Brian Zinchuk is editor and owner of Pipeline Online
Vermilion Energy Inc. announced the sale of approximately 5,500 boepd of light oil production in southeast Saskatchewan on March 8.
That’s roughly half of its production in Saskatchewan. For 2022, Vermillion averaged 11,777 barrels of oil per day.
The announcement came as part of the company’s 2022 year-end financials. The Saskatchewan sale in a way paired up with an acquisition in Ireland as well as gas development in British Columbia.
In the release, Vermilion said, “Subsequent to year-end, we signed an agreement to sell certain assets in southeast Saskatchewan. The assets are comprised of approximately 5,500 boepd of non-core light oil production spread across the greater Arcola and Queensdale areas of southeast Saskatchewan. Total cash consideration is $225 million, before closing adjustments. Following our entry into the Montney, these mature assets were unlikely to attract capital. The divestment was part of our strategy to re-position Vermilion for long term success by high-grading our North American inventory, reducing unit cost and accelerating the timeline of achieving our debt reduction targets. The transaction has an effective date of September 1, 2022 and is expected to close in March 2023. The net proceeds will be used to pay down our revolving credit facility.”
The purchaser was not disclosed.
In the message to shareholders, Vermillion said, “In 2022, we delivered on our strategic priorities and continued to re-position Vermilion for long term success. Due to the robust free cash flow generation of our international and diversified assets, we reduced net debt by $300 million and completed $500 million of strategic acquisitions, despite incurring $406 million of realized hedging losses and $223 million of temporary windfall taxes.
“To increase our exposure to premium priced European gas, we progressed the high rate of return Irish Corrib consolidation deal, which we plan to close on March 31, 2023. In Canada, our Montney acquisition increased the depth and quality of our North American inventory. With lower debt and an even stronger asset base, we announced our return of capital framework and returned over $100 million to our shareholders with the reinstatement of a quarterly dividend in Q1 2022 and commencement of a share buyback program in Q3 2022.
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“We exited the year with net debt of $1.3 billion, or 0.8 times trailing FFO, which is less than half the leverage ratio from the prior year. These results translated into a total shareholder return in excess of 50 per cent including share price appreciation and dividends. We remain committed to reducing debt even further, which will allow for increasing return of capital to our shareholders in the future. Our next debt target remains $1.0 billion of net debt, which we anticipate achieving by the end of 2023 or early 2024, depending on commodity prices.”
The company’s production remained largely flat year-over-year. Production in Q4 2022 averaged 85,450 boepd, representing a one per cent increase over Q3 2022. Annual average production was 85,187 boepd, which is consistent with 2021 production levels.
During the fourth quarter, Vermilion’s production was impacted by unplanned downtime in Australia, cold weather and third-party downtime in North America, and the delayed startup of its six-well Montney pad in Alberta.
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Outlook and Guidance Update
The Corrib acquisition in Ireland has a planned close on March 31, 2023. Vermilion estimates a net cash payment of approximately $200 million at close and expect the acquisition to payout in approximately one year, based on forward commodity prices. This acquisition is expected to add approximately 7,000 boepd of European gas production, which was reflected from March 31, 2023 onwards in the company’s original production guidance of 87,000 to 91,000 boepd. Taking into account the southeast Saskatchewan asset sale and Australia downtime, Vermilion is revising its 2023 production guidance to 82,000 to 86,000 boepd. The company’s 2023 capital budget remains unchanged at $570 million as there was minimal capital allocated to the assets being sold.
“Our Q1 2023 drilling program is off to a strong start and is expected to deliver higher production in Canada during the first quarter, however extended maintenance downtime in Australia will result in lower corporate production in Q1 2023,” the company said. “As a result of the Australia downtime and the southeast Saskatchewan asset sale, Q1 2023 corporate production is expected to be in the range of 80,000 to 82,000 boepd.”
Q4 2022 Operations Review – North America
Production from Vermilion’s North American operations averaged 58,499 boepd in Q4 2022, an increase of 2 per cent from the prior quarter primarily due to new well production from its Montney assets in Canada and a full quarter contribution from its 2022 drilling program in the United States.
Vermilion said, “In Saskatchewan, we drilled seven (5.5 net) wells, completed ten (6.9 net) wells, and brought on production twelve (6.7 net) wells in southeast Saskatchewan. No drilling or completion activity occurred in the United States in the fourth quarter as the team focused on preparation for the 2023 drilling program which will commence in Q2 2023.”
“In Alberta, we drilled twelve (10.6 net), completed ten (8.2 net), and brought on production seven (6.9 net) Mannville liquids rich gas wells, while at Mica we drilled one (1.0 net) well and brought on production the six (6.0 net) wells from our first Montney pad. The six well Montney pad was brought on production in late November and saw rates increase through the balance of the year as the wells cleaned up. Total production from our Montney assets averaged 7,500 boe/d during the month of December. In December, drilling 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. During the fourth quarter of 2022 we received three permits in British Columbia, including one of the permits to construct a 16,000 boe/d battery and to drill a multi-well pad in British Columbia. We also signed agreements to acquire 11 sections of adjacent land at Mica, further consolidating our contiguous land base and increasing our Tier 1 inventory.”
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