Vermilion Energy Inc. (VET) Q4 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Vermilion Energy Inc. Fourth Quarter Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lorenzo Donadeo, President and Chief Executive Officer for Vermilion Energy Inc. Thank you, Mr. Donadeo. You may begin.

Thank you, Claudia. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our fourth quarter and full-year 2011 financial and operating results. I'm Lorenzo Donadeo, President and CEO of Vermilion. Joining me today are Curtis Hicks, Executive Vice President and CFO; Bob MacDougall, Executive Vice President and Chief Operating Officer; and Dean Morrison, Director of Investor Relations. Earlier this morning, we released our fourth quarter and full-year results for 2011, reporting fund flows from operations for the fourth quarter of $137 million, that's $1.46 per share and full-year funds flows from operations of $474 million, that's $5.22 per share, significantly ahead of the analyst consensus of $4.99 per share. The significant 33% increase in fund flows for full-year 2011 as compared to 2010 was attributable to strong growth and average production volumes, as well as our significant exposure to Dated Brent crude. That's -- we have about 46% of our production exposed to Dated Brent. And Dated Brent averaged $16.15 U.S. premium to WTI during 2011. The increase was further attributable to our high netback natural gas production in the Netherlands, representing approximately 16% of our consolidated production volumes, which received an average price of $9.59 per MCF in 2011. Combining these volumes with our Cardium light oil production in Canada results and our consolidated production volumes for 2011, having an approximately 80% weighting to crude oil pricing. A recent look at the forward strip pricing reflects the market's current expectation for continued strength in pricing for oil and Dated Brent in particular. And at current price of over $125 per barrel, Dated Brent is trading at approximately -- at approximate $18 per barrel U.S. premium to WTI, a premium that is currently forecast average more than USD $14.50 per barrel for 2012. With our strong leveraged oil prices and specifically, Dated Brent, which is forecast to remain at a premium to WTI longer term, our company is well positioned for continued growth of strength and cash flows moving forward. This creates a strong competitive position relative to our peers, who are faced with significant exposure to weakening North American natural gas prices and a recent widening of the discount for Canadian-based crude products relative to WTI. Also today, we reported a record fourth quarter and full-year production volumes of 36,674 BOE per day and 35,202 BOE per day, respectively. The strong 10% growth in full-year average production volumes year-over-year was driven by robust production growth in Australia at 11%, the Netherlands 17% and a solid performance of our Cardium light oil program in Canada, which saw significant growth during the second half of 2011. We increased the Cardium-related production by more than 260% during the year from an average of approximately 1,000 BOEs per day in 2010 to more than 3,800 BOEs per day in 2011, with the 2011 exit volumes for the month of December in excess of 6,000 BOEs per day. Subsequent to year end, we acquired interest in 6 producing fields located in Paris and Aquitaine basins in France. These assets are expected to average approximately 2,200 BOE a day of production in 2012, weighted 86% to high-quality Dated Brent based crude and add an additional estimated 6.7 million BOE of proved plus probable reserves, 96% crude oil. This was a bolt-on acquisition of high-value Brent crude focused assets for which we paid approximately $170 million cash at closing. This reflects a cash cost of 2 to 3x cash flow at approximately $48,600 per flowing barrel and $16 per BOE of proved plus probable reserves. Acquisition metrics continue to highlight the comparative value underlying our international asset base when compared to similar asset opportunities in North America. Our initial review of these assets has confirmed many attractive work over, pump optimization and potential inflow growing opportunities that we will be focusing on during the next 12 to 18 months. Reported net debt was $429 million at year-end 2011, reflecting the inclusion of the USD $135 million final payment for Corrib as a current liability, while the net debt to 2011 fund flows from operations was approximately 0.9x. Our balance sheet remains strong in support of our growth initiatives with approximately $640 million of borrowing capacity remaining, following closing of the past[ph] acquisition on January 24, 2012. 2011 was also a key year for advancement of our Corrib project in Ireland with the partners now in receipt of all the key regulatory approvals required for construction of the onshore pipeline to begin. Furthermore, as of January 22, 2012, all open periods for appeal of the regulatory approvals have expired with no open appeals outstanding. The tunneling site has currently been handed over to the tunnel contractor, who will prepare and install the tunnel boring machine and is scheduled to commence tunneling in the fourth quarter of 2012 with first gas currently anticipated in late 2014. As part of our 20/20 vision, our strategic plan to the year 2020, we continue to balance our spending to drive year-term growth with the appropriate level of capital to capture large organic resource opportunities in Canada, Europe and Australia. The level of capital allocated will be balanced to ensure conservative debt levels are maintained. As part of our 20/20 vision, we've assembled 2 new growth teams staffed by senior technical professionals focused on the identification and capture of unconventional resource base growth opportunities with potential to deliver meaningful production in reserves growth. Thus far, we've invested approximately $65 million in the past 14 months to acquire 197 net sections of undeveloped lands in Canada with exposure to potential emerging shale oil and liquids-rich gas resource opportunities. We plan to begin appraisal of 2 of these opportunities as part of our 2012 capital program. We are actively working on expanding our opportunity base in Canada. Vermilion's international initiatives include the pursuit of multiple, low-cost material land positions through direct grants from regulatory authorities and minimal upfront entry cost and only modest work commitments. During 2011, we added 16.8 million BOEs of proved plus probable reserves, replacing 130% of 2011 production an increase in our total reserves, which are predominantly oil-focused by 2.7%. Including all capital planning and development costs for 2011, we're approximately $20.93 per BOE on a proved plus probable basis. However, excluding the capital occurred at Corrib and for the purchase of our new [indiscernible] related land position, proved plus probable funding development cost decreased to approximately $21.96 per BOE. Using our fourth quarter 2011 average production volumes, the company's current proved plus probable reserve life index is approximately 10.9 years. Based on our success in 2011, the 2012 capital program will remain predominantly focused on the development of our light oil Cardium play in Western Canada. We currently anticipate the drilling of approximately 20 net new Cardium wells and completion of an additional 11 net drilled wells in 2012. However, we are currently evaluating the potential for additional Cardium-related capital expenditures of between $50 million and $75 million. The initial capital were targeted incremental drilling of between 10 and 20 additional wells in 2012. The majority of this incremental activity will take place later in the year, so we do not currently expect that it would materially impact anticipated 2012 consolidated production volumes, which are currently forecast to average between 37,000 and 38,000 BOEs per day in 2012. We continue to improve our cost structure in this play, the transition to water-based frac fluids during 2011 as significantly reduced overall well cost. And as a result, we are currently targeting drilling completion, equipping and tie-in related costs to average between $3.5 million and $3.7 million per well in 2012. On the reserves front, we booked 100.7 additional net Cardium wells at the end of 2011 in addition to an upward revision to reserves for previously booked Cardium wells to bring average bookings across the companies approximately 208 net booked Cardium wells to approximately 163,000 BOE per day. The play is performing as expected, and our well performance continues to outpace that of many peers in the region further supporting the approximate 12% increase in crude oil reserve bookings, which remains conservative given the lack of long-term production history for the play. We continue to believe that the potential remains for positive revisions in the booked recoverable reserves potential of the Cardium play as additional production history is observed. And we'll also be pursuing the evaluation of a potential pilot program in the Cardium play in the fourth quarter of this year tentatively we're looking at, and we'll report back to you on the results of that at a later date. We'll continue to defer development of our material liquids-rich gas position in Canada in the near term and deferring much of this activity to focus on the full-scale development and optimization of our Cardium play. These are lands that we currently hold by production so there is no expiry issues. In the meantime, we'll continue to work the prospects and add to the inventory where possible, as we dive toward delineation development of plays toward the latter half of our current 5-year plan. In the Netherlands, we completed the 4-well drilling program in 2011 and continue to evaluate the results of this campaign. Depending on further review, we anticipate bringing on approximately 1,000 BOE a day of related production volumes during the first half of 2013. For the current year, we're planning to tie in production from the 2009 De Hoeve-1 during the first half of 2012 and initiate a follow-up 2 well-drilling campaign during the second half of 2012. We continue to advance our efforts on permitting for future Netherlands joint programs and currently anticipate undertaking further 3- to 5-well programs each year for the foreseeable future. Natural gas pricing remains robust in the Netherlands during 2011. The company achieved an average realized price of $9.59 per MCF and currently anticipates pricing for 2012 in the range of $9.65 per MCF, a number which could go higher during the second half of the year given the recent strength in Dated Brent and the lag nature of Netherland's gas pricing to this benchmark. In France, an active 2012 work-over recompletion program is anticipated to keep production volumes relatively stable in the region. In addition, our team will begin to work and planning to achieve targeted optimization and cost-reduction opportunities that have been identified with respect to the recently acquired assets. And in Australia, preparations for a 2- to 3-well drilling program for 2012 are ongoing. Our rig contract has been signed, and we currently anticipate commencing this program late in 2012. Vermilion has a rich portfolio of opportunities, and we remain confident of our ability to deliver continued growth to approximately 50,000 BOE per day through 2015 with the current asset base. We also continue to work -- to position the company for continued growth during the second half of this decade and remain focused on supplementing our existing asset base with opportunities capable of delivering on our long-term strategic goal to provide a balanced and continued stream of income and growth to shareholders. We have the financial strength and capital structure to enable us to take action today to position our company and our shareholders for tomorrow. Vermilion generated a positive total return to investors of 3.1% in 2011 and has delivered a compound annualized rate of return of 10.1% over the past 5 years as compared to a peer group average of 6.4%. We are focused on providing shareholders a stable and reliable dividend that we would expect to grow over time in addition to steady production growth. As announced earlier this morning, Bob McDougall, our Executive Vice President and Chief Operating Officer will be leaving Vermilion later this year. We have initiated an international search for Bob's replacement and are pleased to announce that Bob has agreed to remain with the company until August 31, 2012, to ensure business continuity and an orderly transition. The Board and management wish to thank Bob for his hard work and strong contributions to our success over the last 8 years, during which time he's been instrumental in assembling Vermilion's top-rated international operations team. Our management, directors and employees remain well aligned with and strongly invested alongside our shareholders. We remain excited about the prospects for our future, our strong premium-priced Brent exposure, and we look forward to delivering strong rewards for all of our stakeholders. So with that, I will conclude my formal remarks. And operator, please open the floor to questions.

[Operator Instructions] Our first question is coming from the line of Eric Castle [ph] with CCI.

Just a quick question. How do you see the M&A market? Is it relatively empty, relatively full? How do you just see the M&A? And how would you look at that?

Well, we're pretty focused on oil weighted or liquids-rich gas opportunities with the weakening in North American natural gas prices. And what we look at -- we're looking at assets in North America and internationally. We're finding that a lot of the oil-weighted assets right now are priced quite competitively at pretty high prices, the best in North America anyhow. We're looking at other opportunities internationally. We continue to evaluate those. We're pretty patient and we're looking for the right opportunity with the right mix of assets that fit our 20/20 vision. And so we'll continue to look at those. But like I say in the near term, it seems like some of the oil opportunities are quite fully priced.

Okay. And can you say anything more about your international look at shale, just any other information you can provide?

We're in the early stages on the couple of opportunities but we're trying to capture some large blocks of opportunities that are in the very early stage of development. And so we're hopeful that by the end of 2012, we'll have 2 to 3 material land positions in shale oil or shale gas opportunities that are in Europe or in Australia. In addition to the opportunities that we've identified in Canada that we captured, we bought 100, as we say -- as mentioned that we got 197 net sections in Canada, and we'll be adding to that by the end of 2012 as well.

Okay. And lastly, is there any news from the Netherlands from those wells that you had sort of off-line for over a year?

These are the subsidence?

Yes.

Yes. The progress is slow -- slower than we like, but we continue to make some progress and the focus clearly is really on 2 parts. We continue to update the technical work. We think we have a couple of solutions that were just fairly[ph] worked on now. And then the second piece is as we completed the negotiations with the municipalities and stuff around any potential compensation so progress but it is slow.

Is there any chance this year you'd get it back or...

We anticipate that over the next 12 months, you'll start to see us spring some of the gas production back on but the timeframe for the full amount of gas production is probably in the 24-month kind of time frame.

And would that be back to the original level or like half the original level or?

Well, that's the goal but that's subject to some approval by the regulator here. So that's what we're in the process of doing, is getting everybody comfortable that we can manage this and do the job and bring it back on and not have any further significant subsidence in the area so...

[Operator Instructions] Our next question is coming from the line of Gordon Tait with BMO Capital Markets.

A couple of questions. First in Australia, you've mentioned that the volumes number [ph] are not as high as expected. Is there some issue, some common issue that's going on in the Australian production that might persist for a while? Do you see it being resolved?

Yes. Gordon, you're referring to volumes less than what we had forecast or...

Yes, just -- you kind of make a mention to that, that the incremental volumes were not as high as expected, the deferred some future workovers. So is that studying [indiscernible] there's some potential issues there, do you think?

Yes. I mean, we have a couple of workovers that we did in Q2 of last year and they were essentially the shut-off high water production from a portion of horizontal wells. And we got -- we encountered some difficulties, so we actually had deferred and delayed further work. So we're continuing to do some study work there. So that's the first thing. The second thing is we did see some additional decline on one of our bigger wells the last -- the end of last year and that of course transferred into current production rates from there. But we're still on track to spud a couple of wells at the end of the year. We got a rig contracted. You probably see us drill 2, hopefully 3 wells starting latter part of 2012.

Okay. And then in Canada, it looks like these Cardium results are kind of having probably better than what you might have thought at some point. Would you say that the tight [ph] curve, your average tight [ph] curve, are you in position to say that, that actually maybe improved over what you had originally been modeling?

I'd say no that our tight [ph] curve remains the same internally, and what we're doing is we're getting results that closely match that. If you look at -- if you take a close look at the wells that we're drilling and brought on production in Q4 last year and we saw real strong correlation between actual results and the tight [ph] curve expectations. So we're getting the results that we expect. In addition, we've been able to drive the cost down a bunch. So we haven't changed anything internally, Gordon.

Okay. And then lastly, it looks like you recently licensed a well out of [indiscernible]. Is that part of the strategy you're looking to do more drilling up there? And what kind of affair you're looking for there?

Yes. We really can't comment on that right now. But we are working -- we're always working and testing new opportunities. So it's still a bit early stage there. So we're not going to comment at this time.

Gordon, just to clarify. For those 2 components to our exploitation program in Australia, there's the workover component and then there's the infill drilling component. And the workover component, we tested -- as Bob said, we tested that in the second quarter of last year. It didn't really turn out as we had hoped. The infill drilling component still remains very robust, and we're still planning -- and we still see a good inventory of opportunities there. That hasn't changed and we're looking to drill like I say, as we mentioned earlier, the 2 to 3 wells later this year.

Yes. You see 2 to 3 wells every second year, is that what...

Yes.

[Operator Instructions] It appears we have no further questions. I'll now turn the floor back over to management for any closing remarks.

So thank you, Claudia, and thank you, everybody, for participating today in our conference call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.