Vermilion Energy Announces Corrib Acquisition and 2022 Budget and Guidance

Source: www.gulfoilandgas.com 11/29/2021, Location: Europe

Vermilion Energy Inc. is pleased to announce the acquisition of an incremental 36.5% interest in the Corrib Natural Gas Project ("Corrib") and our 2022 Budget and Guidance. Highlights
Vermilion has entered into an agreement to acquire Equinor Energy Ireland Limited which owns a 36.5% interest in Corrib ("Corrib Acquisition") for total consideration of US$434 million ($556 million), before closing adjustments and contingent payment. The transaction has an effective date of January 1, 2022 and is expected to close during the second half of 2022 after all requisite approvals have been received.

The cash payment on closing will be reduced by the interim free cash flow ("FCF")(1) generated from the effective date to closing. We estimate a cash payment on closing in the range of $200 to $300 million, depending on the actual closing date, which we expect to fund within 2022 FCF. As part of the transaction, we have entered into an agreement with Equinor to hedge approximately 70% of the production for 2022 and 2023 which provides high certainty of an approximate two-year payback period.

The purchase price represents a funds flow from operations ("FFO") multiple of approximately 1.5 times. We estimate 2022 full-year pro forma(2) FFO per share accretion of approximately 33% and FCF per share accretion of approximately 53%, based on forward commodity prices(3). In addition, we estimate the transaction to be approximately 11% deleveraging in 2022 with incremental deleveraging and accretion expected in 2023 and beyond.

The Corrib Acquisition will add approximately 23 mmboe of 2P reserves and is expected to produce approximately 7,700 boe/d in 2022. Based on forward commodity prices, the Corrib Acquisition is forecast to generate approximately $365 million of FFO and $361 million of FCF in 2022 which equates to an FFO and FCF netback of approximately $130/boe.

Vermilion's operated interest in Corrib will increase to 56.5% upon closing, significantly increasing our exposure to premium priced European natural gas. On a 2022 full-year pro forma basis, European natural gas will represent approximately 22% of our production and approximately 42% of FFO. The acquisition also rebalances our international weighting to approximately 39% of production and 60% of FFO based on 2022 full-year pro forma estimates, further enhancing our geographical and commodity diversification which is a unique differentiator in our business model.

Corrib's natural gas production features world-class ESG, with best-in-class Scope 1 and 2 emissions intensity of 4.2 kgCO2e/boe and a robust plan for long-term biodiversity enhancement.

Vermilion's Board of Directors has approved an E&D capital budget of $425 million for 2022 which is expected to deliver annual average production of 83,000 to 85,000 boe/d, excluding any impact from the Corrib Acquisition. We will update our 2022 guidance once we have confirmation on the timing of the Corrib Acquisition closing date.

Based on forward commodity prices, we forecast 2022 full-year pro forma FFO in excess of $1.45 billion and FCF in excess of $1.0 billion (FFO and FCF in excess of $1.1 billion and $650 million, respectively excluding the Corrib Acquisition). The majority of FCF after dividends will be allocated to debt reduction and to fund the Corrib Acquisition, resulting in year-end net debt of less than $1.3 billion and a net debt to trailing full-year pro forma FFO ratio of less than 0.9 times.

We plan to reinstate a $0.06 per share quarterly dividend commencing in Q1 2022. Our return of capital framework will be a staged approach that will increase over time as further debt targets are achieved while retaining the flexibility to adjust when necessary. The Corrib Acquisition will significantly enhance the company's FCF profile and ability to return additional capital to shareholders.

Corrib Acquisition
Vermilion has entered into an agreement with Equinor ASA to acquire its wholly owned subsidiary Equinor Energy Ireland Limited which owns a 36.5% interest in Corrib for total consideration of US$434 million ($556 million), before closing adjustments and contingent payment. The acquisition has an effective date of January 1, 2022 and is expected to close in the second half of 2022 after all requisite approvals have been received. The length of time required to close is due to obtaining approval from partners, government and regulatory bodies. The cash payment on closing will be reduced by the interim FCF generated from the effective date to closing. Based on forward commodity prices, we estimate a cash payment on closing in the range of $200 to $300 million, depending on the actual closing date, which we expect to fund within 2022 FCF.

The Corrib Acquisition will add approximately 23 mmboe of 2P reserves and is expected to produce approximately 7,700 boe/d in 2022. Based on forward commodity prices, the Corrib Acquisition is forecast to generate approximately $365 million of FFO and $361 million of FCF in 2022, which equates to an FFO and FCF netback of approximately $130/boe. The purchase price represents an FFO multiple of approximately 1.5 times and an FCF yield of approximately 65%, based on 2022 full year estimates. The Corrib Acquisition is deleveraging and highly accretive to Vermilion on an FFO and FCF per share basis for 2022 and beyond. We estimate 2022 full-year pro forma FFO per share accretion of approximately 33% and FCF per share accretion of approximately 53%, based on forward commodity prices. In addition, we estimate the transaction to be approximately 11% deleveraging in 2022 with incremental deleveraging and accretion expected in 2023 and beyond. This acquisition is self-funded and reduces our leverage in 2022 and beyond without the need of issuing equity. As a result, it will serve our shareholders well by minimizing dilution, maximizing per share accretion metrics and enhancing our ability to return capital to shareholders.

As part of the transaction, we have entered into an agreement with Equinor to hedge approximately 70% of the production for 2022 and 2023 (NBP forward strip is currently ~$22.00-$23.00/mmbtu for 2022 and ~$14.50-$15.00/mmbtu for 2023), and have also agreed to a contingent payment on a portion of the 2022 revenue if European gas prices exceed a certain level. The contingent payment will be calculated by multiplying 12.5% of 2022 production by the difference between average 2022 NBP prices and 102 pence/therm (~$17.25/Mmbtu), provided this difference is positive, and up to a maximum of US$25 million. The structure of this transaction, including the deal contingent hedges, allows us to lock in the majority of cash flow for the next two years during a period of unprecedented high European natural gas prices, and also provides high certainty of an approximate two-year payback period. The estimated cash payment on closing and the estimated payback period includes the impact from the hedges and contingent payment.

The Corrib Acquisition aligns with our corporate acquisition and ESG strategy as it further consolidates ownership in an operated, high margin, low decline, low emission asset that generates significant FCF to support a sustainable and growing dividend. Corrib's natural gas production features a world-class ESG approach, with best-in-class Scope 1 and 2 emissions intensity of 4.2 kgCO2e/boe and a robust plan for long-term biodiversity enhancement. Our ownership in Corrib will increase to 56.5% upon closing of this acquisition, significantly increasing our exposure to premium priced European natural gas. On a 2022 full-year pro forma basis, we expect European natural gas to represent approximately 22% of our production and approximately 42% of FFO. The acquisition also rebalances our international weighting to approximately 39% of production and 60% of FFO on a 2022 full-year pro forma basis, further enhancing our geographical and commodity diversification which is a unique differentiator in our business model.

2022 Budget and Production Guidance
Vermilion's Board of Directors has approved an E&D capital budget of $425 million for 2022, which is in line with the preliminary outlook we provided with our Q3 2021 release. This level of capital investment is expected to deliver annual average production of 83,000 to 85,000 boe/d, before taking into account the Corrib Acquisition, while also providing significant FCF to facilitate the reinstatement of a fixed quarterly dividend and further debt reduction. We will update our 2022 guidance once we have confirmation on the timing of the Corrib Acquisition closing date.

In North America, we plan to invest approximately $215 million of capital, representing a decrease of 3% compared to 2021. The capital program will include the drilling of 50 (46.3 net) wells, comprised of 12 (12.0 net) Mannville condensate-rich natural gas wells in Alberta, 31 (28.1 net) light oil wells in southeast Saskatchewan and seven (6.2 net) light oil wells in Wyoming. The Wyoming drilling program includes four (3.2 net) two-mile lateral wells which are significantly more economic than one-mile laterals and includes three (3.0 net) wells on recently acquired acreage.

We plan to invest approximately $210 million across our international assets, representing an increase of 36% compared to 2021. The increase is primarily related to Australia where we plan to drill two (2.0 net) offshore wells in Q2 2022. In Europe, we plan to drill ten (9.1 net) wells comprised of two (1.1 net) wells in the Netherlands, three (3.0 net) wells in Germany, three (3.0 net) wells in Hungary and two (2.0 net) wells in Croatia. In addition, we plan to execute our standard workover program in France, construct the gas plant on the SA-10 block in Croatia and continue with our 3D seismic campaign to support future development.

Based on forward commodity prices, we forecast 2022 full-year pro forma FFO in excess of $1.45 billion and FCF in excess of $1.0 billion (FFO and FCF in excess of $1.1 billion and $650 million, respectively excluding the Corrib Acquisition). The majority of FCF after dividends will be allocated to debt reduction and funding the Corrib Acquisition. We forecast approximately $400 million of debt reduction in 2022, after funding the Corrib Acquisition, resulting in year-end net debt of less than $1.3 billion and a net debt to trailing full-year pro forma FFO ratio of less than 0.9 times.

Dividend Reinstatement and Return of Capital Strategy
We plan to reinstate a $0.06 per share quarterly dividend commencing in Q1 2022 with an expected payment date in April 2022. This dividend equates to an annual cash outlay of approximately $40 million which represents less than 3% of 2022 full-year pro forma FFO based on forward commodity prices, and approximately 5% under our mid-cycle commodity price assumptions (US$55/bbl WTI, $2.50/mmbtu AECO and $8.00/mmbtu European Gas). At this level we believe the quarterly dividend is sustainable through various commodity cycles and provides excess FCF to facilitate further debt reduction and additional return of capital beyond the current dividend. The Corrib Acquisition will significantly enhance the company's FCF profile and ability to return additional capital to shareholders.

As we approach and achieve further debt and leverage targets, it is our intention to augment our return of capital to shareholders through one or a combination of base dividend increases, special dividends and/or share buybacks. Our next leverage target is 1.5 times net debt to trailing FFO at mid-cycle pricing which implies an absolute net debt level of approximately $1.2 billion. We expect our return of capital framework to be a staged approach that will increase over time as further debt targets are achieved while retaining the flexibility to adjust when necessary. Throughout the past 18 months, we have significantly increased FCF per share and we expect the Corrib Acquisition to further enhance FCF per share in the future.

Advisors
Scotiabank, TD Securities Inc. and RBC Capital Markets are acting as financial advisors to Vermilion on the Corrib Acquisition. Torys LLP and Matheson acted as legal counsel to Vermilion on the Corrib Acquisition.


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