Vermilion Energy Inc. (“Vermilion”, “We”, “Our”, “Us” or the “Company”) (TSX: VET) (NYSE: VET) is pleased to announce its 2023 budget and guidance, a 25% dividend increase, and the resumption of our share buyback program.
- 2023 capital budget of $570 million reflects consistent investment levels in North America and increased capital allocation to continental European gas drilling
- 2023 production guidance of 87,000 – 91,000 boe/d represents a year-over-year increase of approximately 3% at the midpoint. This production guidance assumes a March 31, 2023, closing of the Corrib Acquisition, as well as the optimization of our Montney development to minimize incremental Alberta infrastructure due to recent progress obtaining permits on our British Columbia lands
- Obtained formal Irish government consent for the Corrib Acquisition, which is another key milestone towards completing the transaction
- Forecast 2023 free cash flow (“FCF”) of approximately $800 million based on forward commodity prices and including the impact of temporary windfall taxes and hedging losses
- Expect to return up to 25% of FCF to shareholders in 2023 through base dividend and resumption of share buybacks, with the balance allocated to debt reduction
- Quarterly cash dividend increased by 25% to $0.10 CDN per share, effective with the Q1 2023 dividend
- Vermilion remains well positioned to generate strong FCF in the years ahead which will support our future development plans and return of capital strategy
2023 Budget and Guidance
Vermilion’s Board of Directors has approved an E&D capital budget of $570 million for 2023. With this level of investment, we expect to deliver annual average production of 87,000 to 91,000 boe/d, representing a year-over-year increase of approximately 3% at the midpoint. This production guidance assumes a March 31, 2023, closing of the Corrib Acquisition, as well as the optimization of our Montney development to minimize incremental Alberta infrastructure due to recent progress obtaining permits on our British Columbia lands.
Based on forward commodity prices and assuming a March 31, 2023, Corrib acquisition close, we forecast 2023 FCF of approximately $800 million, including the impact from temporary windfall taxes and hedging losses attributable to 2023. The combined impact of temporary windfall taxes and hedging losses has reduced our 2023 FCF forecast by approximately $350 million. Despite these temporary headwinds, our forecasted ability to generate meaningful free cash flow in 2023 provides confidence to announce a 25% increase to our base dividend, while still providing free cash flow to reduce debt and execute share buybacks. We expect to generate even stronger free cash flow in 2024 as our current hedge book moves into a gain position, based on current commodity prices, and the temporary windfall tax program expires.
We have included a windfall tax estimate range in our guidance table below, however these percentages and amounts are highly sensitive to European gas prices and may fluctuate as commodity prices change. Our FCF estimate also factors in higher anticipated operating costs, which is primarily driven by our European operations where power costs are directly linked to European gas prices.
|Production (boe/d)||87,000 – 91,000|
|E&D Capital Expenditures ($MM)||$570|
|Royalty rate (%)**||8 – 10%|
|Operating ($/boe)||$17.50 – 18.50|
|Transportation ($/boe)||$2.75 – 3.25|
|General and administration ($/boe)||$2.00 – 2.50|
|Cash taxes (% of pre-tax FFO)||11 – 13%|
|Windfall tax (% of pre-tax FFO)***||14 – 16%|
*2023 guidance reflects foreign exchange assumptions of CAD/USD 1.36, CAD/EUR 1.46, and CAD/AUD 0.92. **Royalty rate guidance excludes windfall royalties paid as part of the European Solidarity Contribution. ***Windfall tax guidance is based on forward prices as at December 30, 2022, and incorporates all forms of solidarity payments including windfall taxes and windfall royalties net of tax.
In North America, we plan to invest approximately $340 million of capital which is similar to 2022. The capital program will be deployed across our Mannville and Montney liquids rich gas plays in Alberta and British Columbia and our light oil plays in Wyoming and southeast Saskatchewan. We plan to drill a total of 52 (40.1 net) wells, including seven (7.0 net) Montney wells at Mica, seven (6.1 net) Mannville wells in Alberta, 16 (8.2 net) wells in Wyoming and 22 (18.8 net) wells in southeast Saskatchewan. Similar to recent years, our North American drilling program will be balanced throughout the year to optimize capital, rig, and labour availability, including the transfer of an experienced drilling crew from our Canadian winter program to our US drilling program in Q2 2023. We have utilized this scheduling over the past two years and continue to realize cost and efficiency gains.
During the second half of 2022 we completed the six wells on our first Alberta Montney pad at Mica and tied the wells in during the fourth quarter. Total production from our Montney assets averaged 7,500 boe/d during the month of December which is in line with our expectation. This was Vermilion’s first Montney pad after taking over operations from Leucrotta during drilling, and we are pleased with the initial results as they validate the high return profile and long-term development potential of this asset. Drilling recently commenced on a follow up three-well pad in Alberta which is expected to be completed and tied in during the first half of 2023. Seven additional Montney wells are planned in 2023 to utilize existing infrastructure capacity as we await the final permits to expand infrastructure capacity in British Columbia. In addition, we recently signed agreements to acquire 11 sections of adjacent land at Mica, further consolidating our contiguous land base and increasing our Tier 1 inventory. These land acquisitions, combined with the results from our first pad have increased our Montney inventory to approximately 300 multi-zone, extended reach, drilling locations.
We continue to see positive developments on the Blueberry River First Nations permitting negotiations and are pleased to report that we have received three permits in British Columbia, including one to construct a 16,000 boe/d battery in British Columbia. While additional permits are still required, our increasing confidence in permitting allows a return to the initial drilling and infrastructure plan made at the time of the acquisition. This drives the best long-term return on capital, yet defers the production ramp up by a year relative to the back-up plan which had contemplated an Alberta focused development in 2023. Near term, 2023 volumes are expected to average 8,000 boe/d, with the ramp to 13,000 boe/d now expected in 2024. Our longer-term development plans for Mica have not changed. We expect to grow the asset to a target production base of 28,000 boe/d over the next several years and sustain this level for 20+ years while generating significant free cash flow.
We plan to invest approximately $230 million across our international assets, representing an increase of 7% compared to 2022. We are allocating a greater proportion of capital to European gas in 2023, more than offsetting the capital that was allocated to our Australia drilling program last year. In Europe, we plan to drill eight (6.3 net) wells, comprised of three (2.3 net) wells in Germany, three (3.0 net) wells in Croatia and two (1.0 net) wells in the Netherlands. The largest proportion of our European drilling capital will be allocated to Germany, where the investment climate has improved over the past year. We continue to have open and constructive dialogue with local and state officials about Vermilion’s ability to contribute to Germany’s energy security and are working towards an accelerated drilling program. Vermilion has a large undeveloped land base in Germany with several large gas prospects. We plan to drill two (2.0 net) oil wells and one (0.3 net) high prospect gas well in Germany in 2023, while putting plans in place to drill additional high prospect gas wells in 2024 and beyond. In Croatia, we plan to drill three (3.0 net) wells on our SA-7 block, and anticipate starting up the gas plant on the SA-10 block in late 2023 or early 2024. This gas plant will have an initial capacity of 15 mmcf/d with capacity to expand should we make additional discoveries in the region.
In December 2022, the Irish government gave formal consent to proceed with our Corrib acquisition. This approval is another key milestone towards completing the transaction. We continue to work closely with our partners and expect closing to occur in Q1 2023. We have scheduled a plant turnaround and other non-routine maintenance in 2023, which will result in production being offline for approximately 30 days mid-2023.
European Windfall Tax
We expect our windfall tax exposure for both 2022 and 2023 to be at the lower end of our previous estimates, primarily due to lower 2023 European gas strip pricing. Based on the windfall tax frameworks outlined to date, we estimate a windfall tax of approximately $250 million for 2022 and approximately $300 million for 2023. We have reflected these updated estimates in our 2022 net debt forecast and 2023 windfall tax guidance. As a result of this, we expect to exit 2022 with net debt of $1.4 billion or less. Note, the 2023 estimate remains highly sensitive to European gas prices.
Included in these estimates is the assumption that Ireland moves ahead with its proposed 75% windfall tax (approximately 56% net of income tax) in each of 2022 and 2023. We remain firmly opposed to the windfall tax and the manner in which it is being implemented, and we continue to explore options to mitigate the impact. Vermilion has been a responsible operator in Europe for over 25 years, providing essential energy to the region as other oil and gas companies exited. It is our desire to continue working with governments in the region to enhance Europe’s energy security; however, Vermilion and its partners require a stable, predictable and equitable regulatory regime in order to commit capital to long-term investments.
Return of Capital
As part of our 2023 return of capital strategy, we are pleased to announce a 25% increase to our Q1 2023 quarterly cash dividend to $0.10 CDN per share, which equates to an annual dividend of $0.40 CDN per share, approximately 5% of forecasted 2023 FFO. This increase aligns with our dividend policy of providing ratable increases while ensuring the annual dividend amount is sustainable at mid-cycle pricing. Our decision to pause share buybacks in Q4 2022 was entirely due to the uncertainty related to the European windfall tax and how each country was going to implement. Now that we have better clarity, we are pleased to announce the resumption of our share buyback program. We continue to see significant long-term value in our asset base which we do not believe is accurately reflected in our share price today. As such, we expect the primary method of returning capital beyond the base dividend to be through share buybacks in the near-term.
As a result of the unexpected windfall tax, our current debt levels are higher than we anticipated. As such, we believe it is prudent to remain focused on debt reduction in 2023. We are targeting net debt of $1 billion which represents an undrawn credit facility. This debt target will govern the pace of which we return capital to shareholders. At this time, we expect to allocate up to 25% of FCF to shareholder returns primarily through our base dividend and share buybacks, with the balance going to debt reduction. While this return of capital allocation is lower than what we outlined in August 2022, prior to learning of the European windfall tax, we believe lower debt levels are in the best interest of our shareholders over the long-term. Every dollar of debt reduction translates to an increase in equity value while also improving the resiliency of the company. As debt levels decrease, we plan to increase the allocation of capital returned to shareholders.
SOURCE Vermilion Energy Inc.