Vermilion operates in three core areas: North America, Europe and Australia. Reserves and production by geography are discussed earlier in this note. Operational performance in 2017 was strong across the asset base with the exception of an extended period of downtime at the partner-operated Corrib asset in Ireland. Corrib remains under operatorship of Royal Dutch Shell, with transfer of title to Vermilion expected during H118. We briefly discuss the key components of Vermilion’s asset base below; however, we deemed a detailed subsurface and technical review of each asset to be beyond the scope of this report.
Canada: Largest component of production with high post-tax netbacks
Vermilion holds an expansive onshore position encompassing three resource plays that share surface infrastructure: Cardium light oil; Mannville condensate-rich gas; and Duvernay condensate-rich gas. Cash flows are expected to be sheltered from tax for the coming 10 years with tax pools in excess of C$1.5bn, which drove a FFO netback of C$17.7/boe for FY17. The Cardium light oil play is developed using horizontal wells with multi-stage completions with fluids exported to an operated 15kbod oil facility and two gas plants. Vermilion holds a significant inventory of undrilled prospects and a 90,000 net acre position.
The Mannville condensate-rich gas development is a multi-zone development across 215,000 net acres that are largely held by production. Only a small portion of the company’s Mannville inventory has been drilled, providing for significant growth potential.
The Duvernay liquids-rich gas play is currently in the appraisal phase and the company’s 82,000 net acres underlie existing development rights, providing an option for future development.
As of 15 January 2018, Vermilion has added an additional 6.7mmboe of crude oil to its 2P reserve base and c 1kbod of light oil production through the acquisition of a private producer in south-east Saskatchewan for a total cash consideration of C$90.8m. The acquisition complements the company’s existing Saskatchewan operations, which are located 55km to the south-west. The assets have low base decline rates at c 15% pa and less than 10% when under waterflood.
Exhibit 29: Canada asset overview
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Exhibit 30: Canada FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Exhibit 29: Canada asset overview
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Exhibit 30: Canada FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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US: Step change in production through organic growth
Vermilion entered the US in 2014 through acquisition and has since consolidated its position in the Turner Sand play in the Powder River Basin of north-eastern Wyoming. Production is expected to double in FY18 as the company drills light oil targets in the Turner Sand play.
Exhibit 31: US asset overview
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Exhibit 32: US FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Exhibit 31: US asset overview
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Exhibit 32: US FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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France: Largest oil producer with 75% share of domestic market
Vermilion’s oil assets are located in the Aquitaine and Paris Basins; assets are conventional with large original oil in place (OOIP) at more than 1.7bnbbls with a low base decline rate. Vermilion has an inventory of low-risk infill drilling, workover and optimisation opportunities, and benefits from a 100% appraisal success rate in the 18 wells that have been drilled in the Champotran field since 2013.
Exhibit 33: France asset overview
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Exhibit 34: France FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Exhibit 33: France asset overview
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Exhibit 34: France FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Netherlands: Second largest onshore natural gas producer in country
Vermilion’s gas-producing assets are in the north-west part of the country with the company holding c 800,000 net acres. It has drilled 14 extension and discovery wells since 2009 with an average success rate of 67%. Wells are low cost (c $8.5m) and typically produce 10-20mmscfd, and with favourable European natural gas prices generate high returns (at strip per well, returns exceed 100% IRR).
Exhibit 35: Netherlands asset overview
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Exhibit 36: Netherlands FFO netback & capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Exhibit 35: Netherlands asset overview
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Exhibit 36: Netherlands FFO netback & capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Germany: Strategic position in Europe’s largest gas market
Vermilion’s operations are located in Lower Saxony and are focused on the exploration, development and production of conventional oil and natural gas to meet domestic demand. Vermilion entered the country in 2014 through the acquisition of non-operated interests in 2.5kboed and followed up with several transactions including farming-in with ExxonMobil and Shell on 850,000 net undeveloped acres. In June 2016, Vermilion acquired the interests in nine oil and four natural gas fields from ENGIE E&P (formerly GDF Suez), thereby becoming an operator in Germany. In aggregate, Vermilion has established a land position of approximately 1.1million net acres (97% undeveloped) representing one-quarter of the total licensed land in the North German Basin.
Exhibit 37: Germany asset overview
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Exhibit 38: Germany FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Exhibit 37: Germany asset overview
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Exhibit 38: Germany FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Ireland: 20% interest in the Corrib gas field
The Corrib gas field, offshore Ireland, commenced production in December 2015.Volumes reached peak supply of 350mmscfd by the end of June 2016, supplying 60-65% of Ireland’s natural gas needs and accounting for 95% of domestic production. In July 2017, Vermilion signed a strategic partnership with the Canada Pension Plan Investment Board (CPPIB) leading to a net increase in its Corrib interest from 18.5% to 20% and transfer of operatorship from Shell to Vermilion. On closure of the deal, expected in H118, CPPIB will hold 43.5% interest in the project, and Statoil 36.5%.
Corrib production fell quarter-on-quarter in Q317 (-23%) due to extended downtime following a plant turnaround resulting from unodorised gas detected in the distribution network. Production was resumed on 11 October, but resulted in a net annualised impact of 900boed to Vermilion.
Exhibit 39: Ireland asset overview
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Exhibit 40: Ireland FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Exhibit 39: Ireland asset overview
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Exhibit 40: Ireland FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Other Europe: European growth strategy
Vermilion has established a footprint in Croatia, Hungary and Slovakia. At this stage the company has modest commitments focusing on early-stage exploration. The company’s Croatia position covers some 2.35m net acres making it the largest onshore landholder in the country, and in Hungary its position extends to 320,000 acres. In Slovakia, the company has partnered with NAFTA, the country’s dominant E&P, in a farm-in arrangement that grants Vermilion a 50% working interest in a joint 183,000 acres. Vermilion drilled and tested its first exploration well in the Hungary, South Battonya concession in early 2018 with a natural gas test rate of 5.8mmcfd which is expected to be brought into production in mid-2018.
Australia: High-return oil infill drilling
Vermilion has a 100% interest in the Wandoo field 80km off the north-west shelf. Production is maintained a c 6kbod through in-fill drilling (long reach laterals). Despite wells costing c C$25-26m to drill, each well can add up to 1.8kboed to production once put onstream, generating IRRs close to 100% in a $60/bbl Brent crude price environment. The company is planning its next drilling campaign in 2019 which is expected to restore production to 6,000kbod.
Exhibit 41: Australia asset overview
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Exhibit 42: Australia FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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Exhibit 41: Australia asset overview
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Exhibit 42: Australia FFO netback and capex C$/boe
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Source: Vermilion Energy, Edison Investment Research
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