Vermilion Q3 2026 Conference Call - VERMILION ENERGY INC

Explicit Guidance:

• FY 2027 Capital Expenditures (E&D): $675 million to $725 million.
• FY 2027 Production Guidance: 122,000 to 126,000 BOE per day (representing ~2% absolute and ~5% per share growth vs. 2026).
• FY 2027 Dividend: Increased by 4% to $0.56 per share annually (sub-10% payout ratio).
• FY 2026 Production Forecast: Full-year average of 122,400 BOE per day on $620 million E&D spend; Q4 forecast average of 121,000 BOE per day.
• FY 2027 Free Cash Flow (FCF): Excess recashable forecast >20% higher than 2026 levels, despite increased capital program.
• Five-Year FCF Guidance: Increased to $1.9 billion (up $200 million vs. initial five-year plan).
• Sustaining/Stabilized Capital: $565 million forecast for 2027.
• FY 2028 E&D Capital: Expected to return to low $600 million range.

Business-Segment Outlook:

• Europe (Germany):
  • Q4 2026 European gas production target: ~100 million cubic feet per day (mcf/d).
  • 2027 European gas production expected to be flat vs. 2026; anticipated growth to begin mid-2028 following completion of the Bisselhoven pipeline and new well production.
  • Bisselhoven Well (Discovery): Initial well expected to deliver 17 mcf/d capacity by end of 2027 after pipeline completion (construction starts Q1 2027).
  • Germany Drilling (2027): Two follow-up wells at Vissahorse (spud Q1 2027); expected to be on production by mid-2028 with combined rate of 15–17 mcf/d.
  • Netherlands: Two wells planned for 2027 targeting larger structures; expected to be on production early 2027 (one well) or late 2027/early 2028 (two wells).
• Canada (Deep Basin):
  • Focus on condensate-rich prospects to capture premium pricing.
  • Unit operating expenses down ~10% YoY; aim to reduce $8.2 million per-well desilt cost to $8.0 million.
  • Q4 2026 production impact: Temporarily restricted gas production to align with higher pricing; deferred well start-ups.
• Canada (Montney):
  • 2027 Capital: $385 million allocated.
  • Infrastructure Delay: Third-party processing infrastructure shift moves target production rate (28,000 BOE/d) to early 2029 (previously mid-2028).
  • Interim Strategy: Redirect capital to high-return Deep Basin locations using existing infrastructure.
  • Future Pacing: Once target rate is reached (45 wells drilled 2027–2028), annual drilling moderates to ~8 wells to maintain production.
• Australia (Wando Crude):
  • 2027 Program: Two-well campaign in H2 2027; production commences early 2028.
  • 2028 Outlook: Field production expected to grow from ~3,000 bbl/d (2027 exit) to 4,000–5,000 bbl/d (driven by new wells and post-cyclone recovery).
  • Capital Logic: High-rate wells (~1,000 bbl/d) intended to maintain flat platform production for 2–4 years.

Market and Competitive Outlook:

• Commodity Prices: Elevated European gas prices (>€30–40 CAD/MmBtu for 2026/2027 strips) and premium condensate pricing in Australia driving improved returns.
• European Gas Fundamentals: Inventories below historical averages; market increasingly reliant on LNG imports, supporting prices through 2027.
• Competitive Positioning: German assets (Bisselhoven) exceed deliverability expectations; Australia offers premium pricing to Brent.
• Infrastructure: De-bottlenecking pipeline projects critical to unlocking capacity at Vissahorse; third-party processing delays in BC Montney necessitating strategic capital reallocation.

Macro / Industry Outlook:

• Capital Efficiency: Expectations for continued reduction in unit costs and base declines; $20% cost savings identified in back-to-back drilling cycles.
• Shareholder Returns: Commitment to 40–60% of excess free cash flow (EFCF) return via dividends and buybacks.
• Currency/FX: Implicit exposure to EUR and CAD, with management focusing on structural improvements to offset FX volatility.

Strategic Initiatives:

• Germany Infrastructure: Construction of 12-inch sales pipeline at Vissahorse planned to start Q1 2027; completion expected late 2027.
• Acquisition Integration: Full integration of recently acquired German assets completed; Vissahorse well on production July 2026.
• Rig Optimization: Utilization of industry multi-well programs in Australia to reduce mobilization costs; back-to-back drilling in Germany to save ~20% costs and improve cycle time by 30%.
• Technology Pilots: New completion approach in Montney (soak time trials) to reduce sand/water recovery; aiming to sustain $8.2 million/well cost targets.
• M&A/Divestiture: Completed largest cash acquisition in company history; net debt reduced by ~$900 million.

Risks and Headwinds to Outlook:

• Infrastructure Delays: Third-party gas processing delays in BC Montney (shifted 2028 target to 2029) affecting production ramp-up.
• Operational Downtime: Unplanned Australia downtime due to cyclones and third-party maintenance in Germany/Netherlands impacting Q3/Q4 2026 volumes.
• Commodity Price Volatility: Outlook assumes price strip for 2026; reverts to conservative investor day assumptions for 2028–2030.
• Exploration Risk: Netherlands 2027 wells target larger structures, carrying "step-out" risk, though management views risk profile as similar to recent history.
• Regulatory/Permitting: Limited permitting scope previously restricted drilling to existing areas; new 2027 permits allow expansion but require approval.

Management Tone on the Future:

• Confidence Level: "Very well positioned"; confidence in meeting/exceeding multi-year production and capital objectives established at investor day.
• Sentiment: Positive and aggressive on capital allocation; emphasizes "structural improvement" and "optionality."
• Guidance Revision: 2026 EFCF forecast >60% higher than initial; 2027 FCF forecast >20% higher than 2026; 5-year FCF increased by $200 million.
• Hedges: Capital plan remains flexible; explicitly states ability to redirect capital between Deep Basin and Montney to maintain FCF commitments despite infrastructure delays.

Miscellaneous:

• Debt Reduction: Net debt reduced by ~$180 million YTD 2026; total reduction ~$900 million post-acquisition.
• Share Repurchases: $20 million repurchased in Q3 (double H1 levels); $92 million returned to shareholders YTD 2026.
• Cost Targets: $8.2 million per-well cost in Montney; target to reduce to $8.0 million.
• Timeline Specifics: Vissahorse pipeline construction starts Q1 2027; Netherlands spud Q1 2027; Australia wells H2 2027.