CALGARY, May 1, 2013 /CNW/ – Vermilion Energy Inc. (“Vermilion” or the “Company”) (TSX, NYSE: VET) is pleased to report interim operating and unaudited financial results for the three months ended March 31, 2013.
HIGHLIGHTS
Annual General and Special Meeting Webcast
As Vermilion’s Annual General and Special Meeting is being held today, May 1, 2013 at 1:30 PM MST at the Metropolitan Centre, Calgary, Alberta, there will not be a first quarter conference call, however, a presentation will be given by Mr. Lorenzo Donadeo, President & CEO after the conclusion of the formal part of this meeting. Please visithttp://www.vermilionenergy.com/ir/eventspresentations.cfm and click on webcast under upcoming events to view the presentation which will commence at approximately 1:45 PM MST.
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ABBREVIATIONS
| bbl(s) | barrel(s) |
| mbbls | thousand barrels |
| bbls/d | barrels per day |
| mcf | thousand cubic feet |
| mmcf | million cubic feet |
| bcf | billion cubic feet |
| mcf/d | thousand cubic feet per day |
| mmcf/d | million cubic feet per day |
| GJ | gigajoules |
| boe | barrel of oil equivalent, including: crude oil, natural gas liquids and natural gas (converted on the basis of one boe for six mcf of natural gas) |
| mboe | thousand barrel of oil equivalent |
| mmboe | million barrel of oil equivalent |
| boe/d | barrel of oil equivalent per day |
| NGLs | natural gas liquids |
| WTI | West Texas Intermediate, the reference price paid for crude oil of standard grade in U.S. dollars at Cushing, Oklahoma |
| AECO | the daily average benchmark price for natural gas at the AECO ‘C’ hub in southeast Alberta |
| TTF | the price for natural gas in the Netherlands, quoted in MWh of natural gas per hour per day, at the Title Transfer Facility Virtual Trading Point operated by Dutch TSO Gas Transport Services |
| $M | thousand dollars |
| $MM | million dollars |
| PRRT | Petroleum Resource Rent Tax, a profit based tax levied on petroleum projects in Australia |
DISCLAIMER
Certain statements included or incorporated by reference in this document may constitute forward looking statements or financial outlooks under applicable securities legislation. Such forward looking statements or information typically contain statements with words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “estimate”, “propose”, or similar words suggesting future outcomes or statements regarding an outlook. Forward looking statements or information in this document may include, but are not limited to:
Such forward looking statements or information are based on a number of assumptions all or any of which may prove to be incorrect. In addition to any other assumptions identified in this document, assumptions have been made regarding, among other things:
Although Vermilion believes that the expectations reflected in such forward looking statements or information are reasonable, undue reliance should not be placed on forward looking statements because Vermilion can give no assurance that such expectations will prove to be correct. Financial outlooks are provided for the purpose of understanding Vermilion’s financial strength and business objectives and the information may not be appropriate for other purposes. Forward looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by Vermilion and described in the forward looking statements or information. These risks and uncertainties include but are not limited to:
The forward looking statements or information contained in this document are made as of the date hereof and Vermilion undertakes no obligation to update publicly or revise any forward looking statements or information, whether as a result of new information, future events or otherwise, unless required by applicable securities laws.
Initial production and short-term rates are not necessarily indicative of long-term performance or of ultimate recovery.
In accordance with National Instruments 51-101, natural gas volumes have been converted on the basis of six thousand cubic feet of natural gas to one barrel of oil equivalent. Barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Financial data contained within this document are reported in Canadian dollars, unless otherwise stated.
| HIGHLIGHTS | ||||
| Three Months Ended | ||||
| ($M except as indicated) | Mar 31, | Dec 31, | Mar 31, | |
| Financial | 2013 | 2012 | 2012 | |
| Petroleum and natural gas sales | 309,576 | 241,233 | 310,488 | |
| Fund flows from operations 1 | 163,629 | 141,737 | 151,122 | |
| Fund flows from operations ($/basic share) | 1.65 | 1.43 | 1.56 | |
| Fund flows from operations ($/diluted share) | 1.61 | 1.41 | 1.54 | |
| Net earnings | 52,137 | 56,914 | 65,094 | |
| Net earnings per share ($/basic share) | 0.53 | 0.58 | 0.67 | |
| Capital expenditures | 180,469 | 157,035 | 94,360 | |
| Acquisitions | – | 209,254 | 106,184 | |
| Asset retirement obligations settled | 1,388 | 8,424 | 766 | |
| Cash dividends ($/share) | 0.60 | 0.57 | 0.57 | |
| Dividends declared | 59,612 | 56,435 | 55,124 | |
| Net dividends 1 | 44,080 | 37,967 | 37,566 | |
| % of fund flows from operations, gross | 36% | 40% | 36% | |
| % of fund flows from operations, net | 27% | 27% | 25% | |
| Total net dividends, capital expenditures and asset retirement obligations settled 1 | 225,937 | 203,426 | 132,692 | |
| % of fund flows from operations | 138% | 144% | 88% | |
| % of fund flows from operations (excluding the Corrib project) | 127% | 129% | 80% | |
| Net debt 1 | 744,762 | 677,231 | 530,031 | |
| Operational | ||||
| Production | ||||
| Crude oil (bbls/d) | 23,583 | 23,699 | 24,492 | |
| NGLs (bbls/d) | 1,431 | 1,176 | 1,374 | |
| Natural gas (mmcf/d) | 82.16 | 68.34 | 80.39 | |
| Total (boe/d) | 38,707 | 36,265 | 39,265 | |
| Average realized prices | ||||
| Crude oil and NGLs ($/bbl) | 103.98 | 96.74 | 113.99 | |
| Natural gas ($/mcf) | 6.77 | 7.15 | 5.77 | |
| Production mix (% of production) | ||||
| % priced with reference to WTI | 24% | 25% | 23% | |
| % priced with reference to AECO | 18% | 14% | 18% | |
| % priced with reference to European gas | 18% | 17% | 16% | |
| % priced with reference to Dated Brent | 40% | 44% | 43% | |
| Netbacks ($/boe) 1 | ||||
| Operating netback | 59.18 | 57.54 | 58.45 | |
| Fund flows netback | 43.89 | 46.07 | 42.30 | |
| Operating expenses | 14.10 | 14.18 | 13.31 | |
| Average reference prices | ||||
| WTI (US $/bbl) | 94.37 | 88.18 | 102.93 | |
| Dated Brent (US $/bbl) | 112.55 | 110.02 | 118.49 | |
| AECO ($/GJ) | 3.03 | 3.05 | 2.04 | |
| Average foreign currency exchange rates | ||||
| CDN $/US $ | 1.01 | 0.99 | 1.00 | |
| CDN $/Euro | 1.33 | 1.29 | 1.31 | |
| Share information (‘000s) | ||||
| Shares outstanding – basic | 99,462 | 99,135 | 96,838 | |
| Shares outstanding – diluted 1 | 102,380 | 101,913 | 99,557 | |
| Weighted average shares outstanding – basic | 99,301 | 98,944 | 96,644 | |
| Weighted average shares outstanding – diluted | 101,349 | 100,425 | 98,191 | |
1 The above table includes non-GAAP measures which may not be comparable to other companies. Please see the “Non-GAAP Measures” section of Management’s Discussion and Analysis.
OPERATIONAL REVIEW AND OUTLOOK
Performance during the first quarter of 2013 highlights Vermilion’s strong operations and the benefits of global commodity exposure. Vermilion achieved consolidated production volumes of 38,707 boe/d and record quarterly fund flows from operations of $163.6 million. Vermilion was active in the first quarter drilling in Canada, Australia and France, positioning the Company for growth for the remainder of 2013.
Vermilion’s global commodity exposure continues to afford the Company a significant competitive advantage with 40% of first quarter production volumes comprised of Brent-based crude and 18% comprised of high-netback European gas. Vermilion’s Brent-based crude realized an average price of $113.34 per bbl, generating a nearly 30% premium over the Edmonton Sweet index which reflects pricing for Canadian light crude. The Company’s Netherlands natural gas production received an average price $10.09 per mcf, a premium of $6.76 per mcf or over 200% compared to an average first quarter price of $3.33 per mcf for AECO natural gas in Canada. Vermilion’s significant exposure to international pricing for the Company’s high-netback liquids and European gas, enabled fund flows from operations growth of 15% quarter-over-quarter and outpaced production growth of 7%.
Canadian development activities continue to be focused on the full scale development of the Cardium light oil play. The Company’s well performance to date remains consistent and continues to outpace that of most peers in the area, demonstrating the quality of Vermilion’s land position in the West Pembina region. Since entering the play in 2009, the Company has drilled 201 gross wells (140 net) in the Cardium and increased production to over 8,400 boe/d. Vermilion continues to advance on a drilling and completions learning curve, including the implementation of water-based fracturing systems and multi-well pad drilling, and is currently the only Company in the region employing long reach wells (greater than one mile in length). Having generated a significant reduction in costs by drilling longer reach 1.5 mile horizontal wells, Vermilion is planning on drilling a higher percentage of 1.5 mile wells and potentially several 2.0 mile pilot wells over the remainder of 2013. Drilling longer horizontal wells has allowed the company to reduce well costs from more than $5 million per section to approximately $3 million per section in the first quarter of 2013. With a significant drilling inventory identified in its full Cardium development plan, Vermilion anticipates inventory to last five to six years at a drilling rate of 40 to 60 wells per year.
In the Mannville formation, positioned below the Cardium in the stratigraphic column, the Company has a significant inventory of liquids-rich natural gas horizontal drilling prospects. Vermilion plans to drill six gross (3.2 net) horizontal Mannville wells in 2013. Initial production results are now available from the first two wells in the Mannville program. The first well (50% Vermilion working interest) was put on production during the first quarter at a rate of 3.6 mmcf/d of natural gas and 515 bbls/d of condensate1. Subsequent to the end of the first quarter, the second well (82% working interest) was put on production at a rate of 2.6 mmcf/d of natural gas and 100 bbls/d of condensate2.
In the first quarter, Vermilion drilled and cored a third vertical stratigraphic test well in the Duvernay liquids-rich natural gas resource play. The Company has amassed 272 net sections in the Edson area capturing the full breadth of the liquids-rich natural gas fairway for approximately $74 million ($425 per acre). Vermilion’s Duvernay rights largely underlie the Company’s Cardium and Mannville positions, allowing for potential infrastructure, operational and timing advantages should full-field development of the Duvernay commence. The Duvernay has the potential to provide Vermilion with very significant development opportunities in its core Canadian operating region, and may deliver production growth into the latter half of the decade and beyond.
Australian activity in the first quarter of 2013 focused on the drilling program at Wandoo. Two sidetrack horizontal laterals from existing wells were drilled, including the longest horizontal section drilled at Wandoo to date at 3,400 metres. The first well was spud in early February, completed in mid-March, and put on production at an initial rate of approximately 3,000 bbls/d of oil3prior to the end of the first quarter. The second well was spud in mid-March, and put on production at an initial rate of approximately 6,000 bbls/d of oil4 subsequent to the end of the first quarter. The jack-up drilling rig was demobilized and released in early April. The new sidetracks tested several drilling and geological concepts at Wandoo, including extreme long-reach horizontal drilling and further exploitation of the less-developed southern part of the field. The results will be incorporated into the geologic and numerical reservoir simulation models of Wandoo, with the objective of expanding and improving the Company’s long-term drilling inventory. While the initial production rates are indicative of the high productivity that can be generated through extreme long reach horizontal drilling in this very permeable reservoir, the Company intends to significantly restrict production from these wells after an initial production period to maximize long-term resource recovery. Vermilion anticipates maintaining production levels between 6,000 and 8,000 boe/d in Australia for the foreseeable future with drilling programs approximately every 18 to 24 months. Australia continues to generate strong netbacks and garners pricing at a premium to the Dated Brent index and incurs no transportation cost as production is sold directly from the platform.
During the first quarter of 2013, Vermilion began a five well drilling program in the Champotran field including four infill wells as a part of a waterflood expansion and one field extension test well. The Company had two wells drilled and a further two spud at the end of the first quarter. Additional activities in France included workovers, recompletions and facilities upgrades in the Paris and Aquitaine basins. Vermilion’s 2012 acquisitions were a natural addition to the Company’s asset base in France and further secured the Company’s position as the leading oil producer in France. Vermilion continues to work toward integration of these assets and the identification of further opportunities to decrease the current cost structure and increase production through optimized operations, water flood management and development drilling. Vermilion’s French assets are consistent with the Company’s sustainable growth-and-income model, with low base decline rates, high quality Brent-based production, strong cash flow generation and numerous long-term investment opportunities.
Vermilion continues permitting and drilling preparations in the Netherlands with respect to a three well drilling campaign planned for 2013. The Company’s Garijp debottlenecking project was completed in the first quarter of 2013, enabling incremental production from the existing Vinkega-1 well and first gas from Vinkega-2 in the second quarter. Facility construction for Langezwaag-1 is ongoing with production additions anticipated in the second quarter of 2013. The Company is looking to increase activity in the Netherlands to maintain a rolling inventory of production-adding projects with the intent to ultimately establish a reliable long-term growth profile. In March, the Company was awarded an exploration license for the Akkrum concession, located directly between Vermilion’s existing Gorredijk and Leeuwarden concessions. Covering more than 54,000 acres, the Akkrum concession adds to the Company’s already significant land position and future projects in the Netherlands.
In Ireland, the tunnel boring machine was installed on December 16, 2012 and has begun tunneling activities related to the completion of the nine kilometer onshore pipeline for Corrib. Tunneling, construction and installation, commissioning and start-up are anticipated to take approximately two years to complete with first gas anticipated in late 2014 or early 2015. Peak production is expected to be reached in mid-2015 with production levels of approximately 55 mmcf/d (9,000 boe/d) net to Vermilion.
Vermilion remains positioned to deliver strong operational and financial performance over the next several years. The Company continues to target growth of approximately 30% to 50,000 boe/d in 2015 and fund flows from operations growth of approximately 40% over the same period (assuming current commodity pricing indications are realized). Near-to-medium term growth is expected to be driven by continued Cardium and Mannville development in Canada, high-netback natural gas in the Netherlands, and first gas from Corrib in late 2014 or early 2015. France and Australia production are anticipated to provide reliable production as well as significant cash flow during this time from Brent-based pricing, with the potential to provide production growth as Vermilion expands its technical work to mature investment projects in these areas.
Additional medium and long-term growth is expected to be generated by the Company’s New Growth Initiative which is focused on the identification and development of emerging resource plays in Canada and the greater European region, including the Duvernay liquids-rich natural gas resource. As an example of the Company’s greater European effort, Vermilion has acquired an exploration permit for 2.34 million acres in Morocco. This opportunity is consistent with the Company’s low-cost, early-entry strategy to secure large positions in unconventional shale oil and natural gas plays, providing significant optionality and potential for growth into the latter half of the decade.
Vermilion increased its monthly dividend 5.3% in the first quarter of 2013, from $0.19 to $0.20 per share. The increase became effective for the January 2013 dividend paid February 15, 2013. Based on increasing certainty for Corrib development timing and the strength of anticipated future cash flows from a variety of sources, the Company is committed to providing a reliable and growing dividend stream to investors.
On March 12, 2013, Vermilion shares began trading on the New York Stock Exchange under the ticker symbol “VET”. As an international oil and gas producer, the Company believes the secondary listing may assist in broadening its investor base and increasing trading liquidity.
Vermilion’s conservative fiscal management and capital discipline leaves the Company well positioned to execute its growth-and-income model and provide growth to investors on a per share basis. The management and directors of Vermilion continue to hold approximately 8% of the outstanding shares and remain committed to delivering superior rewards to all stakeholders. Continuing to be acknowledged for excellence in its business practices, Vermilion was recognized for the fourth consecutive year by the Great Place to Work® Institute in both Canada and France. Vermilion ranked as the 22nd Best Workplace in Canada among more than 315 companies. Vermilion’s France subsidiary ranked as the 27th Best Workplace in the country.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The following is Management’s Discussion and Analysis (“MD&A”), dated April 30, 2013, of Vermilion Energy Inc.’s (“Vermilion” or the “Company”) operating and financial results as at and for the three months ended March 31, 2013 as compared with the corresponding period in the prior year.
This discussion should be read in conjunction with the unaudited condensed consolidated interim financial statements for the three months ended March 31, 2013 and the audited consolidated financial statements for the year ended December 31, 2012 and 2011, together with accompanying notes. Additional information relating to Vermilion, including its Annual Information Form, is available on SEDAR at www.sedar.com or on Vermilion’s website at www.vermilionenergy.com.
The unaudited condensed consolidated interim financial statements for the three months ended March 31, 2013 and comparative information have been prepared in Canadian dollars, except where another currency has been indicated, and in accordance with IAS 34, “Interim financial reporting”, as issued by the International Accounting Standards Board.
NON-GAAP MEASURES
This report includes non-GAAP measures as further described herein. These non-GAAP measures do not have standardized meanings prescribed by International Financial Reporting Standards (“IFRS” or, alternatively, “GAAP”) and therefore may not be comparable with the calculations of similar measures for other entities.
“Fund flows from operations” represents cash flows from operating activities before changes in non-cash operating working capital and asset retirement obligations settled. Management considers fund flows from operations and fund flows from operations per share to be key measures as they demonstrate Vermilion’s ability to generate the cash necessary to pay dividends, repay debt, fund asset retirement obligations and make capital investments. Management believes that by excluding the temporary impact of changes in non-cash operating working capital, fund flows from operations provides a useful measure of Vermilion’s ability to generate cash that is not subject to short-term movements in non-cash operating working capital.
“Fund flows from operations (excluding the Corrib project)” represents fund flows from operations excluding expenses related to the Corrib project. Management believes that by excluding expenses related to the Corrib project, fund flows from operations (excluding the Corrib project) provides a useful measure of Vermilion’s ability to generate cash from its current producing assets.
The most directly comparable GAAP measure to fund flows from operations and fund flows from operations (excluding the Corrib project) is cash flows from operating activities.
Cash flows from operating activities as presented in Vermilion’s consolidated statements of cash flows are reconciled to fund flows from operations and fund flows from operations (excluding the Corrib project) as follows:
| Three Months Ended | ||||
| Mar 31, | Dec 31, | Mar 31, | ||
| ($M) | 2013 | 2012 | 2012 | |
| Cash flows from operating activities | 190,712 | 99,907 | 124,887 | |
| Changes in non-cash operating working capital | (28,471) | 33,406 | 25,469 | |
| Asset retirement obligations settled | 1,388 | 8,424 | 766 | |
| Fund flows from operations | 163,629 | 141,737 | 151,122 | |
| Expenses related to the Corrib project | 1,855 | 2,023 | 2,364 | |
| Fund flows from operations (excluding the Corrib project) | 165,484 | 143,760 | 153,486 | |
“Cash dividends per share” represents cash dividends declared per share by Vermilion.
“Net dividends” are dividends declared less proceeds received by Vermilion for the issuance of shares pursuant to the dividend reinvestment plan, both as presented in Vermilion’s consolidated statements of changes in shareholders’ equity. Dividends both before and after the dividend reinvestment plan are reviewed by management and are assessed as a percentage of fund flows from operations to analyze the amount of cash that is generated by Vermilion which is being used to fund dividends. Dividends declared is the most directly comparable GAAP measure to net dividends.
“Total net dividends, capital expenditures and asset retirement obligations settled” are net dividends plus the following amounts from Vermilion’s consolidated statements of cash flows: drilling and development, exploration and evaluation, dispositions and asset retirement obligations settled.
“Total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project)” are total net dividends, capital expenditures and asset retirement obligations settled excluding drilling and development and asset retirement obligations settled relating to the Corrib project.
Total net dividends, capital expenditures and asset retirement obligations settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reviewed by management and are assessed as a percentage of fund flows from operations and fund flows from operations (excluding the Corrib project) to analyze the amount of cash that is generated by Vermilion that is available to repay debt and fund potential future acquisitions and capital expenditures.
Dividends declared, total net dividends, capital expenditures and asset retirement obligations settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reconciled to their most directly comparable GAAP measures as follows:
| Three Months Ended | ||||
| Mar 31, | Dec 31, | Mar 31, | ||
| ($M) | 2013 | 2012 | 2012 | |
| Dividends declared | 59,612 | 56,435 | 55,124 | |
| Issuance of shares pursuant to the dividend reinvestment plan | (15,532) | (18,468) | (17,558) | |
| Net dividends | 44,080 | 37,967 | 37,566 | |
| Drilling and development | 179,520 | 151,157 | 87,896 | |
| Dispositions | (8,627) | – | – | |
| Exploration and evaluation | 9,576 | 5,878 | 6,464 | |
| Asset retirement obligations settled | 1,388 | 8,424 | 766 | |
| Total net dividends, capital expenditures and asset retirement obligations settled | 225,937 | 203,426 | 132,692 | |
| Capital expenditures and asset retirement obligations settled related to the Corrib project | (16,520) | (18,092) | (9,482) | |
| Total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) | 209,417 | 185,334 | 123,210 | |
“Net debt” is the sum of long-term debt and working capital as presented in Vermilion’s consolidated balance sheets. Net debt is used by management to analyze the financial position and leverage of Vermilion. The most directly comparable GAAP measure is long-term debt.
Long-term debt as presented in Vermilion’s consolidated balance sheets is reconciled to net debt as follows:
| As At | ||
| Mar 31, | Dec 31, | |
| ($M) | 2013 | 2012 |
| Long-term debt | 712,763 | 642,022 |
| Current liabilities | 391,708 | 355,711 |
| Current assets | (359,709) | (320,502) |
| Net debt | 744,762 | 677,231 |
“Netbacks” are per boe and per mcf measures used in operational and capital allocation decisions.
“Diluted shares outstanding” is the sum of shares outstanding at the period end plus outstanding awards under Vermilion’s equity based compensation plan, based on current estimates of future performance factors and forfeitures. The most directly comparable GAAP measure is shares outstanding.
Shares outstanding is reconciled to diluted shares outstanding as follows:
| As At | |||
| Mar 31, | Dec 31, | Mar 31, | |
| (‘000s of shares) | 2013 | 2012 | 2012 |
| Shares outstanding | 99,462 | 99,135 | 96,838 |
| Potential shares issuable pursuant to the equity based compensation plan | 2,918 | 2,778 | 2,719 |
| Diluted shares outstanding | 102,380 | 101,913 | 99,557 |
OPERATIONAL ACTIVITIES
Canada
Vermilion drilled 24 (22.5 net) wells during the first quarter of 2013, including 20 (20 net) operated Cardium horizontal wells and one (0.1 net) non-operated Cardium horizontal well. Since entering the play in 2009, the Company has drilled a total of 201 (140 net) wells in the Cardium. In the first quarter of 2013, Vermilion completed its third vertical test well in the Duvernay and drilled two (1.3 net) Mannville liquids-rich natural gas wells.
France
Vermilion commenced its Champotran drilling program with two wells drilled and two wells spud at the end of the first quarter. The Company completed a number of workovers in both the Paris and Aquitaine basins. Vermilion continues to work towards the full integration of the assets acquired through two separate transactions in 2012 and the identification of further optimization and infill drilling opportunities.
Netherlands
Operating activities in the first quarter focused on facility maintenance and site construction. Surface facilities for Vinkega-2 and Langezwaag-1 are under construction, with first gas for both wells anticipated in the second quarter of 2013. The Company’s debottlenecking project at Garijp was completed in the first quarter, ahead of schedule, and will enable incremental production additions from Vinkega-2 and other wells to be brought on-stream. In March, Vermilion was awarded the exploration license for the Akkrum concession, covering more than 54,000 acres and located between the Company’s existing Gorredijk and Leeuwarden concessions.
Australia
Vermilion conducted a two well drilling program at Wandoo during the first quarter of 2013. These wells were horizontal sidetracks from existing well bores. The first well was spud early February and completed mid-March, the second was then spud and completed late March. The rig was demobilized and released subsequent to quarter end.
PRODUCTION
| Three Months Ended | % change | ||||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |||
| 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |||
| Canada | |||||||
| Crude oil & NGLs (bbls/d) | 9,301 | 9,089 | 8,876 | 2% | 5% | ||
| Natural gas (mmcf/d) | 41.04 | 31.41 | 41.83 | 31% | (2%) | ||
| Total (boe/d) | 16,140 | 14,323 | 15,848 | 13% | 2% | ||
| % of consolidated | 41% | 40% | 40% | ||||
| France | |||||||
| Crude oil (bbls/d) | 10,330 | 9,843 | 10,270 | 5% | 1% | ||
| Natural gas (mmcf/d) | 4.21 | 3.91 | 3.48 | 8% | 21% | ||
| Total (boe/d) | 11,032 | 10,495 | 10,850 | 5% | 2% | ||
| % of consolidated | 29% | 29% | 28% | ||||
| Netherlands | |||||||
| NGLs (bbls/d) | 96 | 70 | 72 | 37% | 33% | ||
| Natural gas (mmcf/d) | 36.91 | 33.03 | 35.08 | 12% | 5% | ||
| Total (boe/d) | 6,248 | 5,574 | 5,919 | 12% | 6% | ||
| % of consolidated | 16% | 15% | 15% | ||||
| Australia | |||||||
| Crude oil (bbls/d) | 5,287 | 5,873 | 6,648 | (10%) | (20%) | ||
| % of consolidated | 14% | 16% | 17% | ||||
| Consolidated | |||||||
| Crude oil & NGLs (bbls/d) | 25,014 | 24,875 | 25,866 | 1% | (3%) | ||
| % of consolidated | 65% | 69% | 66% | ||||
| Natural gas (mmcf/d) | 82.16 | 68.34 | 80.39 | 20% | 2% | ||
| % of consolidated | 35% | 31% | 34% | ||||
| Total (boe/d) | 38,707 | 36,265 | 39,265 | 7% | (1%) | ||
Average total production in Canada of 16,140 boe/d during the first quarter of 2013 represented an increase of 13% compared to 14,323 boe/d in the fourth quarter of 2012 and 2% as compared to 15,848 boe/d in the first quarter of the prior year. The increased volumes were largely attributable to continued development in the Cardium and initiation of a horizontal drilling program in the Mannville, as well as previously shut-in dry natural gas being brought back on-stream. Vermilion’s exposure to oil and liquids represented approximately 58% of Canadian production in the first quarter of 2013 compared to 56% in the first quarter of 2012.
France production averaged 11,032 boe/d in the first quarter of 2013, representing a 5% increase compared to fourth quarter 2012. This increase is largely attributable to volumes associated with Vermilion’s acquisition completed in December 2012 and continued workover and recompletion activities largely offsetting natural declines.
Netherlands average production of 6,248 boe/d in the first quarter of 2013 represented an increase of 12% quarter-over-quarter and 6% year-over-year. Following shutdown for facility upgrades, the Slootdorp-4 well was reactivated in the first quarter contributing to the increased production.
Australia production averaged 5,287 boe/d during the first quarter of 2013, compared to 5,873 boe/d in the fourth quarter of 2012 and 6,648 boe/d in the first quarter of 2012. The decrease in production represents downtime associated with the two-well drilling program and seasonal cyclone activity. Production additions from the two wells are anticipated for the second quarter of 2013. Vermilion expects to sustain annual average production between 6,000 and 8,000 boe/d over the next few years with two to three well drilling programs every other year.
FINANCIAL REVIEW
| Three Months Ended | % change | ||||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |||
| ($M) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | ||
| Net earnings | 52,137 | 56,914 | 65,094 | (8%) | (20%) | ||
| Fund flows from operations | 163,629 | 141,737 | 151,122 | 15% | 8% | ||
| Cash flow from operating activities | 190,712 | 99,907 | 124,887 | 91% | 53% | ||
| Net debt | 744,762 | 677,231 | 530,031 | 10% | 41% | ||
| Long-term debt | 712,763 | 642,022 | 373,798 | 11% | 91% | ||
| Ratio of net debt to annualized fund flows from operations | 1.1 | 1.2 | 0.9 | (8%) | 22% | ||
| Total net dividends, capital expenditures and asset retirement obligations settled | |||||||
| % of fund flows from operations | 138% | 144% | 88% | ||||
| % of fund flows from operations (excluding the Corrib project) | 127% | 129% | 80% | ||||
Fund flows from operations for the first quarter of 2013 increased compared to both the first and fourth quarters of 2012. On a quarter-over-quarter basis, the increase was a result of significantly higher petroleum and natural gas sales, driven by an increase in crude oil sales volumes and favorable crude oil and natural gas pricing. The increase in crude oil sales volumes was due in part to a draw of crude oil inventory in France and Australia totalling approximately 244,000 bbls during the first quarter of 2013. On a year-over-year basis, the increase in fund flows from operations occurred despite relatively consistent petroleum and natural gas sales due to a decrease in PRRT, which resulted from increased capital expenditures for the 2013 Australian drilling campaign, and the absence of the $8.5 million of transfer taxes paid in the first quarter of 2012 for the first of two acquisitions in France.
Cash flow from operating activities increased for the first quarter of 2013 compared to both the first and fourth quarter of 2012. This increase was a result of the aforementioned changes to fund flows from operations, coupled with favorable timing differences pertaining to working capital.
Net earnings for the first quarter of 2013 decreased when compared to the fourth quarter of 2012. This decrease occurred despite significantly higher petroleum and natural gas sales due to an unrealized foreign exchange loss in the current quarter versus an unrealized foreign exchange gain in the previous quarter. Unrealized foreign exchange gains and losses are non-cash charges that result from the translation of Euro denominated loans made by Vermilion to its subsidiaries. On a year-over-year basis, the decrease in net earnings was primarily the result of an increase in deferred tax expense in 2013, resulting from the timing of the deductibility of capital expenditures for tax purposes, and an increase in depletion expense.
Vermilion’s net debt and long-term debt increased from December 31, 2012 as a result of draws on the revolving credit facility to fund current year development capital expenditures. The increase in net debt and long-term debt from March 31, 2012 was the result of the second of two acquisitions in France during 2012 and current year development capital expenditures. In addition, December 31, 2012 and March 31, 2013 long-term debt included the impact of payment of the US$135 million deferred payment, which pertained to the 2009 acquisition of Vermilion’s 18.5% non-operated interest in the Corrib field.
The ratio of total net dividends, capital expenditures and asset retirement obligations settled (excluding capital expenditures and asset retirement obligations settled on the Corrib project) expressed as a percentage of fund flows from operations was relatively consistent quarter-over-quarter. On a year-over-year basis, the increase in this ratio is primarily the result of increased capital expenditures during the current period relating to drilling activity in Australia, Canada and France.
COMMODITY PRICES
| Three Months Ended | % change | |||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | ||
| 2013 | 2012 | 2012 | Q4/12 | Q1/12 | ||
| Average reference prices | ||||||
| WTI (US $/bbl) | 94.37 | 88.18 | 102.93 | 7% | (8%) | |
| Edmonton Sweet index (US $/bbl) | 87.42 | 84.86 | 92.44 | 3% | (5%) | |
| Dated Brent (US $/bbl) | 112.55 | 110.02 | 118.49 | 2% | (5%) | |
| AECO ($/GJ) | 3.03 | 3.05 | 2.04 | (1%) | 49% | |
| Netherlands gas price ($/GJ) | 10.40 | 9.78 | 9.63 | 6% | 8% | |
| Netherlands gas price (€/GJ) | 7.81 | 7.58 | 7.35 | 3% | 6% | |
| Average realized prices ($/boe) | ||||||
| Canada | 57.61 | 58.80 | 55.84 | (2%) | 3% | |
| France | 107.17 | 102.26 | 104.84 | 5% | 2% | |
| Netherlands | 61.21 | 60.96 | 59.08 | – | 4% | |
| Australia | 120.76 | 115.22 | 156.43 | 5% | (23%) | |
| Consolidated | 83.04 | 78.40 | 86.90 | 6% | (4%) | |
| Production mix (% of production) | ||||||
| % priced with reference to WTI | 24% | 25% | 23% | |||
| % priced with reference to AECO | 18% | 14% | 18% | |||
| % priced with reference to European gas | 18% | 17% | 16% | |||
| % priced with reference to Dated Brent | 40% | 44% | 43% | |||
Reference prices
Overall, crude oil prices increased during the first quarter of 2013 as compared to the fourth quarter of 2012. WTI increased by 7% quarter-over-quarter as a result of the U.S. economy showing signs of improving growth and improved transportation capacity for crude oil from the U.S. Midwest to the Gulf Coast. The increase in WTI coupled with a modest 2% increase in Dated Brent resulted in a narrowing differential between the two reference prices; however both WTI and the Edmonton Sweet index continued to trade at a significant discount ($18.18 and $25.13 per barrel, respectively) to Dated Brent.
The AECO reference price was relatively unchanged from the fourth quarter of 2012, however AECO pricing was significantly higher when compared to the first quarter of 2012 as a result of relatively flat North American production coupled with downward trending storage levels.
Realized pricing
The realized price of Vermilion’s crude oil in Canada is directly linked to WTI but is subject to market conditions in Western Canada. These market conditions can result in fluctuations in the pricing differential, as reflected by the Edmonton Sweet index price. The realized price of Vermilion’s NGLs in Canada is based on product specific differentials pertaining to trading hubs in the U.S. The realized price of Vermilion’s natural gas in Canada is based on the AECO spot price in Alberta.
Vermilion’s crude oil in France and Australia is priced with reference to Dated Brent.
As of January 1, 2013, the price of Vermilion’s natural gas in the Netherlands is now based on the TTF day-ahead index, as determined on the Title Transfer Facility Virtual Trading Point operated by Dutch TSO Gas Transport Services, plus various fees. GasTerra, a state owned entity, continues to purchase all natural gas produced by Vermilion in the Netherlands. Prior to 2013, the natural gas price received by Vermilion in the Netherlands was calculated using a trailing average of Dated Brent and the natural gas prices from European trading hubs.
Average realized prices in Vermilion’s jurisdictions will differ from their corresponding average reference prices due to a number of factors, including the timing of the sale of production, differences in the quality of production and point of settlement. In Canada, average realized prices are also impacted by the production mix of crude oil, NGLs and natural gas.
On a consolidated basis, for the three months ended March 31, 2013, crude oil and NGL production represented approximately 65% of total production (three months ended March 31, 2012 – 66%).
CAPITAL EXPENDITURES AND ACQUISITIONS
| Three Months Ended | |||
| By classification | Mar 31, | Dec 31, | Mar 31, |
| ($M) | 2013 | 2012 | 2012 |
| Drilling and development | 179,520 | 151,157 | 87,896 |
| Dispositions | (8,627) | – | – |
| Exploration and evaluation | 9,576 | 5,878 | 6,464 |
| Capital expenditures | 180,469 | 157,035 | 94,360 |
| Property acquisition | – | – | 106,184 |
| Corporate acquisition | – | 74,947 | – |
| Payment of amount due pursuant to acquisition | – | 134,307 | – |
| Acquisitions | – | 209,254 | 106,184 |
| Three Months Ended | |||
| By category | Mar 31, | Dec 31, | Mar 31, |
| ($M) | 2013 | 2012 | 2012 |
| Land | 3,129 | 462 | 6,667 |
| Seismic | 3,813 | 3,963 | 799 |
| Drilling and completion | 126,185 | 76,774 | 54,858 |
| Production equipment and facilities | 49,942 | 64,232 | 24,755 |
| Recompletions | 4,131 | 5,040 | 2,645 |
| Other | 1,896 | 6,564 | 4,636 |
| Dispositions | (8,627) | – | – |
| Capital expenditures | 180,469 | 157,035 | 94,360 |
| Acquisitions | – | 209,254 | 106,184 |
| Total capital expenditures and acquisitions | 180,469 | 366,289 | 200,544 |
| Three Months Ended | |||
| By country | Mar 31, | Dec 31, | Mar 31, |
| ($M) | 2013 | 2012 | 2012 |
| Canada | 86,636 | 84,609 | 71,982 |
| France | 21,592 | 95,905 | 111,842 |
| Netherlands | 372 | 8,118 | 2,570 |
| Australia | 55,349 | 25,257 | 4,544 |
| Ireland | 16,520 | 152,400 | 9,606 |
Capital expenditures:
Capital expenditures for the first quarter of 2013 were higher than both the first and fourth quarters of 2012. On a quarter-over-quarter basis, capital expenditures were higher primarily as a result of increased capital expenditures in Australia related to the 2013 drilling campaign. On a year-over-year basis, capital expenditures were higher as a result of the aforementioned Australia drilling campaign in addition to increased drilling activity in both Canada and France.
PETROLEUM AND NATURAL GAS SALES
| Three Months Ended | % change | |||||
| By product | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe and per mcf) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Crude oil & NGLs | 259,498 | 196,286 | 268,291 | 32% | (3%) | |
| Per boe | 103.98 | 96.74 | 113.99 | 7% | (9%) | |
| Natural gas | 50,078 | 44,947 | 42,197 | 11% | 19% | |
| Per mcf | 6.77 | 7.15 | 5.77 | (5%) | 17% | |
| Petroleum and natural gas sales | 309,576 | 241,233 | 310,488 | 28% | – | |
| Per boe | 83.04 | 78.40 | 86.90 | 6% | (4%) | |
| Three Months Ended | % change | |||||
| By country | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Canada | 83,688 | 77,476 | 80,526 | 8% | 4% | |
| Per boe | 57.61 | 58.80 | 55.84 | (2%) | 3% | |
| France | 121,566 | 87,702 | 103,511 | 39% | 17% | |
| Per boe | 107.17 | 102.26 | 104.84 | 5% | 2% | |
| Netherlands | 34,421 | 31,260 | 31,820 | 10% | 8% | |
| Per boe | 61.21 | 60.96 | 59.08 | – | 4% | |
| Australia | 69,901 | 44,795 | 94,631 | 56% | (26%) | |
| Per boe | 120.76 | 115.22 | 156.43 | 5% | (23%) | |
Vermilion’s consolidated petroleum and natural gas sales for the first quarter of 2013 were higher than the fourth quarter of 2012 as a result of increased sales volumes, including an inventory draw in both Australia and France, in addition to an increase in the realized price of crude oil.
Vermilion’s consolidated petroleum and natural gas sales for the first quarter of 2013 remained relatively unchanged as compared to the same period in the prior year as the impact of the decrease in crude oil volumes sold and prices was offset by a significant increase in North American natural gas prices.
CRUDE OIL INVENTORY
Vermilion carries an inventory of crude oil in France and Australia, which is a result of timing differences between production and sales.
The following table summarizes the changes in Vermilion’s crude oil inventory positions:
| Three Months Ended | ||||
| Mar 31, | Dec 31, | Mar 31, | ||
| (mbbls) | 2013 | 2012 | 2012 | |
| France | ||||
| Opening crude oil inventory | 354 | 246 | 187 | |
| Adjustments | 5 | – | – | |
| Crude oil production | 930 | 906 | 935 | |
| Crude oil sales | (1,071) | (798) | (899) | |
| Closing crude oil inventory | 218 | 354 | 223 | |
| Australia | ||||
| Opening crude oil inventory | 268 | 117 | 222 | |
| Crude oil production | 476 | 540 | 605 | |
| Crude oil sales | (579) | (389) | (827) | |
| Closing crude oil inventory | 165 | 268 | – | |
Inventory as at March 31, 2013 was comprised of the following components:
| ($M) | France | Australia | Total | ||||
| Operating expense | 3,284 | 3,701 | 6,985 | ||||
| Royalties | 1,106 | – | 1,106 | ||||
| Depletion | 4,206 | 3,229 | 7,435 | ||||
| 8,596 | 6,930 | 15,526 |
DERIVATIVE INSTRUMENTS
The following tables summarize Vermilion’s outstanding risk management positions as at March 31, 2013:
| Risk Management – Oil | Funded Cost (US $/bbl) | bbls/d | Strike Price(s) US $/bbl | |
| Swap – WTI | ||||
| January 2013 – June 2013 1 | – | 1,000 | 101.18 | |
| January 2013 – December 2013 | – | 2,000 | 93.04 | |
| Collar – WTI | ||||
| April 2013 – June 2013 | – | 1,000 | 91.75 – 101.91 | |
| Fixed Price Differential – MSW | ||||
| April 2013 – June 2013 | – | 2,000 | WTI less $4.25 | |
| Collar – Dated Brent | ||||
| January 2013 – June 2013 | – | 2,000 | 90.00 – 105.28 | |
| January 2013 – December 2013 | – | 3,500 | 96.14 – 107.34 | |
| April 2013 – June 2013 | – | 2,700 | 106.85 – 113.77 | |
| July 2013 – December 2013 | – | 500 | 95.00 – 109.10 | |
| Swap – Dated Brent | ||||
| April 2013 – June 2013 | – | 250 | 115.41 | |
| Risk Management – European natural gas | Funded Cost (€/GJ) | GJ/d | Strike Price €/GJ | |
| Swap – TTF | ||||
| April 2013 – September 2013 2 | – | 1,800 | 7.12 | |
| Risk Management – Canadian natural gas | Funded Cost ($/GJ) | GJ/d | Strike Price(s) $/GJ | |
| Collar – AECO | ||||
| April 2013 – September 2013 | – | 2,500 | 2.90 – 3.47 | |
| April 2013 – October 2013 | – | 3,500 | 3.05 – 3.66 | |
| April 2013 – December 2013 | – | 5,000 | 2.93 – 3.52 | |
| October 2013 – December 2013 | – | 2,500 | 2.85 – 3.56 | |
| Collar – AECO (Physical) | ||||
| April 2012 – March 2014 | 0.10 | 5,500 | 2.60 – 3.78 | |
| June 2012 – March 2014 | 0.10 | 3,000 | 2.30 – 3.75 |
| 1 | The counterparties to the swaps have the option on June 28, 2013 to extend the swap to December 31, 2013 at the contracted volume and price. |
| 2 | TTF collars are priced based on the TTF “day-ahead” bid and offer quotations, which are quoted in MWh of natural gas per hour per day. MWh of natural gas per hour per day measures are converted at a ratio of 1 MWh to 3.6 GJ. |
From time to time Vermilion enters into new risk management positions. Information regarding outstanding risk management positions is available on Vermilion’s website at www.vermilionenergy.com/ir/hedging.cfm.
The following table summarizes the impact of derivative instruments on cash flows from operating activities:
| Three Months Ended | % change | |||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | ||
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Realized loss on derivative instruments | 2,787 | 1,559 | 5,718 | 79% | (51%) | |
| Per boe | 0.75 | 0.51 | 1.60 | 47% | (53%) | |
The realized loss on derivative instruments for the first quarter of 2013 is comprised primarily of amounts paid to settle Dated Brent costless collars, as reference prices exceeded the ceiling price on those instruments, partially offset by amounts received on WTI extendable swaps. This realized loss was higher than the previous quarter (where the loss related primarily to premiums paid on funded collars and put options) and was lower than the same quarter in the previous year (where the loss related both to premiums and amounts paid for settlement).
ROYALTIES
| Three Months Ended | % change | |||||
| By product | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe and per mcf) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Crude oil & NGLs | 14,810 | 11,429 | 14,241 | 30% | 4% | |
| Per boe | 5.93 | 5.63 | 6.05 | 5% | (2%) | |
| Natural gas | 980 | 509 | 211 | 93% | 364% | |
| Per mcf | 0.13 | 0.08 | 0.03 | 63% | 333% | |
| Royalties | 15,790 | 11,938 | 14,452 | 32% | 9% | |
| Per boe | 4.24 | 3.88 | 4.04 | 9% | 5% | |
| % of petroleum and natural gas sales | 5.1% | 4.9% | 4.7% | |||
| Three Months Ended | % change | |||||
| By country | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Canada | 8,989 | 7,401 | 8,969 | 21% | – | |
| Per boe | 6.19 | 5.62 | 6.22 | 10% | – | |
| % of petroleum and natural gas sales | 10.7% | 9.6% | 11.1% | |||
| France | 6,801 | 4,537 | 5,483 | 50% | 24% | |
| Per boe | 6.00 | 5.29 | 5.55 | 13% | 8% | |
| % of petroleum and natural gas sales | 5.6% | 5.2% | 5.3% | |||
In Canada, royalties as a percentage of sales for the three months ended March 31, 2013 was 10.7% as compared to 9.6% for the prior quarter and 11.1% for the comparative period of the prior year. Crude oil and NGL royalties as a percentage of sales for the current quarter of 11.4% increased slightly from 10.4% for the prior quarter but decreased from 12.2% for the first quarter of 2012. The timing of putting additional horizontal Cardium wells on production results in slight changes to realized royalty rates arising from a royalty incentive applied to initial production volumes from these wells.
In France, the primary portion of the royalties is levied in Euros and is based on units of production and that component, therefore, is not subject to changes in commodity prices. Royalties as a percentage of sales for the three months ended March 31, 2013 increased to 5.6% from 5.2% and 5.3% for the three months ended December 31, 2012 and March 31, 2012, respectively, due to the impact of a stronger Euro year-over-year.
Production in the Netherlands and Australia is not subject to royalties.
OPERATING EXPENSE
| Three Months Ended | % change | |||||
| By product | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe and per mcf) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Crude oil & NGLs | 41,855 | 31,212 | 36,866 | 34% | 14% | |
| Per boe | 16.77 | 15.38 | 15.66 | 9% | 7% | |
| Natural gas | 10,720 | 12,422 | 10,687 | (14%) | – | |
| Per mcf | 1.45 | 1.98 | 1.46 | (27%) | (1%) | |
| Operating | 52,575 | 43,634 | 47,553 | 20% | 11% | |
| Per boe | 14.10 | 14.18 | 13.31 | (1%) | 6% | |
| Three Months Ended | % change | |||||
| By country | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Canada | 13,841 | 14,514 | 14,267 | (5%) | (3%) | |
| Per boe | 9.53 | 11.01 | 9.89 | (13%) | (4%) | |
| France | 19,939 | 13,699 | 15,102 | 46% | 32% | |
| Per boe | 17.58 | 15.97 | 15.30 | 10% | 15% | |
| Netherlands | 3,969 | 5,713 | 4,109 | (31%) | (3%) | |
| Per boe | 7.06 | 11.14 | 7.63 | (37%) | (7%) | |
| Australia | 14,826 | 9,708 | 14,075 | 53% | 5% | |
| Per boe | 25.61 | 24.97 | 23.27 | 3% | 10% | |
In Canada, first quarter operating expense of $13.8 million was lower than the $14.5 million for the fourth quarter of 2012 as a result of costs incurred in the prior quarter associated with two facility turnarounds partially offset by higher costs in the first quarter of this year related to salaries and benefits, fuel and electricity and chemical usage. Operating expense for the first quarter of 2013 was also lower as compared to the $14.3 million for the first quarter of the prior year as a result of some non-operated equalizations received in that period. Operating costs per boe for the three months ended March 31, 2013, decreased as compared to the previous quarter and the first quarter of 2012 as a result of lower expense and higher volumes.
In France, first quarter operating expense of $19.9 million was higher than both the fourth quarter 2012 expense of $13.7 million and the expense of $15.1 million for the first quarter of 2012 largely as a result of the inventory draw that occurred in the current quarter. When inventoried product is sold, the related costs are expensed in the period of sale. Despite higher production volumes in the first quarter of 2013 as compared to the fourth quarter of 2012, the timing of downhole work and increased electricity costs resulted in an increase in operating expense per boe to $17.58 for the current quarter from $15.97 for the prior quarter.
In the Netherlands, operating expense for the three months ended March 31, 2013 of $4.0 million decreased from $5.7 million in the prior quarter and was consistent with the $4.1 million for the first quarter of 2012. The quarter-over-quarter decrease is attributable to the timing of project work. Operating expense per boe for the three months ended March 31, 2013 similarly decreased versus the previous quarter and the first quarter of 2012 as a result of lower expenses coupled with higher volumes.
In Australia, first quarter operating expense increased to $14.8 million from the previous quarter’s expense of $9.7 million due to a draw in crude oil inventory associated with shipment timing. A decrease in crude oil inventory results in the related production costs being expensed when the product is sold. On a per boe basis, operating expense for the first quarter of 2013 was higher than the previous quarter and the first quarter of 2012 as a result of lower production volumes in the current quarter due to two cyclones and drilling activities that resulted in unplanned downtime.
TRANSPORTATION EXPENSE
| Three Months Ended | % change | |||||
| By country | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Canada | 2,269 | 1,922 | 2,044 | 18% | 11% | |
| Per boe | 1.56 | 1.46 | 1.42 | 7% | 10% | |
| France | 2,754 | 1,854 | 2,648 | 49% | 4% | |
| Per boe | 2.43 | 2.16 | 2.68 | 13% | (9%) | |
| Ireland | 1,618 | 1,682 | 2,001 | (4%) | (19%) | |
| Transportation | 6,641 | 5,458 | 6,693 | 22% | (1%) | |
| Per boe | 1.78 | 1.77 | 1.87 | 1% | (5%) | |
Consolidated transportation expense was higher for the first quarter of 2013 as compared to the fourth quarter of 2012. This increase was primarily the result of higher sales volumes in Canada and an increased number of shipments in France from the Aquitaine basin.
Consolidated transportation expense for the first quarter of 2013 was consistent with the expense for the same period in 2012 as a result of lower payments under the ship or pay agreement related to the Corrib project, mostly offset by higher volumes in both Canada and France.
OTHER (INCOME) EXPENSE
| Three Months Ended | % change | |||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | ||
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Other (income) expense | (67) | 460 | 7,983 | (115%) | (101%) | |
| Per boe | (0.02) | 0.15 | 2.24 | (113%) | (101%) | |
Other expense for the three months ended March 31, 2012 was comprised primarily of $8.5 million relating to transfer taxes paid to regulatory authorities in France pursuant to the first quarter of 2012 acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins in France.
GENERAL AND ADMINISTRATION EXPENSE
| Three Months Ended | % change | |||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | ||
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| General and administration | 12,610 | 8,888 | 10,148 | 42% | 24% | |
| Per boe | 3.38 | 2.89 | 2.84 | 17% | 19% | |
General and administration expense for the first quarter of 2013 was higher than the expense for both the previous quarter and the first quarter of 2012 due to increased staffing levels to support Vermilion’s operational activities coupled with expenditure timing.
EQUITY BASED COMPENSATION EXPENSE
| Three Months Ended | % change | |||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | ||
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Equity based compensation | 16,136 | 18,484 | 10,055 | (13%) | 60% | |
| Per boe | 4.33 | 6.01 | 2.81 | (28%) | 54% | |
Equity based compensation expense relates to non-cash compensation expense attributable to long-term incentives granted to directors, officers and employees under the Vermilion Incentive Plan (VIP). The expense is recognized over the vesting period based on the grant date fair value of awards, adjusted for the ultimate number of awards that actually vest as determined by the Company’s achievement of performance conditions.
Equity based compensation expense for the first quarter of 2013 was lower than the preceeding quarter as the fourth quarter of 2012 included additional expense resulting from a change in performance condition assumptions. As the first quarter of 2013 also reflected this change in performance condition assumptions, equity based compensation expense for the current quarter was higher than the expense for the same quarter in 2012.
INTEREST EXPENSE
| Three Months Ended | % change | |||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | ||
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Interest expense | 8,689 | 7,656 | 6,101 | 13% | 42% | |
| Per boe | 2.33 | 2.49 | 1.71 | (6%) | 36% | |
Interest expense increased during the current quarter as compared to both the prior quarter and same quarter in the previous year primarily due to increased borrowings under Vermilion’s revolving credit facility.
DEPLETION AND DEPRECIATION, ACCRETION, IMPAIRMENTS AND GAIN ON ACQUISITION
| Three Months Ended | % change | |||||
| Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | ||
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Depletion and depreciation | 81,448 | 66,642 | 75,848 | 22% | 7% | |
| Per boe | 21.85 | 21.66 | 21.23 | 1% | 3% | |
| Accretion | 5,824 | 6,119 | 5,238 | (5%) | 11% | |
| Per boe | 1.56 | 1.99 | 1.47 | (22%) | 6% | |
| Impairments | – | – | 65,800 | – | (100%) | |
| Per boe | – | – | 18.42 | – | (100%) | |
| Gain on acquisition | – | – | (45,309) | – | (100%) | |
| Per boe | – | – | (12.68) | – | (100%) | |
Depletion and depreciation expense on a per boe basis was relatively consistent for the first quarter of 2013 as compared to both the first and fourth quarters of 2012. The slight increase in the current quarter was higher primarily due to the result of higher finding, development and acquisition costs incurred from additional liquids development in Canada and the acquisitions in France in 2012.
Accretion expense decreased for the first quarter of 2013 as compared to the fourth quarter of 2012 as a result of a decrease in asset retirement obligations. This decrease occurred in Canada, due to a change in estimate recorded in the fourth quarter of 2012, and was partially offset by asset retirement obligations recorded on the fourth quarter of 2012 acquisition in France. On a year-over-year basis, accretion expense increased as the aforementioned decrease in Canada’s asset retirement obligations were offset by asset retirement obligations assumed on the France acquisition in the fourth quarter of 2012.
The impairment losses for the first quarter of 2012 pertained to impairment losses recorded on Vermilion’s conventional deep gas and shallow coal bed methane natural gas plays. These impairment charges were the result of significant declines in the forward pricing assumptions for natural gas in Canada.
The gain on acquisition for the first quarter of 2012 relates to Vermilion’s acquisition of certain working interests in the Paris and Aquitaine basins in France. The gain arose as a result of the increase in the fair value of the acquired petroleum and natural gas reserves from the time when the acquisition was negotiated to the acquisition date. The increase resulted from a change in the underlying commodity price forecasts used to determine the fair value of the acquired reserves.
TAXES
| Three Months Ended | % change | |||||
| By classification | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Current taxes before PRRT | 35,557 | 21,470 | 32,364 | 66% | 10% | |
| Per boe | 9.54 | 6.98 | 9.06 | 37% | 5% | |
| PRRT | 11,153 | 1,598 | 27,269 | 598% | (59%) | |
| Per boe | 2.99 | 0.52 | 7.63 | 475% | (61%) | |
| Current taxes | 46,710 | 23,068 | 59,633 | 102% | (22%) | |
| Per boe | 12.53 | 7.50 | 16.69 | 67% | (25%) | |
| Three Months Ended | % change | |||||
| By country | Mar 31, | Dec 31, | Mar 31, | Q1/13 vs. | Q1/13 vs. | |
| ($M except per boe) | 2013 | 2012 | 2012 | Q4/12 | Q1/12 | |
| Canada | 251 | 259 | 442 | (3%) | (43%) | |
| Per boe | 0.17 | 0.20 | 0.31 | (15%) | (45%) | |
| France | 18,659 | 13,335 | 12,895 | 40% | 45% | |
| Per boe | 16.45 | 15.55 | 13.06 | 6% | 26% | |
| Netherlands | 9,434 | 1,102 | 9,057 | 756% | 4% | |
| Per boe | 16.78 | 2.15 | 16.82 | 680% | – | |
| Australia | 18,366 | 8,372 | 37,239 | 119% | (51%) | |
| Per boe | 31.73 | 21.53 | 61.56 | 47% | (48%) | |
Vermilion pays current taxes in France, the Netherlands and Australia. Corporate income taxes in France and the Netherlands apply to taxable income after eligible deductions. In France, taxable income is taxed at a rate of approximately 34.4%, plus an additional profit tax of 1.7% levied until 2014 if annual gross revenues exceed 250 million Euros. In the Netherlands, taxable income is taxed at a rate of approximately 46%. As a function of the impact of Vermilion’s Canadian tax pools, the Company does not presently pay current taxes in Canada. The Canadian segment includes holding companies that pay current taxes in foreign jurisdictions.
In Australia, current taxes include both corporate income taxes and PRRT. Corporate income taxes are applied at a rate of approximately 30% on taxable income after eligible deductions, which include PRRT. PRRT is a profit based tax applied at a rate of 40% on sales less eligible expenditures, including operating expenses and capital expenditures.
Total current taxes before PRRT was higher in the first quarter of 2013 as compared to the fourth quarter of 2012 as a result of increased sales in France and Australia, in addition to the absence of certain deductions for asset retirement obligations and depletion recorded in the Netherlands for the fourth quarter of 2012. Total current taxes before PRRT was relatively consistent for the first quarter of 2013 as compared to the same period in the prior year.
PRRT increased for the first quarter of 2013 compared to fourth quarter of 2012 as a result of an inventory draw in the current quarter. On a year-over-year basis, the decrease in PRRT is a result of higher capital expenditures in Australia.
FOREIGN EXCHANGE
| Three Months Ended | |||
| Mar 31, | Dec 31, | Mar 31, | |
| ($M except per boe) | 2013 | 2012 | 2012 |
| Unrealized foreign exchange loss (gain) | 2,519 | (13,873) | (5,247) |
| Per boe | 0.68 | (4.50) | (1.47) |
| Realized foreign exchange loss (gain) | 617 | (2,459) | 820 |
| Per boe | 0.17 | (0.81) | 0.23 |
| Foreign exchange loss (gain) | 3,136 | (16,332) | (4,427) |
| Per boe | 0.85 | (5.31) | (1.24) |
As a result of Vermilion’s international operations, Vermilion conducts business in currencies other than the Canadian dollar and has monetary assets and liabilities (including cash, receivables, payables, derivative assets and liabilities, and intercompany loans) denominated in such currencies. Vermilion’s exposure to foreign currencies includes the U.S. Dollar, the Euro and the Australian Dollar.
Foreign exchange gains and losses are comprised of both unrealized and realized amounts. Unrealized foreign exchange gains and losses are the result of translating monetary assets and liabilities held in non-functional currencies to the respective functional currencies of Vermilion and its subsidiaries. Realized gains and losses are the result of foreign exchange fluctuations and the timing of payments on transactions conducted in non-functional currencies and as such are subject to fluctuations.
For the first quarter of 2013, the unrealized foreign exchange loss primarily resulted from the impact of the appreciation of the Canadian dollar against the Euro and the resultant impact on Euro denominated loans made by Vermilion to its subsidiaries.
SUMMARY OF RESULTS
| Three Months Ended | |||||||||
| Mar 31, | Dec 31, | Sept 30, | Jun 30, | Mar 31, | Dec 31, | Sept 30, | Jun 30, | ||
| ($M except per share) | 2013 | 2012 | 2012 | 2012 | 2012 | 2011 | 2011 | 2011 | |
| Petroleum and natural gas sales | 309,576 | 241,233 | 284,838 | 246,544 | 310,488 | 275,172 | 248,361 | 278,297 | |
| Net earnings (loss) | 52,137 | 56,914 | 30,798 | 37,816 | 65,094 | (30,243) | 64,442 | 81,429 | |
| Net earnings (loss) per share | |||||||||
| Basic | 0.53 | 0.58 | 0.31 | 0.39 | 0.67 | (0.32) | 0.71 | 0.90 | |
| Diluted | 0.51 | 0.57 | 0.31 | 0.38 | 0.66 | (0.32) | 0.70 | 0.89 | |
The fluctuations in Vermilion’s petroleum and natural gas sales and net earnings (loss) from quarter-to-quarter are primarily caused by variations in sales volumes, crude oil and natural gas prices and the impact of royalties and tax legislation in the jurisdictions in which Vermilion operates. In addition, petroleum and natural gas prices may impact gains and losses on derivative instruments and may result in impairment charges or the reversal of impairment charges incurred in previous periods.
LIQUIDITY AND CAPITAL RESOURCES
Vermilion’s net debt as at March 31, 2013 was $744.8 million compared to $677.2 million as at December 31, 2012.
Long-term debt was comprised of the following:
| As At | |||
| Mar 31, | Dec 31, | ||
| ($M) | 2013 | 2012 | |
| Revolving credit facility | 490,303 | 419,784 | |
| Senior unsecured notes | 222,460 | 222,238 | |
| Long-term debt | 712,763 | 642,022 | |
Revolving Credit Facility
At March 31, 2013, Vermilion had in place a bank revolving credit facility totalling $950 million, of which approximately $490.3 million was drawn. The facility, which matures in May of 2015, is fully revolving up to the date of maturity.
The facility is extendable from time to time, but not more than once per year, for a period not longer than three years, at the option of the lenders and upon notice from Vermilion. If no extension is granted by the lenders, the amounts owing pursuant to the facility are repayable on the maturity date. This facility bears interest at a rate applicable to demand loans plus applicable margins.
The amount available to Vermilion under this facility is reduced by outstanding letters of credit associated with Vermilion’s operations totalling $49.1 million as at March 31, 2013 (December 31, 2012 – $49.2 million).
The facility is secured by various fixed and floating charges against the subsidiaries of Vermilion. Under the terms of the facility, Vermilion must maintain a ratio of total bank borrowings (defined as consolidated total debt), to consolidated net earnings before interest, income taxes, depreciation, accretion and other certain non-cash items of not greater than 4.0. In addition, Vermilion must maintain a ratio of consolidated total senior debt (consolidated total debt excluding unsecured and subordinated debt) to consolidated net earnings before interest, income taxes, depreciation, accretion and other certain non-cash items of not greater than 3.0.
As at March 31, 2013, Vermilion was in compliance with its financial covenants.
Senior Unsecured Notes
On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par. The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016. As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.
Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date. Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date. The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.
ASSET RETIREMENT OBLIGATIONS
| As At | |||
| Mar 31, | Dec 31, | ||
| ($M) | 2013 | 2012 | |
| Asset retirement obligations | 362,113 | 371,063 | |
The decrease in asset retirement obligations was primarily the result of an overall increase in the discount rates applied to the obligations. This decrease was partially offset by accretion and additions from new wells drilled during the quarter.
DIVIDENDS
| Three Months Ended | Year Ended | |||
| Mar 31, | Dec 31, | |||
| ($M) | 2013 | 2012 | ||
| Cash flows from operating activities | 190,712 | 496,580 | ||
| Net earnings | 52,137 | 190,622 | ||
| Dividends declared | 59,612 | 223,717 | ||
| Excess of cash flows from operating activities over dividends declared | 131,100 | 272,863 | ||
| (Shortfall) of net earnings over dividends declared | (7,475) | (33,095) |
During the three months ended March 31, 2013, Vermilion maintained monthly dividends at $0.20 per share and declared dividends totalling $59.6 million.
Excess cash flows from operating activities over dividends declared are used to fund capital expenditures, asset retirement obligations and debt repayments.
Following Vermilion’s conversion to a trust in January 2003, the distribution remained at $0.17 per unit per month until it was increased to $0.19 per unit per month in December 2007. Effective September 1, 2010, Vermilion converted to a dividend paying corporation and dividends remained at $0.19 per share per month until increased to $0.20 per share per month in January 2013. The January 2013 increase was announced on November 14, 2012 and resulted in an increase in the monthly cash dividends by 5.3% to $0.20 per share per month beginning with the January 2013 dividend (paid on February 15, 2013).
Vermilion’s policy with respect to dividends is to be conservative and maintain a low ratio of dividends to fund flows from operations. During low price commodity cycles, Vermilion will initially maintain dividends and allow the ratio to rise. Should low commodity price cycles remain for an extended period of time, Vermilion will evaluate the necessity of changing the level of dividends, taking into consideration capital development requirements, debt levels and acquisition opportunities.
Over the next two years, Vermilion anticipates that Corrib, Cardium and other exploration and development activities will require a significant capital investment by Vermilion. Although Vermilion currently expects to be able to maintain its current dividend, Vermilion’s fund flows from operations may not be sufficient during this period to fund cash dividends, capital expenditures and asset retirement obligations. Vermilion will evaluate its ability to finance any shortfalls with debt, issuances of equity or by reducing some or all categories of expenditures to ensure that total expenditures do not exceed available funds.
SHAREHOLDERS’ EQUITY
During the three months ended March 31, 2013, Vermilion issued 0.3 million shares pursuant to the dividend reinvestment plan and Vermilion’s equity based compensation programs. Shareholders’ capital increased by $16.2 million as a result of the issuance of those shares.
As at March 31, 2013, there were 99.5 million shares outstanding. As at April 30, 2013, there were 101.2 million shares outstanding.
CORRIB PROJECT
Vermilion holds an 18.5% non-operating interest in the offshore Corrib gas field located off the northwest coast of Ireland. Production from Corrib is expected to increase Vermilion’s volumes by approximately 55 mmcf/d (9,000 boe/d) once the field reaches peak production. Vermilion acquired its 18.5% working interest in the project on July 30, 2009. The project comprises five offshore wells, both offshore and onshore pipeline segments as well as a natural gas processing facility. At the time of the acquisition most of the key components of the project, with the exception of the onshore pipeline, were either complete or in the latter stages of development. Vermilion’s interest was acquired for cash consideration of $136.8 million with subsequent capital expenditures to March 31, 2013 of $319.1 million, primarily related to completion of the natural gas processing facility, sub-surface well work, and permitting, preparations and construction of the onshore pipeline. Furthermore, pursuant to the terms of the acquisition agreement, Vermilion made an additional payment to the vendor of $134.3 million (US$135 million) at the end of 2012. In 2011, approvals and permissions were granted for the onshore gas pipeline and tunneling activities commenced in December of 2012. Vermilion expects to continue significant capital investment on this project over the next two years and currently expects to achieve initial gas production from this field in late 2014 or early 2015, and to reach peak production levels in mid-2015.
RISK MANAGEMENT
Vermilion is exposed to various market and operational risks. For a detailed discussion of these risks, please see Vermilion’s Annual Report for the year ended December 31, 2012.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect reported assets, liabilities, revenues and expenses, gains and losses, and disclosures of any possible contingencies. These estimates and assumptions are developed based on the best available information which management believed to be reasonable at the time such estimates and assumptions were made. As such, these assumptions are uncertain at the time estimates are made and could change, resulting in a material impact on Vermilion’s consolidated financial statements. Estimates are reviewed by management on an ongoing basis, and as a result, certain of these estimates may change from period to period due to the availability of new information. Additionally, as a result of the unique circumstances of each jurisdiction that Vermilion operates in, the critical accounting estimates may affect one or more jurisdictions.
The following outlines what management believes to be the most critical accounting policies involving the use of estimates and assumptions:
| i. | Depletion and depreciation charges are based on estimates of total proven and probable reserves that Vermilion expects to recover in the future. | |
| ii. | Asset retirement obligations are based on past experience and current economic factors which management believes are reasonable. | |
| iii. | Impairment tests are performed at the cash generating unit (CGU) level, which is determined based on management’s judgment. The calculation of the recoverable amount of a CGU is based on market factors as well as estimates of PNG reserves and future costs required to develop reserves. | |
| iv. | Deferred tax amounts recognized in the consolidated financial statements are based on management’s assessment of the tax positions at the end of each reporting period. |
OFF BALANCE SHEET ARRANGEMENTS
Vermilion has certain lease agreements that are entered into in the normal course of operations, all of which are operating leases and accordingly no asset or liability value has been assigned to the consolidated balance sheet as at March 31, 2013.
Vermilion has not entered into any guarantee or off balance sheet arrangements that would materially impact Vermilion’s financial position or results of operations.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in Vermilion’s internal control over financial reporting that occurred during the period covered by this MD&A that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
As of January 1, 2013, Vermilion adopted the following standards and amendments as issued by the IASB. The adoption of these standards did not have a material impact on Vermilion’s consolidated financial statements.
IFRS 10 “Consolidated Financial Statements”
IFRS 10 replaced Standing Interpretations Committee 12, “Consolidation – Special Purpose Entities” and the consolidation requirements of IAS 27 “Consolidated and Separate Financial Statements”. The new standard replaces the existing risk and rewards based approaches and establishes control as the determining factor when determining whether an interest in another entity should be included in the consolidated financial statements.
IFRS 11 “Joint Arrangements”
IFRS 11 replaced IAS 31 “Interests in Joint Ventures”. The new standard focuses on the rights and obligations of an arrangement, rather than its legal form. The standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to be equity accounted.
IFRS 12 “Disclosure of Interests in Other Entities”
IFRS 12 provides comprehensive disclosure requirements on interests in other entities, including joint arrangements, associates, and special purpose entities. The new disclosures are intended to assist financial statement users in evaluating the nature, risks and financial effects of an entity’s interest in subsidiaries and joint arrangements.
IFRS 13 “Fair Value Measurement”
IFRS 13 provides a common definition of fair value within IFRS. The new standard provides measurement and disclosure guidance and applies when another IFRS requires or permits an item to be measured at fair value, with limited exceptions.
IAS 34 “Interim Financial Reporting”
Amendments to IAS 34 require specific disclosure on the fair value of financial instruments for interim reporting.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The adoption of the following standards is not expected to have a material impact on Vermilion’s consolidated financial statements:
IFRS 9 “Financial Instruments”
As of January 1, 2015, Vermilion will be required to adopt IFRS 9, as part of the first phase of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value.
NETBACKS
The following table includes segmented financial statement information on a per unit basis. Natural gas sales volumes have been converted on a basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.
| Three Months Ended Mar 31, 2013 | Three Months Ended Mar 31, 2012 | ||||||
| Oil & NGLs | Natural Gas | Total | Total | ||||
| $/bbl | $/mcf | $/boe | $/boe | ||||
| Canada | |||||||
| Price | 85.26 | 3.33 | 57.61 | 55.84 | |||
| Realized hedging gain (loss) | 0.28 | – | 0.16 | (0.44) | |||
| Royalties | (9.71) | (0.23) | (6.19) | (6.22) | |||
| Transportation | (1.99) | (0.16) | (1.56) | (1.42) | |||
| Operating | (9.23) | (1.66) | (9.53) | (9.89) | |||
| Operating netback | 64.61 | 1.28 | 40.49 | 37.87 | |||
| France | |||||||
| Price | 109.54 | 11.17 | 107.17 | 104.84 | |||
| Realized hedging loss | (1.89) | – | (1.78) | (4.98) | |||
| Royalties | (6.24) | (0.30) | (6.00) | (5.55) | |||
| Transportation | (2.57) | – | (2.43) | (2.68) | |||
| Operating | (18.02) | (1.68) | (17.58) | (15.30) | |||
| Operating netback | 80.82 | 9.19 | 79.38 | 76.33 | |||
| Netherlands | |||||||
| Price | 102.96 | 10.09 | 61.21 | 59.08 | |||
| Operating | – | (1.19) | (7.06) | (7.63) | |||
| Operating netback | 102.96 | 8.90 | 54.15 | 51.45 | |||
| Australia | |||||||
| Price | 120.76 | – | 120.76 | 156.43 | |||
| Realized hedging loss | (1.74) | – | (1.74) | (0.27) | |||
| Operating | (25.61) | – | (25.61) | (23.27) | |||
| PRRT 1 | (19.27) | – | (19.27) | (45.08) | |||
| Operating netback | 74.14 | – | 74.14 | 87.81 | |||
| Total Company | |||||||
| Price | 103.98 | 6.77 | 83.04 | 86.90 | |||
| Realized hedging loss | (1.12) | – | (0.75) | (1.60) | |||
| Royalties | (5.93) | (0.13) | (4.24) | (4.04) | |||
| Transportation | (1.77) | (0.30) | (1.78) | (1.87) | |||
| Operating | (16.77) | (1.45) | (14.10) | (13.31) | |||
| PRRT 1 | (4.47) | – | (2.99) | (7.63) | |||
| Operating netback | 73.92 | 4.89 | 59.18 | 58.45 | |||
| General and administration | (3.38) | (2.84) | |||||
| Interest expense | (2.33) | (1.71) | |||||
| Realized foreign exchange loss | (0.17) | (0.23) | |||||
| Other income (expense) | 0.13 | (2.31) | |||||
| Current income taxes 1 | (9.54) | (9.06) | |||||
| Fund flows netback | 43.89 | 42.30 | |||||
| Accretion | (1.56) | (1.47) | |||||
| Depletion and depreciation | (21.85) | (21.23) | |||||
| Impairments | – | (18.42) | |||||
| Gain on acquisition | – | 12.68 | |||||
| Deferred taxes | (1.09) | 7.96 | |||||
| Unrealized other (expense) income | (0.11) | 0.07 | |||||
| Unrealized foreign exchange (loss) gain | (0.68) | 1.47 | |||||
| Unrealized loss on derivative instruments | (0.30) | (2.33) | |||||
| Equity based compensation | (4.33) | (2.81) | |||||
| Earnings netback | 13.97 | 18.22 | |||||
| 1 | Vermilion considers Australian PRRT to be an operating item and accordingly has included PRRT in the calculation of operating netbacks. Current income taxes presented above excludes PRRT. |
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)
| March 31, | December 31, | ||||
| Note | 2013 | 2012 | |||
| ASSETS | |||||
| Current | |||||
| Cash and cash equivalents | 176,513 | 102,125 | |||
| Accounts receivable | 156,966 | 180,064 | |||
| Crude oil inventory | 15,526 | 25,719 | |||
| Derivative instruments | 746 | 2,086 | |||
| Prepaid expenses | 9,958 | 10,508 | |||
| 359,709 | 320,502 | ||||
| Deferred taxes | 194,354 | 193,354 | |||
| Exploration and evaluation assets | 4 | 125,775 | 117,161 | ||
| Capital assets | 3 | 2,523,959 | 2,445,240 | ||
| 3,203,797 | 3,076,257 | ||||
| LIABILITIES | |||||
| Current | |||||
| Accounts payable and accrued liabilities | 321,775 | 300,682 | |||
| Dividends payable | 7 | 19,892 | 18,836 | ||
| Derivative instruments | 8,257 | 8,484 | |||
| Income taxes payable | 41,784 | 27,709 | |||
| 391,708 | 355,711 | ||||
| Long-term debt | 6 | 712,763 | 642,022 | ||
| Asset retirement obligations | 5 | 362,113 | 371,063 | ||
| Deferred taxes | 295,706 | 288,815 | |||
| 1,762,290 | 1,657,611 | ||||
| SHAREHOLDERS’ EQUITY | |||||
| Shareholders’ capital | 7 | 1,497,506 | 1,481,345 | ||
| Contributed surplus | 85,088 | 69,581 | |||
| Accumulated other comprehensive loss | (33,741) | (32,409) | |||
| Deficit | (107,346) | (99,871) | |||
| 1,441,507 | 1,418,646 | ||||
| 3,203,797 | 3,076,257 | ||||
CONSOLIDATED STATEMENTS OF NET EARNINGS AND COMPREHENSIVE INCOME
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)
| Three Months Ended | |||||
| March 31, | March 31, | ||||
| Note | 2013 | 2012 | |||
| REVENUE | |||||
| Petroleum and natural gas sales | 309,576 | 310,488 | |||
| Royalties | (15,790) | (14,452) | |||
| Petroleum and natural gas revenue | 293,786 | 296,036 | |||
| EXPENSES | |||||
| Operating | 52,575 | 47,553 | |||
| Transportation | 6,641 | 6,693 | |||
| Equity based compensation | 8 | 16,136 | 10,055 | ||
| Loss on derivative instruments | 3,900 | 14,057 | |||
| Interest expense | 8,689 | 6,101 | |||
| General and administration | 12,610 | 10,148 | |||
| Foreign exchange loss (gain) | 3,136 | (4,427) | |||
| Other (income) expense | (67) | 7,983 | |||
| Accretion | 5 | 5,824 | 5,238 | ||
| Depletion and depreciation | 3, 4 | 81,448 | 75,848 | ||
| Impairments | 3 | – | 65,800 | ||
| Gain on acquisition | – | (45,309) | |||
| 190,892 | 199,740 | ||||
| EARNINGS BEFORE INCOME TAXES | 102,894 | 96,296 | |||
| INCOME TAXES | |||||
| Deferred | 4,047 | (28,431) | |||
| Current | 46,710 | 59,633 | |||
| 50,757 | 31,202 | ||||
| NET EARNINGS | 52,137 | 65,094 | |||
| OTHER COMPREHENSIVE (LOSS) INCOME | |||||
| Currency translation adjustments | (1,332) | 7,381 | |||
| COMPREHENSIVE INCOME | 50,805 | 72,475 | |||
| NET EARNINGS PER SHARE | |||||
| Basic | 0.53 | 0.67 | |||
| Diluted | 0.51 | 0.66 | |||
| WEIGHTED AVERAGE SHARES OUTSTANDING (‘000s) | |||||
| Basic | 99,301 | 96,644 | |||
| Diluted | 101,349 | 98,191 | |||
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)
| Three Months Ended | ||||||
| March 31, | March 31, | |||||
| Note | 2013 | 2012 | ||||
| OPERATING | ||||||
| Net earnings | 52,137 | 65,094 | ||||
| Adjustments: | ||||||
| Accretion | 5 | 5,824 | 5,238 | |||
| Depletion and depreciation | 3, 4 | 81,448 | 75,848 | |||
| Impairments | 3 | – | 65,800 | |||
| Gain on acquisition | – | (45,309) | ||||
| Unrealized loss on derivative instruments | 1,113 | 8,339 | ||||
| Equity based compensation | 8 | 16,136 | 10,055 | |||
| Unrealized foreign exchange loss (gain) | 2,519 | (5,247) | ||||
| Unrealized other expense (income) | 405 | (265) | ||||
| Deferred taxes | 4,047 | (28,431) | ||||
| Asset retirement obligations settled | 5 | (1,388) | (766) | |||
| Changes in non-cash operating working capital | 28,471 | (25,469) | ||||
| Cash flows from operating activities | 190,712 | 124,887 | ||||
| INVESTING | ||||||
| Drilling and development | 3 | (179,520) | (87,896) | |||
| Exploration and evaluation | 4 | (9,576) | (6,464) | |||
| Property acquisitions | 3 | – | (106,184) | |||
| Dispositions | 3 | 8,627 | – | |||
| Changes in non-cash investing working capital | 38,210 | (6,754) | ||||
| Cash flows used in investing activities | (142,259) | (207,298) | ||||
| FINANCING | ||||||
| Increase in long-term debt | 69,429 | – | ||||
| Issuance of shares pursuant to the dividend reinvestment plan | – | 17,558 | ||||
| Cash dividends | (43,024) | (55,047) | ||||
| Cash flows from (used in) financing activities | 26,405 | (37,489) | ||||
| Foreign exchange (loss) gain on cash held in foreign currencies | (470) | 30 | ||||
| Net change in cash and cash equivalents | 74,388 | (119,870) | ||||
| Cash and cash equivalents, beginning of period | 102,125 | 234,507 | ||||
| Cash and cash equivalents, end of period | 176,513 | 114,637 | ||||
| Supplementary information for operating activities – cash payments | ||||||
| Interest paid | 12,092 | 9,507 | ||||
| Income taxes paid | 32,635 | 19,699 | ||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)
| Accumulated | |||||||||||
| Other | Total | ||||||||||
| Shareholders’ | Contributed | Comprehensive | Shareholders’ | ||||||||
| Note | Capital | Surplus | Loss | Deficit | Equity | ||||||
| Balances as at January 1, 2012 | 1,368,145 | 56,468 | (33,387) | (59,625) | 1,331,601 | ||||||
| Net earnings | – | – | – | 65,094 | 65,094 | ||||||
| Currency translation adjustments | – | – | 7,381 | – | 7,381 | ||||||
| Equity based compensation expense | – | 9,419 | – | – | 9,419 | ||||||
| Dividends declared | 7 | – | – | – | (55,124) | (55,124) | |||||
| Issuance of shares pursuant to the | |||||||||||
| dividend reinvestment plan | 7 | 17,558 | – | – | – | 17,558 | |||||
| Shares issued pursuant to the bonus plan | 7 | 636 | – | – | – | 636 | |||||
| Balances as at March 31, 2012 | 1,386,339 | 65,887 | (26,006) | (49,655) | 1,376,565 | ||||||
| Accumulated | |||||||||||
| Other | Total | ||||||||||
| Shareholders’ | Contributed | Comprehensive | Shareholders’ | ||||||||
| Note | Capital | Surplus | Loss | Deficit | Equity | ||||||
| Balances as at January 1, 2013 | 1,481,345 | 69,581 | (32,409) | (99,871) | 1,418,646 | ||||||
| Net earnings | – | – | – | 52,137 | 52,137 | ||||||
| Currency translation adjustments | – | – | (1,332) | – | (1,332) | ||||||
| Equity based compensation expense | – | 15,507 | – | – | 15,507 | ||||||
| Dividends declared | 7 | – | – | – | (59,612) | (59,612) | |||||
| Issuance of shares pursuant to the | |||||||||||
| dividend reinvestment plan | 7 | 15,532 | – | – | – | 15,532 | |||||
| Shares issued pursuant to the bonus plan | 7 | 629 | – | – | – | 629 | |||||
| Balances as at March 31, 2013 | 1,497,506 | 85,088 | (33,741) | (107,346) | 1,441,507 | ||||||
DESCRIPTION OF EQUITY RESERVES
Shareholders’ capital
Represents the recognized amount for common shares when issued, net of equity issuance costs and deferred taxes.
Contributed surplus
Represents the recognized value of employee awards which are settled in shares. Once vested, the value of the awards is transferred to shareholders’ capital.
Accumulated other comprehensive loss
Represents the cumulative income and expenses which are not recorded immediately in net earnings and are accumulated until an event triggers recognition in net earnings. The current balance consists of currency translation adjustments resulting from translating financial statements of subsidiaries with a foreign functional currency to Canadian dollars at period end rates.
Retained earnings (deficit)
Represents the cumulative net earnings less distributed earnings of Vermilion Energy Inc.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)
1. BASIS OF PRESENTATION
Vermilion Energy Inc. (the “Company” or “Vermilion”) is a corporation governed by the laws of the Province of Alberta and is actively engaged in the business of crude oil and natural gas exploration, development, acquisition and production.
These condensed consolidated interim financial statements are in compliance with IAS 34, “Interim financial reporting” and have been prepared using the same accounting policies and methods of computation as Vermilion’s consolidated financial statements for the year ended December 31, 2012, except as discussed in Note 2.
These condensed consolidated interim financial statements should be read in conjunction with Vermilion’s consolidated financial statements for the year ended December 31, 2012, which are contained within Vermilion’s Annual Report for the year ended December 31, 2012 and are available on SEDAR at www.sedar.com or on Vermilion’s website at www.vermilionenergy.com.
These condensed consolidated interim financial statements were approved and authorized for issuance by the Board of Directors of Vermilion on April 30, 2013.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
As of January 1, 2013, Vermilion adopted the following standards and amendments as issued by the IASB. The adoption of these standards did not have a material impact on Vermilion’s consolidated financial statements.
IFRS 10 “Consolidated Financial Statements”
IFRS 10 replaced Standing Interpretations Committee 12, “Consolidation – Special Purpose Entities” and the consolidation requirements of IAS 27 “Consolidated and Separate Financial Statements”. The new standard replaces the existing risk and rewards based approaches and establishes control as the determining factor when determining whether an interest in another entity should be included in the consolidated financial statements.
IFRS 11 “Joint Arrangements”
IFRS 11 replaced IAS 31 “Interests in Joint Ventures”. The new standard focuses on the rights and obligations of an arrangement, rather than its legal form. The standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to be equity accounted.
IFRS 12 “Disclosure of Interests in Other Entities”
IFRS 12 provides comprehensive disclosure requirements on interests in other entities, including joint arrangements, associates, and special purpose entities. The new disclosures are intended to assist financial statement users in evaluating the nature, risks and financial effects of an entity’s interest in subsidiaries and joint arrangements.
IFRS 13 “Fair Value Measurement”
IFRS 13 provides a common definition of fair value within IFRS. The new standard provides measurement and disclosure guidance and applies when another IFRS requires or permits an item to be measured at fair value, with limited exceptions.
IAS 34 “Interim Financial Reporting”
Amendments to IAS 34 require specific disclosure on the fair value of financial instruments for interim reporting. These disclosures are included in Note 11.
3. CAPITAL ASSETS
The following table reconciles the change in Vermilion’s capital assets:
| Petroleum and | Furniture and | Total | ||||
| ($M) | Natural Gas Assets | Office Equipment | Capital Assets | |||
| Balance at January 1, 2012 | 2,016,611 | 15,071 | 2,031,682 | |||
| Additions | 407,973 | 5,248 | 413,221 | |||
| Transfers from exploration and evaluation assets | 10,528 | – | 10,528 | |||
| Property acquisitions | 206,260 | – | 206,260 | |||
| Corporate acquisitions | 136,297 | – | 136,297 | |||
| Borrowing costs capitalized | 9,994 | – | 9,994 | |||
| Changes in estimate for asset retirement obligations | 1,334 | – | 1,334 | |||
| Depletion and depreciation 1 | (289,194) | (5,165) | (294,359) | |||
| Impairments | (65,800) | – | (65,800) | |||
| Effect of movements in foreign exchange rates | (3,882) | (35) | (3,917) | |||
| Balance at December 31, 2012 | 2,430,121 | 15,119 | 2,445,240 | |||
| Additions | 178,013 | 1,507 | 179,520 | |||
| Dispositions | (8,627) | – | (8,627) | |||
| Changes in estimate for asset retirement obligations | (13,657) | – | (13,657) | |||
| Depletion and depreciation 1 | (75,395) | (2,150) | (77,545) | |||
| Effect of movements in foreign exchange rates | (961) | (11) | (972) | |||
| Balance at March 31, 2013 | 2,509,494 | 14,465 | 2,523,959 | |||
| 1 | Depletion and depreciation above excludes depletion recorded as a component of crude oil inventory. |
4. EXPLORATION AND EVALUATION ASSETS
The following table reconciles the change in Vermilion’s exploration and evaluation assets:
| ($M) | Exploration and Evaluation Assets | |||
| Balance at January 1, 2012 | 92,301 | |||
| Additions | 39,317 | |||
| Transfers to petroleum and natural gas assets | (10,528) | |||
| Depreciation | (3,485) | |||
| Effect of movements in foreign exchange rates | (444) | |||
| Balance at December 31, 2012 | 117,161 | |||
| Additions | 9,576 | |||
| Depreciation | (903) | |||
| Effect of movements in foreign exchange rates | (59) | |||
| Balance at March 31, 2013 | 125,775 | |||
5. ASSET RETIREMENT OBLIGATIONS
The following table reconciles the change in Vermilion’s asset retirement obligations:
| ($M) | Asset Retirement Obligations | ||
| Balance at January 1, 2012 | 310,531 | ||
| Additional obligations recognized | 55,228 | ||
| Changes in estimates for existing obligations | (26,560) | ||
| Obligations settled | (13,739) | ||
| Accretion | 23,040 | ||
| Changes in discount rates | 22,807 | ||
| Effect of movements in foreign exchange rates | (244) | ||
| Balance at December 31, 2012 | 371,063 | ||
| Additional obligations recognized | 1,023 | ||
| Obligations settled | (1,388) | ||
| Accretion | 5,824 | ||
| Changes in discount rates | (14,680) | ||
| Effect of movements in foreign exchange rates | 271 | ||
| Balance at March 31, 2013 | 362,113 | ||
6. LONG-TERM DEBT
The following table summarizes Vermilion’s outstanding long-term debt:
| As At | ||||
| ($M) | Mar 31, 2013 | Dec 31, 2012 | ||
| Revolving credit facility | 490,303 | 419,784 | ||
| Senior unsecured notes | 222,460 | 222,238 | ||
| Long-term debt | 712,763 | 642,022 | ||
Revolving Credit Facility
At March 31, 2013, Vermilion had in place a bank revolving credit facility totalling $950 million, of which approximately $490.3 million was drawn. The facility, which matures in May of 2015, is fully revolving up to the date of maturity.
The facility is extendable from time to time, but not more than once per year, for a period not longer than three years, at the option of the lenders and upon notice from Vermilion. If no extension is granted by the lenders, the amounts owing pursuant to the facility are repayable on the maturity date. This facility bears interest at a rate applicable to demand loans plus applicable margins.
The amount available to Vermilion under this facility is reduced by outstanding letters of credit associated with Vermilion’s operations totalling $49.1 million as at March 31, 2013 (December 31, 2012 – $49.2 million).
The facility is secured by various fixed and floating charges against the subsidiaries of Vermilion. Under the terms of the facility, Vermilion must maintain a ratio of total bank borrowings (defined as consolidated total debt), to consolidated net earnings before interest, income taxes, depreciation, accretion and other certain non-cash items of not greater than 4.0. In addition, Vermilion must maintain a ratio of consolidated total senior debt (consolidated total debt excluding unsecured and subordinated debt) to consolidated net earnings before interest, income taxes, depreciation, accretion and other certain non-cash items of not greater than 3.0.
As at March 31, 2013, Vermilion was in compliance with its financial covenants.
Senior Unsecured Notes
On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par. The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016. As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.
Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date. Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date. The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.
7. SHAREHOLDERS’ CAPITAL
The following tables reconcile the change in Vermilion’s shareholders’ capital:
| Shareholders’ Capital | Number of Shares (‘000s) | Amount ($M) | ||
| Balance as at January 1, 2012 | 96,430 | 1,368,145 | ||
| Issuance of shares pursuant to the dividend reinvestment plan | 1,631 | 72,058 | ||
| Vesting of equity based awards | 904 | 33,355 | ||
| Share-settled dividends on vested equity based awards | 157 | 7,151 | ||
| Shares issued pursuant to the bonus plan | 13 | 636 | ||
| Balance as at December 31, 2012 | 99,135 | 1,481,345 | ||
| Issuance of shares pursuant to the dividend reinvestment plan | 315 | 15,532 | ||
| Shares issued pursuant to the bonus plan | 12 | 629 | ||
| Balance as at March 31, 2013 | 99,462 | 1,497,506 | ||
Dividends declared to shareholders for the three months ended March 31, 2013 were $59.6 million.
Subsequent to the end of the period and prior to the condensed consolidated interim financial statements being authorized for issue on April 30, 2013, Vermilion declared dividends totalling $20.2 million or $0.20 per share.
8. EQUITY BASED COMPENSATION
The following table summarizes the number of awards outstanding under the Vermilion Incentive Plan (“VIP”):
| Number of Awards (‘000s) | 2013 | 2012 | |
| Opening balance | 1,690 | 1,750 | |
| Granted | 57 | 681 | |
| Vested | – | (596) | |
| Forfeited | (3) | (145) | |
| Closing balance | 1,744 | 1,690 |
The fair value of a VIP award is determined on the grant date at the closing price of Vermilion’s common shares on the Toronto Stock Exchange, adjusted by the estimated performance factor that will ultimately be achieved. Dividends, which notionally accrue to the awards during the vesting period, are not included in the determination of grant date fair values.
9. SEGMENTED INFORMATION
The following segment information has been prepared by segregating the results into the geographic areas in which Vermilion operates. The following amounts include transactions between segments, which are recorded at fair value at the date of recognition.
| Three Months Ended March 31, 2013 | ||||||||||||
| ($M) | Canada | France | Netherlands | Australia | Ireland | Total | ||||||
| Total assets | 1,289,888 | 842,756 | 140,269 | 342,107 | 588,777 | 3,203,797 | ||||||
| Drilling and development | 84,060 | 21,592 | 1,999 | 55,349 | 16,520 | 179,520 | ||||||
| Exploration and evaluation | 9,576 | – | – | – | – | 9,576 | ||||||
| Operating Income (Loss) | ||||||||||||
| Oil and gas sales to external customers | 83,688 | 121,566 | 34,421 | 69,901 | – | 309,576 | ||||||
| Royalties | (8,989) | (6,801) | – | – | – | (15,790) | ||||||
| Revenue from external customers | 74,699 | 114,765 | 34,421 | 69,901 | – | 293,786 | ||||||
| Realized gain (loss) on derivative instruments | 237 | (2,019) | – | (1,005) | – | (2,787) | ||||||
| Transportation expense | (2,269) | (2,754) | – | – | (1,618) | (6,641) | ||||||
| Operating expense | (13,841) | (19,939) | (3,969) | (14,826) | – | (52,575) | ||||||
| Operating income (loss) | 58,826 | 90,053 | 30,452 | 54,070 | (1,618) | 231,783 | ||||||
| Corporate income taxes | 251 | 18,659 | 9,434 | 7,213 | – | 35,557 | ||||||
| PRRT | – | – | – | 11,153 | – | 11,153 | ||||||
| Current income taxes | 251 | 18,659 | 9,434 | 18,366 | – | 46,710 | ||||||
| Three Months Ended March 31, 2012 | ||||||||||||
| ($M) | Canada | France | Netherlands | Australia | Ireland | Total | ||||||
| Total assets | 1,181,389 | 727,854 | 145,102 | 260,736 | 511,918 | 2,826,999 | ||||||
| Drilling and development | 65,546 | 5,727 | 2,473 | 4,544 | 9,606 | 87,896 | ||||||
| Exploration and evaluation | 6,367 | – | 97 | – | – | 6,464 | ||||||
| Operating Income (Loss) | ||||||||||||
| Oil and gas sales to external customers | 80,526 | 103,511 | 31,820 | 94,631 | – | 310,488 | ||||||
| Royalties | (8,969) | (5,483) | – | – | – | (14,452) | ||||||
| Revenue from external customers | 71,557 | 98,028 | 31,820 | 94,631 | – | 296,036 | ||||||
| Realized loss on derivative instruments | (638) | (4,914) | – | (166) | – | (5,718) | ||||||
| Transportation expense | (2,044) | (2,648) | – | – | (2,001) | (6,693) | ||||||
| Operating expense | (14,267) | (15,102) | (4,109) | (14,075) | – | (47,553) | ||||||
| Operating income (loss) | 54,608 | 75,364 | 27,711 | 80,390 | (2,001) | 236,072 | ||||||
| Corporate income taxes | 442 | 12,895 | 9,057 | 9,970 | – | 32,364 | ||||||
| PRRT | – | – | – | 27,269 | – | 27,269 | ||||||
| Current income taxes | 442 | 12,895 | 9,057 | 37,239 | – | 59,633 | ||||||
Reconciliation of operating income to net earnings
| Three Months Ended | ||||
| ($M) | Mar 31, 2013 | Mar 31, 2012 | ||
| Operating income | 231,783 | 236,072 | ||
| Equity based compensation | (16,136) | (10,055) | ||
| Unrealized loss on derivative instruments | (1,113) | (8,339) | ||
| Interest expense | (8,689) | (6,101) | ||
| General and administration | (12,610) | (10,148) | ||
| Foreign exchange (loss) gain | (3,136) | 4,427 | ||
| Other income (expense) | 67 | (7,983) | ||
| Accretion | (5,824) | (5,238) | ||
| Depletion and depreciation | (81,448) | (75,848) | ||
| Impairments | – | (65,800) | ||
| Gain on acquisition | – | 45,309 | ||
| Earnings before income taxes | 102,894 | 96,296 | ||
| Income taxes | (50,757) | (31,202) | ||
| Net earnings | 52,137 | 65,094 | ||
10. CAPITAL DISCLOSURES
| Three Months Ended | |||
| ($M except as indicated) | Mar 31, 2013 | Mar 31, 2012 | |
| Long-term debt | 712,763 | 373,798 | |
| Current liabilities | 391,708 | 493,465 | |
| Current assets | (359,709) | (337,232) | |
| Net debt [1] | 744,762 | 530,031 | |
| Cash flows from operating activities | 190,712 | 124,887 | |
| Changes in non-cash operating working capital | (28,471) | 25,469 | |
| Asset retirement obligations settled | 1,388 | 766 | |
| Fund flows from operations | 163,629 | 151,122 | |
| Annualized fund flows from operations [2] | 654,516 | 604,488 | |
| Ratio of net debt to annualized fund flows from operations ([1] ÷ [2]) | 1.1 | 0.9 | |
The ratio of net debt to annualized fund flows from operations was higher in the current year as compared to the prior year primarily as a result of an increase in net debt. The increase in net debt was the result of the two acquisitions that occurred in France during the first and fourth quarter of 2012 and capital expenditures pertaining to the Ireland assets, which are currently under development.
Vermilion is subject to certain externally imposed capital requirements under its revolving credit facility. During the periods covered by these consolidated financial statements, Vermilion continued to comply with these requirements.
11. FINANCIAL INSTRUMENTS
Classification of Financial Instruments
The following table summarizes information relating to Vermilion’s financial instruments as at March 31, 2013 and December 31, 2012:
| As at March 31, 2013 | As at December 31, 2012 | ||||||||||||||||
| Class of financial instrument | Consolidated balance sheet caption | Accounting designation | Related caption on Statement of Net Earnings | Carrying value ($M) |
Fair value ($M) |
Carrying value ($M) | Fair value ($M) |
Fair value measurement hierarchy | |||||||||
| Cash | Cash and cash equivalents | HFT | Gains and losses on foreign exchange are included in foreign exchange loss (gain) | 176,513 | 176,513 | 102,125 | 102,125 | Level 1 | |||||||||
| Receivables | Accounts receivable | LAR | Gains and losses on foreign exchange are included in foreign exchange loss (gain) and impairments are recognized as general and administration expense | 156,966 | 156,966 | 180,064 | 180,064 | Not applicable | |||||||||
| Derivative assets | Derivative instruments | HFT | Loss on derivative instruments | 746 | 746 | 2,086 | 2,086 | Level 2 | |||||||||
| Derivative liabilities | Derivative instruments | HFT | Loss on derivative instruments | (8,257) | (8,257) | (8,484) | (8,484) | Level 2 | |||||||||
| Payables | Accounts payable and accrued liabilities | OTH | Gains and losses on foreign exchange are included in foreign exchange loss (gain) | (341,667) | (341,667) | (319,518) | (319,518) | Not applicable | |||||||||
| Dividends payable | |||||||||||||||||
| Long-term debt | Long-term debt | OTH | Interest expense | (712,763) | (728,101) | (642,022) | (656,315) | Not applicable | |||||||||
The accounting designations used in the above table refer to the following:
HFT – Classified as “Held for trading” in accordance with International Accounting Standard 39 “Financial Instruments: Recognition and Measurement”. These financial assets and liabilities are carried at fair value on the consolidated balance sheets with associated gains and losses reflected in net earnings.
LAR – “Loans and receivables” are initially recognized at fair value and are subsequently measured at amortized cost. Impairments and foreign exchange gains and losses are recognized in net earnings.
OTH – “Other financial liabilities” are initially recognized at fair value net of transaction costs directly attributable to the issuance of the instrument and subsequently are measured at amortized cost. Interest is recognized in net earnings using the effective interest method. Foreign exchange gains and losses are recognized in net earnings.
Level 1 – Fair value measurement is determined by reference to unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Fair value measurement is determined based on inputs other than unadjusted quoted prices that are observable, either directly or indirectly.
Level 3 – Fair value measurement is based on inputs for the asset or liability that are not based on observable market data.
Determination of Fair Values
The level in the fair value hierarchy into which the fair value measurements are categorized is determined on the basis of the lowest level input that is significant to the fair value measurement. Transfers between levels on the fair value hierarchy are deemed to have occurred at the end of the reporting period.
Fair values for derivative assets and derivative liabilities are determined using pricing models incorporating future prices that are based on assumptions which are supported by prices from observable market transactions and are adjusted for credit risk.
The carrying value of receivables approximate their fair value due to their short maturities.
The carrying value of long-term debt outstanding on the revolving credit facility approximates its fair value due to the use of short-term borrowing instruments at market rates of interest.
The fair value of the senior unsecured notes changes in response to changes in the market rates of interest payable on similar instruments and was determined with reference to prevailing market rates for such instruments.
Nature and Extent of Risks Arising from Financial Instruments
Market risk:
Vermilion’s financial instruments are exposed to currency risk related to changes in foreign currency denominated financial instruments and commodity price risk related to outstanding derivative positions. The following table summarizes what the impact on comprehensive income before tax would be for the three months ended March 31, 2013 given changes in the relevant risk variables that Vermilion considers were reasonably possible at the balance sheet date. The impact on comprehensive income before tax associated with changes in these risk variables for assets and liabilities that are not considered financial instruments are excluded from this analysis. This analysis does not attempt to reflect any interdependencies between the relevant risk variables.
| March 31, 2013 | ||||
| Before tax effect on comprehensive income | ||||
| Risk ($M) | Description of change in risk variable | Increase (decrease) | ||
| Currency risk – Euro to Canadian | Increase in strength of the Canadian dollar against the | (6,953) | ||
| Euro by 5% over the relevant closing rates on March 31, 2013 | ||||
| Decrease in strength of the Canadian dollar against the | 6,953 | |||
| Euro by 5% over the relevant closing rates on March 31, 2013 | ||||
| Currency risk – US $ to Canadian | Increase in strength of the Canadian dollar against the | (1,440) | ||
| US$ by 5% over the relevant closing rates on March 31, 2013 | ||||
| Decrease in strength of the Canadian dollar against the | 1,440 | |||
| US$ by 5% over the relevant closing rates on March 31, 2013 | ||||
| Currency risk – AUD $ to Canadian | Increase in strength of the Canadian dollar against the | (1,898) | ||
| AUD$ by 5% over the relevant closing rates on March 31, 2013 | ||||
| Decrease in strength of the Canadian dollar against the | 1,898 | |||
| AUD$ by 5% over the relevant closing rates on March 31, 2013 | ||||
| Commodity price risk | Increase in relevant oil reference price within option pricing models used to | (13,178) | ||
| determine the fair value of financial derivative positions by US$5.00/bbl at March 31, 2013 | ||||
| Decrease in relevant oil reference price within option pricing models used to | 6,014 | |||
| determine the fair value of financial derivative positions by US$5.00/bbl at March 31, 2013 | ||||
| Interest rate risk | Increase in average Canadian prime interest rate | (1,021) | ||
| by 100 basis points during the three months ended March 31, 2013 | ||||
| Decrease in average Canadian prime interest rate | 1,021 | |||
| by 100 basis points during the three months ended March 31, 2013 | ||||