Vermilion Q3 2026 Conference Call - VERMILION ENERGY INC

Financial Performance:

• Generated $237 million in fund flows from operations in Q3 2026 on $146 million in E&D capital expenditures, yielding over $90 million in free cash flow.
• Returned $41 million to shareholders in Q3 ($21M dividends, $20M share repurchases), totaling $92 million year-to-date alongside nearly $180 million in net debt reduction.
• Net debt reduced by approximately $900 million following the largest cash acquisition in company history, while production per share grew by 50%.
• 2026 adjusted cash flow forecast is over 60% higher than the initial outlook due to operational outperformance and elevated prices; 2027 excess free cash flow is forecast to be over 20% higher than 2026 levels.
• Five-year excess free cash flow estimate increased by $200 million to $1.9 billion.
• 2027 base dividend increased by 4% to $0.56 per share annually (6th consecutive increase), maintaining a payout ratio of sub-10% of fund flows.

Guidance and Future Outlook:

• Announced 2027 budget with E&D capital of $675–$725 million and production guidance of 122,000–126,000 BOE per day (approx. 2% absolute and 5% per share growth vs. 2026).
• 2027 budget includes ~$150 million of capital forecast to add production starting in 2028.
• Full-year 2026 production expected at 122,400 BOE per day with E&D capital of $620 million; Q4 2026 production guidance is 121,000 BOE per day.
• European gas production expected to reach ~100 million cubic feet per day (mcf/d) in Q4 2026.
• 2028 E&D capital expected to return to low $600 million range as 2027 infrastructure projects mature.
• Strategic pipeline project in Germany to increase capacity to ~17 mcf/d from Vissahorse, with construction starting early 2027 and production late 2027.

Business Segments and Product Lines:

• Germany: Integrated acquired assets and Vissahorse well; production expected to reach 7,500 BOE per day in Q4 2026 (25% increase vs. Q1). Planning two follow-up wells at Vissahorse in H1 2027 and infrastructure connections.
• Netherlands: Drilled well in H2 2026; production from Osterheide well reached 13 mcf/d in August. Planning two additional wells in 2027 targeting larger structures.
• Australia: Focusing on Wando Crude (premium to Brent). Executing a two-well campaign in H2 2027 with production coming online early 2028; expected to lift field rate to 4,000–5,000 barrels per day.
• Canada (Deep Basin): Added five net wells in 2026; one new well produced 12.6 mcf/d gas and 400+ barrels per day condensate. Set an industry benchmark drilling an Upper Mannville well to 7,800 meters.
• Canada (Montney): Brought four-well pad online in Alberta; piloting new completion approaches to reduce sand and water recovery. Targeting 10% year-over-year production growth within MICA cash flows, though third-party infrastructure delays shift target rate to early 2029.

Market and Competitive Landscape:

• Benefiting from elevated European gas prices (TTF strip >$40 CAD/MMBtu for remainder of 2026, >$30 CAD/MMBtu for 2027) and Canadian condensate premiums.
• European gas fundamentals remain constructive due to inventories significantly below historical averages and reliance on LNG imports.
• Vermilion's diversified portfolio (gas, condensate, oil) provides optionality and resilience against single-commodity volatility.
• Operating in a competitive E&P sector with a sub-10% dividend payout ratio positioning the company favorably for sustained growth.

Risks and Challenges:

• Operational Downtime: Temporary production reductions occurred due to planned turnarounds in Ireland, non-operated downtime in Germany, and third-party maintenance in the Canadian Deep Basin.
• Infrastructure Delays: Revised timing of third-party gas processing infrastructure in northeast BC shifts Montney production targets from mid-2028 to early 2029.
• Cyclical Risks: Australia operations impacted by cyclones earlier in the year; commodity price fluctuations remain a risk, though long-term strip prices are currently favorable.
• Exploration Risk: While Dutch wells target larger structures, they involve stepping out from existing pads, though management asserts risk levels remain similar to recent programs.

Management Commentary and Tone:

• Tone was highly confident, emphasizing successful execution of the five-year plan, structural improvement of cash flow, and strong operational momentum.
• Management highlighted a "rate of change" in profitability reflected in capital efficiency, base decline mitigation, and cost structure improvements.
• Emphasis placed on delivering on announced milestones, with production outperformance and cost synergies driving higher-than-expected cash flow.
• Reiterated commitment to "sustainable, rateable dividend growth" and disciplined capital allocation.

Analyst Questions and Answers:

• Germany Production: Confirmed that the Vissahorse pipeline will start construction in Q1 2027 and go online late 2027. Two follow-up wells will be spud in H1 2027, with first gas expected mid-2028. Production from these wells combined is expected to be 15–17 mcf/d.
• Australia Growth: Two wells drilled in H2 2027 are expected to increase Australian field production from ~3,000 bbl/d to 4,000–5,000 bbl/d in 2028, offsetting declines from previous cyclone disruptions.
• Montney Completions: Piloted a "soak time" period post-fracking to reduce sand and water recovery; early results show capital and operating cost savings, with potential to reduce "deset" (development cost) from $8.2 million to $8.0 million per well.
• Drill Rates: Confirmed record drilling pace in Montney and high production rates in Deep Basin (condensate-rich wells) driving strong well economics.

Other Key Points:

• Completed integration of recently acquired German assets, including bringing the Vissahorse well on production.
• Successfully executed planned maintenance in Ireland and Germany without incident, restoring full production capacity.
• Capital efficiency improved in Deep Basin through back-to-back drilling (cost savings ~20%, cycle time improvement ~30%).
• Company maintains a diversified approach allowing flexibility to redirect capital from Montney (due to infrastructure delays) to high-return Deep Basin locations.