The unaudited interim financial statements and management discussion and analysis for the three and nine months ended September 30, 2020 will be available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com, on EDGAR at www.sec.gov/edgar.shtml, and on Vermilion’s website at www.vermilionenergy.com.
Highlights
- Fund flows from operations (“FFO”) in Q3 2020 was $115 million ($0.73/basic share(1)), an increase of 40% from the prior quarter. The increase is primarily due to higher commodity prices, most notably global oil benchmarks and European gas which represents our two most dominant products from a revenue generating perspective. The impact from higher commodity prices was partially offset by lower production quarter-over-quarter.
- Free cash flow(1) (“FCF”) in Q3 2020 more than doubled from the prior quarter to $83 million as a result of the increase in FFO and limited capital investment during the quarter.
- Capital expenditures in Q3 2020 decreased 26% from the prior quarter to $31 million, and was focused primarily on maintenance related activities. This reduced level of activity was partly due to the design of our front-end weighted capital program and the budget cuts announced earlier this year in response to the commodity price collapse, and was also influenced by our focus on directing FCF towards debt reduction.
- Q3 2020 production averaged 95,471 boe/d, representing a 5% decrease from the prior quarter. The decrease was primarily due to natural declines, plant turnarounds and limited capital investment during the quarter, partially offset by increased production in France following the restart of the Grandpuits refinery in mid-June.
- Production from our European business units averaged 25,935 in Q3 2020, an increase of 3% from the prior quarter primarily due to higher production in France following the restart of the Grandpuits refinery in mid-June. This increase was partially offset by a planned turnaround in Ireland and Germany and natural declines across all other European business units.
- Production from our North American business units averaged 64,986 boe/d in Q3 2020, a decrease of 7% from the prior quarter. The decrease was primarily due to natural decline and limited capital investment as a result of the front-end-weighted capital program and reduced capital budget announced earlier in the year in response to the COVID-19 pandemic and resulting commodity price collapse.
- In Australia, production averaged 4,549 bbl/d in Q3 2020, a 14% decrease from the prior quarter primarily due to natural decline and an unplanned 4-day shutdown to clean out one of the separator vessels.
- 2020 annual production guidance has been tightened to a range of 94,000 to 96,000 boe/d (from 94,000 to 98,000 boe/d previously) to reflect current production estimates and the deferred startup of new gas production in the Netherlands to take advantage of higher European gas prices during the winter months.
- We continue to work through various scenarios for our 2021 capital budget and expect to release more information early in the new year. We are taking a very careful and thoughtful approach in preparing our capital budget for 2021, paying close attention to forward commodity prices and the profitability of each individual project, while also seeking the appropriate balance between production preservation, debt reduction and capital flexibility. As we have previously stated, our number one financial priority at this time is debt reduction and positioning the company for future success, and we are willing to sacrifice top-line production growth in the near-term to achieve this objective.
- In early November, Vermilion released its 2020 Corporate Sustainability Report, marking our 7th year of ESG reporting. The 2020 report highlights our ongoing focus on reducing emissions within our operations, along with a content index that includes recommendations from the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board. The report can be found on our website using the following link. http://sustainability.vermilionenergy.com/
(1) |
Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of the accompanying Management’s Discussion and Analysis. |
($M except as indicated) |
Q3 2020 |
Q2 2020 |
Q3 2019 |
YTD 2020 |
YTD 2019 |
|
Financial |
||||||
Petroleum and natural gas sales |
282,020 |
193,013 |
391,935 |
803,347 |
1,301,061 |
|
Fund flows from operations |
114,776 |
81,852 |
216,153 |
366,853 |
692,463 |
|
Fund flows from operations ($/basic share) (1) |
0.73 |
0.52 |
1.39 |
2.33 |
4.49 |
|
Fund flows from operations ($/diluted share) (1) |
0.73 |
0.52 |
1.39 |
2.33 |
4.45 |
|
Net (loss) earnings |
(69,926) |
(71,290) |
(10,229) |
(1,459,720) |
31,322 |
|
Net (loss) earnings ($/basic share) |
(0.44) |
(0.45) |
(0.07) |
(9.26) |
0.20 |
|
Capital expenditures |
31,330 |
42,274 |
127,879 |
307,308 |
422,539 |
|
Acquisitions |
6,720 |
2,932 |
4,657 |
20,989 |
29,307 |
|
Asset retirement obligations settled |
2,305 |
970 |
3,586 |
7,007 |
12,090 |
|
Cash dividends ($/share) |
— |
— |
0.690 |
0.575 |
2.070 |
|
Dividends declared |
— |
— |
107,176 |
90,067 |
319,609 |
|
% of fund flows from operations |
—% |
—% |
50% |
25% |
46% |
|
Net dividends (1) |
— |
— |
98,316 |
81,790 |
294,872 |
|
% of fund flows from operations |
—% |
—% |
45% |
22% |
43% |
|
Payout (1) |
33,635 |
42,612 |
229,781 |
396,105 |
729,501 |
|
% of fund flows from operations |
29% |
52% |
106% |
108% |
105% |
|
Net debt |
2,136,219 |
2,161,442 |
2,001,870 |
2,136,219 |
2,001,870 |
|
Net debt to four quarter trailing fund flows from operations |
3.67 |
3.16 |
2.19 |
3.67 |
2.19 |
|
Operational |
||||||
Production |
||||||
Crude oil and condensate (bbls/d) |
43,240 |
45,041 |
47,242 |
44,383 |
48,455 |
|
NGLs (bbls/d) |
9,509 |
9,588 |
7,772 |
9,041 |
7,925 |
|
Natural gas (mmcf/d) |
256.34 |
274.42 |
253.36 |
265.39 |
268.88 |
|
Total (boe/d) |
95,471 |
100,366 |
97,239 |
97,656 |
101,193 |
|
Average realized prices |
||||||
Crude oil and condensate ($/bbl) |
52.77 |
34.90 |
73.45 |
49.03 |
75.38 |
|
NGLs ($/bbl) |
15.04 |
8.94 |
6.14 |
11.09 |
13.25 |
|
Natural gas ($/mcf) |
2.34 |
1.85 |
2.43 |
2.37 |
3.56 |
|
Production mix (% of production) |
||||||
% priced with reference to WTI |
40% |
41% |
39% |
40% |
38% |
|
% priced with reference to Dated Brent |
17% |
14% |
19% |
16% |
18% |
|
% priced with reference to AECO |
28% |
29% |
26% |
28% |
26% |
|
% priced with reference to TTF and NBP |
15% |
16% |
16% |
16% |
18% |
|
Netbacks ($/boe) |
||||||
Operating netback (1) |
16.29 |
12.49 |
28.22 |
16.94 |
29.80 |
|
Fund flows from operations netback |
12.95 |
9.08 |
23.73 |
13.63 |
24.89 |
|
Operating expenses |
10.21 |
11.00 |
11.55 |
11.55 |
11.85 |
|
General and administration expenses |
1.35 |
1.88 |
1.50 |
1.57 |
1.53 |
|
Average reference prices |
||||||
WTI (US $/bbl) |
40.93 |
27.85 |
56.45 |
38.32 |
57.06 |
|
Edmonton Sweet index (US $/bbl) |
37.42 |
21.71 |
51.79 |
32.57 |
52.34 |
|
Saskatchewan LSB index (US $/bbl) |
37.57 |
21.60 |
52.01 |
32.53 |
52.81 |
|
Dated Brent (US $/bbl) |
43.00 |
29.20 |
61.94 |
40.82 |
64.65 |
|
AECO ($/mcf) |
2.24 |
1.99 |
1.06 |
2.09 |
1.64 |
|
NBP ($/mcf) |
3.67 |
2.26 |
4.50 |
3.43 |
6.08 |
|
TTF ($/mcf) |
3.51 |
2.39 |
4.40 |
3.38 |
6.08 |
|
Average foreign currency exchange rates |
||||||
CDN $/US $ |
1.33 |
1.39 |
1.32 |
1.35 |
1.33 |
|
CDN $/Euro |
1.56 |
1.53 |
1.47 |
1.52 |
1.49 |
|
Share information (‘000s) |
||||||
Shares outstanding – basic |
158,308 |
158,307 |
155,505 |
158,308 |
155,505 |
|
Shares outstanding – diluted (1) |
163,800 |
164,090 |
159,260 |
163,800 |
159,260 |
|
Weighted average shares outstanding – basic |
158,307 |
158,189 |
155,254 |
157,688 |
154,326 |
|
Weighted average shares outstanding – diluted (1) |
158,307 |
158,189 |
155,421 |
157,688 |
155,673 |
(1) |
The above table includes non-GAAP financial measures which may not be comparable to other companies. Please see the “Non-GAAP Financial Measures” section of the accompanying Management’s Discussion and Analysis. |
Message to Shareholders
Commodity prices during the third quarter partially recovered from the lows experienced in the prior quarter. In particular, global oil benchmarks and European natural gas benchmarks, our two most dominant products from a revenue generating perspective, increased approximately 50% relative to average prices in the second quarter. While the operating environment remains challenging even at these higher price levels, the improvement in commodity prices helped drive a 40% sequential increase in our Q3 2020 FFO to $115 million ($0.73/basic share(1)). As a result of the increase in FFO and limited capital investment, we generated $83 million of free cash flow during the third quarter and paid down $55 million on our credit facility.
During the third quarter, we resumed all operational activity that was stopped or deferred during the COVID-19 confinement period, and have slowly started returning staff to the office while keeping a close eye on further COVID-19 developments. Capital expenditures in Q3 2020 decreased 26% from the prior quarter to $31 million, and was focused primarily on maintenance related activities with no new wells drilled or tied-in during the quarter. This reduced level of activity was partly due to the design of our front-end weighted capital program and the budget cuts announced earlier this year in response to the commodity price collapse, and was also influenced by our focus on debt reduction.
Production in Q3 2020 declined 5% from the prior quarter to an average of 95,471 boe/d primarily due to natural decline, plant turnarounds and limited capital investment during the quarter, partially offset by increased production in France following the restart of the Grandpuits refinery. As a result of the front-end weighted capital program we executed this year, all of our new production was added during the first half of the year resulting in a declining production base for most business units through the second half of the year. We also made the economic decision to defer the startup of the Weststellingwerf (0.5 net) well until 2021 to take advantage of higher European gas prices. Although this will have a modestly negative impact on production for the second half of 2020, the decision will ultimately enhance the overall profitability and cash flow for the company. Incorporating this production deferral and taking into account our current production estimates, we have tightened our 2020 annual production guidance to a range of 94,000 to 96,000 boe/d.
We continue to work through various scenarios for our 2021 capital budget and expect to release more information in the new year. We are taking a very careful and thoughtful approach in preparing our capital budget for 2021, paying close attention to forward commodity prices and the profitability of each individual project, while also seeking the appropriate balance between production preservation, debt reduction and capital flexibility. As we have previously stated, our number one financial priority at this time is debt reduction and positioning the company for future success, and we are willing to sacrifice top-line production growth in the near-term to achieve this objective. We continue to focus on opportunities to improve our cost structure and capital efficiencies, and to that end we will be targeting a more level-loaded capital program in 2021 which should result in a more efficient allocation of capital while smoothing the production profile throughout the year.
The third quarter of 2020 was the first full quarter with the formal Executive Committee in place, and this structure is proving to be very successful in managing the company. By utilizing the collective knowledge and skillset of the Committee members, recently increased from six to nine members, we have been making steady progress in evaluating the business and navigating the company through these challenging times. While we anticipate continued volatility through the balance of 2020 and into 2021 as uncertainty persists around the duration of the COVID-19 pandemic, we have taken the necessary steps to position Vermilion for this environment. Earlier this year we reduced annual cash outflows by over $550 million and negotiated an extension to our $2.1 billion revolving credit facility to May 2024. We are also constructing our 2021 budget in a way that will ensure we retain the maximum amount of flexibility while only investing in the highest return projects. We remain optimistic about the longer-term prospects for Vermilion and our ability to generate free cash flow with the aim of returning capital to investors and maximizing value creation for all of our stakeholders over the long-term.
Q3 2020 Operations Review
North America
Production from our North American business units averaged 64,986 boe/d in Q3 2020, a decrease of 7% from the prior quarter primarily due to natural decline and limited capital investment during the quarter. As a result of the front-end-weighted capital program we executed this year and the reduced capital program announced in March in response to the COVID-19 pandemic and resulting commodity price collapse, capital activity during the third quarter was focused on maintenance activities with no wells drilled or tied-in during the quarter. During the fourth quarter we reinitiated moderate investment into new well activity with two rigs in Alberta targeting liquids rich gas.
Europe
Production from our European business units averaged 25,935 in Q3 2020, an increase of 3% from the prior quarter primarily due to increased production from the Paris basin in France following the restart of the Grandpuits refinery in mid-June. Production in France was also supported by the restart of workover activities in June following the COVID-19 confinement period in France. At the end of September, Total SE (“Total”) announced plans to convert its Grandpuits refinery into a zero-crude platform for biofuels and bioplastics and its intention to discontinue crude oil refining at the platform in the first quarter of 2021. The Grandpuits refinery has been in operation for over 50 years and currently processes all of our Paris Basin oil production, approximately 5,000 bbl/d. Our recently negotiated long-term agreement with Total has provisions to deal with the closure of the Grandpuits refinery, whereby Total will take receipt of our crude at one of their other refineries in France. We are currently working on securing other transportation and delivery options to ensure a smooth transition. We estimate this will increase our transportation costs by approximately $20 million on an annualized basis, however we will continue to evaluate longer-term marketing options for this crude.
Elsewhere in Europe, our employees and contractors slowly started returning to the office following the COVID-19 confinements, however capital activity was limited due to the capital reductions announced earlier in the year. In the Netherlands, we deferred the startup of the Weststellingwerf (0.5 net) well until 2021 to take advantage of higher European gas prices during the winter months. In Ireland, a 3-week turnaround scheduled for September was scaled back to approximately 1-week due to the unavailability of a key contractor, however we managed to complete 50% of the scope work and plan to reschedule the remaining work next year. A third-party facility turnaround in Germany and well maintenance in Hungary further offset some of the production gains in France. We continue to advance future drilling projects in the Netherlands and Central and Eastern Europe in preparation for our 2021 drilling campaign.
Australia
In Australia, production averaged 4,549 bbl/d in Q3 2020, a 14% decrease from the prior quarter primarily due to natural decline and an unplanned 4-day shutdown to clean out one of the separator vessels. We sold 445,000 barrels of Wandoo crude during the third quarter and realized an average price premium of C$11 above Dated Brent. This premium remains well above the premium realized in prior years but is less than the premium realized earlier in the year due to weaker refinery margins as a result of the global economic slowdown related to COVID-19. We have a two-week maintenance turnaround scheduled for the Wandoo platform in Q4 2020 which will result in lower production volumes during the fourth quarter.
Commodity Hedging
Vermilion hedges to manage commodity price exposures and increase the stability of our cash flows. In aggregate, as of October 27, 2020, we have 47% of our expected net-of-royalty production hedged for the fourth quarter of 2020. With respect to individual commodity products, we have hedged 90% of our European natural gas production, 17% of our oil production, and 57% of our North American natural gas volumes for the fourth quarter of 2020, respectively. Please refer to the Hedging section of our website under Invest With Us for further details.
Sustainability
In early November, Vermilion released its 2020 Corporate Sustainability Report, marking our 7th year of ESG reporting. The 2020 report highlights our ongoing focus on reducing emissions within our operations, along with a content index that includes recommendations from the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board. We are committed to providing safe, affordable and reliable energy for our stakeholders and we believe that integrating sustainability principles into our business will increase shareholder returns, enhance our business development opportunities and reduce long-term risks to our business. The report can be found on our website using the following link.
http://sustainability.vermilionenergy.com/
Organizational Update
During the third quarter, we expanded our Executive Committee from six to nine members with the additions of Gerard Schut, Vice President European Operations, Darcy Kerwin, Vice President Strategic Planning and Dion Hatcher, Vice President Canada Business Unit. This expansion provides deeper coverage of the operations of the company, while continuing to utilize expertise from the corporate functional teams. Each member of the Executive Committee brings a unique skill set and knowledge base which contributes to the collective decision making process of the Committee.
(Signed “Lorenzo Donadeo”) |
(Signed “Curtis Hicks”) |
|
Lorenzo Donadeo |
Curtis Hicks |
|
Executive Chairman |
President |
|
November 6, 2020 |
November 6, 2020 |
(1) |
Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of the accompanying Management’s Discussion and Analysis. |
Management’s Discussion and Analysis and Consolidated Financial Statements
To view Vermilion’s Management’s Discussion and Analysis and Interim Condensed Consolidated Financial Statements for the periods ended September 30, 2020 and 2019, please refer to SEDAR (www.sedar.com) or Vermilion’s website at https://www.vermilionenergy.com/invest-with-us/reports-filings.cfm.
About Vermilion
Vermilion is an international energy producer that seeks to create value through the acquisition, exploration, development and optimization of producing properties in North America, Europe and Australia. Our business model emphasizes organic production growth augmented with value-adding acquisitions, along with returning capital to investors when economically warranted. Vermilion is targeting growth in production primarily through the exploitation of light oil and liquids-rich natural gas conventional resource plays in Canada and the United States, the exploration and development of high impact natural gas opportunities in the Netherlands and Germany, and through oil drilling and workover programs in France and Australia. Vermilion holds a 20% working interest in the Corrib gas field in Ireland.
Vermilion’s priorities are health and safety, the environment, and profitability, in that order. Nothing is more important to us than the safety of the public and those who work with us, and the protection of our natural surroundings. We have been recognized as a top decile performer amongst Canadian publicly listed companies in governance practices, as a Climate Leadership level (A-) performer by the CDP, and a Best Workplace in the Great Place to Work® Institute’s annual rankings in Canada, the Netherlands and Germany. In addition, Vermilion emphasizes strategic community investment in each of our operating areas.
Employees and directors hold approximately 5% of our fully diluted shares and are committed to delivering long-term value for all stakeholders. Vermilion trades on the Toronto Stock Exchange and the New York Stock Exchange under the symbol VET.