CALGARY, AB, Jan. 18, 2021 /PRNewswire/ – Vermilion Energy Inc. to announce its 2021 exploration and development (“E&D”) capital budget and associated production guidance.
Highlights
E&D capital budget of $300 million is a balanced and disciplined budget focused on maximizing returns and free cash flow (“FCF”)(1) to facilitate debt reduction.
Annual average production guidance of 83,000 to 85,000 boe/d reflects a transition to a more efficient, level-loaded capital program.
At the midpoint of production guidance and using the January 13, 2021 commodity strip, Vermilion expects to generate in excess of $200 million of free cash flow with a payout ratio less than 65%, including the impact from existing hedges.
E&D capital budget is fully funded at a WTI oil price of approximately $37/bbl on an unhedged basis, assuming all other commodity prices held at the January 13, 2021 commodity strip.
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Additional capital projects will be considered for drilling later in the year if market conditions are supportive.
2021 Budget and Production Guidance
Vermilion’s Board of Directors has approved an E&D capital budget of $300 million for 2021, representing a 17% reduction from 2020. The Company’s primary focus for 2021 is to preserve liquidity and reduce debt while positioning the Company for long-term sustainability. As a result, the capital budget was designed to maximize returns and free cash flow while retaining the flexibility to adjust investment levels depending on commodity prices. In addition, following a review of our global asset base, we have reorganized the business and reporting lines into two core regions, North America and International.
Sponsor
The allocation of capital in 2021 will be more level-loaded compared to recent years. While the transition to a more level-loaded capital program will result in lower annual average production for 2021, it is expected to deliver better overall capital efficiencies and lead to a more manageable production base going forward. Approximately 31% of the 2021 capital budget will be invested during the first quarter, compared to approximately 65% in 2020. This $300 million capital program is expected to deliver annual average production of 83,000 to 85,000 boe/d.
During the budgeting process, close attention was paid to the return and payback period of each individual project under various commodity price scenarios. Given the strong recovery in European and North American natural gas prices throughout the second half of 2020 and into 2021, Vermilion’s condensate-rich natural gas projects in Alberta and conventional natural gas projects in the Netherlands provided the strongest return profiles. As a result, the majority of the first half 2021 drilling program will be allocated to these projects. Vermilion’s light oil projects in southeast Saskatchewan, Wyoming and France also screened well under strip pricing at the time of evaluation, however the size of the program has been scaled back in 2021. With the recent strengthening of global oil prices, the economics of these oil projects has further improved and additional drilling will be considered during the second half of the year if market conditions remain supportive.
Based on the midpoint of our production guidance and using the January 13, 2021 commodity strip, Vermilion expects to generate in excess of $200 million of free cash flow with a payout ratio less than 65%, including the impact from existing hedges. Our $300 million capital program is fully funded at a WTI oil price of approximately $37/bbl on an unhedged basis, assuming all other commodity prices held at the January 13, 2021 commodity strip. Vermilion has approximately 32% of its total production hedged for 2021, including 46% of its 2021 natural gas production and approximately 19% of its 2021 crude oil production, using a combination of swaps and three-way contracts (https://www.vermilionenergy.com/invest-with-us/hedging.cfm), while retaining significant leverage to further improvements in commodity prices.
Excess free cash flow net of reclamation and abandonment expenditures will be allocated to debt reduction as the Company remains committed to reducing its net debt(2)-to-fund flows from operations (“FFO”) ratio to less than 1.5x over time. As our leverage profile improves, we will continue to review our long-term shareholder return policy to determine the appropriate time to reinstate a dividend and/or share buyback program.
North America
In North America, we plan to invest approximately $165 million of capital, representing a reduction of 37% compared to 2020. This program includes the drilling of ten (9.6 net) Mannville condensate-rich natural gas wells in Alberta, 25 (22.1 net) light oil wells in southeast Saskatchewan and four (3.9 net) light oil wells in Wyoming. In addition to these wells, the Company will also bring on production five (5.0 net) Mannville condensate-rich natural gas wells drilled in Q4 2020. Additional light oil wells in southeast Saskatchewan and Wyoming have been identified for drilling during the second half of 2021 if market conditions are supportive.
Vermilion Canadian Well Permit & Wells Drilled
International
We plan to invest approximately $135 million across our international assets, representing an increase of 35% compared to 2020. The 2021 drilling program includes two (1.5 net) natural gas wells in the Netherlands, one (1.0 net) natural gas well in Croatia and one (1.0 net) oil well in Hungary. Capital activity in France and Germany will be primarily focused on well workovers to preserve production. Several oil wells have been identified in France for drilling during the second half of 2021 if market conditions are supportive. In addition, the previously drilled Burgmoor Z5 well (46% working interest) in Germany is expected to be brought on production in 2021. Capital activity in our remaining international jurisdictions will be focused primarily on maintenance activities, including a 1-week planned turnaround in Ireland and 3 weeks of planned maintenance downtime in Australia. As part of the review of our global asset base, we have decided to explore certain farm out opportunities to reduce exposure to higher risk assets in Europe as part of managing corporate risk and to refocus the organization.
| E&D Capital Investment by Region | ||||||
| Country | 2021 Budget* ($MM) | 2020 Budget** ($MM) | 2021 vs. 2020 % Change | 2021 Net Wells | 2020 Net Wells | |
| North America | 165 | 260 | (37) | % | 35.6 | 83.0 |
| International | 135 | 100 | 35 | % | 3.5 | 1.0 |
| Total E&D Capital Expenditures | 300 | 360 | (17) | % | 39.1 | 84.0 |
| E&D Capital Investment by Category | ||||
| Category | 2021 Budget* ($MM) | 2020 Budget** ($MM) | 2021 vs. 2020 % Change | |
| Drilling, completion, new well equipment and tie-in, workovers and recompletions | 185 | 280 | (34) | % |
| Production equipment and facilities | 90 | 65 | 38 | % |
| Seismic, land and other | 25 | 15 | 67 | % |
| Total E&D Capital Expenditures | 300 | 360 | (17) | % |
*2021 Budget reflects foreign exchange assumptions of CAD/USD 1.27, CAD/EUR 1.56, and CAD/AUD 0.99. ** 2020 Budget figures based on midpoint of current guidance.
