Vermilion Energy Inc. Common (Canada)

Good morning, ladies and gentlemen, and welcome to the Vermilion Q2 2026 conference call. At this time, all lines are in this lonely 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 girl for the operator. This call is being recorded on July 30, 2026. I would now like to turn the conference over to Dion Hatcher, President and CEO. Please go ahead.

Thank you. Good morning, ladies and gentlemen. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Glemser, Vice President and CFO, Darcy Kerwin, Vice President, International and HSE, Brandon McQuaig, Vice President, North America, Laura Conrad, Vice President, Business Development, and Travis Thorgeirson, Director of Investor Relations and Corporate Planning. Please refer to the 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 outlines the risk factors and assumptions relevant to this discussion. The second quarter of 2026 was another strong quarter for Vermillion, with production averaging 125,800 BUs per day, exceeding the top end of our guidance range. Positive results across our portfolio continue to support performance that is trending ahead of our five-year plan that we communicated during Investor Day in December of 2025. With this current performance in mind, and with significant progress in debt reduction, we have increased our return to capital target in a range of 40% to 60% of excess free cash flow, up from 40% previously. Production performance is driven by record output at Mike and Monty, continued strong execution in the Deep Basin, and the state's restart of production in Australia following the back-to-back cyclones earlier this year. Based on operational performance year-to-date, we have increased our full-year production guidance, now 121 to 123,000 V's per day, while maintaining our E&D capital budget range of $600 to $630 million. Our ED capital expenditures and operating expenses are weighted towards the second half of the year, and we expect full-year costs to be within the stated guidance ranges for these items. In the Montney, strong performance from the most recent BC 6-well pad at 835 drove quarterly production at mica up to 18,000 BUs per day. The pad achieved an IP90 of more than 950 BUs per day per well, comprised of 3 million a day of natural gas, Thank you. Thank you. Thank you for joining us. Devolonating the production with a new sales pipeline as well as building the next two wells on this license in 2027. Elsewhere, the Osterhag well continues to perform in line with prior quarter rates with cumulative free cash flow of $43 million since startup. We expect production growth in Germany to be driven by our deep gas exploration program reaching 10,000 views per day by 2030 and given the significant resource, continue to grow into the next decade. Also in Germany, we closed a previously announced full-time acquisition following quarter-end. The transaction adds approximately 1,000 views per day of production, equating 85% to natural gas, as well as ownership of key infrastructure around the ostride well. Adding production from resource, these acquired assets are particularly impactful with the recent rally in European gas prices, currently over $25 per MMVTU through winter 2026. Averyl Schraven, Larissa Marianne Conrad, Tamar Epstein Thank you for joining us. Thank you, Dion. In the second quarter, Vermillion generated fund flows from operations of $231 million.

on E&D capital expenditures of $110 million, resulting in free cash flow of over $120 million. Capital allocation remains focused on disciplined investment, continued balance sheet improvement, and shareholder returns. During the quarter, net debt was reduced by approximately $70 million to $1.22 billion. As of June 30, 2026, net debt to trailing four-quarter fund flows from operations was 1.3 times. Over the past five quarters Vermillion has reduced debt by approximately $840 million, accelerating progress toward our $1 billion net debt target and significantly strengthening the balance sheet. This continued deleveraging has also reduced structural financing costs, with unit interest expense declining approximately 35% from the prior year, and we are on track to reduce full year interest expense by $30 million from 2025. Reflecting this progress, as well as improved visibility to future cash flow and confidence in the sustainability of the business, we have enhanced our return to capital framework. Vermillion now intends to return 40% to 60% of excess free cash flow to shareholders compared to the previous target of 40%. This framework continues to be supported by our base dividend and ongoing share repurchase program. Subsequent to the quarter, we announced the renewal of our NCIB out to July 2027. During the quarter, we returned approximately $26 million to shareholders through dividends of $21 million and $5 million of share repurchases. With the increased return of capital target, we expect the pace of share buybacks to increase. Turning to commodity risk management, Vermillion recognized a gain on hedging during the quarter As a realized loss of $57 million was more than offset by unrealized mark-to-market gains of $174 million on our hedge portfolio. These unrealized gains reflect changes in forward commodity prices relative to our hedge position at March 31, 2026. Our percentage of production hedged will decrease in the second half of 2026 relative to the second quarter levels, which increases our exposure to current elevated commodity prices. Operationally, Canadian production averaged 99,605 BUE per day during the quarter, which included record production from mica. We continued to actively manage eco-exposure and prioritize profitability over production during periods of weaker natural gas pricing. We maintained strong well performance and continued to shift deep basin activity toward liquids-rich opportunities in the Rock Creek, Knighton, and Ellerslie. Several of our wells in Canada, in both the Deep Basin and Maunee, ranked among the most prolific wells brought online during the quarter. In Europe, in addition to our work getting Vissil Horse online and preparing for follow-up drilling, our activity this quarter focused on workovers, maintenance programs, and preparation for drilling activities in the Netherlands during the second half of 2026. These activities, together with production from Vissil Horse and Osterhuis, support the continued development of our European Gas Platform. Looking ahead, we expect third quarter production to average between 116,000 and 118,000 BOE per day, reflecting planned maintenance activities in Ireland, Germany, and Canada. This is consistent with our assumptions at the time of the budget release. We expect Q4 production to be approximately 122,000 BOE per day With European gas production back in line with first half levels. For the full year, production guidance has been increased to 121,000 to 123,000 VOE per day, while E&D capital expenditure guidance remains unchanged at $600 million to $630 million. Both operating expenses and capital expenditures are expected to be weighted toward the second half of the year, as Dion previously noted. The increased production guidance reflects our strong operational performance year-to-date, which has more than offset the impact of back-to-back cyclones in Australia earlier this year. We are confident in the ability of the company to continue to deliver on our investor day outlook. I will now pass it back to Dion.

Thank you, Lars. In summary, Vermillion delivered another strong quarter and made significant progress executing our five-year plan. Production exceeded the top end of our guidance range, free cash flow totaled $122 million, and net debt was reduced by another $70 million. These results reflect the strength of our asset base, the quality of our teams, and our disciplined approach to capital allocation. Sermillion continues to focus on what we can control. As a result, we're seeing structural improvements in the business, stronger capital efficiency, improving wealth performance, lower controllable costs, Averyl Schraven, Darcy Kerwin, Larissa Marianne Conrad, Tamar Epstein As leverage declines and visibility in growing free cash flow continues to improve, we are increasing our shareholder return framework to target 40% to 60% of excess free cash flow. Looking forward, operational momentum remains strong. Product performance for the first half of 26 has allowed us to increase annual guidance without increasing capital spending. Supported by a repositioned portfolio, growing European gas exposure, a strengthening balance sheet, and a dismal capital allocation framework, We believe Vermillion is well positioned to continue generating sustainable free cash flow and shareholder value. With that, we want to open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, Please press the star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Neno Hulsvoth with TD Cohen. Please go ahead, Neno.

Thanks, and good morning, everyone. I'll start with the question on the higher-level operational setup for the middle of next year. You did touch on this to some degree here. Opening remarks. I understand that you can't provide guidance for 2027, but beyond turnarounds this quarter, is there any significant downtime or other considerations we should be aware of between now and the middle of next year? And then what could the, I think you did guide Q4, but what could the exit rate look like for this year?

Great. Benno, thanks for that. A couple comments. To your point, I think the turnarounds that we're planning for and it Averyl Schraven Averyl Schraven Lars referenced this, you know, we're back to 122 or better. If you reference back to European gas, what does that mean for our business? The first half we were 95 to 100 million a day. Again, hopefully we're on the higher end of that range as we exit this year. So we'll get these turnarounds behind us and I think have a strong Q4 and that really is a good setup going into 2027.

Terrific. And then the second question is on the Germany drilling program. Can you maybe just remind us of how you manage the risk on these larger wells, including the two that will get drilled next year? I understand there is the farm down component, but maybe you could just remind us of the broader risk mitigation strategy and maybe also the math on the out-of-pocket cost per million in the event of a dry hole, because if I recall, it's significantly lower than the actual well cost. Thank you.

Thanks for all that. Yeah, a lot of good questions there. So first of all, I think, you know, it comes down to the, I think, the quality of the team and the G&G and the science and the decades that we have, multiple decades of working on these structures in Europe, this particular formation, the Rottliegen, again, it's something we've been drilling for decades. Second, I would say we're in a proven fairway. You know, when you look at some of those maps where we're drilling these structures, Averyl Schraven, Larissa Marianne Conrad, Tamar Epstein Thank you for watching. If you assume gas prices are $13, and of course, they're more than double that now, but if at $13, the FDD per well is $60 million, right? And you can see it with ostracite. Like, it's been on for a year, and it's gained over $40 million of free cash flow, and the well hasn't started to decline yet. So, the success case, I think, is pretty, hopefully, straightforward. The failure case is, you know, we drill the well, we don't like what we see, we get off of the well, it's less than 15 million bucks. Okay, so the $50 million is the all-in success case. The dry-oil case, let's call it, is sub-15, so 1-5. The final point is commercially. You know, when we drilled this, of course, we knew that it was a very large structure, but also we viewed that one as a little more higher risk, but it was big. And so commercially, we did use a farm-in to Averyl Schraven Hey, we're looking for big targets in the area where big gas has been found. We've got a team that's been doing this for decades. We've done all the technology and reprocessed seismic, and then the failure case is sub-15, and then commercially, we can further mitigate that failure case with a promoter, Carly.

Thanks for the rundown, Dion. I'll pass it back.

Thank you. Your next question comes from Greg Carty with RBC Capital Markets. Please go ahead, Greg.

Yeah, thanks. Good morning. I wanted to say, just maybe on the back of Minnow's question, maybe just to stay with Germany for a minute. And just in terms of the next two exploration wells that you have planned for the next year, I'm just wondering how far away those might be from and then in addition to that maybe just any potential deep bottlenecking opportunities that you would have in that area maybe just increased rates and what's required to accomplish that.

Thanks Greg for those questions. I'm going to pass it over to Darcy and just talk about the location of the next two visceral horse wells and some of the steps as noted for the deep bottlenecking of the gas.

Great, thanks for that. To answer your first question, those next two wells are located on a common path, so they'll be drilled together on one path. That location is kind of between one and two kilometers away from the original fissile source discovery well as the crow flies. In terms of de-bottlenecking the first fissile source well that we brought online, we are In the process of permitting, acquiring land to build a new sales pipeline for that well, we expect that that pipeline be online, ready for service towards the end of next year. And then we do for the next two new wells, you'll have a plan for an initial gas plant on that one site to capture their production. We have the opportunity to twin that gas plant on that site if we have strong results there. And then that sales pipeline that we're building for Bissell Source 1 will also be the sales point for the next two wells of Bissell Source. So lots of opportunity to de-bottleneck that area kind of next year with this sales pipeline and then hopefully a new gas plant for those next two wells in a success case.

Thanks Darcy. So summarized there, that sales line, it's a 12-inch piece of pipe. I think all the materials ordered. We're going to start construction here early next year. And as Darcy noted, that will allow us to open that wall up and get it up to that full 16, 17 million a day design rate. And further on that is this 20-mil B infrastructure that Darcy mentioned. In fact, you're able to double to go from 17 to 34 million a day. Thank you for your time.

Thank you for joining us.

I think he was emphasizing is, you know, these targets are two and a half to three times bigger than what we were targeting before. But, Darcy, do you want to build on that?

Yeah, sure. Thank you. In the Netherlands, I think if you look back into the last ten years, as you said, the projects we were drilling were getting smaller. That was really driven by an effort from the permitting side to stay drilling on existing leases in existing areas. And we've We've been continuously pursuing drilling locations outside of those areas to access some of these bigger pools and the drilling that we have planned for later this year as well as next year is on the back of that where we are stepping out a little bit further from our existing operations and able to access bigger pools again in that area. Permitting for wells, the wells that we have planned this year, currently in hand, we're ready to go once we have the rig available. Towards the end of September, then wells for 27 and 28 are in the midst of permitting. We have everything kind of in hand to prove wells in 27 and onward into 28 in these bigger pools.

That team's done great work, again, on the fronting, but also the technical side, building on Darcy's comments to bring these larger structures forward. We're quite excited to allocate capital there.

Got it. All right. Thank you very much, both of you.

Great. Thanks, Greg.

As a reminder, if you wish to ask a question, please press star 1. Your next question comes from Dennis Song with CIBC WM. Please go ahead.

Hi, good morning, and thanks for taking my questions. Sorry to keep focusing on Germany here. Obviously, a lot of exciting things there. I was hoping to dig into the recent concessions that you've been awarded, and how specifically you're thinking about balancing, we'll call it, step-outs or follow-up drilling, like things that you're doing at the Baumelson License. Thank you for that, Dennis. I can give you a good summary there.

This will work, but also test some of those additional six structures in the upcoming years. To build on that, deals like the one we closed, but also the new concessions, another half line at Acres, the team will do, let's call it more of that study, G&G work, relatively low cost, pulling a lot of data, but we'll spend the next two or three years really defining the prospectivity, maturing prospectivity, Averyl Schraven, Larissa Marianne Right now, it's a lot of land in the fairway that we like. We spent a year or two just doing the G&G work to mature what we expect to be some prospects on that, but it's just really building on that decade that we've got in front of us. So, you're going to see us test some new structures in the upcoming years, as well as develop the vessel horse.

Okay, great. I appreciate that color and context there, Dionne. My next question focuses a little bit more on the balance sheet and allocation of free cash allocation to shareholders. So obviously you continue to deliver and this is kind of a nice bump up in terms of directing 40% to 60% of excess free cash towards shareholder returns. Can you talk towards kind of what kind of drives you to maybe a 40% versus a 60%? Is that more commodity or kind of value that you see in the shares? And then how do you think about the confidence that you build in terms of allocating more and more free cash to shareholders, especially just given as you improved obviously depth of inventory across the asset base and then continue to execute across the various assets, whether it be in Canada or in Europe or Australia? Larry can't wait to answer that question.

We're going to pass it over to him. Great. Yeah. No, thanks, Dennis. And I'll just try to give a little bit of context in terms of how we arrived at the decision to move to 40% to 60%. So maybe two key data points that we look at. Obviously, the first one is just the status of the business today in terms of where we've taken the balance sheet, the quality of inventory. But maybe what I'll spend a bit more time on is just the rate of change of how we've gotten here. And so I made the comments in my remarks. We've reduced net debt by $840 million over the past 15 months. So a lot of progress there made in a short period of time. And you think back to 15 months as well, we had just closed the Westbrook acquisition, consolidated into a 1.2 million acre deep basin position. We still had some infrastructure spend in the Montney to execute on, some key pads to deliver on as well. and we were still trying to quantify what we had in Germany and so you fast forward 15 months to the end of the second quarter here and I think a lot of boxes have been checked and in a very short period of time so those are the type of things that we want to look at it's sort of structurally are we executing on the plan within the business as we look back we said you know what we are more comfortable increasing that return of capital You'll recall when we did the Westbrook acquisition, we reduced or temporarily reduced the return of capital from 50% to 40%. So with those losses checked, happy to move to the 40% to 60%. Now, one thing that we are going to continue to maintain here is flexibility within that 40% to 60%. And so you think back to the second quarter here, lots of volatility, whether it was commodity price-wise, share price-wise, So we want to maintain flexibility in terms of how we allocate capital over the longer term. But with this announcement today, we are looking to increase what we're allocating to shareholder returns. And then maybe just the last point I'll make, Dennis, if you go back to the investor day last December, we laid out a framework of what we wanted to achieve here over the five-year plan in terms of end of 2030. I think we are well into that plan, delivering on that plan. We've been able to increase our guidance here in 2026 on the production side, maintain the capital as well. And so we are looking at this from a long-term perspective in terms of allocating that capital. Maybe just lastly, you asked about Australia as well in terms of how we think about allocating capital. We continue to evaluate the prospect of drilling in Australia in 2027. with where oil prices are. We are leaning towards that being the right decision. So as we foreshadowed in our investor data, that would push capital for 2027 into that $700 million range, something that will manage within this framework. So anyways, I'll maybe stop there, Dennis, just to see if there's any follow-up.

Yeah, just appreciate that color there, Lars. I guess the Averyl Schraven, Larissa Marianne Conrad, Tamar Epstein There's going to be a balance in terms of where you want to really kind of drive down net debt even further because for whatever reason on a go-forward basis.

Yeah, no, I think you framed it very appropriately there. So as we get into the second half of 2027 and then sort of let's call it the later three years of the five-year plan that we laid out, Capital comes back into that $600 to $630 million range as the business grows towards that 130,000 barrels a day. And so the reason that we are able to keep capital within that range, grow production, are for the reasons that you referenced there. Monty infrastructure spend starts to come down. We start to get some gas behind pipe in Germany online. We get the Australia drill behind us as well. And so those will be the type of things that we look at. And I think with the flexibility we have in the framework now, we don't necessarily need to wait for those inflection points to buy back shares. If we want to be a bit more aggressive leading up to that, we have the capability within the framework here. The vice versa is also true in terms of targeting within that 40% to 60%.

Maybe just to build on Larissa's comments there, because Larissa sort of presented a slide that's in our deck that shows, you know, how that $1.7 billion of excess free cash flow tends to be allocated over that five-year time frame. And if you look at that plot, you know, it shows the net debt getting down midpoint around $750 million. It shows the dividend, of course, lots of runway there. And then on share buybacks, we showed a range, but share cap was coming down about 30%. Now that, of course, would have been based on a $12 stock price, but that was based on $70 oil. That was based on $13 TTF. So it summarizes Lars' points there as the business fundamentals continue to improve. It's a return of capital. There's more free cash on the system. We're looking forward to returning more of that. And again, I think the IR Day five-year plan is a good summary of what this business can deliver at reasonable commodity prices, i.e. $70 oil. It's a big number, $1.7 billion of accessory cash over five years. Great.

I appreciate the call of both of you.

I'll turn it back. Thanks, Dennis.

There are no further questions at this time. I will now turn the call over to Dion Hatcher for closing remarks. Please continue.

Thank you again for participating in our Q2 conference call. Enjoy the rest of your day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.