Vermilion Energy (VET) Misses Q3 EPS by 18c, Revenues Beat

Vermilion Energy (NYSE: VET) reported Q3 EPS of ($0.07), $0.18 worse than the analyst estimate of $0.11. Revenue for the quarter came in at $397.94 million versus the consensus estimate of $225.21 million.

Highlights

• Q3 2019 production averaged 97,239 boe/d, a decrease of 6% from the prior quarter. The lower production level resulted from a number of plant turnarounds, unplanned downtime, and weather delays. Higher production in the US and France was more than offset by lower production in Canada, Netherlands, Ireland and Australia.
• We have reduced our 2019 capital investment guidance by $10 million to $520 million. With nine months of results in place, we are revising our 2019 annual production guidance range to 100,000 to 101,000 boe/d to account for the unplanned downtime and lower capital investment. We expect to deliver annual production at the mid-point of this revised guidance range, reflecting strong year-over-year production per share growth of 5%.
• Fund flows from operations ("FFO") for Q3 2019 was $216 million ($1.39/basic share(1)), a decrease of 3% from the previous quarter, primarily due to lower production volumes and weaker commodity prices. FFO for Q3 2019 decreased 17% from the same quarter last year as increased production was more than offset by weaker global commodity pricing.
• In the United States, Q3 2019 production averaged 4,925 boe/d, an increase of 12% from the prior quarter, primarily driven by contributions from our 2019 drilling program, which continues to perform above our expectations. New well results were partially offset by a longer-than-expected turnaround at a third-party operated gas plant.
• In Central and Eastern Europe, we drilled one (1.0 net) exploration well in Croatia during Q3 2019, which resulted in a second consecutive gas discovery. The well tested at a rate of 17.2 mmcf/d(2). We were also provisionally awarded the SA-07 license in Croatia, adding approximately 500,000 net acres to our portfolio, which will bring our total licensed acreage to approximately 2.4 million net acres in the country.
• In France, Q3 2019 production averaged 10,347 boe/d, an increase of 6% from the prior quarter. Production volumes in the Paris Basin were no longer restricted after restart of the Grandpuits refinery in mid-August.
• In Canada, Q3 2019 production averaged 58,504 boe/d, a decrease of 5% from the prior quarter. The decrease was primarily due to planned turnarounds and project delays caused by abnormally wet weather.
• In the Netherlands, Q3 2019 production averaged 7,429 boe/d, a decrease of 17% from the prior quarter, primarily due to a planned turnaround and subsequent repairs required on a gas compression facility.
• In Ireland, Q3 2019 production averaged 43 mmcf/d (7,202 boe/d), a decrease of 12% from the prior quarter. The decrease was primarily due to a planned plant turnaround and unplanned downtime at the Corrib natural gas processing facility. The downtime, which was unrelated to the plant turnaround, was remedied by early October.
• In Australia, Q3 2019 production averaged 5,564 bbl/d, a decrease of 17% from the previous quarter primarily due to well management and unplanned vessel maintenance on the Wandoo platform.
• Our Board of Directors has approved a 2020 Exploration and Development ("E&D") capital budget of $450 million, with associated production guidance of 100,000 to 103,000 boe/d. Our 2020 budget reflects continued emphasis on returning capital to investors, while still providing modest production growth. Within this budget, we also continue to advance strategic capital projects associated with early-stage exploration and development activities.
• We have elected to phase out the Dividend Reinvestment Plan ("DRIP"), prorating the available DRIP shares by 25% each quarter starting in Q1 2020, until completely eliminated in Q4 2020.
• Vermilion received top quartile rankings for 2019 for our industry sector in both the Sustainalytics ESG Rating and SAM (formerly known as RobecoSAM) annual Corporate Sustainability Assessment ("CSA"). These agencies analyze sustainability performance across economic, environmental, governance and social criteria, and the CSA is also the basis of the Dow Jones Sustainability Indices. Our 2019 Sustainability Report is available on our corporate website at: http://sustainability.vermilionenergy.com.

Message to Shareholders

The third quarter of 2019 continued to be an exceptionally difficult period for energy investors, as the upstream oil and gas sector traded down to multi-year lows and significantly underperformed the broader equity market. Vermilion was not spared. Our stock price declined over 30% during the quarter, bringing our current dividend yield to approximately 14%. While we are certainly disappointed with our share price performance, we would like to stress that Vermilion's dividend policy is not based on the market price of our shares. Our dividend policy is based on the fundamental economic sustainability and free cash flow generation of our business, which remains strong.

The capital markets environment for oil and gas companies has changed dramatically over recent years due to a multitude of factors, including poor investment returns from energy issuers, increased focus on ESG and SRI mandates, and a growing concern about the future of fossil fuels amongst both investors and the general public. This has led to valuation multiple compression across the entire sector with many companies, including Vermilion, trading significantly below their historical valuation metrics. Despite these changing capital market dynamics, the oil and gas sector is a vital contributor to the global economy and will be around for many decades to support the long-term energy transition. During this transition, we believe there is significant value to be realized from responsible energy investment, and that Vermilion is optimally positioned to prosper in this industry and market environment. Our belief in Vermilion is founded in the economic sustainability of our business model and our leadership in environmental sustainability in the upstream oil and gas sector.

Throughout our 25-year history, we have repeatedly made the necessary adjustments to adapt to the changing landscape around us. Our business model has focused on sustainable growth and income, which we have successfully delivered to our shareholders over the years. Vermilion has paid over $39 per share in distributions and dividends since 2003 and generated compounded growth in production per share of over 8% annually since 2012. Our investment cycle time is short with minimal fixed commitments. Consequently, we have flexibility to adjust our investment and growth levels to provide the combination of return of capital and growth which we think will maximize shareholder value in a changing capital market environment. Based on the current market and commodity environment, we believe a strategy that is even more focused on free cash flow generation will create the most value for our shareholders. As such, for 2020, while maintaining our dividend at current levels, we have elected to reduce our production growth rate and to introduce additional flexibility in how we return capital to investors.

This lower growth strategy was embedded in the preparation of our 2020 budget as well as our capital plans for the remainder of 2019. For 2019, we have reduced capital investment by $10 million, and now expect to invest $520 million. As a result of this reduced level of investment and after accounting for higher-than-expected downtime and weather delays, we have correspondingly reduced our 2019 annual production guidance to 100,000 to 101,000 boe/d. We expect to deliver annual production at the mid-point of this revised guidance range, reflecting strong year-over-year production per share growth of 5%. Our Board of Directors has approved a 2020 capital budget of $450 million with associated production guidance of 100,000 to 103,000 boe/d. This budget is designed to deliver modest production growth of about 1%. The 2020 budget includes approximately $20 million of strategic capital associated with early-stage exploration and development activities. These activities will lay the groundwork for future development and production growth from a highly economic asset base.

During the third quarter we received approval from the TSX for a normal course issuer bid ("NCIB"), which will allow us to buy back up to 7.75 million shares. With this approval, we intend to use the NCIB in combination with debt reduction when we have excess free cash flow available (beyond dividends) to enhance per share growth. We will also be phasing out our DRIP over the course of the next year, prorating the available DRIP shares by 25% each quarter starting in Q1 2020 until the DRIP is completely eliminated in Q4 2020. The DRIP has been a shareholder service that we have provided since our first income distribution in 2003, with discounted share purchases offered until 2018. We recognize that the elimination of the DRIP may be a disappointment to some shareholders. Nonetheless, we feel that in an environment of lower trading commissions, the establishment of our NCIB, and lower energy issuer valuation multiples, the elimination of the DRIP is in the best interests of our broad shareholder group.

We remain committed to maximizing value for our shareholders over the long-term through a combination of a sustainable dividend, low financial leverage, share buybacks, and production growth as appropriate. In addition, we will remain disciplined in our acquisition strategy as we continue to evaluate strategic opportunities that fit within our business model and add value for existing shareholders. Our highest financial priority is our balance sheet, and under no circumstance will we do anything that jeopardizes Vermilion's long-term financial stability. We have a robust balance sheet with termed-out borrowing, strong liquidity, and a very low cost of debt. Coupled with low operating leverage due to high margins, a diversified product mix, and a strong hedge position, our balance sheet provides us with the flexibility to weather volatility in commodity prices.

For earnings history and earnings-related data on Vermilion Energy (VET) click here.

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