Vermilion Energy Inc. Common (Canada)

Good morning, my name is Konstantin and I will be your conference operator today. At this time, I would like to welcome everyone to the Vermilion Energy fourth quarter 2024 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press star too. Thank you. I will now hand the call over to Mr. Dion Hatcher, President and CEO. You may now begin your conference.

Thank you, Faustine. Well, good morning, ladies and gentlemen. Thank you for joining us. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Glemster, Vice President, CFO, Darcy Kerwin, Vice President, International HSE, Brandon McQuaid, Vice President, North America, and Kyle Preston, Vice President of Investor Relations. We'll be referencing a PowerPoint presentation to discuss our 2024 full year, and Q4 results. This presentation can be found on our website under Invest With Us and Events and Presentations. Please refer to our advisory and forward-looking statements at the end of the presentation. It describes the forward-looking information, non-GAAP measures, and oil and gas firms used today, and outlines the risk factors and assumptions relevant to this discussion. Vermilion delivered a strong operational financial results in 2024. Production averaged 84,543 views today, which was above the midpoint of our original guidance and represents annual production per share growth of 4%. Our international production increased 12% year-over-year, reflecting strong operational runtimes in Australia and the mid-year startup of the gas plant on the SA-10 block in Croatia. Our North American production was down 5% year-over-year. This is reflecting the full-year impact from the 5,500 viewing per day divestments in southeast Saskatchewan that was completed in 2023. Now that was partially offset by the growth from our Montney asset following the startup of the new battery in Q2. We generated $1.2 billion or $7.63 per share of fund flow and $583 million or $3.69 per share of free cash flow, both representing a 9% increase over 2023 on a per share basis. We successfully executed a $623 million E&D capital program within budget. The capital program included significant investments in new growth projects in Germany, Croatia, and the B.C. Montney, which will all contribute strong free cash flow in future years. We've returned $216 million, or approximately 10% of our market cap, to our shareholders in 2024. That comprised $75 million in dividends and $141 million of share buybacks. In December, we announced an 8% increase to our quarterly dividend, effective Q1 2025. This represents our fourth consecutive increase since reinstating the dividend. Net debt decreased by 10% in 2024 to $967 million at the end of the year, representing a net debt to trailing fund flow ratio 0.8 times or the lowest ratio in over a decade. Included in our year-end release was an updated reserve estimate for 2024. Total approved plus probable reserves increased by 1% from the prior year, 435 million BOEs, primarily due to extensions and improved recovery on the mica-montane acid. We added 26 million BOEs of PDP reserves, 36 million BOEs of 2P reserves at an average FD&A cost, including future development costs of $22.81 per PDP BOE and $15.77 per 2P BOE. Now, this results in a recycle ratio of 1.6 times on a PDP basis and 2.3 times on a 2P basis. The 2024 FD&A figures include significant upfront capital costs associated with the early-stage growth projects, such as the mountain infrastructure, as well as Germany and Croatia exploration, from which limited reserves compared to our internal estimates have been recognized to date. Our PDP and 2P reserve life index as of December 31st, 2024 was 5.4 and 14.1 years respectively. Both of these are consistent with a long-term average. The after-tax net present value of our PDP reserves discounted at 10% is $2.8 billion. And the after-tax net present value of our 2P reserves discounted at 10% is $5.2 billion. That is over $27 per share after deducting year-end net debt. Production for the fourth quarter averaged 83,536 BUs per day, which includes the impact from planned third-party turnaround activity and partial shut-in of some Canadian gas in response to weak equal prices. We generated $263 million of fund folds, that's $1.70 per share, and $62 million of free cash flow, of which $36 million was returned to shareholders by the dividend and share buybacks. E&D capital increased in Q4 relative to Q3 as drilling activity picked up in Germany and Canada. Germany activity included the completion and testing of the successful second well and the commencement of drilling on the third exploration well that was originally scheduled for 2025. Net debt increased slightly due to the stronger U.S. dollar and the full repayment of the Montney battery lease. This provides immediate lease and interest savings as well as increasing our excess free cash flow that's available for shareholder returns in 2025 and beyond. As I mentioned, drilling and fleece activity picked up in Q4. In Europe, our primary focus was on the German deep gas exploration program, where we progressed facility construction and tie-in operations on their Osterheide well and completed testing operations on the Bissellhorst well, including testing on a second zone subsequent to the border. commenced drilling in the third deep gas exploration well in Germany, Weissenmoor, during Q4, and completed drilling it in Q1. I will provide more detail on the successful German exploration program in the following slides. We were also very active in North America during the fourth quarter. In Canada, we drilled six Montney liquid-rich gas wells, including five wells in the new 804 pad in BC and one land retention well in Alberta. The team continues to make progress towards achieving our $9 to $9.5 million decent cost target. In the deep basin, we drilled, completed, and brought on production five liquids-rich gas wells. In Saskatchewan, we drilled and completed six wells and brought on production seven oil wells. In the U.S., we participated in the drilling completions of five gross or 0.6 net non-op oil wells. In addition to executing a very active program in Canada, our team spent the better part of Q4 evaluating the Westberg acquisition, We were successful and announced on December 23rd. We are very, very excited about the results from our 2024 German Deep Gas Exploration Program. We have made significant gas discovery on our second gas well, Bissell Horse. Bissell Horse, which are 64% working interest. We tested two zones within this well at a combined restricted rate 41 million per day with flowing wellhead pressures of 6,200 PSI. We've got an estimated EOR of 68 BCF or 43 BCF net. As we announced in late December, this first test, the first zone tested at a restricted rate of 21 million a day of gas with a flowing wellhead pressure of 6,200 PSI. Substantive to year-end, we tested the second zone in this well, which flow tested at a restricted rate of 20 million a day with a similar pressure of 6,200 PSI. Based on our assessment, we believe the visceral structure is large enough to support an additional four to six follow-up locations. We expect to bring the first well on production in the first half of 26 and are advancing options to de-bottleneck our takeaway capacity in the second half of 27, sorry, first half of 27, given the very strong deliverability of this well. With successful development of these follow-up locations, as well as the additional prospects we've identified across our land base, We see the potential to double our current European 2P gas reserves. Substance to year-end, we also completed drilling operations on the Weisemore gas exploration well, which we are 100% working interest, and we discovered multiple hydrocarbon-bearing zones. This would mark our third discovery in Germany. The well is currently in the process of being tested. The first well in the German program, Osterheide, which is 100% working interest, was drilled in the first half of 24 and tested at a restricted rate of 17 million a day of gas with a flowing wellhead pressure of 4,600 psi. The well site gas facility is nearing completion, first gas expected in Q2. In aggregate, the Osterheide and Vistahorse wells tested at a combined rate of 56 million per day. This is equivalent to 50% of Vermilion's current European gas production. The success of our deep gas exploration program to date validates our technical models and our ability to achieve F&D costs of approximately $1 to $1.50 per MBTU with the potential to more than double our German production. It is early days in the development of this long-life, high-margin asset that is expected to add meaningful, free cash flow in the years ahead. Last week, we were very pleased to announce the closing of the Westbrook acquisitions. The strategic acquisition represents a significant step forward in Vermilion's North American High Grading Initiative to increase operational scale and enhance full cycle margins in the deep basin. As a reminder, the acquisition adds 50,000 views a day of production and over 770,000 net acres of contiguous land along with valuable infrastructure. We have identified over 700 net future drilling locations, providing a robust inventory to keep production flat for over 15 years. while generating significant free cash flow. As shown on the map on this slide, land and infrastructure is very complementary to Vermilion's legacy deep basin assets, which we expect to provide operational synergies and add further value over time. Since our first Spirit River, Allerslie, and Cardian wells, going back as far as 2009, Vermilion has drilled nearly 300 wells spanning the and we operate significant infrastructure in the deep basin. which we will leverage in developing these newly acquired locations. In addition, we were already a partner with Westbrook on approximately 140 of these locations, which speaks both to the operational synergies as well as our knowledge on the asset. These newly acquired locations are competitive with Vermillion's existing B-Basin inventory with half-cycle returns ranging from 40% to over 100% based on third-party reserve engineering estimates. We'll now like to hand over to Lars to discuss our balance sheet and e-leveraging plans along with our revised 2025 notebook.

Thank you, Dion. Vermillion has taken a prudent approach in balancing debt reduction, high grading our asset base, and returning capital to shareholders. We have reduced net debt by over $1 billion from 2020 while also reducing the share count over this time period. This prudent balance of capital allocation provided us the opportunity to complete the opportunistic acquisition of Westbrook with the balance sheet and minimal share issuance. Over the past three years, we have completed over $2.1 billion of acquisitions while continuing to reduce the share count and now have a plan to reduce our debt and leverage. Subsequent to the announced acquisition of Westbrook, we issued U.S. $400 million of senior unsecured notes with a maturity date of April 2033 and an interest rate of 7.25%. This extends our weighted average maturity of our debt to over five years and results in over $1 billion of liquidity. With the Westbrook acquisition now closed, Vermillion has net debt of approximately $2.1 billion today and anticipates about $200 million to $300 million of organic deleveraging in 2025 based on our current forecast, assuming no divestments. This leaves us with ample liquidity of approximately $1 billion. As part of the WestBurke acquisition, we also launched a process to divest non-core assets as another means to accelerate deleveraging while directing 60% of excess free cash flow to the balance sheet. As mentioned, our non-core Asset disposition program has been formally launched for our southeast Saskatchewan and Wyoming assets. The Saskatchewan assets include approximately 10,000 barrels a day of production, 85% liquids with moderate declines and multilateral development upside. Our Wyoming assets include 5,000 barrels a day, 80% liquids of production with multi-zone development potential, including the Niobrara and the Parkman. The interest to date on these packages has been very strong. These are high-quality assets with strong retention values that will be incorporated into the decision-making process on how to best maximize shareholder value. The potential sale of these assets would help accelerate Vermillion's deleveraging efforts as we remain committed to reducing our net debt to FFO ratio to a target range of one times or less. Going back to 2022, Vermilion has taken a concerted effort to build operational scale where we have a competitive advantage by increasing our ownership in the Irish core project, adding a material position in the Mica-Montney oil window, and making Vermilion one of the largest operators in the prolific deep basin. This has been complemented with organic investment into our onshore European gas portfolio, most recently in Germany and Croatia. The results of these efforts is increased operational scale with 80% of our production and 70% of our capital investment into our global gas portfolio and a reweight of our portfolio towards gas, where we see strong demand dynamics across the coming decades. The benefit of this global exposure is stronger realized prices than any of our peers, even when factoring in various marketing and diversification strategies. We have access to LNG-driven prices without the cost and risk exposure of liquefying and transporting gas across oceans. With elevated prices in Europe and multiple successes from our recent exploration program in Germany, including follow-up development, we expect to maintain our pricing advantage over the coming years. We also expect strong tailwinds for demand and pricing in Western Canada. where we now have a much larger production and project inventory base to take advantage of this positive trend. Within our Q4 2024 release, we provided updated 2025 capital budget and production guidance to incorporate the closing of the Westbrook acquisition on February 26, 2025. Annual production is expected to range between 125 to 130,000 BOEs a day, with E&D capital expenditures of $730 to $760 million. The revised capital program includes an additional 13 gross 12.3 net wells to be drilled on the Westbrook assets, bringing the total deep basin well count to 28 gross 24.9 net wells for 2025. The forecasted 50% increase in 2025 production coupled with efficient operations from an increased position in the deep basin is seen in our 2025 financial guidance, which includes a substantial reduction in our unit operating and G&A costs. We continue to monitor the tariff situation between the U.S. and Canada, which includes a 10% tariff on Canadian energy exports. Over half of Vermilion's revenue is derived from assets located outside of Canada and the vast majority of our Canadian gas production is sold within Canada. As such, we do not expect the tariffs in place today to have a material impact. Based on forward commodity prices, we forecast 2025 FCF of $400 million. The unhedged FFO per share is forecast to increase from $5.61 in 2024 to approximately $7.50 in 2025, an increase of over 30%. As you will note in our financial guidance table on the prior slide, our lease obligations are substantially lower in 2025 due to the fact we repaid the full Montney Battery lease obligation in Q4 of 2024, which had an interest cost well in excess of our most recent debt issuance. Our return on capital framework has continued to evolve, and we believe it provides the appropriate flexibility to effectively manage our business while providing shareholders with meaningful returns. As Dion mentioned, we announced our fourth consecutive dividend increase effective for Q1 2025. At $0.13 per share per quarter, our annual dividend obligations amount to approximately $80 million, or 7% of our forecast FFO. providing capacity to manage the dividend through various commodity cycles. For 2025, we will continue to target shareholder returns at 40% of EFCF, inclusive of the quarterly base dividend, with 60% of EFCF going towards debt reduction. The variable component of shareholder returns will continue to be allocated towards share buybacks. Since initiating the share buyback program in July 2022, Vermilion has repurchased and retired 17.8 million shares and reduced our outstanding share count to approximately 154 million shares, inclusive of the 1.1 million share issuance associated with the closing of the Westbrook acquisition. With that, I will now pass it back to Dion.