Vermilion Energy Inc. (VET) Earnings Call Transcript & Summary

Thank you.

Good morning, ladies and gentlemen, and welcome to the Vermilion Q2 2026 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press the button for the operator. This call is being recorded on July 30th, 2026. I would now like to turn the conference over to Dion Hatcher, President and CEO. Please go ahead.

Thank you. Good morning, ladies and gentlemen. I'm Dion Hatcher, President and CEO of Vermilion Energy. With me today are Lars Glemster, Vice President and CFO, Darcy Kerwin, Vice President, International and HSE, Brandon McQuaid, Vice President, North America. Lara Conrad, Vice President, Business Development, and Travis Thorgerson, Director of Investor Relations and Corporate Planning. defer to the advisory and forward-looking statements in our Q2 release. It describes forward-looking information, non-GAAP measures, and oil and gas terms used today, and outlines the risk factors and assumptions relevant to this discussion. The second quarter of 2026 was another strong quarter for Vermilion, with production averaging 125,800 buies per day, exceeding the top end of our guidance range. Positive results across our portfolio continue to support performance that is trending ahead of our five-year plan that we communicated to our customers. during our investor date in December 2025. With this current performance in mind, and with significant progress in debt reduction, we have increased our return to capital target range of 40 to 60% of access free cash flow, up from 40% previously. Production performance is driven by record output at Mike and Montney, continued strong execution in the Deep Basin, and the state's restart of production in Australia following the back-to-back cyclones earlier this year. Based on operational performance year-to-date, we have increased our full-year production guidance, now 121,000 to 123,000 Bs per day, while maintaining our E&D capital budget range of $600 to $630 million. Our E&D capital expenditures and operating expenses are weighted towards the second half of the year, and we expect full-year costs to be within the stated guidance ranges for these items. In the Montney, strong performance from the most recent BC 6-well pad at 8-35 drove quarterly production at mica of 18,000 BWs per day. had achieved an IP 90 of more than 950 buoys per day per well, comprised of 3 million a day of natural gas, and 470 barrels per day of oil and NGLs. The offset cost reduced to 8.2 million per well. results continue to support the quality, repeatability and improving capital efficiency of our Montney inventory. In the Deep Basin, activity was moderated through spring break-up. The program continues to outperform budget expectations. It has been the primary driver of corporate production outperformance for the first half of the year. In Europe, following the quarter end, we achieved another important milestone in our German deep gas exploration program, with the Vissehorst well being brought on to production in July. This represents first production from the largest discovery for millions made in Europe to date. I would like to take this opportunity to thank our teams for their commitment to safe operations during the many steps required to bring this well in production. We're excited about the next steps, de-bottlenecking the production with a new sales pipeline, as well as drilling the next two wells on this license in 2027. Elsewhere, the Osterhout Well continues to perform in line with prior quarter rates, with a cumulative free cash flow of $43 million since startup. We expect production growth in Germany to be driven by our deep gas exploration program, reaching 10,000 bu's per day by 2030, and given the significant resource, continuing to grow into the next decade. Also in Germany, we closed a previously announced bolt-on acquisition following quarter end. The transaction adds approximately 1,000 bu's per day of production, weighted 85% to natural gas, as well as ownership of key infrastructure around the Osterheide well. Adding production from this horse and these acquired assets is particularly impactful with the recent rally in European gas prices, currently over $25 per MMBTU through winter 2026. European storage levels are well below average for this time of year, and the current pace of refilling is not sufficient to reach the 80% target for winter. plan to increase our domestic gas production through the bottlenecking of infrastructure as well as exploration development across our significant land base in both Germany and the Netherlands. prospect list of high return capital efficient targets, Vermillion is well positioned to grow our production and free cash flow by providing our communities with a reliable source of energy. In Australia, production operations at Bondu safely resumed, following repair work completed during the quarter. Our next export is planned for the third quarter and we expect to return to more regular exports thereafter. Our five-year plan continues to progress well. Operational execution across the portfolio, combined with the first production from this force and continued success in the deep basin and mountaineering, reinforces our confidence in the ability to generate growing free cash flow. Before I pass it to Lars to further discuss these results, I want to take a moment and acknowledge the challenges faced by several of our employees, contractors, and their families that have been impacted by the fires in southern France. Arthur. thoughts are with you and we hope the situation continues to improve in the upcoming days.

Thank you, Dion. In the second quarter, Vermilion generated fund flows from operations of $231 million on E&D capital expenditures of $110 million, resulting in free cash flow of over $120 million. Capital allocation remains focused on disciplined investment, continued balance sheet improvement, and shareholder returns. During the quarter, net debt was reduced by approximately $70 million to $1.22 billion. As of June 30, 2026, net debt to trailing four-quarter fund flows from operations was $1.3 billion. times. Over the past five quarters, Vermillion has reduced debt by approximately $840 million, accelerating progress toward our $1 billion net debt target and significantly strengthening the balance sheet. This continued deleveraging has also reduced structural financing costs, with unit interest expense declining approximately 35% from the prior year. we are on track to reduce full year interest expense by 30 million from 2025. Reflecting this progress, as well as improved visibility to future cashflow and confidence in the sustainability of the business, we have enhanced our return to capital framework. Vermillion now intends to return 40 to 60% of excess free cash flow to shareholders compared to the previous target of 40%. This framework continues to be supported by our base dividend and ongoing share repurchase program. Subsequent to the quarter, we announced the renewal of our NCIB out to July 2027. During the quarter, we returned approximately $26 million to shareholders through dividends of $21 million and $5 million of share repurchases. With the increased return of capital target, we expect the pace of share buybacks to increase. Returning to commodity risk management, Vermillion recognized a gain on hedging during the quarter as a realized loss of $57 million was more than offset by unrealized mark-to-market gains of $174 million on our hedge portfolio. These unrealized gains reflect changes in forward commodity prices relative to our hedge position at March 31, 2026. Our percentage of production hedged will decrease in the second half of 2026 relative to the second quarter levels, which increases our exposure to current elevated commodity prices. Operationally, Canadian production averaged 99,605 BUE per day during the quarter, which included record production from MICA. continue to actively manage eco-exposure and prioritize profitability over production during periods of weaker natural gas pricing. We maintain strong well performance and continued to shift deep basin activity toward liquids rich opportunities in the Rock Creek, Knighton and Ellerslie. Several of our wells in Canada, in both the Deep Basin and Maunee, ranked among the most prolific wells brought online during the quarter. In Europe, in addition to our work getting Vissilhorse online and preparing for follow-up drilling, our activity this quarter focused on workovers, maintenance programs, and preparation for drilling activities in the Netherlands during the second half of 2026. These activities, together with production from Vissahorse and Osterhide, support the continued development of our European gas platform. Looking ahead, we expect third quarter production to average between 116,000 and 118,000 BOE per day, plan maintenance activities in Ireland, Germany and Canada. This is consistent with our assumptions at the time of the budget release. We expect Q4 production to be approximately 122,000 BUE per day, with European gas production back in line with first half levels. For the full year, production guidance has been increased to 121 to 123,000 BOE per day. while E&D capital expenditure guidance remains unchanged at 600 million to 630 million. Both operating expenses and capital expenditures are expected to be weighted toward the second half of the year, as Dion previously noted. The increased production guidance reflects our strong operational performance year-to-date, which has more than offset the impact of back-to-back cyclones in Australia earlier this year. we are confident in the ability of the company to continue to deliver on our investor day outlook i.

We'll now pass it back to Dion. Thank you, Lars. In summary, Vermillion delivered another strong quarter and made significant progress executing our five-year plan. and exceeded the top end of our guidance range, free cash flow totaled $122 million, and net debt was reduced by another $70 million. These results reflect the strength of our asset base, quality of our teams, and our disciplined approach to capital allocation. Vermillion continues to focus on what we can control. As a result, we're seeing structural improvements in the business to stronger capital efficiency, improving wealth performance, lower controllable costs, which improves our full cycle margins. Operationally, record production at MICA, continued deep basing in performance, and a successful restart. of Wando support a strong results across portfolio. In Europe, we achieved first production of Vistahorse, marking another important milestone executing our long-term European gas growth strategy. Financially, our balance sheet continues to strengthen with approximately $840 million of debt reduction achieved over the past five quarters. As leverage declines and visibility to growing free cash flow continues to improve, we are increasing our shareholder return framework to target 40 to 60% of accessory cash flow. Looking forward, operational momentum remains strong. Product performance through the first half of 26 has allowed us to increase annual guidance without increasing capital expenditure. supported by a repositioned portfolio, growing European gas exposure, a strengthening balance sheet, and a dismal capital allocation framework. We believe Vermillion is well positioned to continue generating sustainable free cash flow and shareholder value. With that, we want to open the line for questions. Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Menno Hulsvath with TD Cohen. Please go ahead, Menno.

Thanks and good morning everyone. I'll start with the question on the higher level operational setup through the middle of next year. You did touch on this to some degree in your opening remarks. I understand that you can't provide guidance for 2027, but beyond turnarounds this quarter, is there any significant downtime or other considerations we should be aware of between and the middle of next year? And then what could the, and I think you did guide Q4, but what could the exit rate look like for this year?.

Great. Benno, thanks for that. A couple of comments. To your point, I think the turnarounds that we're planning for and executing here in this quarter, Ireland's a great example. That is a five-year cycle on that turnaround, and so that would be very unique, but something we plan for on that turnaround. key asset looking out from now into mid 2027? Yes, the answer is no, we don't see any, any, key downtime? Yes, so quick answer is no. The setup, we're quite excited. So if you look at the exit rate, Lars referenced this, we're back to 122 or better. If you reference back to European gas, what does that mean for our business? The first half, we were 95 to 100 million a day. Again, hopefully we're on the higher end of that range. as we exit this year. So we'll get these turnarounds behind us and I think have a strong Q4 and that really is a good setup going into 2027.

Terrific. And then second question is on the Germany drilling program. Can you maybe just remind us of how you manage the risk on these larger wells, including the two that will get drilled next year? I understand there is the farm down component, but maybe you could just remind us of the broader risk mitigation strategy. and maybe also the math on the out-of-pocket cost of vermilion in the event of a dry hole, because if I recall, it's significantly lower than the actual well cost. Thank you.

Thanks, Ben. A lot of good questions there. First of all, I think it comes down to the quality of the team and the... the G&G and the science and the decades that we have, multiple decades of working on these structures in Europe. This particular formation, the Rottliegen, again, is something we've been drilling for decades. Second, I would say we're in a proven fairway. You know, when you look at some of those maps where we're drilling these structures, it is not uncommon There's multiple, let's call it a handful of structures that have cumulatively produced over TCF. So if you're going to find big gas, start drilling in areas where there's been big gas found. So we're excited about the setup. As to how we look at the risk reward, let's call it. First is economically, if you think about about the cost of drill these wells at 50 million CAD, our target rate is 30 BCF recoverable. Fizzlehorse, of course, is twice that. But if you spend 50 million in the success case, and that gives you the drill, the test, the unlease, gas plant, the pipeline, for 50 million bucks and you get 30 Bs of gas, that's $1.50 MCF. If you assume gas prices are $13, and of course, they're more than double that now, but if at $13, the NPV per well is $60 million, right? And you can see with Osterheide, like it's been on for a year and it's cumed over $40 million of free cash flow and the well hasn't started to decline yet. So the success case, I think, is pretty, hopefully, straightforward. the failure case is, you know, we drill the well, we don't like what we see, we get off of the well, it's less than $15 million. Okay, so the $50 million is the all-in success case. The dry oak case, let's call it, is sub-15, so 1-5. The final point is commercially, you know, when we drilled this horse, we knew that it was a very large structure, but also we viewed that one as a little more higher risk, but it was big. And so commercially, we did use a farm in to provide a promote. And with that curry, it effectively meant the after-tax dry hole cost was zero, right? or less than zero maybe. So that's another quiver in our strategy here is we can use farm ends, they're good prospects, we're going to drill these prospects, but if someone wants to come in and leverage some of the great work we've done commercially, we can further reduce our risk. So hopefully that gives you right from, hey, we're looking for big targets in the period where, in the area where big gas has been found. We've got a team that's been doing this for decades. done all the technology and reprocessed seismic and then the failure case is sub 15 and then commercially we can further mitigate that failure case with a promoter carry. Thanks for the rundown, Dion. I'll pass it back.

Thank you. Your next question comes from Greg Pardee with RBC Capital Markets. Please go ahead, Greg. Yes, thanks. Good morning. I wanted to stay just maybe on the back of Menno's question, maybe just to stay with Germany for a minute. And just in In terms of the next two exploration wells that you have planned for early next year, I'm just wondering how far away those might be from Whistle Horse, and then in addition to that, maybe just any potential deep bottlenecking opportunities that you would have in that area, maybe just to increase rates and what's required to accomplish that?.

Thanks, Greg, for those questions. I'm going to pass it over to Darcy and just talk about the location of the next two visible horse wells and some of the steps, as noted, for the deep bottlenecking of the gas.

Yes, great. Thanks for that. Can I answer your first question? Those next two wells are located on a common pad, so they'll be drilled together on one pad. That location is kind of between one and two kilometers away from the original fissile source discovery well as the crow flies. In terms In terms of de-bottlenecking, the first vessel source well that we brought online, We are in the process of permitting, acquiring land to build a new sales pipeline for that well. We expect that that pipeline be online, ready for service towards the end of next year. do for the next two new wells, you'll have a plan for an initial gas plant on that one site to capture their production. We have the opportunity to twin that gas plant on that site if we have strong results there, and then that sales pipeline that we're building for Bissell Source 1. will also be the sales point for the next two wells in this resource. So lots of opportunity to de-bottleneck that area kind of next year with this sales pipeline and then hopefully a new gas plant for those next two wells in a success case.

Thanks Darcy. So summarized there that sales line, it's a 12 inch piece of pipe. I think all the materials order, we're going to plan to start construction here early next year. And as Darcy noted, that'll allow us to open that well up and get it up to that full 16, 17 million a day design rate. And further on that is this twinning of the infrastructure that Darcy mentioned. mentioned effectively you're able to double to go from 17 to 34 million a day with the amount of gas we've got behind pipe. But first step, Greg, to your point is, as Darcy mentioned, is getting that 12 inch pipe in the ground and we're well on our route to do that.

Okay, terrific. Yes, no, thanks for that. And maybe just staying with Europe, but maybe just moving into the Netherlands. You know, in the past year, You probably drilled potentially smaller prospects. Now what I understand is you're drilling perhaps fewer but bigger prospects. Am I thinking about that the right way? Just any color around that would be great.