Vermilion Energy(VET) - 2022 Q4 - Annual Report

Financial & Operational Highlights The company achieved record full-year cash flow and reserves growth in 2022, with solid Q4 results despite significant one-time tax impacts Full-Year 2022 Highlights Vermilion achieved record 2022 financial results with a 78% increase in FFO and a 99% increase in FCF, enabling significant debt reduction and acquisitions 2022 Full-Year Key Financial Metrics | Metric | Value | Change (YoY) | | :--- | :--- | :--- | | Fund Flows from Operations (FFO) | $1.6 billion | +78% | | Free Cash Flow (FCF) | $1.1 billion | +99% | | Net Earnings | $1.3 billion | +14% | | Net Debt Reduction | >$300 million | N/A | | Shareholder Returns (Dividends & Buybacks) | >$100 million | N/A | | Net Debt to Trailing FFO Ratio | 0.8 times | Down from 1.8x in 2021 | - Total proved plus probable (2P) reserves increased by 9% to 523 mmboe, replacing 234% of production, with the after-tax net present value rising 36% to $8.9 billion[6] - Financial results were impacted by $406 million in realized hedging losses and $223 million in temporary European windfall taxes[3] Fourth Quarter 2022 Highlights Q4 2022 FFO was significantly impacted by a full-year European windfall tax, while production saw a slight sequential increase led by North America Q4 2022 Financial and Production Summary | Metric | Q4 2022 Value | Note | | :--- | :--- | :--- | | Fund Flows from Operations (FFO) | $284 million | Includes $223M full-year windfall tax | | Free Cash Flow (FCF) | $115 million | Includes $223M full-year windfall tax | | Average Production | 85,450 boe/d | +1% vs Q3 2022 | | North American Production | 58,499 boe/d | +2% vs Q3 2022 | | International Production | 26,953 boe/d | -1% vs Q3 2022 | - Without the temporary windfall tax, Q4 2022 FFO would have been $507 million and FCF would have been $338 million[6] - Q4 production was affected by unplanned downtime in Australia, cold weather in North America, and a delayed startup of a Montney pad in Alberta[6] Financial & Operational Summary This section presents detailed comparative financial and operational data, highlighting year-over-year growth and key performance metrics Consolidated Financial and Operational Data Key financial and operational metrics for Q4 and full-year 2022 show significant growth in sales and earnings compared to the prior year Key Financial Data Comparison ($M) | Financial Metric | Q4 2022 | Q4 2021 | 2022 (Full Year) | 2021 (Full Year) | | :--- | :--- | :--- | :--- | :--- | | Petroleum and natural gas sales | 842.7 | 765.9 | 3,476.4 | 2,079.8 | | Fund flows from operations | 284.2 | 322.2 | 1,634.9 | 919.9 | | Net earnings | 395.4 | 344.6 | 1,313.1 | 1,148.7 | | Capital expenditures | 169.3 | 145.8 | 551.8 | 374.8 | | Free cash flow | 114.9 | 176.4 | 1,083.0 | 545.1 | | Net debt | 1,344.6 | 1,644.8 | 1,344.6 | 1,644.8 | Key Operational Data Comparison | Operational Metric | Q4 2022 | Q4 2021 | 2022 (Full Year) | 2021 (Full Year) | | :--- | :--- | :--- | :--- | :--- | | Total Production (boe/d) | 85,450 | 84,417 | 85,187 | 85,408 | | Realized Crude Oil Price ($/bbl) | 115.02 | 96.88 | 123.89 | 83.78 | | Realized Natural Gas Price ($/mcf) | 17.43 | 17.89 | 18.99 | 9.53 | Outlook and Guidance The company provides revised 2023 production guidance, maintains its capital budget, and announces increased shareholder returns 2023 Outlook Vermilion revised its 2023 production guidance down due to an asset sale and maintenance, while increasing its quarterly dividend by 25% - Revised 2023 production guidance to 82,000 to 86,000 boe/d, down from 87,000 to 91,000 boe/d[10][31] - The guidance change is driven by the sale of 5,500 boe/d of assets in southeast Saskatchewan for $225 million and extended production downtime in Australia[10][32] - The 2023 capital budget is unchanged at $570 million[10][31] - Declared a 25% increase in the quarterly dividend to $0.10 CDN per share for Q1 2023 and has repurchased 1.1 million shares in 2023 to date[10][34] Message to Shareholders The company highlights its successful 2022 strategic execution, including debt reduction, and details a key non-core asset disposition Strategic Achievements and Priorities In 2022, Vermilion successfully reduced debt by $300 million, completed two strategic acquisitions, and returned over $100 million to shareholders - Reduced net debt by $300 million and exited 2022 with a net debt to trailing FFO ratio of 0.8 times, less than half the prior year's ratio[24][25] - Completed two key strategic acquisitions: the Irish Corrib consolidation to increase exposure to premium-priced European gas, and the Leucrotta Exploration deal to enter the Montney resource play[25][28] - The next debt target is $1.0 billion, which will enable increased return of capital to shareholders[25] Asset Disposition Vermilion agreed to sell non-core assets in southeast Saskatchewan for $225 million to high-grade its portfolio and accelerate debt reduction - Agreed to sell ~5,500 boe/d of non-core light oil assets in southeast Saskatchewan[30] - Total cash consideration is $225 million, with proceeds designated for debt repayment[30] - The strategic rationale is to high-grade the North American portfolio and accelerate deleveraging after the Montney acquisition[30] Q4 2022 Operations Review This section reviews Q4 2022 operational performance, detailing production drivers and drilling activities in North America and International segments North America North American production increased 2% from the prior quarter, driven by new production from the first six-well Montney pad - Q4 2022 production averaged 58,499 boe/d, up 2% from Q3 2022[35] - Brought the first six-well Montney pad on production, with output from Montney assets reaching 7,500 boe/d in December[35] - Advanced Montney development by receiving key permits in British Columbia and acquiring 11 sections of adjacent land at Mica[35] International International production decreased 1% from Q3, mainly due to natural declines and unplanned downtime in Australia - Q4 2022 production averaged 26,953 boe/d, down 1% from Q3 2022[37] - The decrease was primarily caused by natural decline in Netherlands/Germany and unplanned downtime in Australia[37] - Drilled one successful oil well in Germany and one successful gas well in the Netherlands; two exploratory wells in Croatia were not commercial[38] 2022 Reserve Report The company reports a 9% increase in 2P reserves to 523 mmboe with a strong production replacement ratio and provides a detailed reconciliation Reserve Highlights and Costs At year-end 2022, Vermilion's 2P reserves increased 9% to 523 mmboe with an after-tax NPV10 value of $8.9 billion 2022 Year-End Reserve Highlights | Metric | Value | Change (YoY) | | :--- | :--- | :--- | | Total 2P Reserves | 523 mmboe | +9% | | 2P After-Tax NPV10 | $8.9 billion | +36% | | 2P Reserve Life Index | 16.8 years | +9% | | 2P Production Replacement | 234% | N/A | 2022 Finding, Development & Acquisition (FD&A) Costs | Metric | Value ($/boe) | | :--- | :--- | | 2P FD&A Cost (incl. FDC) | $19.22 | | 2P FD&A Operating Recycle Ratio | 4.4x | Reconciliation of Reserves This section provides a tabular reconciliation of reserve changes, showing additions from extensions and acquisitions offsetting production Reconciliation of 2P Reserves (mboe) | Category | North America | International | Vermilion Total | | :--- | :--- | :--- | :--- | | Dec 31, 2021 | 357,780 | 123,227 | 481,007 | | Extensions & Improved Recovery | 47,369 | 3,223 | 50,592 | | Technical Revisions | (24,889) | (8,054) | (32,943) | | Acquisitions | 48,113 | — | 48,113 | | Production | (21,013) | (10,080) | (31,093) | | Dec 31, 2022 | 412,045 | 110,745 | 522,790 | Corporate Updates This section outlines the company's current commodity hedging position and announces a key leadership promotion to CEO Commodity Hedging As of March 2023, Vermilion has hedged 15% of its remaining 2023 production, focused primarily on European natural gas Hedging Position for Remainder of 2023 (as of March 8, 2023) | Commodity | Percentage Hedged | | :--- | :--- | | Total Net Production | 15% | | European Natural Gas | 50% | | Crude Oil | 0% | | North American Natural Gas | 13% | Organizational Update Effective March 7, 2023, Mr. Dion Hatcher has been promoted to President and Chief Executive Officer and appointed to the Board of Directors - Mr. Dion Hatcher was promoted to President and Chief Executive Officer and appointed as a member of the Board of Directors, effective March 7, 2023[45] - Mr. Hatcher has been with Vermilion for 17 years and was promoted to President on January 1, 2022[45][46] Non-GAAP and Other Specified Financial Measures This section defines and provides detailed reconciliations for non-GAAP financial measures like FFO, FCF, and Net Debt Definitions and Reconciliations This section defines non-GAAP measures like FFO and FCF and reconciles them to their most comparable IFRS counterparts - Fund flows from operations (FFO) is used to assess the ability to generate income for dividends, debt repayment, and capital investments[52][53] - Free cash flow (FCF) is defined as FFO less capital expenditures and is used to determine funding available for investing and financing activities[55][56] - Net debt is a capital management measure comprised of long-term debt plus adjusted working capital, used to represent net financing obligations[63] Reconciliation of Net Debt ($M) | Component | As at Dec 31, 2022 | As at Dec 31, 2021 | | :--- | :--- | :--- | | Long-term debt | 1,081,351 | 1,651,569 | | Adjusted working capital | 265,111 | 9,284 | | Unrealized FX on swapped USD borrowings | (1,876) | (16,067) | | Net debt | 1,344,586 | 1,644,786 | About Vermilion & Disclaimer This section provides a brief company overview and includes important disclaimers regarding forward-looking statements Company Overview Vermilion is an international energy producer focused on generating free cash flow and returning capital to shareholders - Vermilion is an international energy producer with assets in North America, Europe, and Australia[69] - The business model emphasizes free cash flow generation and returning capital to investors[69] - The company's stated priorities are health and safety, the environment, and profitability, in that order[70] Forward-Looking Statements This section cautions that the document contains forward-looking statements subject to significant risks and uncertainties - The document includes forward-looking statements concerning future plans, including capital expenditures, production guidance, debt reduction, and shareholder returns[72] - These statements are based on assumptions about commodity prices, regulatory approvals, and operational success, which may prove incorrect[74] - Readers are warned not to place undue reliance on these statements as they are subject to numerous risks and uncertainties inherent in the oil and gas industry[75]