Vermilion Energy Inc. (NYSE:VET) Q4 2016 Earnings Conference Call February 27, 2017 11:00 AM ET
Kyle Preston - Director of Investor Relations
Anthony Marino - President and Chief Executive Officer
Michael Kaluza - Executive Vice President and COO
Curtis Hicks - Executive Vice President and CFO
David Popowich - CIBC World Markets
Good morning. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Vermilion Energy Fourth Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions]
Thank you. Mr. Anthony Marino, President and Chief Executive Officer, you may begin your conference.
Good morning, ladies and gentlemen. Thank you for joining us. I am Tony Marino, President and CEO of Vermilion Energy. With me today are Mike Kaluza, Executive Vice President and COO; Curtis Hicks, Executive Vice President and CFO; and Kyle Preston, our Director of Investor Relations.
I would first like to refer to the advisory regarding forward-looking statements contained in today's news release. These advisories describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today, and outline the risk factors and assumptions relevant to this discussion.
During this call, I’ll provide you with a brief overview of our 2016 financial and operating results including a summary of our updated reserves and resource evaluations. I’ll also expand on a few of our key achievements in 2016 and discuss how they contribute to Vermilion’s self-funded growth and income model.
Vermilion had a successful year of 2016 despite the challenges faced by our industry. We delivered record annual production of 63,526 BOE/D, exceeding the upper-end of our guidance range of 62,500 to 63,500 BOE/D. This represents 16% production growth and 10% on a per share basis. We achieved this while investing approximately half the E&D capital compared to 2015 and approximately one-third of the amount from two years ago.
We invested $242.4 million in E&D CapEx in 2016, which was within 1% of our $240 million budget and represented only 47% of our fund flows from operations also known as FFO. Annual FFO in 2016 was $510.8 million or $4.41 per basic share, just 1% lower than in 2015 despite significantly lower commodity prices year-over-year.
Our two largest commodity exposure benchmarks, Dated Brent and European Gas were down 17% and 27% respectively year-over-year. The impact from lower commodity prices was largely offset by higher production, particularly for European Gas, as we benefited from the ramp up of Corrib, which continues to outperform our expectations.
On a per unit basis, our 2016 operating and G&A expenses decreased 16% and 15% respectively year-over-year due in part to ongoing contributions from our profitability enhancement plan which led to over $70 million in cost savings in 2016.
With respect to capital costs, we have achieved substantial improvement in our capital efficiencies over the last several years, through cost control, improved completions, and significant upgrading of our project slate.
The improvement in our project slate is best characterized by the advancement of several high return projects like our Mannville condensate-rich gas play in Alberta, our conventional gas drilling program in The Netherlands, and our light oil development projects in France, to name a few.
The improvement in our capital efficiencies also allowed us to deliver strong reserve growth with very low F&D costs. Based on our independent GLJ reserve assessment, our total proved or 1P reserves increased 9% to 175.8 million barrels equivalent, while our total proved plus probable or 2P reserves increased 11% to 290.1 million barrels equivalent.
On a 2P basis, our 2016 F&D and FD&A costs including future development capital decreased 38% to $5.57 per BOE and 34% to $6.62 per BOE respectively. Vermilion’s F&D cost has decreased 84% compared to five years ago. This contributed to a strong operating recycle ratio of 4.9 times in 2016, which is more than three times the level from five years ago when commodity prices were much higher than they are today.
In addition to growing our reserve base, we also focused on activities to expand our resource base to support our long-term production and reserves growth profile. Based on our independent GLJ resource assessment, our best estimate contingent resources in the Development Pending category increased by 24% year-over-year to 198.5 million barrels equivalent.
More detailed information on our reserves and resources can be found in our AIF and reserves press release issued this morning. We achieved these strong operational results while preserving the strength of our balance sheet and maintaining our dividend in 2016.
Over our 14 year history of paying a dividend, we have increased our dividend three times and have never reduced it. We funded our 2016 cash dividend and capital expenditures within our fund flows from operations, achieving a payout ratio of 70% while maintaining our net debt at approximately $1.4 billion.
The excess cash generated in 2016 was used to fund several small but strategic acquisitions including the Engie acquisition in Germany which closed on December 19, along with several small transactions in Canada, the US, and The Netherlands.
During Q4 2016, we began prorating our premium dividend by 25% and subsequently announced a further 25% proration starting with the January 17, 2017 dividend payment. This morning, we announced another 25% proration in our premium DRIP program with the April 2017 dividend payment such that eligible shareholders who have elected to participate in the premium DRIP will receive a 1.5% premium on 25% of their participating shares and the regular cash dividend on the remaining 75% of their shares.
Subject to unexpected changes in the commodity price outlook, we’ve planned to discontinue the premium DRIP beginning with the July 2017 dividend payment such that there would be no further equity issuance under this program. We also reduced the discount associated with an additional component of our dividend reinvestment plan from 3% to 2% beginning with the January 2017 payment.
Our strategy aims to deliver a combination of consistent per share growth and meaningful income to our shareholders. These measures associated with our DRIPs will further reduce share issuance ensuring that future growth and production, reserves and FFO more efficiently flows to our owners on a per share basis.
In addition to our strong financial and operational performance, we made great strides in our environmental, social and governance efforts in 2016. We improved our Corporate Knights ranking for the second consecutive year, now ranking 9th on the Future 40 Responsible Leaders in Canada list, the highest ranking for an oil and gas company and also increased our MSCI ESG rating placing Vermilion in the 90th percentile globally.
Most importantly, we were named to the CDP Climate "A" List, which recognizes companies for their actions in mitigating climate change. We were one of only five oil and gas companies in the world and the only energy company in North America to be designated on the Climate “A” List.
Our outlook for 2017 remains consistent with the budget we announced in November 2016. We have maintained our 2017 E&D capital budget of $295 million, along with corresponding production guidance of 69,000 to 70,000 BOE/D representing 6% production per share growth at the upper-end of this range.
As a reflection of the flexibility in our project portfolio, we have responded to permitting delays on a couple of Netherlands projects by reallocating a modest amount of capital in Canada where we added 4 gross, 3.7 net Mannville wells to our 2017 program.
More details on this reallocation of CapEx and production by business unit can be found in our March 2017 investor presentation, which is currently posted on our website. We have modestly increased our 2018 capital investment target by $5 million to $340 million to account for investment on the new Slovakian farm-in we announced this morning.
The farm-in provides Vermilion with a 50% interest in a 183,000 acres on an existing license with modest seismic and well commitments over a five year primary term. Our 2018 production target remains unchanged at 75,000 to 76,000 BOE/D.
As a result of our ongoing cost reductions and capital efficiency improvements, we’ve been able to significantly reduce our planned capital investment program over the past several years while increasing production. Due to the improvement in our project slate, we believe that most of these cost and efficiency gains are durable over the long-term.
With respect to 2017 services costs, we note that a significant majority of our capital costs are locked in for the year. We have designed our 2017 and 2018 capital programs to provide for continued self-funded growth. At the current commodity price strip, we expect FFO to exceed the combined cost of our E&D capital expenditures and dividends.
Based on the strip, we project our 2017 and 2018 free cash flow levels to be more than three times what they were during the 2012 to 2014 timeframe when commodity prices were much higher. We have the flexibility to direct through resulting surplus cash to further debt reduction, expand the capital program, make value-adding acquisitions or potentially to increase the dividend under the right circumstances.
Despite the continued commodity downturn, we believe we are now in a stronger position than we have ever been before with a deep inventory of high return projects to underpin our self-funded growth and income model for the long-term.
That concludes my planned remarks. We will be happy to address any questions that you might have. Operator, would you please open the phone lines to questions?
[Operator Instructions] Your first question comes from David Popowich from CIBC. Your line is open.
Thanks for taking my questions guys. I just had a question about your asset retirement obligations. It looks like a pretty big uptick in the ARO relative to previous years. And then, when I dig into the notes, it looks like a large chunk of that is due to changes in discount rate assumptions, but there is also a large asset retirement obligation associated with your Germany acquisition.
So, I was just wondering if you could just give me a sense of what are the main contributors to the ARO in Germany? And are there any opportunities for, perhaps optimizing that in the future? Thank you.
Well, Dave, our ARO in Germany is really typical with the – our assets spread across Germany or Europe as well as assets in Canada, it’s just - it’s well abandonment. We don’t own major facilities in Germany. So really it relates to the well bores that we’ve acquired and it’s a function of the discount rates that we are required to use from an accounting perspective. And we use fairly consistent rates across all jurisdictions.
So, really nothing unusual in the ARO there and the big change really in our overall ARO was the result of a reduction in discount rates and as you can appreciate rates, not, not necessarily bank rates, but global rates or rates that we would be able to achieve in debt markets that have come down considerably in the last year and that has impacted the ARO calculation and a lower discount rate that resulted in a higher net present value that’s recorded on the balance sheet.
So, is there any spending that you would have to incur in the near or medium-term towards asset retirement in Germany? Or is that all in mind with the rest of your reserve report, I believe you talk about the 2030 to 2040 timeframe for having just a number?
Yes, nothing, nothing unusual in those German assets and nothing has an immediate capital commitment. Our ARO spending is forecast in around the $10 million mark which is where it’s been for the last number of years on a global basis.
Great. Thanks guys.
[Operator Instructions] We do not have any questions over the phone at this time. I will turn the call over to Mr. Marino.
Thank you again for participating in our conference call. We look forward to speaking with you again after our Q1 release.
This concludes today's conference call. You may now disconnect.
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