Vermilion Energy Inc. Common (Canada)

Good morning, ladies and gentlemen. Welcome to the Vermilion Energy Q2 2025 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, August 8, 2025. I would now like to call over to Mr. Dion Hatcher. Please go ahead.

Thank you, Kelsey. Good morning, ladies and gentlemen.

I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Glemster, Vice President and CFO, Darcy Kerwin, Vice President International and HSE, Randy McQuaid, Vice President North America, Laura Conrad, Vice President Business Development, and Kyle Preston, Vice President of Investor Relations. Please refer to our advisory and forward-looking statements in our Q2 release. It describes forward-looking information, non-GAAP measures, and oil and gas terms used today, and it outlines the risk factors and assumptions relevant to this discussion. Vermillion delivered strong second quarter results. Production for Q2 averaged 136,000 VUEs per day, representing a 32% increase for the prior quarter, mainly due to a full quarter contribution from the Westbrook acquisition that closed in February. Subsequent to the second quarter, we closed both of the previously announced Saskatchewan and U.S. asset sales for a combined gross proceeds of $535 million, which has been allocated to debt reduction. These divestments were a key component of Vermillion's broader strategic transition towards becoming a global gas producer, enabling us to enhance operational scale and long-duration assets and better position the company for sustainable, profitable growth. Vermillion now has a production base of approximately 120,000 views per day, 70% weighted to natural gas, with over 90% of our production coming from our global gas assets, which include liquids rich in gas in Canada and high net back gas in Europe. We expect over 80% of our future capital investment will be directed toward these global gas assets, which will be the primary growth drivers within our portfolio. We generated $260 million of fund flows from operations and $144 million of free cash flow in Q2 after deducting E&D capital expenditures. Capital expenditures were down from the previous quarter due to the seasonality of drilling activity in Western Canada and a deferral of some E&D capital associated with the Saskatchewan and U.S. assets. Activity during Q2 was focused on our global gas assets in the Micah Montney, Alberta Deep Basin, and Germany. At Micah, Vermillion completed five and brought on production in 11 liquids-rich Montney wells. Montney production averaged approximately 15,000 views per day in Q2. which includes production from new wells and increased takeaway capacity from the operated infrastructure expansion that was completed earlier this year. Production from our two most recent pads continues to be in line with our expectations. Our operations teams are always focused on continuous improvement, and through these efforts, we're able to achieve a new cost benchmark for Vermont new wells, with our drilling completions, equipment tie-in costs coming in at approximately $8.5 million per well for the two most recent pads. These cost reductions are mainly driven by reduced trucking due to our water infrastructure, reduced tester costs due to optimized flow back, and lower drilling costs due to faster drill times. This is a reduction of a half million dollars per well from our prior target and over one million dollars per well compared to just one year ago. We are confident we can turn our new cost benchmark of $8.5 million per well into our program average, which will reduce future development costs and improve full-select returns on our Montney development. With the second expansion phase that Mike can now complete, our Montney team is now planning for the third and final expansion phase. We plan to invest approximately $100 million in the additional infrastructure and gathering pipelines over the next few years, along with drilling another 40 wells over this time frame to reach our targeted production rate of 28,000 BUs per day by 2028. Once we get to this level, we anticipate drilling approximately 8 wells per year to maintain this production level for over 15 years, which translates to generating approximately $125 to $150 million of annual free cash flow, assuming a price of $70 WTI and $3 ACO. In the Deep Basin, we executed a one-rig program during the quarter and drilled four, completed three, and brought on production three liquid-rich wells. We plan to add two rigs and execute a three-rig program during the second half of 2025 as we ramp up activity heading into the winter. We are very pleased with how the integration of the WestBrig assets has unfolded, and we continue to identify further upside, including improving up new locations, reducing our service costs, and processing costs. As a result, in Q2, the first full quarter of operating these new assets, the team has identified another $100 million of synergies. That now brings the total to date to over $200 million on an MPP 10 basis of synergies post-acquisition. This clearly demonstrates the benefits of our dominant continuous land base in the deep basin and our continued focus on enhancing profitability. Following the divestment of our Saskatchewan and U.S. assets and the continued integration of the Westbrook acquisition, we have taken additional steps to further streamline the business by reorganizing our Canadian business unit. This has led to dedicated technical and corporate teams concentrating exclusively on our liquids-rich assets in the Deep Basin and the Monty. In Germany, we drilled, completed, and brought on production two oil wells. These high-return wells have initial rates in the 100 to 200 barrels of oil per day range but they represent low-risk waterfowl development opportunities in Germany. Facility and tie-in activity on the Osserheide deep gas well was completed at the end of Q1, and the well averaged approximately 1,100 buoys per day in Q2, which is above our original constrained expectations due to stronger than anticipated seasonal demand. We continue to advance the permitting and infrastructure expansion plans for the first Bissell Horse well, which remains on schedule for tie-in and start-up during the first half of 26. The team continues to work on the full field development plans for our deep gas prospects in Germany, where we are excited about the long-term growth potential from this asset. These prolific wells, combined with strong European gas prices, currently over $15 per mm BTU, will translate to significant free cash flow for a million in the future. In addition to the organic development in Germany, we will continue to evaluate opportunities in our core European operations.