Vermilion Energy Inc. ("Vermilion", "We", "Our", "Us" or the "Company") (TSX, NYSE: VET) is pleased to report operating and unaudited financial results for the three months ended March 31, 2017.
The unaudited financial statements and management discussion and analysis for the three months ended March 31, 2017, 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.
Q1 2017 Review
Vermilion's first quarter production increased by 6% to 64,537 boe/d from 60,863 boe/d in the prior quarter. This increase was primarily attributable to higher volumes in Canada related to the resumption of voluntarily curtailed production and organic growth from development activities, as well as incremental volumes from our German acquisition which closed near the end of last year. We expect production volumes to continue increasing throughout 2017 with production volumes averaging between 69,000 to 70,000 boe/d for the year.
Fund flows from operations ("FFO") for Q1 2017 was $143.4 million ($1.21/basic share(1)) as compared to $149.6 million ($1.27/basic share) in Q4 2016. This 4% decrease in FFO quarter-over-quarter is primarily attributable to a significant inventory build in France and Australia related to shipment timing. The pre-tax FFO impact of the quarter-over-quarter change in inventory levels was approximately $15.5 million. Based on anticipated shipment schedules, we expect that this inventory build will reverse over the course of the year, unwinding the FFO impact. Year-over-year, FFO increased by 53% as compared to Q1 2016 as a result of significantly higher commodity prices. Vermilion generated net earnings of $44.5 million ($0.38/basic share) during the first quarter, representing a return to positive net income for the first time since Q2 2015.
While commodity prices have increased from the lows experienced in 2016, we continue to maintain our strict focus on cost management. Per-unit operating expense of $9.35 per boe decreased by 11% during Q1 2017 as compared to the prior quarter and by 2% as compared to the year-earlier quarter.
During the quarter, we issued US$300 million of eight-year senior unsecured notes at a coupon of 5.625% per annum. This issuance was completed by way of a private offering and represented Vermilion's first issuance in the US debt markets. Despite Vermilion's first-time issuer status, we were able to secure a very attractive interest rate, reflecting our track record of prudent fiscal management. The issuance of US dollar denominated debt provides a natural hedge against our largely US dollar denominated revenue streams. Subsequent to the quarter, we negotiated an extension of our credit facility with our banking syndicate to May 2021. As a result of our projected liquidity requirements and the proceeds from this debt issuance, we elected to reduce our bank facility to $1.4 billion from $2.0 billion.
Effective with the April 2017 dividend payment, the allowable participation in the Premium DividendTM Component of our Premium DividendTM and Dividend Reinvestment Plan is now being prorated by 75%. As such, eligible shareholders who have elected to participate in the Premium DividendTM Component now receive a 1.5% premium on 25% of their participating shares, and the regular cash dividend on the remaining 75% of their shares. We plan to discontinue the Premium DividendTM Component of our Premium DividendTM and Dividend Reinvestment Plan beginning with the July 2017 dividend payment, such that there would be no further equity issuance under this program. We also reduced the discount associated with the traditional component of our Premium DividendTM and Dividend Reinvestment Plan from 3% to 2% beginning with the January 2017 dividend.
Production from Corrib averaged 64.8 mmcf/d (10,803 boe/d) in Q1 2017, representing 100% of rated plant capacity. The project has continued to outperform expectations for well deliverability and downtime. Due to expected higher recovery efficiency resulting from better well-to-well communication, we have adjusted our field and well performance estimates, and now expect to maintain peak production plateau through Q1 2018 and potentially into Q2 2018. Corrib is a highly efficient generator of free cash flow as a result of its highly-valued European gas product, absence of royalties, low operating expense, and low maintenance capital requirements.
In France, we drilled and completed our first wells in the Neocomian fields during Q1 2017. Initial results from this four (4.0 net) horizontal well program are highly encouraging. The first well was placed on production in early March and delivered an IP30 rate of 250 bbls/d versus our type curve expectations of 110 bbls/d. The second well, which only has a completed horizontal section of 40% of the anticipated length due to drilling problems, was placed on production in late March at a rate of approximately 50 bbls/d at low drawdown during the initial production phase. The production rate from this well is expected to increase as pump displacement and drawdown are turned up over time. The remaining two wells have now been successfully drilled and cased with slotted liner through the full horizontal section targeted. Reservoir quality indications from these two wells were positive, and we expect to have them on production during the second quarter. During the first quarter, we also completed and placed on production the four (4.0 net) Champotran wells we drilled in France in Q4 2016. All wells are productive, with two exceeding expectations, and two below. The combined IP30 oil rate from the four wells was 550 bbls/d. Lastly, we drilled and placed a Vulaines horizontal sidetrack well on production during the quarter. The well delivered an IP30 rate of 90 bbls/d prior to finishing the completion by acidizing the horizontal lateral. Our ability to successfully execute a sidetracked horizontal lateral in Vulaines creates the opportunity for higher productivity multi-lateral horizontal development from existing wellbores.
As noted previously, permitting delays in the Netherlands have resulted in a reallocation of capital and production targets amongst business units. Due to the delays in receiving final production permits for three of our wells, two wells are now producing at significantly restricted rates and a third well has been shut-in. While we believe the final production permits for one of the wells will be received in 2017, we do not currently expect to receive the permits for the other two wells until 2018. As such, we have reduced our full year 2017 average production forecast for the Netherlands to approximately 6,500 boe/d. This compares to our initial 2017 Netherlands production plan of 9,400 boe/d which reflected our prior permitting timeline assumptions. We intend to offset lower Netherlands volumes through increased production in other jurisdictions, primarily Canada and Australia, and have made no changes to our 2017 guidance targets for consolidated production or E&D capital. In the Netherlands, two (1.0 net) wells that were in our original budget have been postponed and we have deferred the completion activities for the remaining two (1.0 net) exploration wells that we intend to drill this year to 2018. In addition, we have reduced the scope of our planned seismic program in the Akkrum exploration concession. Further information on these changes is included in our May 2017 investor presentation available on our website. We expect the curtailed Netherlands volumes to be available for production during 2018.
In Germany, Vermilion assumed operatorship of the assets acquired near the end of 2016 from Engie E&P Deutschland GmbH. Production from the acquired assets averaged approximately 2,000 boe/d during the quarter. Vermilion commenced service rig operations on the acquired assets in February, and we have developed a work plan to implement identified optimization and workover projects. In March 2017, we were awarded an exploration license in Lower Saxony comprising 150,000 gross acres (50,000 acres net to Vermilion) surrounding the acquired oil fields. The Engie acquisition, our assumption of production operatorship and the additional exploration acreage further advance our objective of developing a material business unit in Germany.
In Canada, capital activity increased significantly during the first quarter as compared to Q1 of the prior year. During Q1 2017, we drilled or participated in seven (5.1 net) Mannville wells, five (5.0 net) Cardium wells and 10 (8.3 net) Midale wells. Eleven (7.1 net) Mannville wells, two (2.0 net) Cardium wells and eight (7.0 net) Midale wells were brought on production. Individual well results from our Q1 2017 Mannville program exceeded our expectations with the majority displaying test productivity significantly above our average well performance to-date. Lower Mannville wells tested during the quarter(2) include one well that tested at 8.0 mmcf/d with 190 bbls/d of free liquids, and a second well at 2.8 mmcf/d with 535 bbls/d of free liquids. Based on early stage production results, oil rates from our Cardium and Midale wells are in-line with expectations while cost efficiencies continue to improve. Cardium Drill, Complete, Equip and Tie-in (DCET) well costs averaged $2.3 million on a per-section basis for Q1 2017 as compared to $3.2 million during our last program in 2014. Per well costs for our Midale play decreased to $1.7 million during Q1 2017 from $3.0 million in 2014. These improvements largely resulted from an approximately 30% decrease in required drilling days achieved during the quarter as compared to the start in the Midale play in 2014. The last five wells at the end of the Q1 2017 program achieved a further 25% reduction in drilling days. During Q1, we also continued to advance an infrastructure project supporting the continued growth of our Upper Mannville development in the Ferrier area. We plan to start the construction of a 14 mmcf/d compressor station in Q4 2017 with start-up scheduled for Q2 2018.
In the United States, we drilled three (3.0 net) wells in our early stage Turner Sand play during the quarter. The Q1 2017 program was designed to establish consistent drilling and completion procedures while reducing drilling times and overall capital costs. Drilling times were reduced to 12 days from the previous 18 day average despite an approximately 20% increase in average lateral length. Based on currently available data, while recognizing that some additional completion costs may still be incurred on the new wells, we project that the per well drilling and completion capital cost was reduced by approximately 25% from the previous program. Two of the three wells have been completed and were placed on production in late March, while the third well is expected to be on production by late April. The first two wells have been produced intermittently so far, with initial production performance that is comparable to the better wells drilled thus far in our East Finn project area. During Q1 2017, we purchased overriding royalty interests on our lands (ranging from 0.83% to 5%) for US$1.5 million, further consolidating our position and enhancing our play economics.
Activities in Australia were largely centered around our debottlenecking project to further improve fluid handling capability on the Wandoo B platform. Once completed, we expect that this infrastructure enhancement will allow us to increase oil production on the platform by 600 to 700 bbls/d later in 2017. The two sidetrack wells we drilled in Q2 2016 continue to exhibit strong productive capability. When utilized, combined oil production from these wells was approximately 4,000 bbls/d during Q1 2017. These wells are produced intermittently to achieve business unit targets and meet oil sales contract commitments. We do not expect to drill additional wells in Australia until 2019.
Environmental, Social & Governance
Vermilion was recently ranked 13th by Corporate Knights on the Future 40 Responsible Corporate Leaders in Canada list. This marks the fourth year in a row that Vermilion has been recognized by Corporate Knights as one of Canada's top sustainability performers. Vermilion continues to be the highest rated oil and gas company on the list. This recognition reflects our strong focus on sustainability, transparency and performance regarding environmental, social and governance issues.
Board of Directors
Vermilion recently announced that Mr. William Roby will be appointed to the Board of Directors effective April 26, 2017. Mr. Roby brings 33 years of experience in various senior management and executive positions primarily from a number of US and international management positions with Occidental Petroleum Corporation from 1997 to 2013, most recently as Senior Vice President, Worldwide Operations and Production/Facility Engineering. From 2013 to 2014, he acted as Chief Operating Officer of Sheridan Production Company, LLC, a Houston based oil and gas company. Mr. Roby holds a Bachelor of Mechanical Engineering degree from Louisiana State University.
In addition, Mr. Claudio Ghersinich has advised that he will not be standing for re-election to Vermilion's Board in 2017. Mr. Ghersinich has been a director of Vermilion since 1994. He was one of the three co-founders of Vermilion and served most recently as Executive Vice President, Business Development from 2005 to 2008. Mr. Ghersinich was a key contributor to Vermilion's success, and on behalf of Vermilion's management and Board of Directors, we wish to thank him for his contributions to Vermilion, the Board, Audit and Independent Reserves Committees. We wish Claudio the very best in his future endeavours.
ANNUAL GENERAL MEETING WEBCAST
As Vermilion's Annual General Shareholders Meeting is being held today, April 28th, 2017 at 10:00 AM MST at the Metropolitan Centre, 333 – 4th Avenue S.W., Calgary, Alberta, there will not be a first quarter conference call. In lieu of the conference call, a presentation will be given by Mr. Anthony Marino, President & Chief Executive Officer at the end of the meeting. Questions from the public can be submitted via the webcast.
Please visit http://event.on24.com/r.htm?e=1408430&s=1&k=69B66BC77507314039EFD37F8972FC98 or Vermilion's website at http://www.vermilionenergy.com/ir/eventspresentations.cfm and click on webcast under the upcoming events to view the webcast which will commence at approximately 10:15 AM MST.
Vermilion is an international energy producer that seeks to create value through the acquisition, exploration, development and optimization of producing properties in North America, Europe and Australia. Our business model targets annual organic production growth, along with providing reliable and increasing dividends to investors. Vermilion is targeting growth in production primarily through the exploitation of light oil and liquids-rich natural gas conventional resource plays in Canada and the United States, the exploration and development of high impact natural gas opportunities in the Netherlands and Germany, and through oil drilling and workover programs in France and Australia. Vermilion also holds an 18.5% working interest in the Corrib gas field in Ireland. Vermilion pays a monthly dividend of Canadian $0.215 per share, which provides a current yield of approximately 5%.
SOURCE: Vermilion Energy Inc.
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