The unaudited interim financial statements and management discussion and analysis for the three and nine months ended September 30, 2023 will be available on the System for Electronic Document Analysis and Retrieval Plus ("SEDAR+")
Highlights
- Q3 2023 fund flows from operations ("FFO")(1) was $270 million ($1.65/basic share)(2) and exploration and development ("E&D") capital expenditures(3) were $126 million, resulting in free cash flow ("FCF")(4) of $144 million ($0.88/basic share)(5).
- Year-to-date net earnings of $566 million ($3.45/basic share) driven by strong price realization and acquisition and disposition activity.
- The TTF natural gas benchmark price in Europe averaged $14.11 per mcf in Q3 2023, which was over five times higher than the average AECO benchmark index price for the quarter. Approximately 35% of Vermilion's Q3 2023 gas production had direct exposure to European gas pricing.
- Net debt(6) decreased to $1.2 billion, representing a trailing net debt-to-FFO ratio(7) of 1.2 times.
- In conjunction with our Q3 2023 release, we announced a quarterly cash dividend of $0.10 per share, payable on January 15, 2024 to shareholders of record on December 29, 2023.
- Given the improving FCF profile of the business, we are now targeting to return 30% of FCF to shareholders in 2023, compared to the prior range of 25 to 30%, until we achieve our net debt target of $1 billion. Under current strip pricing, we anticipate achieving this debt target in Q1 2024 at which time we intend to increase the amount of capital returned to shareholders via the base dividend and share repurchases. We plan to communicate an update to our return of capital framework with our 2024 budget release.
- Production during the third quarter of 2023 averaged 82,727 boe/d(8), which was at the top end of our Q3 2023 guidance range, primarily due to the successful restart of the Wandoo facility in Australia in early September 2023 and the accelerated maintenance turnaround at Corrib, which was completed five days ahead of schedule.
- In Australia, our wells continue to produce at strong rates following the restart of the Wandoo facility, and the business is forecasted to contribute approximately 4,000 bbls/d in Q4 2023.
- In Ireland, Corrib is forecasted to produce approximately 10,000 boe/d (net to Vermilion) of premium-priced European gas in Q4 2023.
- As a result of strong operational execution and performance across our portfolio, we are maintaining our 2023 annual production guidance of 82,000 to 86,000 boe/d.
- We have completed the site preparation and awarded all major contracts for the 16,000 boe/d Mica Montney battery.
- The majority of construction is scheduled to occur in the first half of 2024 with the battery expected to be operational by mid-2024.
- We continued to advance our deep gas exploration and development plans in Germany, and commenced drilling on the first well of our two well winter drilling program in October 2023. In addition, we have started site preparation for the gas plant in Croatia, which is scheduled for start-up in mid-2024, subject to ongoing regulatory approvals processes, and will facilitate production from the SA-10 block where we have previous gas discoveries.
Message to Shareholders
Production during the third quarter of 2023 averaged 82,727 boe/d(1), which was at the top end of our Q3 2023 guidance range, primarily due to the successful restart of the Wandoo facility in Australia in early September 2023 and the accelerated maintenance turnaround at Corrib, which was completed five days ahead of schedule. We would like to thank all of our staff in Australia and Ireland for the safe and efficient execution of these large scale maintenance programs. Health, Safety and the Environment is our number one priority and we take great pride in these accomplishments. With all production back online, we remain on target to achieve our Q4 2023 guidance range of 86,000 to 89,000 boe/d and full year guidance range of 82,000 to 86,000 boe/d.
We generated $270 million of fund flows from operations ("FFO") in Q3 2023 and invested $126 million of E&D capital, resulting in $144 million of free cash flow ("FCF") - an 80% increase over the prior quarter. This level of FCF allowed us to fund our current asset retirement obligations, lease payments and the base dividend, with the excess FCF allocated to debt reduction and share repurchases. Net debt at the end of Q3 2023 decreased 6% to $1.2 billion, representing a trailing net debt-to-FFO ratio of 1.2 times.
Our Q4 2023 capital program is well underway as we embark on exciting new growth projects in North America and Europe. We broke ground on the Mica Montney BC battery construction in August 2023 and will continue to progress this project over the next several months. This key piece of infrastructure will underpin the future development and growth of our Mica Montney asset. In Germany, we recently commenced drilling on our first of two planned exploration gas wells, which is a natural extension of the successful drilling campaigns we have executed over the past two decades in neighboring Netherlands. With success from our Germany exploration drilling program, we believe our land base of approximately 700,000 net acres can support a multi-year drilling campaign, providing Vermilion with years of organic production growth of high valued European gas. In Croatia, we started site preparation for the gas plant, which is scheduled for start-up in 2024 and will facilitate production from the SA-10 block where we have previous gas discoveries.
We continue to provide our investors with a diversified commodity exposure, of which approximately 20% is European gas. Both prompt and forward European gas prices have stabilized in recent months in the low-$20 per mmbtu range. This is well below the prices seen at this time last year, during the height of the Russian invasion of Ukraine, which prompted the European Union to take the extraordinary measure of levying a windfall tax for 2022 and 2023. To date, there has been no extension of the windfall tax by the EU into 2024, which is in line with the EU's statement that the measure was exceptional and strictly temporary. Given the stability of European gas prices and a more constructive outlook on European regulatory policy, we have been actively hedging more European gas to support our future investment in this region. We have hedged 38% of our 2024 European gas production at an average floor price of $33 per mmbtu and 20% of our 2025 European gas production at an average floor price of $22 per mmbtu. These hedges enable us to lock in future FFO, providing greater certainty on achieving our near-term debt targets while enhancing our future return of capital to shareholders.
It is an exciting time for Vermilion and its shareholders. We are gaining operational momentum with Australia now back online, Mica BC battery and Croatia gas plant construction underway and spudding of our first Germany gas exploration well. Second, we have direct exposure to premium priced European gas, which remains in extremely tight supply. We are pleased with our current hedge levels and will continue to lock in these strong prices. Third, we are seeing the benefits of the strategic asset high-grade and focus on debt reduction. Vermilion is well positioned to deliver a significant increase in 2024 FCF. With this, we are on track to achieve our debt target in Q1 2024 and intend to increase our return of capital to shareholders.
