Vermilion Energy Inc (VET) 2025 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Vermilion Q3 2025 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instruction) This call is being recorded on Thursday, November 6, 2025. I would now to turn the conference call over to Mr. Diane Hatcher, President and CEO. Please go ahead.

Good morning ladies and gentlemen. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Lemser, Vice President, CFO, Darcy Kerwin, Vice President of International and HSE, Brandon McQuaid, Vice President of North America, Lara Conrad, Vice President of Business Development, and Travis Thorgeson, director of Investor relations and corporate planning.

Please refer to the advisory on forward-looking statements in our Q3 release. It describes the forward-looking information, non-gas measures, and oil gas terms used today. It outlines the risk factors and assumptions relevant to this discussion.

Vermilion delivered another strong quarter in Q3, demonstrating both operational excellence and financial discipline. Our production came in at the upper end of our guidance range and we were able to generate robust fund flows from operations in a challenging commodity price environment. Our performance this quarter reflects improvements in both capital and operating efficiencies driven by the strategic repositioning of our asset base. The structural improvements enabled us to lower the top end of our 2025 capital guidance by $20 million without impacting our production.

This speaks to the growing efficiency of our capital deployment. In addition, we lowered our fully operating cost guidance by more than $10 million due to the improvements we are realizing in the second half of 2025. This momentum will carry into the 2026 budget guidance, which includes even lower capital and unit operating costs reflective of our larger, more caught up portfolio.

When compared to 2024, the last full year before we launched our asset high grading initiative, our production per share has increased by over 40%, where our unit cost structure is down by 30%. This reflects the strength of our repositioned portfolio, where 85% of both production and capital is now concentrated in our global gas business.

By focusing on these more efficient, longer duration assets, we have better positioned Vermil for sustainable long-term success. Our Q3 results underscore the resilience and the competitive strength of our differentiated asset base, notably, I realized gas price in the quarter, excluding hedging gains, was $4.36 per MCF. Significantly outperforming the A 5A pricing.

In Canada, we realized a gas price that was more than double the al benchmark, and when combined with our direct exposure to premium price European gas, our realized pricing is 7 times the al benchmark. When you include hedging gains, the realized price increased to $5.62 per Mia, 9 times the acre benchmark, highlighting the strategic advantage of being a global gas producer.

During the quarter we made a deliberate and strategic choice to temporarily shut in a portion of our deep basin gas production and defer the startup of several wells, resulting in approximately VEs3,000 per day of production impact in the quarter. We expect to bring these volumes online in Q4, where pricing is more favorable. During the quarter, we met a portion of our volume commitments by purchasing rather than producing our own gas, demonstrating our commitment to profitable development.

We continue to make progress towards key milestones with the development of our global gas assets in Germany, the Montani, and the Deep Basin. In Germany in 2026, we will bring our discovery well at Bisselhorst online and look to expand takeaway capacity over the next two years to maximize the economics of this prolific well.

We will also advance our plans to spud the follow-up Bissehor structure in early 2027 and with a shorter cycle time than our initial exploration well, plan to bring these wells on production in the second half of 2028. In Canada, we'll continue to invest in the Monty asset as we progress towards a significant inflection in free cash flow in 2028.

In the deep basin, we will run an efficient, consistent three-rig program and generate strong free cash flow by producing volumes into our existing infrastructure. As we look out over the next three years, these projects will significantly improve our free cash flow outlook.

We will now pass it over to Lars to discuss the Q3 results as well as our 2026 budget guidance.

Thank you, Dion. Vermillion generated $254 million in fund flows from operations in Q3 with free cash flow of $108 million after E&D capital expenditures of $146 million. We continue to reduce debt during the quarter and have now reduced our net debt by over $650 million since Q1 2025, bringing that debt to under $1.4 billion as of September 30.

This resulted in a net debt to four quarter trailing FFO ratio of 1.4 times, reflecting continued progress towards strengthening Vermillion's balance sheet. In addition, Vermillion returned $26 million to shareholders through dividends and share buybacks, comprising $20 million in dividends and $6 million of share buybacks during the quarter. This resulted in the company repurchasing 600,000 shares for a total of 2.5 million shares repurchased year-to-date. In total, we have repurchased approximately 20 million shares since mid-2022.

Q3 production averaged 119,062 BE per day with a 67% gas weighting, which was at the upper end of our guidance range. In North America, production averaged 88,763 BE per day, inclusive of the July divestments of our Saskatchewan and US assets, as well as shutting gas production and deferral of new well startups in Q3 in response to pricing. International operations averaged 30,299 BOE per day, up 2% from the previous quarter due to strong performance across our business units.

In the deep basin, we ramped up to a three rig drilling program in Q3, targeting multiple stack zones across our 1.1 million net acre land base. We drilled 13, completed 12, and brought on production three gross liquids rich gas wells in the deep basin. The drill program results to date are exceeding our expectations, with test rates indicating deliverability well in excess of our tight curves.

Internationally, we executed a successful two gross or 1.2 net well drilling program in the Netherlands, discovering commercial gas across two zones, the Rodligen and Zechstein. Both wells are expected to be completed, tied in, and brought on production in Q4 2025.

These two wells are the latest successes and our two plus decades of exploration and development in the Netherlands and combined with recent discoveries in Germany demonstrate Vermilion's broader European gas exploration capabilities to repeatedly add European gas reserves at a cost of $1.05 per MCF. Into a gas market currently in excess of $15 per MCF.

Meanwhile, Osterheit, our first German exploration well, continues to produce at a restricted rate of 1,100 BE per day, generating nearly $2 million per month of excess free cash flow, and our second well, Wisselshorst, is on track for startup by mid-2026, with preparations underway for follow-up drilling of two gross or 1.3 net wells in the Wisselshorst structure.

As a reminder, the first well is expected to recover 68 BCF of gas, and our P50 estimate of gross gas in place for the structure is 380 BCF. We also released our 2026 budget yesterday, featuring an exploration and development capital budget of 600 to $630 million with approximately 85% allocated to our global gas portfolio.

Key investments include drilling and strategic infrastructure in the Montani, a continuous drilling program targeting high return, liquids rich gas wells in the deep basin, and drilling and infrastructure capital in Germany and the Netherlands. We expect modest production growth from second half 2025 levels on our continuing operations with annual average production between 118 and 122,000 BE per day. Maintaining our commitment to financial discipline and free cash flow generation.

Our 2026 budget includes a significant reduction in our overall cost structure with a 30% improvement in capital and operating efficiencies, reflecting the benefits of our repositioned global gas portfolio and our focus on operational excellence.

For 2026, we plan to invest approximately $415 million into liquids rich gas assets in the Mai and Dee Basin, drilling 49 gross wells, which translates to approximately 45 net wells, reflecting our high working interest in Canada. In the deep basin, we plan to run a three-rig program to drill 43 gross wells. Notably, minimal new infrastructure spending is required to support this development, which is a key advantage of our deep basin asset. In the Mai we plan to drill 6 and complete and bring on production 10 wells.

In addition, we will continue to expand our infrastructure in advance of total Monte throughput growing to 28,000 BE per day by 2028, which aligns with the buildout of third-party gas infrastructure. Once we achieve target production, infrastructure and drilling capital requirements will decrease as we expect to drill about 8 wells per year to sustain production.

The combination of higher production and lower capital will pivot the Monty asset to significant excess free cash flow of approximately $125 million per year for 15+ years, assuming commodity prices of $3 acre and $70 WTI. Internationally, we plan to invest around $200 million in 2026, focusing on European gas exploration and development and optimizing base production.

This includes drilling one well at a 50% working interest in the Netherlands and preparing for two additional follow-up wells at 64% working interest at the Wisselshorst discovery in Germany in early Q1 2027. We will bring the initial Wisselshorst well online mid 2026 and expand the supporting infrastructure to enable significantly higher production over the next two years.

We will also invest in economic workovers and optimization projects across our international assets. Higher maintenance spending in 2026 compared to prior years is due to non-reoccurring turnarounds, including a planned 32 day turnaround in Ireland, the scope of which is scheduled to occur every five years.

Our priorities on shareholder returns remain unchanged. We will use excess free cash flow to maintain a strong balance sheet, fund a sustainable base dividend, and be opportunistic with share buybacks. I'm pleased to announce our intention to increase the quarterly cash dividend by 4% to 13.5% Canadian per share, effective with the Q1 2026 dividend. The dividend payout remains at a modest level, even during this commodity price period, and we see the potential for higher return of capital as free cash flow increases in the Moti, Germany, and the basin.

I will now pass it back to Dion.

Thank you, Lars. Looking ahead, Q4 will mark the first full quarter of a repositioned global gas portfolio following an active year of acquisition and disposition activity. We expect fourth quarter production to average between 1,190 and 121,000 views per day. Inclusive of the decision to defer the startup of multiple wells. Based on this performance, our 2025 full year production guidance is expected to be 119,500 BEs per day.

Importantly, we're able to maintain this production outlook while reducing our E&D capital guidance to between $630million and $640 million. The $20 million reduction at the top end of our guidance reflects continued improvement in capital efficiency. The Capital reduction aligns with the improvement in operating costs, enabling a $10 million reduction in operating cost guidance.

We're now entering the next phase of our strategy with a larger, more focused asset base, one that's characterized by longer duration assets, high return drilling inventory, a more efficient cost structure, and a top decile realized gas price. With proven success in exploration and development across our portfolio, a plan to increase free cash flow in our key development assets and an improving outlook for natural gas pricing, Vermillion is very well positioned for the future.

In closing, I want to thank the entire Vermillion team for your efforts over the past year in creating our high grade portfolio and real strong efficiencies throughout the business. It's truly been a heavy lift by all, and I'm extremely proud of your work of our team. With that, thank you.

We'll now open the line for questions.

Thank you ladies and gentlemen. We'll now begin the question-and-answer session. (Operator Instruction)

And your first question comes from Travis Wood from National Bank Capital Markets. Please go ahead.

Yeah, good morning guys. Could you provide some additional color or further color around Australia in terms of, kind of where current volumes would be sitting at, and how you're setting that asset up, through 2026 and potentially into 2027 with incremental drills and what that capital would look like.

Thanks Travis. Dion, I'll take the call. Yeah, well, Australia, as is a, premium, pricing there. We get $10 to $15 US premium to rent pricing which helps our net backs. The last year here we've been focused on optimizing the platform and frankly getting ahead on some of our maintenance. We're well advanced on that. With respect to the next drilling program, we drill every two to four years, tentatively we plan the next drill for 2027, but frankly we have flexibility on that depending on, rig rates as well as commodity price environment. So, we'll be in around 4,000 barrels per day. Currently we'll drift a little lower next year and then set up for that drilling program likely in kind of mid 2027.

Okay, perfect. And then, probably for Lars, you gave a modest dividend bump, on the back of, the quarter. How, and I think you've walked through this before, but just to remind us, what, or rather, how are you finding that balance of buying back more stock at this valuation versus kind of the base dividend growth? As you look out on the 2026 budget and flexing some optionality around commodity prices too, I guess.

Yeah, for sure, Travis, thanks for the question. I think at the end of the day what we're really focused on is things that we can control and driving per share value. We've got a number of ways to drive per share value. I would say that share buybacks is one of those ways to do it. There are other options as well and if you kind of look at the portfolio now, we're getting a lot of this infrastructure spend in the Monte behind us. We've got a lot of infrastructure to fill up in. The deep basin, we've been able to de-risk some of these exploration projects in, Germany as well, and we want to balance that operational momentum with return of capital as well in delivering per share value over the longer-term.

Part of that is to continue strengthening the balance sheet as well, and so we will have a chunk of our excess free cash flow. Reserved for debt reduction in 2026 as well, I think the dividend increase that should be viewed as, confidence in a lot of these operational activities that we're executing on as well and in addition to that, we will continue to buy back shares and be opportunistic on that front.

Okay.

Fantastic that's all for me I'll turn it back thanks guys.

Thanks, Travis.

Thank you. There are no further questions at this time. I'd like to turn the conference call back over to Dion Hatcher for further questions.

Great, I'm going to pass it back to Travis here. I know we had some questions on the inbox from my error, so maybe we can work through a couple of those.

Yeah, for sure, thanks, Dion. The first one just for Lars here, so you mentioned in the release a realized gas price of about 7 times the eco price in the quarter. Can you please help me understand the drivers behind this?

Yeah, for sure, thanks, Travis, for the question. Zooming out here a lot has changed with the portfolio in terms of the repositioning that we have done. Something that has not changed is we continue to have a very diverse portfolio and so if you start with that AO benchmark price, which is the price a lot of our peers use as well in terms of how do we do relative to that, it's not just the European assets that are contributing to a strong corporate realized price. So here in Canada, we actually realized the price in the third quarter of $1.37 per MCF, which was more than double the AO benchmark.

We've got an active program in terms of selling into the daily and the monthly price index as well. We also have over 26 million MCF a day exposed to the Chicago market as well, so we're well diversified within our Canadian portfolio. We were also able to strategically shut in and defer wells without meaningfully impacting the liquids production in our Canadian business as well. So a combination of all these led to that outperformance. When you combine this strong Canadian business with our European gas business, that's where you really start to see the impact and benefits of a diversified portfolio. And so the impact of that is we end up with a realized price of $4.36 per MCF before hedges.

Say before hedges, we do have an active hedging program, both here in Canada as well as European gas. The majority of our hedge gain in the third quarter was driven by our gas hedges. When you combine that with the realized price, we get up to $5.62 per MCF. So a really strong corridor really shows the benefits of that diversified portfolio, and we are organically investing in both the Canadian assets as well as the European assets. Just a reminder as well, Travis, as we move into 2026 here, I think it's worth noting that a dollar increase in that AO price. It would effectively add $100 million of excess free cash flow, so lots of exposure to that AO price and still lots of exposure to the TTF price as well. A $1 improvement in that, TTF marker would add about $24 million of excess free cash flow. So we feel that Vermillion is very well positioned to benefit from improving gas prices here to 2026.

Yeah, the only thing I can add to that, I think it's worth walking through the details because again it was 9 times the April benchmark, so it's worth thinking through and we're able to deliver that with our differentiate portfolio. But back to you, Travis.

Yeah, thanks to Young Lars. Next couple here for Darcy, could you provide more background on the next steps of the Bisselshors prospect in Germany? What are the bottlenecking plans and how are you thinking about drilling follow-up locations there?

Yeah, thanks, Travis. So in Germany at fisselsource, as we have, the one discovery of what we call fissile sources Z1A, that tested at a pretty prolific rates, so combined test rate of slightly over 40 million cubic feet a day. Our intention is to have that well tied in and producing by Q2 of next year, so Q2 2026. I think we've talked before that that initial rate kind of ties into a. A more local gathering system that will be restricted for some time, but we expect that those restrictions start to go away in 2027, allow us, allowing us to bring production kind of up into that 17.5 million cubic feet a day. And then there's some additional the bottlenecking options that we expect to have online in in 2028 that that doubles that to to $35 million a day.

So that kind of talks about that first discovery well. So on the back of that successful discovery, well we see a number of follow-up locations, we intend to spot two of those, so the second and third well into the vesselso structure in January 2027. Timing is partially driven by our ability to secure the rig that we want to use to drill those wells and really doesn't impact our. Expectation around online time. We expect to get those wells drilled kind of through the first half of 2027 and expect them tied in and producing by the second half of 2028.

So maybe you can summarize that. Like I think the takeaway, it's quite interesting. We're excited about Germany, but the simple math is the 1.6 net, sorry, 1.6 net wells that we drilled with Osterhede and the Wisselshorst well that'll come on mid next year. Like that's going to add about$25 million a day of gas, which is again about 25% of our production. The two wells that Darcy just walked us through, the two Wisselshorst follow-up wells, that'll be 1.3 net wells, so.

Once those are on in the second half of 28, that'll be another 20 plus million a day of gas. So if you zoom out three net wells, it's going to add about 45 million a day of gas, which is almost half of all our European gas production. So again, that's why we're excited about Germany, just the materiality of these wells, and kudos to the team to be able to get the rig we wanted and do all the pre-planning to really reduce that cycle time. So thanks for that, Nursing.

Thanks. And then the next one here for Darcy, jumping to the Netherlands, a couple of discoveries in the quarter. Could you give a bit more background on what we're seeing there?

Yeah, so in the Netherlands, we drilled two successful wells in a field called Appenhuisen. We discovered gas in two zones in each of those wells. We discovered gas in the Routeligen and Zechstein formations, two of the primary formations that we do chase in the Netherlands. We've discovered about 16 BCF gross of recoverable gas, and the F&D costs for those wells are less than $1.50 per MCF.

We talked about tying those wells in in Q4 of this year, so both wells are tied into existing facilities now. We're currently producing the first of those two wells at a rate of about 15 million cubic feet per day, limited by surface constraints at that location, and we intend to kind of bring the second well on as capacity opens up there.

Okay, thanks, Darcy. And then the last one here over to Randy. You noted the Q3 drilling program in the deep basin has exceeded expectations so far. Can you provide a bit more color on what we're seeing date and the results? Sure.

Yeah, so yeah, as Lars has mentioned, we completed 12 wells in Q3. Of these 12 wells, 6 of them tested at over $10 million a day of gas production, and then we also had some strong liquid rates from the other wells in the program. With our focus on profitability, most of these wells were deferred and will be coming on production over the next month, so we'll have a better sense of performance. But those initial test results definitely exceeded our expectations. And then when we think about it on the capital front, the program also did come in under budget, and that's, really what we're starting to see is the cost benefits of running a consistent three-rig drilling program.

Which we plan to, as we noted in the call through '26 and into '27. So overall I'm very pleased with the results of this program.

Thanks, Randy. Be on back to you. That's all we have for additional questions.

Thanks, Travis. So with that, I'd like to thank everyone again for participating in our Q3, results conference call. Enjoy the rest of your day.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.