Vermilion Energy Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 8, 2025

Key Takeaways

  • Positive Sentiment: Vermillion delivered Q2 production of 136,000 BOE/d, a 32% increase quarter-over-quarter, and reinvested proceeds of $535 million in debt reduction following the Saskatchewan and U.S. asset sales.
  • Positive Sentiment: The company has repositioned to a global gas producer with approximately 120,000 BOE/d of continuing operations, 70% natural gas weighting, and plans to allocate over 80% of future capital to high-impact gas assets in the Montney, Deep Basin and Germany.
  • Positive Sentiment: In the Montney, Vermillion set a new cost benchmark of $8.5 million per well—saving over $1 million year-over-year—and is investing $100 million to expand infrastructure and drill 40 wells to target 28,000 BOE/d by 2028 with $112–150 million of annual free cash flow at $70 WTI and $3 AECO.
  • Positive Sentiment: Post Westbrook acquisition, the team has identified $200 million of NPV synergies—approximately $30 million per year—with two-thirds expected over the next five years through development, operating efficiencies and corporate restructuring.
  • Positive Sentiment: With $260 million of funds from operations, $144 million of free cash flow in Q2, net debt down to $1.3 billion and ~60% of Q3 Canadian gas hedged at an average $2.65/MMBtu floor, Vermillion is well positioned to balance debt repayment and shareholder returns.
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Earnings Conference Call
Vermilion Energy Q2 2025
00:00 / 00:00

There are 8 speakers on the call.

Operator

Thank you, Kelsey. Good morning.

Speaker 1

Yep. Good morning, ladies and gentlemen. Welcome to the Vermillion Energy Q2 twenty twenty five conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.

Speaker 1

If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Friday, 08/08/2025. I would now like to turn the call over to Mr. Dion Hatcher. Please go ahead.

Operator

Thank you, Kelsey. Well, good morning, ladies and gentlemen. I'm Dion Hatcher, President and CEO of Vermillion Energy. With me today are Lars Glimster, Vice President and CFO Darcy Kirwin, Vice President, International and HSE Randy McQuaid, Vice President, North America Laura Conrad, Vice President, Business Development and Kyle Preston, Vice President of Investor Relations. Please refer to our advisory and forward looking statements in our Q2 release.

Operator

It describes forward looking information, non GAAP measures, and oil and gas terms used today, and it outlines the risk factors and assumptions relevant to this discussion. Vermillion delivered strong second quarter results. Production for Q2 averaged 136,000 BOEs per day, representing a 32% increase over the prior quarter, mainly due to a full quarter contribution from the Westbrook acquisition that closed in February. Subsequent to the second quarter, we closed both of the previously announced Saskatchewan and U. S.

Operator

Asset sales for a combined gross proceeds of $535,000,000 which has been allocated to debt reduction. These divestments were a key component of Vermillion's broader strategic transition towards becoming a global gas producer, enabling us to enhance operational scale and long duration assets and better position the company for sustainable, profitable growth. Vermillion now has a production base of approximately 120,000 BEUs per day, 70% weighted to natural gas, with over 90% of our production coming from our global gas assets, which include liquids rich gas in Canada and high netback gas in Europe. We expect over 80% of our future capital investment will be directed toward these global gas assets, which will be the primary growth drivers within our portfolio. We generated $260,000,000 of fund flows from operations and $144,000,000 of free cash flow in Q2, after deducting E and D capital expenditures.

Operator

Capital expenditures were down from the previous quarter due to the seasonality of drilling activity in Western Canada and a deferral of some E and D capital associated with the Saskatchewan and U. S. Assets. Activity during Q2 was focused on our global gas assets in the Mika Montney, Alberta Deep Basin and Germany. At Mica, Vermillion completed five and brought on production in 11 liquids rich Montney wells.

Operator

Montney production averaged approximately 15,000 BEUs per day in Q2, which includes production from new wells and increased takeaway capacity from the operated infrastructure expansion that was completed earlier this year. Production from our two most recent pads continues to be in line with our expectations. Our operations teams are always focused on continuous improvement and through these efforts we were able to achieve a new cost benchmark for our Montney wells, with our drilling completions equipment tie in costs coming in at approximately $8,500,000 per well for the two most recent pads. These cost reductions were mainly driven by reduced trucking due to our water infrastructure, reduced tester costs due to optimized flowback and lower drilling costs due to faster field times. This is a reduction of $05,000,000 per well from our prior target and over $1,000,000 per well compared to just one year ago.

Operator

We are confident we can turn our new cost benchmark of $8,500,000 per well into our program average, which will reduce future development costs and improve full selection returns on our Montney development. With the second expansion phase at MICA now complete, our Montney team is now planning for the third and final expansion phase. We plan to invest approximately $100,000,000 in the additional infrastructure and gathering pipelines over the next few years, along with drilling another 40 wells over this timeframe to reach our targeted production rate 28,000 BUs per day by 2028. Once we get to this level, we anticipate drilling approximately eight wells per year to maintain this production level for over fifteen years, which translates to generating approximately $1,125 to $150,000,000 of annual free cash flow assuming a price of $70 WTI and $3 AECO. In the Deep Basin, we executed one rig program during the quarter and drilled four, completed three and brought on production three liquids rich wells.

Operator

We plan to add two rigs and execute a three rig program during the 2025 as we ramp up activity heading into the winter. We are very pleased with how the integration of the West Bragg assets has unfolded and we continue to identify further upside, including proving up new locations, reducing our service costs and processing costs. As a result, in Q2, the first full quarter of operating these new assets, the team has identified another $100,000,000 of synergies. That now brings the total to date to over $200,000,000 on an MPV-ten basis of synergies post acquisition. This clearly demonstrates the benefit of our dominant continuous Latin Basin, Deep Basin and our continued focus on enhancing profitability.

Operator

Following the divestment of our Saskatchewan and U. S. Assets and the continued integration of the Westbrook acquisition, we have taken additional steps to further streamline the business by reorganizing our Canadian business unit. This has led to dedicated technical and corporate teams concentrating exclusively on our liquids rich assets in the Deep Basin and Montney. In Germany, we drilled, completed and brought on production two oil wells.

Operator

These high return wells have initial rates in the one hundred-two 100 bpd range, but they represent low risk waterfilla development opportunities in Germany. Facility and tie in activity on the Osterheit deep gas well was completed at the end of Q1 and the well averaged approximately 1,100 BVs per day in Q2, which is above our original constrained expectations due to stronger than anticipated seasonal demand. We continue to advance the permitting and infrastructure expansion plans for the first Bisselhorst well, which remains on schedule for tie in and start up during the 2026. The team continues to work on the full field development plans for our deep gas prospects in Germany, where we are excited about the long term growth potential from this asset. These prolific wells, combined with strong European gas prices currently over $15 per MMBtu, will translate to significant free cash flow per million in the future.

Operator

In addition to the organic development in Germany, we will continue to evaluate opportunities in our core European operations, specifically pursuing European gas acquisition opportunities that complement our existing portfolio and enhance value for our shareholders. We also achieved a significant milestone on the sustainability front, achieving our Scope one emission reduction target one year ahead of plan. In 2021, we set our target to reduce Scope one emissions intensity by 15% to 20% compared to the 2019 intensity levels. We achieved this target with a 16% reduction at the 2024. Looking forward, we are well positioned for our 2030 target, a goal of reducing Scope one plus Scope two emission intensities by 25 to 30% versus our 2019 levels.

Operator

The 2025 was one of the busiest times in Vermillion's history, as we executed our portfolio enhancement strategy. We successfully closed our largest ever production acquisition and divested our North American oil weighted assets. Through these high grading initiatives Vermillion now has a much more focused and resilient asset base underpinned by high return development opportunities, unique exposure to premium price European gas and a lower cost structure. We believe this more efficient, more resilient business will drive significant shareholder value over the longer term. I am especially proud that during this very busy period of integration and divestment, we remain focused on operational excellence.

Operator

Since the start of the year, we have identified Montney, drill cost, equipment timing savings and synergies related to the Westbrook acquisition worth a combined $300,000,000 on an NPV-ten basis. With only 154,000,000 shares outstanding, that equates to approximately $2 per share of value. We also maintain a strong safety record across our operations through this period, a true testament to our commitment of setting everyone home safe every day. The 2025 will be an active period as we add two additional rigs to our Deep Basin program and commence drilling two wells in The Netherlands. Factoring in the timing of the July divestments, combined with the planned seasonal turnaround activity and some shut in gas due to low summer AECO prices, we expect Q3 production to average between 117,000 to 120,000 Bs per day.

Operator

Our full year production guidance of 117,000 to 122,000 Bs per day and capital guidance of $6.30 to $660,000,000 remain unchanged, however, we do have the flexibility to decrease spending if necessary. We expect to end 2025 with approximately $1,300,000,000 of net debt. That's a decrease of $750,000,000 from Q1, reflecting the inorganic deleveraging from asset divestments and organic deleveraging over the balance of the year. We continue to balance debt repayment and shareholder returns. Currently 6040% of excess free cash flow respectively, and we expect to be in a position to increase shareholder returns as debt trends towards a $1,000,000,000 level.

Operator

In periods of commodity volatility, we are able to lean on our hedge book, where we have over 50% of our corporate production hedged for 2025 and over 40% hedged for 2026. In particular, we are very well protected during the current period of weak AECO pricing, with approximately 60% of our Q3 Canadian gas hedged at an average floor price of $2.65 per Mcf. It's worth noting our realized gas price in Q2 was $4.88 per Mcf versus AECO of 1.69 This shows the competitive advantage of our unique gas portfolio. For context, our European gas volumes represents 20% of our gas production, but that gas was sold directly into the European market for a price that was 10 times higher than AECO in Q2. As we look ahead over the next few years, our efforts will continue to focus on our key growth assets Montney, Deep Basin and Germany.

Operator

In the Montney, will build at the final phase of our infrastructure to support our target production rate of 28,000 bees per day, a third of that volume being liquids. We expect to hit that target by 2028. In the Deep Basin, we will focus on optimizing our development of a larger high graded asset base, while in Germany we will continue to progress our deep gas exploration program, where we expect to grow production to over 10,000 bees per day in the coming years. Over this period of investment, we will continue to prioritize free cash flow generation supporting both organic debt reduction and continued shareholder returns. We look forward to the coming quarters where the picture of Vermillion as a global gas producer will become clearer following this busy period of A and D activity.

Operator

We believe the company is now better positioned to drive long term shareholder value with a more focused, a longer duration asset base and an improved cost structure combined with structural tailwinds for natural gas around the world. With that, we'll now move to Q and A.

Speaker 1

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 touch tone phone. You will then 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.

Speaker 1

Again, if you are using a speakerphone, please lift a handset before pressing any key. One moment please for your first question. Your first question comes from Greg Pardy from RBC Capital Markets. Please go ahead.

Speaker 2

Yeah. Thanks. Good morning. Thanks, Dion, for the rundown. I wanted to ask you two things, which you definitely touched on in your opening remarks.

Speaker 2

So maybe just in terms of streamlining the portfolio like there's definitely been coring up in areas. You still have a number of areas perhaps, you know, maybe they're smaller assets or less core, even some of the stuff in Europe and so on. I'm just curious, what's next in terms of reshaping the portfolio and where would that be?

Operator

Thanks Greg for the question. Yeah, I think you're right, if you think about Canada, of course we've exited US and we've exited Saskatchewan and I think we're going to see the benefits with improved capital efficiency and lower cost structure as we look forward. As you look to Europe, we have announced earlier this year that we're exiting Hungary and we're well in the progress of making that happen. We did also have some interest in Slovakia which we decided not to pursue and so that is another couple of jurisdictions that we're deciding not to allocate capital to go forward. And then finally Croatia, Croatia is an area where we've had some success.

Operator

We've drilled some good wells, we have some production and also on the SA7 block, did have some exploration success but that is yet another area that we're looking at to, although we've got a very strong technical team and I think it's a pretty interesting land base, we'll test the market maybe on some retention value for that asset, especially given the capital allocation decisions we have in front of us with the success in Germany, some of the drilling opportunities in The Netherlands and of course long suite of projects that we've got in North America. So we're not done yet, Greg, to answer your question and I think you're going to see continue to focus on making the business more streamlined which will improve our capital efficiency and our cost structure.

Speaker 2

Okay, thanks for that. Maybe just shifting to the shareholder returns, let's say you were at a billion dollars today, then perhaps given the value I'm just trying to I'm not trying to lead you. I'm just trying to get a better sense as to whether with with the where would the payout ratio presumably go? And then is there a bias towards dividends or buybacks? I'm I'm assuming maybe the buyback just in given your relative valuation, but curious there.

Operator

Yeah, no thanks for your time. I'm going to pass it over to Lars to walk us through that.

Speaker 3

Yeah, thanks Dion. Good morning Greg. Yeah, on the shareholder return front, I think we have been pretty clear and transparent the last couple of years here and so we were at 50% of excess free cash flow being returned. We did a very material acquisition late last year, announced late last year with the Westbrook acquisition, funded with the balance sheet primarily at the time of the acquisition and then with the dispositions that Dion mentioned in The U. S.

Speaker 3

And Saskatchewan. It was a cash, as a result of it being a cash funded acquisition, we reduced the return of capital to 40% of excess free cash flow. We have been buying some shares this year and we are quite comfortable with that 40% level as we chip away at the debt, look to get back to one times leverage. I think on the dividend front, we still like the idea of ratable per annum increases. I don't think there'll be the 20% to 25% increases that you saw the last couple of years and so we will look to prioritize share buybacks with that incremental return of capital over and above the dividend.

Speaker 2

Okay, makes sense. Thanks very much.

Speaker 4

Thanks, Greg. Thank

Speaker 1

you. And your next question comes from Menno Halshov from TD Cowen. Please go ahead.

Speaker 5

Thanks and good morning, everyone. I'll start with a question on the Westbrook synergies. Can we perhaps get a more detailed breakdown on what drove the increase to the estimate, the $200,000,000 and if there is upside beyond your new estimate, where is that most likely to come from?

Operator

Thanks, Benel for that. I can't wait to talk about it, I'm going to pass it over to Randy to walk us through some of those synergies that we're seeing. Hi there,

Speaker 6

as you mentioned, as Dion mentioned, we've got about $200,000,000 of NPV synergies identified. We expect to achieve about two thirds of that in the next five years. In terms of the details you're looking for, like in the Q1 announcement, was very much the first $100,000,000 that we announced, it was around development and operational, so that would have been drilling the extended reach wells with the combined land base, optimized production and our operating cost reductions that we've seen. This next $100,000,000 that we've seen here or announcing in the Q2 call is focused on or related to restructuring of the Canadian organization and that was based on the efficiencies that we've identified with the combination of Westbrook and the existing teams that we had in place. The other synergies that we're looking at are related to the reduced drilling cost, service cost that we get with the bigger program and more consistent program and then the reduction in processing fees that as we continue to negotiate with our various third parties.

Speaker 6

Overall, I think when we look at it, we kind of estimate it to be about $30,000,000 a year of savings, so quite significant. Would allocate about a third of that would be on the CapEx side, two thirds on the expense side. So I think we're very happy with the work that we've done to date. The team continues to work as we integrate Westbrook. We're very pleased with the acquisition and we would expect to see more synergies as we continue to integrate.

Operator

Thanks Randy. Yeah, in the summary, I think we're really seeing like if you looked at that image we published at the time of the announcement on December 23, like just the sheer synergies around land touching each other, offsetting infrastructure and so the team's having more time to work with it and we're talking again 30,000,000 a year of kind of savings, which E and P bill all that as Randy was saying, is how we got to that $200,000,000 number. But great work by Randy and the team to start to realize some of these synergies.

Speaker 5

Yeah, no question that it's a very strong number. Maybe just moving on to you touched on this in your opening remarks, just on acquisition potential. Can we get an update on the opportunity set in Europe? Do you envision any packages coming to market anytime soon and maybe a refresh on how you would go about funding it would be helpful as well?

Operator

Thanks Menno. We still see the potential, as a reminder we're 5% of the market in Netherlands and Germany and a lot of that other 95% I should say is owned and controlled by the majors and they position their intention to over time to divest. The one of course we've talked about the most is in Netherlands and I think that is still their intention to divest of those onshore assets and we're quite well positioned given our history there and we're the second largest operator. As to funding, Lars feel free to jump in here, the unique thing about these opportunities and I think Corb was the poster child where the headline number to acquire those assets at the time was $600,000,000 but the cash to close when you close fifteen months later was about $200,000,000 So when we think about our ability to do deals in Europe, we are deleveraging by the day with approximately $750,000,000 off balance sheet here this year, but also the time to close and the type of assets that we would buy which are typically high free cash flow generation, we feel really, really comfortable about our ability to be able to finance those.

Operator

Am I missing anything? Nope, give me the thumbs up for good there, Menno.

Speaker 5

Terrific, thank you. I'll turn it back.

Operator

Great, thank you.

Speaker 1

Thank you. Your next question comes from Chris Worley from Hughes Fund Management. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking my question.

Speaker 3

I want to ask a

Speaker 4

little bit about Q3 CapEx. There was a lot of CapEx from Q2 that's clearly getting deferred, it looks like. So can you just kind of talk through what happened with those deferrals? And maybe like which parts of the development plan got deferred? And how will those deferred dollars get spent in Q3 and Q4?

Operator

Thanks for that. I'm going to pass it to Lars and a couple of comments there before I do is, there is some seasonality as we talked about with in Canada, breakup and things do tend to slow down here and then we are picking up rigs, two additional rigs here in the Deep Basin and drilling in Netherlands right now, so I think you'll see that cadence change, but hey, with that, I'm going to pass it over to Lars to talk more about that.

Speaker 3

Yeah, thanks Dion. Good morning Chris. Maybe just a couple of data points as well to level set and then I'll provide a little bit of perspective here. So Q2 was a strong quarter, as you heard from Randy, a really successful integration, we're starting to see the synergies come to fruition as well and so what we did in the second quarter is we started to pull back on investment in some of the non core assets that were announced as being sold, so Saskatchewan and The US to help prioritize debt reduction. I don't think that can be understated as well or overstated in terms of we printed a $2,100,000,000 net debt number at Q1, we're now at $1,400,000,000 that's a combination of both the disposition proceeds as well as the fact that we were able to defer some capital on those non core assets.

Speaker 3

So just to level set here, we have invested $297,000,000 year to date, As you referenced, Q2 was a lower spent quarter with $115,000,000 spent. You have the lower activity levels due to spring break up here in Western Canada and so we are on track to spend $630 to $660,000,000 for the year, and then that includes $23,000,000 on the sold assets, and when we look at our current forecasting, we're trending to be at the lower end of that guidance range, so closer to the $6.30 level, which includes the $23,000,000 of investment on sold assets. That number is $100,000,000 lower than our previous guidance, and so as I referenced, when you combine that with the proceeds from the dispositions, that's what's allowing us to de lever from that $2,100,000,000 level to $1,300,000,000 while high grading the asset base. And so looking ahead, a capital run rate in the low hundreds is not a bad way to think about annual spend as a proxy for the business. And then just in terms of the third quarter coming up here, we provided some guidance in the release here to expect production in that range of 117,000 to 120,000 barrels a day.

Speaker 3

To put that into context, 2024 production was 84,500 on $623,000,000 of capital and so we're now guiding to 117 to 120 for the third quarter here and an annual run rate in the low 6 hundreds of capital. So I think that just speaks to the stronger capital efficiencies we're seeing in the business, some of the synergies that Randy alluded to coming through here in the actual numbers. And then I know this wasn't your question Chris, but maybe the last thing I would just point out as well, when you look at our OpEx and G and A cost structure, we are now forecasting that to be a $4.5 reduction from our original 2025 guidance that came out pre the Westbrook acquisition. So you're seeing it on the capital efficiency side, you're also seeing it on the operational efficiency side. So hopefully that helps frame it Chris, just in terms of that lower Q2 spend and what that means going forward here for the second half and into 2026.

Operator

Thanks, Lars. Mean to summarize, production is up normally 35% year over year, capital efficiency is significantly improved and our cost structure is lower and this is why we're excited as a management team as we start to look out in the future years. I think we've got a much more concentrated focus asset base and that's why we're excited about the sustainable profile that we're seeing with our excess free cash flow, especially as we think about the ramp up in Montney, the pivot as we become free cash flow positive on the 2028 timeline and then the build up in Germany. But with that, Chris, back to you. Thanks.

Speaker 4

No, thanks guys. That super helpful.

Speaker 1

Thank you. I will now turn it over to Kyle Preston for additional questions.

Speaker 3

Yeah, thanks Kelsey. So we did have a few questions come in online here. I think a couple of

Speaker 7

them are already been addressed by the questions we've received so far but there was one other outstanding here. Your Q2 corporate realized gas price premium relative to AECO was lower than the previous quarters. Can you help me understand this?

Operator

Yeah, great. Thanks Kyle for

Speaker 3

the question here. So, yeah, as the individual referenced here, we've reported a realized gas price of $4.88 for the quarter at the corporate level, the AECO benchmark, which a lot of us are familiar with, was $1.69 so just about a 3x premium to that. So the thing to keep in mind is when we report that corporate realized price, it is a blend of the production that we are selling in Europe combined with the Canadian gas production, that is a very unique feature to Vermillion and so the gas that we produce in Europe, we receive local prices for that. What we have found here the last couple years is European gas prices are very highly correlated to global LNG prices, so you are getting that global LNG price today through the Vermillion production profile. Just to sort of reiterate these numbers that were in our release here for the 2025, the TTF price in Europe averaged $16.27 Canadian versus that AECO price of $1.69 In the second quarter, we produced just over three ninety million a day of gas in Canada and I'll just remind you those come from our liquids rich gas assets in Canada, so on average those gas wells are contributing about 30% liquids as well and then we produced about 105,000,000 a day of gas in Europe.

Speaker 3

And so really what you're getting today with Vermillion is you're getting that LNG price exposure through our European gas production. Here in North America or Western Canada, you're getting a very material exposure to Canadian gas that is well hedged with a very high liquid weighting as well. In fact for the second quarter here, our Canadian revenues on the continuing operations are on that global gas business were about 60% driven the liquids. So I think those are just some nuances that are good to stop and walk through because they are very unique to Vermillion in the sense that we are giving you that global gas exposure through indigenous production in Europe as opposed to contracts that can be risky to get gas exposure from Western Canada to Europe or Asia for that matter.

Operator

Thanks Lars.

Speaker 7

I think that's it, we had for online questions, operator.

Speaker 1

Thank you. Turn it back over to you.

Operator

Well, thanks again for participating in the Q2 conference call and appreciate everyone's time.

Speaker 1

Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.

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