Vermilion Energy (ticker: VET) held its Q3 conference call this week, elaborating on its temporary withdrawal from the Netherlands, share buybacks, basin potentials and budget assumptions.

Fund flows from operations (“FFO”) for Q3 2018 were $261 million ($1.71/basic share), an increase of 34% from the prior quarter (18% on a per share basis) driven by higher production volumes and higher commodity prices, partially offset by hedging losses.

Q3 2018 production increased by 19% from the prior quarter to 96,222 BOEPD.

To read the Q3 results for Vermilion, please refer to this link.

Vermilion Production up 19% to 96 MBOEPD

Source: Verilion Energy, Core Operating Areas

Excerpts from Vermilion Q&A

Canada and share buybacks

Q: Two questions. The first is just with respect to drilling activity in Canada. Can you comment on whether you’ve seen any fluctuations in how you plan to deploy capital in Canada over the course of 2019, just given recent weakness in differentials?

Do you still expect to have an upfront-weighted program in the first quarter as you’ve had in previous years?

The second is with respect to share buybacks. Just given the performance of the stock this year, if you’ve had any change in your view on share buybacks and the capital allocation decision-making process?

President and CEO Anthony W. Marino: Okay. Thanks very much for those questions. The first one in regard to “do differential changes affect our capital plan?”, as we have outlined in this release, they do not at the current levels. They did enter into where we decided to plan to deploy the capital for 2019. As an example of that, we have a very high quality—probably the highest quality Cardium light oil halo position in the industry.

Nonetheless, because the current ‘diffs’ are so wide for MSW or Edmonton Park crude, we decided to not drill any wells in the Cardium. So, it has affected the mix a little bit. The wells that we’re going to be drilling in Southeast Saskatchewan, the Condie wells in west-central Alberta, and the Powder River Basin wells all benefit from significantly better differentials in MSW.

LSB in Southeast Saskatchewan has moved to a significant – very significant premium to MSW, and although its diff has widened a little bit, it still leads to quite strong pricing and very, very high project returns because those wells are very productive and not very expensive.

So, if you were to end up in a really rapid and deep and protracted decline in commodities like perhaps you saw in mid-2014, we don’t expect this to be the case, but were it to occur, we would have the capability to significantly scale back on that capital program and just reduce the amount of growth that we’re reporting.

FFO for Q3 2018 were $261 million ($1.71/basic share) Click to Tweet

Stock and commodity

Q: Your stock is up quite sharply this morning about 5.2% in an otherwise pretty good day for oil and gas stocks. I haven’t heard any discussion as to anything particularly being disappointing in the results.

There was maybe some concern about Corrib declines being faster than expected or that the 2019 cash flow per share forecast in your corporate presentation was lower than people were expecting.

Is everything unchanged from past guidance or is, in fact, there some new news in this quarter that we actually haven’t discussed yet?

President and CEO Anthony W. Marino:  Hey, thank you for the question. I mean on each of those three points you raised, first of all, Corrib, we, first of all, attempted to be much more detailed in the disclosure of the future decline rates at Corrib based on numerical reservoir simulation.

I would point out for 2019 for Europe, we have on the order, I think, it’s 4% growth represented. We have our lowest reinvestment rate in our history in Europe that’s been coming down for the last three years. And next year, that reinvestment rate represents 29% of the cash flow from Europe. So, the asset grows, it cranks out about 70% free cash flow, and it actually generates more free cash flow than it ever has in the past because pricing is up and it’s a bigger regional set of units than we’ve had before. So, that is a quantitative illustration of how the perhaps minuscule differences in decline in Corrib do not have a very large impact on our overall results. And in fact, they continue to improve.

The second point on cash flow, we’ll have a couple of points there. I think the – probably the first one is that it’s quite a volatile period for the underlying commodities, but particularly I would say, for these Canadian differentials. And I’ll just remind you, as I talked about in the opening part of the call, we are very differential-advantaged versus the main Canadian products of WCS, the heavy oil blend that we don’t have any component of in our portfolio. And we have just a small component of the Cardium-based MSW or Edmonton Par like crudes. Our other crudes in Canada are very advantaged. Nonetheless, those differentials have widened. They’re kind of volatile at the moment. And as a result, I think these pricing differences are going to make comparability in forward projections of 2019 cash flow more difficult. And to compare back some of the sell-side estimates may become difficult until that volatility, I guess, is resolved.

On the initial point that you made in your question about the stock, we’re looking at it actually right here and that is up very significantly. Today, in a group that is largely up, that’s something that we don’t really understand. We felt that this was quite a strong quarter with very strong prospects going forward, including in the budget that we have just released for 2019. We think it’s a quite a low level of CapEx. It’s continued to produce growth. This is what our company is about, free cash flow generation. So, speaking for my own view of this market action, to me it does appear unwarranted and inexplicable and something that hopefully over time the market would remedy.

 

Netherlands withdrawals

Q: Could you give more color on the Netherlands drilling program? Looks like you’re doing two wells next year. What’s the permit status? And just talk to us about the plans to accelerate up to six wells or so by 2021?

President and CEO Anthony W. Marino: Thank you for that question. So, to start off in more general terms, this Netherlands question is one that seems to generate a long degree of focus and again, kind of inexplicably to us, given the diversification of our asset base and the amount of disclosure that we’ve attempted to make on it previously, the – we did not drill in 2018 but permitting system over the past year or couple of years has changed in the Netherlands and it had slowed down due to seismicity in the Groningen field in the northeastern part of the country. Now, we are not an owner in Groningen. It’s a very large field, very large withdrawals. And unfortunately, there have been earthquakes that have been associated with gas withdrawal there.

In our fields, some of which are good sized fields to us, but nonetheless everything outside of Groningen falls within what is called small fields policy in the Netherlands. We have, I think, overall similarly have been slowed down by that – by the knock-on effects from the seismicity in Groningen. And that is the reason ultimately that we did not drill in 2018.

So, the permitting system in the Netherlands has been clarified over time. We intend to drill two wells. I would say at least two wells in 2019.

There is a small amount of production I think that comes on perhaps late in the year associated with some of that drilling, but I believe it’s about 2% of our Netherlands production. And the Netherlands would make up about 8% of the company’s production. So, 2% of 8% would be the contribution from that 2019 drilling. Of course, it would be larger in later years, beginning in 2020 because they are – the productivities from these wells are good. And the Netherlands is, I think over the long term, going be a good growth business unit for us and one that generates a lot of free cash flow.

 

Basin potential and budget assumptions

Q: What percentage of your crude production for next year is using budget assumptions as exposed to MSW? It would be small?

President and CEO Anthony W. Marino: It is. It is 8% of the global, global oil production. And oil production is about half of our product mix. So, it’s about 4% of the BOEs and 8%…

Q: Just on the PRB. What kind of wellhead pricing are you getting on the PRB? And two, are you worried about egress because from what I’m hearing, EOG and Chesapeake have ramped up volumes and the outbound pipelines are completely full.

President and CEO Anthony W. Marino:  Yeah, the answer to your questions are, on the first one, our price at the wellhead, this is after transport, it’s minus 2.60 from WTI.

Q: Right.

President and CEO Anthony W. Marino: So, that’s a very good dividend in today’s world. Secondly, there may be – probably, given the quality of the Turner throughout the basin, a potential for some of the shale projects there, in addition to a few other stands, the apartment which will have some of the Shannon-Sussex, there is probably going to be a ramp-up in the Powder. It’s a good basin. However, it is, at least at present, overserved by the local refining. So, I don’t have a basin-wide forecast to compare to. But I think in comparison to the other basins, this one would probably have the best demand-supply characteristics.


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