $611 million and $426 million , respectively.
The majority of Q3 2022 free cash was allocated to debt reduction, with net debt decreasing by approximately 11% to $1.4 billion , representing a debt to trailing 12-month FFO ratio of 0.8x – the lowest level in over ten years. We have made significant debt reduction progress in 2022, which allowed us to increase the amount of capital returned to shareholders in the third quarter. Vermilion declared a quarterly cash dividend of $0.08 CDN per share in Q3 2022 which was paid on October 17, 2022 . This represented a 33% increase over the Q2 2022 dividend and aligns with our dividend policy of providing ratable increases while ensuring the annual dividend amount is sustainable at mid-cycle pricing. In addition, we repurchased 2.3 million shares under our NCIB for $72 million in Q3 2022, representing 14% of the 16 million shares approved for purchase under our current NCIB. Including dividends and share buybacks, we returned $85 million to shareholders in Q3 2022, representing 26% of Q3 2022 FCF.