2017
A N N UA L R E P O R T
EXCELLENCE. TRUST. RESPECT. RESPONSIBILITY.INTERNATIONALLY DIVERSIFIED | SUSTAINABLE GROWTH AND INCOME Vermilion Energy Inc.
TABLE OF CONTENTS
2017 Annual Report
Message to Shareholders........................................................................................................................................................................................6
Management’s Discussion and Analysis................................................................................................................................................................10
Consolidated Financial Statements........................................................................................................................................................................53
Notes to the Consolidated Financial Statements....................................................................................................................................................60
Corporate Information.............................................................................................................................................................................................79
ANNUAL GENERAL MEETING
April 26, 2018
3:00 PM MST
The Ballroom
Metropolitan Centre
333 - 4th Avenue S.W.
Calgary, Alberta
ABBREVIATIONS
$M
$MM
AECO
bbl(s)
bbls/d
boe
boe/d
GJ
HH
mbbls
mcf
mmbtu
mmcf/d
MWh
NBP
NGLs
PRRT
TTF
WTI
thousand dollars
million dollars
the daily average benchmark price for natural gas at the AECO ‘C’ hub in southeast Alberta
barrel(s)
barrels per day
barrel of oil equivalent, including: crude oil, condensate, natural gas liquids, and natural gas (converted on the basis of
one boe for six mcf of natural gas)
barrel of oil equivalent per day
gigajoules
Henry Hub, a reference price paid for natural gas in US dollars at Erath, Louisiana
thousand barrels
thousand cubic feet
million British thermal units
million cubic feet per day
megawatt hour
the reference price paid for natural gas in the United Kingdom, quoted in pence per therm, at the National Balancing Point
Virtual Trading Point. Our production in Ireland is priced with reference to NBP.
natural gas liquids, which includes butane, propane, and ethane
Petroleum Resource Rent Tax, a profit based tax levied on petroleum projects in Australia
the price for natural gas in the Netherlands, quoted in MWh of natural gas, at the Title Transfer Facility
Virtual Trading Point
West Texas Intermediate, the reference price paid for crude oil of standard grade in US dollars at Cushing, Oklahoma
1
Vermilion Energy Inc.
DISCLAIMER
2017 Annual Report
Certain statements included or incorporated by reference in this document may constitute forward looking statements or financial outlooks under
applicable securities legislation. Such forward looking statements or information typically contain statements with words such as "anticipate", "believe",
"expect", "plan", "intend", "estimate", "propose", or similar words suggesting future outcomes or statements regarding an outlook. Forward looking
statements or information in this document may include, but are not limited to: capital expenditures; business strategies and objectives; operational
and financial performance; estimated reserve quantities and the discounted net present value of future net revenue from such reserves; petroleum and
natural gas sales; future production levels (including the timing thereof) and rates of average annual production growth; exploration and development
plans; acquisition and disposition plans and the timing thereof; operating and other expenses, including the payment and amount of future dividends;
royalty and income tax rates; and the timing of regulatory proceedings and approvals.
Such forward looking statements or information are based on a number of assumptions, all or any of which may prove to be incorrect. In addition to
any other assumptions identified in this document, assumptions have been made regarding, among other things: the ability of Vermilion to obtain
equipment, services and supplies in a timely manner to carry out its activities in Canada and internationally; the ability of Vermilion to market crude oil,
natural gas liquids, and natural gas successfully to current and new customers; the timing and costs of pipeline and storage facility construction and
expansion and the ability to secure adequate product transportation; the timely receipt of required regulatory approvals; the ability of Vermilion to obtain
financing on acceptable terms; foreign currency exchange rates and interest rates; future crude oil, natural gas liquids, and natural gas prices; and
management’s expectations relating to the timing and results of exploration and development activities.
Although Vermilion believes that the expectations reflected in such forward looking statements or information are reasonable, undue reliance should
not be placed on forward looking statements because Vermilion can give no assurance that such expectations will prove to be correct. Financial
outlooks are provided for the purpose of understanding Vermilion’s financial position and business objectives, and the information may not be
appropriate for other purposes. Forward looking statements or information are based on current expectations, estimates, and projections that involve
a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by Vermilion and described in the forward
looking statements or information. These risks and uncertainties include, but are not limited to: the ability of management to execute its business plan;
the risks of the oil and gas industry, both domestically and internationally, such as operational risks in exploring for, developing and producing crude
oil, natural gas liquids, and natural gas; risks and uncertainties involving geology of crude oil, natural gas liquids, and natural gas deposits; risks
inherent in Vermilion's marketing operations, including credit risk; the uncertainty of reserves estimates and reserves life and estimates of resources
and associated expenditures; the uncertainty of estimates and projections relating to production and associated expenditures; potential delays or
changes in plans with respect to exploration or development projects; Vermilion's ability to enter into or renew leases on acceptable terms; fluctuations
in crude oil, natural gas liquids, and natural gas prices, foreign currency exchange rates and interest rates; health, safety, and environmental risks;
uncertainties as to the availability and cost of financing; the ability of Vermilion to add production and reserves through exploration and development
activities; the possibility that government policies or laws may change or governmental approvals may be delayed or withheld; uncertainty in amounts
and timing of royalty payments; risks associated with existing and potential future law suits and regulatory actions against Vermilion; and other risks
and uncertainties described elsewhere in this document or in Vermilion's other filings with Canadian securities regulatory authorities.
The forward looking statements or information contained in this document are made as of the date hereof and Vermilion undertakes no obligation to
update publicly or revise any forward looking statements or information, whether as a result of new information, future events, or otherwise, unless
required by applicable securities laws.
All oil and natural gas reserve information contained in this document has been prepared and presented in accordance with National Instrument 51-
101 Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation Handbook. The actual crude oil and natural gas
reserves and future production will be greater than or less than the estimates provided in this document. The estimated future net revenue from the
production of crude oil and natural gas reserves does not represent the fair market value of these reserves.
Natural gas volumes have been converted on the basis of six thousand cubic feet of natural gas to one barrel of oil equivalent. Barrels of oil equivalent
(boe) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet to one barrel of oil is based on an energy
equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Financial data contained within this document are reported in Canadian dollars, unless otherwise stated.
2
Vermilion Energy Inc.
HIGHLIGHTS
2017 Annual Report
• Vermilion's 2017 annual production volumes increased by 7%, or 3% on a per-share-basis, to 68,021 boe/d. Production reached a record level
of 72,821 boe/d during Q4 2017, up 8% from the prior quarter on continued growth in Canada and the Netherlands, and resumption of operations
at Corrib in mid-October, following unplanned downtime in late Q3 and early Q4 2017.
•
Fund flows from operations (“FFO”) in 2017 were $603 million ($5.00/basic share(1)) compared to $511 million ($4.41/basic share) in 2016. Higher
production volumes and higher commodity prices contributed to the year-over-year increase in FFO. Q4 2017 FFO was $181 million ($1.49/basic
share), representing an increase of 38% from the previous quarter as a result of higher sales volumes and commodity pricing.
• Capital expenditures in 2017 were $320 million, resulting in $282 million of free cash flow(1), which was more than sufficient to fund our dividend
and enable further debt reduction. As a result, we achieved a total payout ratio of 88% in 2017 and reduced our trailing net debt-to-FFO ratio to
2.3x, or 1.9x based on Q4 2017 annualized FFO, as compared to a trailing ratio of 2.8x in 2016.
•
The Board of Directors has approved a 7% increase to the monthly dividend to $0.23 per share from $0.215 per share, effective with the April
2018 dividend to be paid on May 15, 2018.
• Production in the Netherlands increased to 9,381 boe/d in Q4 2017 following the amendment of permit restrictions on two key pools and an inline
test on the Eesveen-02 well drilled in the prior quarter. This represents a 59% increase over the prior quarter.
•
•
•
In Ireland, production from Corrib averaged 56 mmcf/d (9,372 boe/d) in Q4 2017, a 15% increase from Q3 2017. As reported in the Q3 2017
release, Corrib had an unplanned 31-day downtime period following a plant turnaround that commenced in early September and extended through
October 10th. This downtime reduced Vermilion’s Q4 2017 production by approximately 1,200 boe/d and annual production by approximately
900 boe/d.
In Hungary, we were awarded a license in December 2017 for the Békéssámson concession for a 4-year term. Located adjacent to our existing
South Battonya concession in southeast Hungary, the Békéssámson concession covers 330,700 net acres (100% working interest) and more
than doubles the size of our total land position in the country. Subsequent to year-end, we drilled and tested our first exploratory well (100%
working interest) in the South Battonya concession. The Mh-Ny-07 natural gas well tested at a rate of 5.8 mmcf/d(2) and is expected to be brought
on production mid-2018. This marks the drilling of our first well in the Central and Eastern Europe Business Unit.
In Canada, we drilled or participated in six (4.0 net) Mannville wells in Q4 2017, successfully concluding our 2017 program. Canadian production
averaged 32,923 boe/d in Q4 2017, representing a 5% increase from the previous quarter and another quarterly record for the business unit.
Subsequent to the end of the year, we announced and closed an acquisition of a private southeast Saskatchewan producer. The acquisition
added over 1,000 bbl/d of high netback 40° API oil and 42,600 net acres of land straddling the Saskatchewan and Manitoba border, near
Vermilion's existing operations in southeast Saskatchewan.
• As a result of the southeast Saskatchewan acquisition announced in Q1 2018, we increased our 2018 capital guidance to $325 million (from $315
million previously) and increased our full-year 2018 production guidance to a range of between 75,000 - 77,500 boe/d (from 74,500 - 76,500 boe/d
previously).
•
•
•
Total proved (“1P”) reserves increased 0.5% to 176.6(3) mmboe in 2017, while total proved plus probable (“2P”) reserves increased 3% to 298.5(3)
mmboe. We replaced 103% and 134% of production at the 1P and 2P levels respectively in 2017.
Finding and Development (“F&D”)(4) and Finding, Development and Acquisition (“FD&A”)(4) costs, including Future Development Capital (“FDC”)(4)
for 2017 on a 2P basis was $10.57/boe and $11.24/boe, respectively. Our three-year F&D and FD&A costs, including FDC, on a 2P basis were
$8.23/boe and $8.87/boe, respectively. Operating recycle ratio(5) (including FDC) was 2.8x in 2017.
Increased Proved Developed Producing ("PDP") reserves by 1.3% to 123.8 mmboe at an average F&D cost (including FDC) of $12.41/boe
resulting in a PDP Operating Recycle Ratio(4) (including FDC) of 2.4x. PDP reserves represent 70% of 1P reserves.
• Our independent GLJ 2017 Resource Assessment(6) indicates risked low, best, and high estimates for contingent resources in the Development
Pending category of 107.3(6) mmboe, 176.7(6) mmboe, and 253.6(6) mmboe, respectively. The GLJ 2017 Resource Assessment also indicates
risked low, best, and high estimates for contingent resources in the Development Unclarified category of 7.5(6) mmboe, 32.8(6) mmboe, and 46.1(6)
mmboe. Over 80% of our risked contingent resources reside in the Development Pending category. Prospective resources were assessed at
risked low, best and high estimates of 51.5(6) mmboe, 153.4(6) mmboe, and 260.4(6) mmboe. Our contingent and prospective resource bases
remain a source of reserve additions, with 20.5 mmboe of contingent resources and 1.7 mmboe of prospective resources converted to 2P reserves
during 2017.
3
Vermilion Energy Inc.
2017 Annual Report
•
In February 2018, Vermilion received the Finance and Sustainability Initiative's ("FSI") award for Best Sustainability Report in the Non-Renewable
Resources - Oil and Gas category for 2018, relating to our 2016 Sustainability Report. Our 2017 Sustainability Report is available on our corporate
website at: http://sustainability.vermilionenergy.com
• Vermilion ranked fourth within the oil and gas sector, and among the top quartile of companies in the S&P/TSX Composite Index in the Globe and
Mail Board Games for 2017. These external recognitions are a reflection of Vermilion's commitment to fostering leading governance and
sustainability practices.
(1)
(2)
(3)
(4)
(5)
(6)
Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of Management’s Discussion and Analysis.
Mh-Ny-07 well tested gas at a rate of 5.8 mmcf/d over the final two hours of a 22 hour test period at a stabilized wellhead pressure of 1,065 psi on a 0.55 inch diameter choke and a shut-in
wellhead pressure of 1,305 psi. No water production was observed during testing. The well logged 21 feet of net gas pay with an average porosity of 31% from an Upper Miocene Pannonian
sandstone occurring within a gross measured depth interval of 3,438-3,465 feet.
Estimated proved and proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. (“GLJ”) in a report dated February 1, 2018 with an effective date
of December 31, 2017 (the “2017 GLJ Reserves Evaluation”)
F&D (finding and development) and FD&A (finding, development and acquisition) costs are used as a measure of capital efficiency and are calculated by dividing the applicable capital
expenditures for the period, including the change in undiscounted future development capital (“FDC”), by the change in the reserves, incorporating revisions and production, for the same period.
Operating Recycle Ratio is a measure of capital efficiency calculated by dividing the Operating Netback by the cost of adding reserves (F&D cost). Operating Netback is calculated as sales less
royalties, operating expense, transportation costs, PRRT and realized hedging gains and losses presented on a per unit basis.
Vermilion retained GLJ to conduct an independent resource evaluation dated February 1, 2018 to assess contingent and prospective resources across all of the Company’s key operating regions
with an effective date of December 31, 2017 (the “GLJ 2017 Resource Assessment”). The aggregate associated chance of development for each of the low, best and high estimate for contingent
resources in the Development Pending category are 84%, 83% and 82%, respectively. The aggregate associated chance of commerciality for each of the low, best and high estimate for
prospective resources in the Prospect category are 56%, 46% and 47%, respectively. There is uncertainty that it will be commercially viable to produce any portion of the resources.
4
Vermilion Energy Inc.
HIGHLIGHTS
($M except as indicated)
Financial
Petroleum and natural gas sales
Fund flows from operations
Fund flows from operations ($/basic share) (1)
Fund flows from operations ($/diluted share) (1)
Net (loss) earnings
Net (loss) earnings ($/basic share)
Capital expenditures
Acquisitions
Asset retirement obligations settled
Cash dividends ($/share)
Dividends declared
% of fund flows from operations
Net dividends (1)
% of fund flows from operations
Payout (1)
% of fund flows from operations
Net debt
Ratio of net debt to annualized fund flows from operations
Operational
Production
Crude oil and condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Average realized prices
Crude oil and condensate ($/bbl)
NGLs ($/bbl)
Natural gas ($/mcf)
Production mix (% of production)
% priced with reference to WTI
% priced with reference to AECO
% priced with reference to TTF and NBP
% priced with reference to Dated Brent
Netbacks ($/boe)
Operating netback (1)
Fund flows from operations netback
Operating expenses
Average reference prices
WTI (US $/bbl)
Edmonton Sweet index (US $/bbl)
Dated Brent (US $/bbl)
AECO ($/mmbtu)
NBP ($/mmbtu)
TTF ($/mmbtu)
Average foreign currency exchange rates
CDN $/US $
CDN $/Euro
Share information ('000s)
Shares outstanding - basic
Shares outstanding - diluted (1)
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted (1)
2017 Annual Report
Dec 31, 2017
Three Months Ended
Sep 30, 2017
Dec 31, 2016
Dec 31, 2017
Dec 31, 2016
Year Ended
317,341
181,253
1.49
1.47
8,645
0.07
74,303
3,048
3,216
0.645
78,653
43%
56,836
31%
134,355
74%
1,371,790
1.9
27,830
5,279
238.27
72,821
74.12
29.28
5.23
21%
25%
30%
24%
30.77
27.13
9.76
55.40
54.26
61.39
1.69
8.70
8.36
1.27
1.50
248,505
130,755
1.08
1.07
(39,191)
(0.32)
91,382
20,976
1,749
0.645
78,293
60%
54,364
42%
147,495
113%
1,370,995
2.6
27,687
4,947
208.63
67,403
61.47
23.96
4.01
22%
26%
26%
26%
26.06
20.87
9.87
48.20
45.32
52.08
1.45
6.78
6.93
1.25
1.47
259,891
149,582
1.27
1.25
(4,032)
(0.03)
66,882
78,713
3,327
0.645
76,096
51%
32,516
22%
102,725
69%
1,427,148
2.4
25,972
2,467
194.54
60,863
64.51
18.13
5.47
18%
20%
33%
29%
31.11
26.43
10.54
49.29
46.18
49.46
3.09
7.51
7.21
1.33
1.44
1,098,838
602,565
5.00
4.92
62,258
0.52
320,449
27,637
9,334
2.580
311,397
52%
200,904
33%
530,687
88%
1,371,790
2.3
27,721
4,194
216.64
68,021
67.00
25.00
4.91
20%
25%
29%
26%
29.24
24.34
9.79
50.95
48.49
54.27
2.16
7.49
7.43
1.30
1.46
882,791
510,791
4.41
4.36
(160,051)
(1.38)
242,408
98,524
9,617
2.580
299,070
59%
106,072
21%
358,097
70%
1,427,148
2.8
27,852
2,582
198.55
63,526
55.42
11.70
4.18
19%
22%
30%
29%
27.06
21.91
9.53
43.32
40.11
43.69
2.16
6.15
6.00
1.33
1.47
118,263
122,119
121,353
125,140
115,695
121,858
117,152
123,450
(1) The above table includes non-GAAP financial measures which may not be comparable to other companies. Please see the “NON-GAAP FINANCIAL MEASURES” section of
Management’s Discussion and Analysis.
122,119
125,140
120,582
122,408
121,585
124,453
121,280
122,485
118,263
121,353
117,840
119,677
5
Vermilion Energy Inc.
2017 Annual Report
MESSAGE TO SHAREHOLDERS
We delivered 7% annual production growth in 2017, coming in at the lower end of our revised guidance range of 68,000 - 69,000 boe/d. Production
growth in Canada, the US, Ireland and Germany more than offset lower production in France, Netherlands and Australia. Permitting delays significantly
reduced Netherlands production volumes in 2017, while an unplanned 31-day downtime period at Corrib late in Q3 2017 reduced annual corporate
production by approximately 900 boe/d. Production at Corrib resumed on October 11th, while Netherlands production recovered to near record levels
during the fourth quarter following the receipt of permits on several pools.
Despite the unplanned downtime at Corrib and the permitting delays in the Netherlands, we achieved our broader corporate goal of delivering self-
funded growth and income to shareholders. We delivered this in a commodity price environment with WTI oil prices ranging from the low US$40's to
a high of US$60/bbl at the end of the year, and AECO gas prices ranging from over $3/mcf at the beginning of the year to negative daily prices on
several occasions over the summer months. Even with this volatility, fund flows from operations (“FFO”) increased 18% year-over-year to $603 million
in 2017, and free cash flow(1) (FCF) was up 5% year-over-year to $282 million. This FCF was more than sufficient to fund our dividend while enabling
further debt reduction. As a result of this strong FFO and FCF profile, we achieved a total payout ratio(1) of 88% in 2017 and reduced our trailing net
debt-to-FFO ratio to 2.3x in 2017, or 1.9x based on Q4 2017 annualized FFO, as compared to a trailing ratio of 2.8x in 2016.
Global commodity prices have recovered in recent months with underlying fundamentals stronger than they have been in a long time. Global oil supply
and demand levels are moving back into a more balanced position, while European gas prices remain strong. Unfortunately, western Canadian natural
gas and heavy oil prices continue to be pressured due to various egress issues, resulting in steeply discounted pricing relative to global prices.
Fortunately for Vermilion, we do not have any exposure to Canadian heavy oil. The majority of our production of both oil and gas comes from outside
of North America and benefits from higher global prices. Based on our current 2018 guidance, we project that 60% of our total oil production is
referenced to Brent, while 57% of our total natural gas production is price referenced to European price benchmarks.
We are pleased to announce that our Board of Directors has approved a 7% increase to the monthly dividend to $0.23 per share from $0.215 per
share, effective with the April 2018 dividend to be paid on May 15, 2018. This represents our fourth dividend increase since initiating a monthly dividend
in 2003. We remain focused on and committed to our self-funded growth and income model. Based on the midpoint of our 2018 guidance, we are
targeting 11% year-over-year production growth, or 8% on a per-share basis, which would translate to significant FFO and FCF growth based on the
current commodity strip. FCF growth is our ultimate goal as we believe this is the true measure of value creation for any business. At current strip
prices, we expect to fully fund our 2018 exploration and development (“E&D”) capital expenditures and cash dividends from fund flows from operations.
Q4 2017 Review
Vermilion’s Q4 2017 production increased 8% from the prior quarter to an average of 72,821 boe/d. This increase was primarily driven by continued
growth in Canada and the Netherlands, and the resumption of operations at the Corrib plant in Ireland following unplanned downtime in late Q3 and
early Q4 2017. Q4 2017 production growth was partially restrained by cold weather impacts in Canada, a force majeure event on a third-party gas
gathering system in our Turner Sands play in Wyoming, and minor maintenance activities in Germany and Australia.
Fund flows from operations in Q4 2017 was $181 million ($1.49/basic share(1)), representing an increase of 38% from the previous quarter primarily
as a result of higher sales volumes and commodity pricing. FFO was more than sufficient to cover our Q4 2017 capital expenditures of $74 million
and cash dividends of $57 million, resulting in a payout ratio of 74% (including Asset Retirement Obligations Settled) and surplus cash of approximately
$50 million during the quarter.
Europe
Production in the Netherlands increased to 9,381 boe/d in Q4 2017, following the amendment of permit restrictions on two key pools and an inline test
on the Eesveen-02 well drilled in the prior quarter. This represents a 59% increase over the prior quarter. The test rate from the Eesveen-2 well (60%
working interest) was limited to approximately 10 mmcf/d net during the test period. In addition to the strong production performance, we also completed
a 315 square kilometre 3D seismic survey in the Akkrum exploration licence and the South Friesland III production licence, our first new data acquisition
since entering the Netherlands in 2004.
In France, Q4 2017 production averaged 11,215 boe/d, an increase of 3% from the prior quarter. The increase was primarily due to better well uptime
compared to the prior period and ongoing well optimization. Activity during Q4 2017 was focused on well workovers and preparing for our 2018 drilling
campaign. We accelerated part of our 2018 program, commencing the drilling on two (2.0 net) of the four (4.0 net) planned Neocomian wells. All
remaining Neocomian wells are expected to be drilled in Q1 2018, along with the drilling of our planned three (3.0 net) Champotran wells. In December
2017, the French parliament approved the proposed Climate Plan which prohibits the issuance of new oil and gas exploration concessions and limiting
the renewal of existing production concessions beyond 2040. Upon review of the final details included in the new legislation, we conclude that we do
not expect these new laws to have a material impact on our future production profile.
6
Vermilion Energy Inc.
2017 Annual Report
In Ireland, production from Corrib averaged 56 mmcf/d (9,372 boe/d) in Q4 2017, a 15% increase from Q3 2017. As reported in our Q3 2017 release,
Corrib had an unplanned 31-day downtime period following a plant turnaround during September and October 2017. This downtime reduced
Vermilion’s Q4 2017 production by approximately 1,200 boe/d and annual production by approximately 900 boe/d. We continue to work closely with
Canada Pension Plan Investment Board (“CPPIB”) and Shell on the transition of ownership and operations from Shell to CPPIB and Vermilion, and
anticipate closing the transaction in the first half of 2018.
In Germany, production in Q4 2017 averaged 4,180 boe/d, a decrease of 5% from the previous quarter. The decrease was primarily due to a temporary
shut-in of one well in December for a SCADA installation. The well is expected to be brought back on production in Q1 2018. Our activity in Germany
continues to focus on well workover and optimization projects on our operated assets and planning activities related to the Burgmoor Z5 well to be
drilled in early 2019.
In Hungary, we were awarded a license in December 2017 for the Békéssámson concession for a 4-year term. Located adjacent to our existing South
Battonya concession in southeast Hungary, the Békéssámson concession covers 330,700 net acres (100% working interest) and more than doubles
the size of our total land position in the country. Subsequent to year-end, we drilled and tested our first exploratory well (100% working interest) in the
South Battonya concession. The Mh-Ny-07 natural gas well tested at a rate of 5.8 mmcf/d(2) and is expected to be brought on production mid-2018.
This marks the drilling of our first well in the Central and Eastern Europe Business Unit.
North America
In Canada, we drilled or participated in six (4.0 net) Mannville wells in Q4 2017, successfully concluding our 2017 program. Production averaged
32,923 boe/d in Q4 2017, representing a 5% increase from the previous quarter and another quarterly record for the business unit. Subsequent to the
end of the year, we announced and closed an acquisition of a private southeast Saskatchewan producer. The acquisition added over 1,000 bbl/d of
high netback 40° API oil and 42,600 net acres of land straddling the Saskatchewan and Manitoba border, near Vermilion's existing operations in
southeast Saskatchewan. Total consideration of $90.8 million, which includes both cash paid to the shareholders of the acquired company and the
assumption of long-term debt, was funded through our revolving credit facility. The acquisition resulted in an increase to our 2018 capital guidance to
$325 million (from $315 million previously), along with a corresponding increase to our full-year 2018 production guidance to a range of between 75,000
- 77,500 boe/d (from 74,500 - 76,500 boe/d previously). The acquisition closed on February 15th.
In the United States, Q4 2017 production averaged 758 boe/d, a decrease of 27% from the prior quarter in part due to a force majeure event on a third-
party gas gathering system, which returned to service mid-Q1 2018. Capital activity in Q4 2017 was focused on the construction of three well pads in
preparation for our five (5.0 net) well 2018 drilling program. One of these well pads was built for the Initial Obligation Well in the 25,500 acre Rex Unit
in the northern region of the East Finn Project, which was approved by the Bureau of Land Management in October 2017.
Australia
In Australia, Q4 2017 production averaged 4,993 bbl/d, a 9% decrease quarter-over-quarter, primarily due to planned maintenance during the quarter
which resulted in eight days of downtime. We continue to focus on maintenance and debottlenecking activities and planning for our 2019 drilling
campaign, which we expect will restore production volumes to our targeted level of approximately 6,000 bbl/d.
Environmental, Social and Governance ("ESG")
In February 2018, Vermilion received the Finance and Sustainability Initiative's ("FSI") award for Best Sustainability Report in the Non-Renewable
Resources - Oil and Gas category for 2018, relating to our 2016 Sustainability Report. Based in Montreal, the FSI is a non-profit organization dedicated
to promoting sustainable finance and, more specifically, responsible investment to financial institutions, companies, and universities. Sustainability
reports were graded on a number of criteria, including transparency and balance, reliability and completeness, and the use of ESG materiality. We
firmly believe in the importance of measuring and understanding our current environmental impact. Furthermore, we believe the integration of
sustainability principles into our business strategy increases shareholder returns and reduces long-term risks to our business model. Our 2017
Sustainability Report is available on our corporate website at: http://sustainability.vermilionenergy.com. In addition, Vermilion ranked fourth within the
oil and gas sector, and among the top quartile of companies in the S&P/TSX Composite Index in the Globe and Mail Board Games for 2017. Both of
these external recognition's reflects Vermilion's strong corporate culture and staff engagement in ESG.
2017 Reserves and Resources
We continued to grow our reserves and resources in 2017. Based on an independent report by GLJ as at December 31, 2017, our 1P reserves
increased modestly to 176.6(3) mmboe in 2017, while 2P reserves increased 3% to 298.5(3) mmboe. Proved developed producing ("PDP") reserves
increased 1.3% to 123.8 mmboe at an average F&D cost (including FDC) of $12.41/boe resulting in a PDP Operating Recycle Ratio(3) (including FDC)
of 2.4x. Our PDP reserves represent 70% of 1P reserves. We replaced 103% and 134% of production at the 1P and 2P levels respectively in 2017.
7
Vermilion Energy Inc.
2017 Annual Report
Our operating recycle ratio(4) (including FDC) decreased to 2.8x in 2017, compared to 4.9x in 2016 and 3.6x in 2015, with F&D cost (including FDC)
increasing to $10.57/boe in 2017. The largest driver of the increase in F&D cost was the strengthening of the Euro relative to the Canadian dollar in
GLJ’s foreign exchange rate forecast as compared to the previous year, which increased FDC for our European properties. Despite the increase in
reported F&D costs and the reduced recycle ratio as compared to 2016, these metrics remain strong relative to the oil and gas sector, and reflect the
significant improvement in capital efficiencies we have achieved over the last several years.
In addition to growing our reserve base, we pursued various initiatives to expand our resource base to support our longer-term growth profile. According
to the independent report by GLJ as at December 31, 2017, our 2017 Resource Assessment(5) indicates risked low, best, and high estimates for
contingent resources in the Development Pending category of 107.3(5) mmboe, 176.7(5) mmboe, and 253.6(5) mmboe, respectively. The GLJ 2017
Resource Assessment also indicates risked low, best, and high estimates for contingent resources in the Development Unclarified category of 7.5(5)
mmboe, 32.8(5) mmboe, and 46.1(5) mmboe. Over 80% of our risked contingent resources reside in the Development Pending category, reflecting the
high quality nature of our contingent resource base. Prospective resources were assessed at risked low, best and high estimates of 51.5(5) mmboe,
153.4(5) mmboe, and 231.1(5) mmboe. Our contingent and prospective resource bases remain a source of reserve additions, with 20.5 mmboe of
contingent resources and 1.7 mmboe of prospective resources converted to 2P reserves during 2017.
Additional information about our 2017 GLJ Reserves Evaluation and GLJ 2017 Resource Assessment can be found in our Annual Information Form
and 2017 Year-end Summary Reserves and Resources news release on our website at www.vermilionenergy.com.
Outlook
In October 2017, we announced a 2018 capital budget of $315 million with corresponding production guidance of 74,500 to 76,500 boe/d. In conjunction
with our acquisition of a private southeast Saskatchewan light oil producer, we increased our 2018 capital budget to $325 million and increased our
full-year production guidance to a range of 75,000 to 77,500 boe/d. Our budget funds the development of a number of high-return projects, including
investment in all three key condensate and light oil projects in Canada, continued development in both the Neocomian and Champotran fields in
France, a return to production growth in the Netherlands where we continue to benefit from favourably-priced European natural gas, continued
development of our Turner Sands play in the United States, and inaugural drilling in our CEE business unit in the South Battonya license in Hungary.
At current strip prices, Vermilion expects to fully fund 2018 exploration and development (“E&D”) capital expenditures and cash dividends from fund
flows from operations, representing the third consecutive year of delivering per share production growth at a payout ratio of less than 100%. Any
surplus of cash generated will be initially directed to debt reduction.
Commodity Hedging
Vermilion hedges to manage commodity price exposures and increase the stability of cash flows, providing additional certainty with regards to the
execution of our dividend and capital programs. In aggregate, we currently have 43% of our expected net-of-royalty production hedged for 2018. Our
diversified commodity mix, including more than a one-third cash flow contribution from relatively high-priced European natural gas, gives us unusual
flexibility in managing our individual commodity exposures. Based on the current level and term structures in the oil, North American gas and European
gas forward curves, we have elected to lock down a greater percentage of our gas exposures, particularly for European gas. We have currently hedged
54% of anticipated European natural gas volumes for 2018. In view of the compelling longer-term forward market for European gas we have also
hedged 41% and 16% of our anticipated 2019 and 2020 volumes at prices which provide for strong project economics and free cash flows. In addition,
we have hedged 39% of anticipated North American gas volumes for 2018. In view of steep backwardation in the oil forward markets, we are keeping
oil hedges shorter-term, with 50% hedged for the first half of 2018, and 27% in the second half of this year. At present, our philosophy is to maintain
greater torque to longer-term oil prices, with only 1% of our expected oil production hedged for 2019. We will continue to add to our hedge positions
in all products as suitable opportunities arise.
Organizational Update
Vermilion has a philosophy of staff development and internal promotion. In line with this approach, we have placed a great deal of emphasis in
preparing for transition of our Chief Financial Officer position, as we have for other C-suite positions in the past. Curtis Hicks, currently Executive Vice
President and Chief Financial Officer, is retiring effective in April 2018 after 15 very successful years with our company. Mr. Hicks has been a key
member of the executive team, helping to guide Vermilion as we have expanded from two countries in 2003 to ten countries today. We thank Mr. Hicks
for his numerous contributions, and wish him the best in his retirement.
Lars Glemser, currently our Director of Finance, will succeed Mr. Hicks as Vice President and Chief Financial Officer. Mr. Glemser joined Vermilion in
2015 as Operations Controller, and progressed through a developmental assignment in Investor Relations before becoming Vermilion’s Director of
Finance. Prior to joining Vermilion, he had management experience in audit, financial reporting, treasury and corporate planning. Mr. Glemser is a
member of the Chartered Professional Accountants of Alberta and received a Bachelor of Commerce degree from the University of Saskatchewan.
We regularly rotate and refresh leadership in our operating units, and maintain a mix of expatriate and national management in our overseas
businesses. Consequently, we are proud to announce a series of interlocking Managing Director appointments.
8
Vermilion Energy Inc.
2017 Annual Report
Scott Seatter, currently Managing Director of the Netherlands Business Unit, will take over as Managing Director of the United States Business Unit
effective April 1, 2018. Mr. Seatter joined Vermilion in 2004, progressing through a number of successful engineering and management positions in
Canada, France and most recently in the Netherlands. He earned a Bachelor of Science degree in Petroleum Engineering from the University of
Alberta. Mr. Seatter replaces Dan Anderson, our current Managing Director of the United States Business Unit, who will be retiring in April 2018. Mr.
Anderson's 33 years of industry experience in the Rocky Mountain region has been instrumental in establishing Vermilion's presence in the United
States, setting the stage for sustainable future growth. We thank Mr. Anderson for his contributions to Vermilion and wish him the best in his retirement.
Sven Tummers, previously Commercial Manager for the Netherlands Business Unit, has been promoted to Managing Director of the Netherlands
Business Unit, replacing Mr. Seatter. Since joining Vermilion in 2012, Mr. Tummers has held various engineering and management roles, utilizing his
extensive and well-rounded background in HSE, asset and business development, and public and government relations. He earned a Master of
Science degree in Chemical and Biochemical Engineering from Delft University of Technology in the Netherlands. Mr. Tummers is the first Dutch
national to assume the Managing Director role for our Netherlands unit, and we look forward to his leadership on commercial, regulatory and political
issues in that jurisdiction.
Darcy Kerwin, previously Managing Director for our France Business Unit, has been appointed to the newly-created role of Managing Director of the
Ireland Business Unit. Since joining Vermilion in 2005, Mr. Kerwin has held several managerial positions across our global operations, working in
Australia, France and Canada prior to assuming his most recent role as Managing Director in France in 2014. He earned a Bachelor of Science degree
in Civil Engineering (Distinction) from the Technical University of Nova Scotia. Mr. Kerwin will lead the integration of Vermilion's vision, strategy and
culture into our Ireland Business Unit as we assume operatorship of the Corrib field later this year.
Sylvain Nothhelfer, previously Technical Services Manager for the France Business Unit, has been promoted to Managing Director of the France
Business Unit, replacing Mr. Kerwin. Mr. Nothhelfer has 30 years of international oil and gas experience including project management, production
operations, and HSE management with Elf Aquitaine and Total SA. In his previous industry roles, Mr. Nothhelfer was involved in several major projects
in Nigeria, the United Kingdom, the United Arab Emirates, Indonesia, France and Italy. He has Masters of Sciences and Doctoral degrees from the
Universite de Toulon et du Var and the Centre National Recherches Scientifiques in France and the Cranfield Institute of Technology in the United
Kingdom. We look forward to Mr. Nothhelfer's leadership in further advancing Vermilion's record of sustainability and value creation in France.
(signed “Anthony Marino”)
Anthony Marino
President & Chief Executive Officer
February 28, 2018
(1)
(2)
(3)
(4)
(5)
Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of Management’s Discussion and Analysis.
Mh-Ny-07 well tested gas at a rate of 5.8 mmcf/d over the final two hours of a 22 hour test period at a stabilized wellhead pressure of 1,065 psi on a 0.55 inch diameter choke and a shut-in
wellhead pressure of 1,305 psi. No water production was observed during testing. The well logged 21 feet of net gas pay with an average porosity of 31% from an Upper Miocene Pannonian
sandstone occurring within a gross measured depth interval of 3,438-3,465 feet.
Estimated proved and proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. (“GLJ”) in a report dated February 1, 2018 with an effective date
of December 31, 2017 (the “2017 GLJ Reserves Evaluation”)
Operating Recycle Ratio is a measure of capital efficiency calculated by dividing the Operating Netback by the cost of adding reserves (F&D cost). Operating Netback is calculated as sales less
royalties, operating expense, transportation costs, PRRT and realized hedging gains and losses presented on a per unit basis.
Vermilion retained GLJ to conduct an independent resource evaluation dated February 1, 2018 to assess contingent and prospective resources across all of the Company’s key operating regions
with an effective date of December 31, 2017 (the “GLJ 2017 Resource Assessment”). The aggregate associated chance of development for each of the low, best and high estimate for contingent
resources in the Development Pending category are 84%, 83% and 82%, respectively. The aggregate associated chance of commerciality for each of the low, best and high estimate for
prospective resources in the Prospect category are 23%, 22% and 22%, respectively. There is uncertainty that it will be commercially viable to produce any portion of the resources.
9
Vermilion Energy Inc.
2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following is Management’s Discussion and Analysis (“MD&A”), dated February 28, 2018, of Vermilion Energy Inc.’s (“Vermilion”, “we”, “our”, “us”
or the “Company”) operating and financial results as at and for the three months and year ended December 31, 2017 compared with the corresponding
periods in the prior year.
This discussion should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017 and 2016,
together with the accompanying notes. Additional information relating to Vermilion, including its Annual Information Form, is available on SEDAR
at www.sedar.com or on Vermilion’s website at www.vermilionenergy.com.
The audited consolidated financial statements for the year ended December 31, 2017 and comparative information have been prepared in Canadian
dollars, except where another currency has been indicated, and in accordance with International Financial Reporting Standards (“IFRS” or, alternatively,
“GAAP”) as issued by the International Accounting Standards Board.
This MD&A includes references to certain financial and performance measures which do not have standardized meanings prescribed by IFRS. These
measures include:
•
Fund flows from operations: Fund flows from operations is a measure of profit or loss in accordance with IFRS 8 “Operating Segments”. Please
see SEGMENTED INFORMATION in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for a reconciliation of fund flows from
operations to net earnings. We analyze fund flows from operations both on a consolidated basis and on a business unit basis in order to assess
the contribution of each business unit to our ability to generate income necessary to pay dividends, repay debt, fund asset retirement obligations
and make capital investments.
• Netbacks: Netbacks are per boe and per mcf performance measures used in the analysis of operational activities. We assess netbacks both on
a consolidated basis and on a business unit basis in order to compare and assess the operational and financial performance of each business
unit versus other business units and also versus third party crude oil and natural gas producers.
In addition, this MD&A includes references to certain financial measures which are not specified, defined, or determined under IFRS and are therefore
considered non-GAAP financial measures. These non-GAAP financial measures are unlikely to be comparable to similar financial measures presented
by other issuers. For a full description of these non-GAAP financial measures and a reconciliation of these measures to their most directly comparable
GAAP measures, please refer to “NON-GAAP FINANCIAL MEASURES”.
VERMILION’S BUSINESS
Vermilion is a Calgary, Alberta based international oil and gas producer focused on the acquisition, exploration, development and optimization of
producing properties in North America, Europe, and Australia. We manage our business through our Calgary head office and our international business
unit offices. This MD&A separately discusses each of our business units in addition to our corporate segment.
CONDENSATE PRESENTATION
We report our condensate production in Canada and the Netherlands business units within the crude oil and condensate production line. We believe
that this presentation better reflects the historical and forecasted pricing for condensate, which is more closely correlated with crude oil pricing than
with pricing for propane, butane and ethane (collectively “NGLs” for the purposes of this report).
10
Vermilion Energy Inc.
2017 REVIEW AND 2018 GUIDANCE
2017 Annual Report
On October 31, 2016, we released our 2017 capital expenditure guidance of $295 million and associated production guidance of between 69,000-
70,000 boe/d. On July 26, 2017 we announced an increase in our capital expenditure guidance from $295 million to $315 million following the
acceleration of 2018 activities in our Canadian business unit. We also adjusted our 2017 annual production guidance on October 30, 2017 to 68,000-
69,000 boe/d to reflect an extended downtime period following a plant turnaround at our Corrib asset in Ireland. Actual 2017 capital spending of $320
million was within 2% of our guidance and 2017 production of 68,021 boe/d modestly exceeded the bottom end of our guidance range.
On October 30, 2017, we released our 2018 capital expenditure guidance of $315 million and associated production guidance of between 74,500-
76,500 boe/d. On January 15, 2018, we increased our capital expenditure guidance to $325 million and production guidance to between 75,000-
77,500 boe/d to reflect the post-closing impact of the acquisition of a private southeast Saskatchewan and southwest Manitoba light oil producer.
The following table summarizes our guidance:
Date
Capital Expenditures ($MM)
Production (boe/d)
2017 Guidance
2017 Guidance
2017 Guidance
2017 Guidance
2017 Actual Results
2018 Guidance
2018 Guidance
2018 Guidance
October 31, 2016
July 26, 2017
October 30, 2017
October 30, 2017
January 15, 2018
295
315
315
320
315
325
69,000 to 70,000
69,000 to 70,000
68,000 to 69,000
68,021
74,500 to 76,500
75,000 to 77,500
11
Vermilion Energy Inc.
CONSOLIDATED RESULTS OVERVIEW
2017 Annual Report
Three Months Ended
% change
Year Ended
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
% change
2017 vs.
2016
Production
Crude oil and condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Sales
Crude oil and condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Build (draw) in inventory (mbbls)
Financial metrics
Fund flows from operations ($M)
Per share ($/basic share)
Net earnings (loss)
Per share ($/basic share)
Net debt ($M)
Cash dividends ($/share)
Activity
Capital expenditures ($M)
Acquisitions ($M)
Gross wells drilled
Net wells drilled
Operational review
27,830
5,279
238.27
72,821
27,638
5,279
238.27
72,628
18
27,687
4,947
208.63
67,403
28,391
4,946
208.63
68,108
(64)
25,972
2,467
194.54
60,863
26,610
2,467
194.54
61,501
(58)
181,253
1.49
8,645
0.07
130,755
1.08
(39,191)
(0.32)
149,582
1.27
(4,032)
(0.03)
1,371,790 1,370,995 1,427,148
0.645
0.645
0.645
1 %
7 %
14 %
8 %
(3)%
7 %
14 %
7 %
39 %
38 %
N/A
N/A
— %
— %
7 %
114 %
22 %
20 %
4 %
114 %
22 %
18 %
27,721
4,194
216.64
68,021
27,483
4,194
216.64
67,784
87
27,852
2,582
198.55
63,526
28,005
2,582
198.55
63,679
(55)
510,791
602,565
21 %
4.41
5.00
17 %
62,258
(160,051)
N/A
0.52
N/A
(1.38)
(4)% 1,371,790 1,427,148
2.580
2.580
— %
74,303
3,048
8.00
6.00
91,382
20,976
17.00
13.77
66,882
78,713
16.00
12.02
(19)%
(85)%
11 %
(96)%
320,449
27,637
56.00
46.58
242,408
98,524
38.00
25.50
— %
62 %
9 %
7 %
(2)%
62 %
9 %
6 %
18 %
13 %
N/A
N/A
(4)%
— %
32 %
(72)%
• Consolidated average production during Q4 2017 increased 8% to 72,821 boe/d versus Q3 2017 due to production increases in the Netherlands,
Canada, and Ireland. In the Netherlands, production growth was positively impacted by the approval of a production rate increase on two of our
key pools and production from a new well drilled in Q3 2017. In Canada, increased production was driven by continued organic growth from our
Mannville condensate-rich resource play. In Ireland, production growth was the result of reduced downtime at the Corrib project.
• Consolidated average production increased by 20% and 7% for the three months and year ended December 31, 2017, versus the comparable
periods in 2016, respectively. Year-over-year production increases were primarily driven by continued organic production growth from our
Mannville condensate-rich resource play in Canada and incremental volumes from our acquisition in Germany in late 2016.
For the three months ended December 31, 2017, capital expenditures of $74.3 million primarily related to activity in Canada, France, and the
Netherlands. In Canada, capital expenditures of $26.9 million included the drilling of 6.0 (4.0 net) wells in the Mannville. In France, capital
expenditures of $20.0 million included the drilling of 2.0 (2.0 net) wells in the Neocomian. In the Netherlands, capital expenditures of $12.3 million
included the acquisition of 315 square kilometers of 3D seismic.
•
12
Vermilion Energy Inc.
Financial review
2017 Annual Report
Net earnings
• Net earnings for Q4 2017 of $8.6 million ($0.07/basic share) compared to a net loss of $39.2 million ($0.32/basic share) in Q3 2017. The net
earnings in Q4 2017 largely resulted from higher revenues due to increased production volumes and stronger crude oil and European natural gas
prices. In addition, net earnings in Q4 2017 benefited from an unrealized foreign exchange gain of $40.7 million, compared to an unrealized loss
of $3.0 million in Q3 2017. These favourable variances were partially offset by an $80.0 million unrealized loss on derivative instruments in Q4
2017, compared to an unrealized loss of $24.2 million in the prior quarter.
• Unrealized losses and gains on derivative instruments result from mark-to-market accounting based on prevailing commodity prices at each period
end. As a result, unrealized gains and losses for all derivative instruments are recognized in current period earnings based on current forward
price curves, while the instruments themselves reduce Vermilion’s exposure to commodity price volatility in future periods.
• Net earnings for the three months and year ended December 31, 2017 of $8.6 million ($0.07/basic share) and $62.3 million ($0.52/basic share)
compare to net losses of $4.0 million ($0.03/basic share) and $160.1 million ($1.38/basic share) in the comparative periods in 2016. The net
earnings in the current year largely resulted from higher revenues due to increased production volumes and stronger crude oil and European
natural gas prices. In addition, net earnings benefited from unrealized foreign exchange gains of $40.7 million and $71.7 million for the three
months and year ended December 31, 2017, compared to unrealized losses of $2.5 million and $0.8 million in the respective comparative periods.
For the year ended December 31, 2017, these favourable variances were coupled with a smaller unrealized loss on derivative instruments of $1.1
million (compared to an unrealized loss of $138.0 million 2016) and lower depletion and depreciation charges.
Fund flows from operations
• Generated fund flows from operations of $181.3 million during Q4 2017, an increase of 39% from Q3 2017. This quarter-over-quarter increase
was driven by higher crude oil and European natural gas prices and higher sales volumes. In addition, Q4 2017 fund flows from operations
benefited from lower taxes, primarily in the Netherlands as a result of an increased tax deduction for future asset retirement obligations resulting
from a reduction in applicable discount rate assumptions.
Fund flows from operations increased by 21% for the three months ended December 31, 2017 versus 2016 primarily due to a 20% increase in
production and a 3% increase in realized pricing. For the year ended December 31, 2017, fund flows from operations increased 18% from 2016
primarily as a result of higher production and higher realized pricing while maintaining per unit operating expenses at a level consistent with 2016.
•
Net debt
• Net debt decreased to $1.37 billion as at December 31, 2017 from $1.43 billion at December 31, 2016 as fund flows from operations generated
in excess of capital expenditures, acquisitions, and net dividends was used to reduce long-term debt.
Dividends
• Declared dividends of $0.215 per common share per month during the year ended December 31, 2017 ($2.58 per common share for the year).
13
Vermilion Energy Inc.
COMMODITY PRICES
Average reference prices
Crude oil
WTI ($/bbl)
WTI (US $/bbl)
Edmonton Sweet index ($/bbl)
Edmonton Sweet index (US $/bbl)
Dated Brent ($/bbl)
Dated Brent (US $/bbl)
Natural gas
AECO ($/mmbtu)
NBP ($/mmbtu)
NBP (€/mmbtu)
TTF ($/mmbtu)
TTF (€/mmbtu)
Henry Hub ($/mmbtu)
Henry Hub (US $/mmbtu)
Average exchange rates
CDN $/US $
CDN $/Euro
Realized Prices
Crude oil and condensate ($/bbl)
NGLs ($/bbl)
Natural gas ($/mmbtu)
Total ($/boe)
Crude Oil
2017 Annual Report
Three Months Ended
% change
Year Ended
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
% change
2017 vs.
2016
70.43
55.40
68.98
54.26
78.05
61.39
1.69
8.70
5.81
8.36
5.58
3.73
2.93
1.27
1.50
74.12
29.28
5.23
47.49
60.37
48.20
56.76
45.32
65.22
52.08
1.45
6.78
4.61
6.93
4.71
3.76
3.00
1.25
1.47
61.47
23.96
4.01
39.66
65.75
49.29
61.60
46.18
65.97
49.46
3.09
7.51
5.22
7.21
5.01
3.98
2.98
1.33
1.44
64.51
18.13
5.47
45.93
17 %
15 %
22 %
20 %
20 %
18 %
17 %
28 %
26 %
21 %
18 %
(1)%
(2)%
2 %
2 %
21 %
22 %
30 %
20 %
7 %
12 %
12 %
17 %
18 %
24 %
(45)%
16 %
11 %
16 %
11 %
(6)%
(2)%
(5)%
4 %
15 %
62 %
(4)%
3 %
66.13
50.95
62.94
48.49
70.44
54.27
2.16
7.49
5.12
7.43
5.07
4.04
3.11
1.30
1.46
67.00
25.00
4.91
44.41
57.42
43.32
53.17
40.11
57.92
43.69
2.16
6.15
4.19
6.00
4.09
3.27
2.46
1.33
1.47
55.42
11.70
4.18
37.88
15 %
18 %
18 %
21 %
22 %
24 %
— %
22 %
22 %
24 %
24 %
24 %
26 %
(2)%
(1)%
21 %
114 %
17 %
17 %
• Q4 2017 was a stronger quarter for crude oil prices with WTI and Dated Brent increasing by 15% and 18% versus the previous quarter. The
increase in crude oil prices during Q4 2017 was largely due to continued indicators of supply and demand rebalancing through inventory
draws in addition to the extension of the OPEC and non-OPEC coordinated production reductions until the end of 2018.
• During Q4 2017, Dated Brent crude oil averaged a premium to WTI of US$5.99/bbl and a premium to the Edmonton Sweet index of
US$7.13/bbl. Approximately 63% of our crude oil and condensate production during Q4 2017 benefited from this premium pricing. As a
result, our fourth quarter consolidated crude oil and condensate price of $74.12/bbl was $3.69/bbl higher than the Canadian dollar WTI
average price and $5.14/bbl higher than the Canadian dollar Edmonton Sweet index price, representing premiums of 5% and 7%.
Natural Gas
• Cold weather in North America at the end of 2017 helped AECO gas prices increase 17% above the average price for Q3 2017. However,
despite the late-year increase, AECO prices remain weak, averaging $1.69/mmbtu in Q4 2017 (45% below the same period the previous
year).
• Supportive weather, supply disruptions, and strong Asian LNG demand all helped to boost European gas prices during Q4 2017. Both TTF
and NBP markets benefited from increased demand for LNG in Asia where consumption growth has exceeded expectations and is offsetting
the continued growth in global liquefaction capacity. As a result, NBP averaged $8.70/mmbtu in Q4 2017, an increase of 28% over Q3 2017
and a 16% increase year-over-year. Similarly, TTF averaged $8.36/mmbtu in Q4 2017, a 21% increase over Q3 2017 and a 16% increase
year-over-year.
• During Q4 2017, average European gas prices were $8.53/mmbtu, which reflects a $6.84/mmbtu premium to AECO and a $4.80/mmbtu
premium to Henry Hub pricing. We receive this premium pricing on our natural gas production in Europe, which made up nearly 55% of our
total company natural gas production during Q4 2017. As a result, our Q4 2017 consolidated natural gas realized price of $5.23/mmbtu
represented a $3.54/mmbtu premium to AECO and a $1.50/mmbtu premium to Henry Hub Pricing.
Foreign Exchange
• While the Canadian dollar weakened slightly versus the US dollar during Q4 2017, it has generally increased in strength throughout 2017.
The Euro also posted small gains versus the Canadian dollar during the Q4 2017, following a general increase in strength throughout 2017
•
14
Vermilion Energy Inc.
FUND FLOWS FROM OPERATIONS
Petroleum and natural gas sales
Royalties
Petroleum and natural gas revenues
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized (loss) gain on derivative instruments
Realized foreign exchange gain (loss)
Realized other income
Fund flows from operations
2017 Annual Report
Three Months Ended
Year Ended
Dec 31, 2017
$/boe
$M
47.49
317,341
(3.52)
(23,541)
43.97
293,800
(1.79)
(11,986)
(9.76)
(65,240)
(2.39)
(15,941)
(0.53)
(3,572)
0.35
2,330
(2.05)
(13,710)
(1.12)
(7,493)
0.43
2,899
0.02
166
27.13
181,253
Sep 30, 2017
$/boe
$M
39.66
248,505
(2.71)
(16,994)
36.95
231,511
(1.72)
(10,800)
(9.87)
(61,832)
(1.93)
(12,114)
(0.69)
(4,345)
(0.49)
(3,092)
(2.14)
(13,400)
1.39
8,723
(0.66)
(4,110)
0.03
214
20.87
130,755
Dec 31, 2016
$/boe
$M
45.93
259,891
(2.65)
(14,999)
43.28
244,892
(1.69)
(9,565)
(10.54)
(59,616)
(2.03)
(11,464)
(0.28)
(1,568)
(1.03)
(5,840)
(2.55)
(14,410)
0.34
1,920
0.23
1,291
3,942
0.70
26.43
149,582
Dec 31, 2017
$/boe
$M
44.41
1,098,838
(3.01)
(74,476 )
41.40
1,024,362
(1.76)
(43,448 )
(9.79)
(242,267 )
(2.20)
(54,373 )
(0.80)
(19,819 )
(0.50)
(12,288 )
(2.32)
(57,313 )
0.19
4,721
0.09
2,316
0.03
674
24.34
602,565
(9.53)
$/boe
37.88
(2.33)
35.55
(1.70)
Dec 31, 2016
$M
882,791
(54,284)
828,507
(39,511)
(222,185)
(52,829)
(1,568)
(18,110)
(56,957)
65,376
4,041
4,027
510,791
(2.44)
2.81
0.17
0.17
21.91
(2.27)
(0.07)
(0.78)
The following table shows a reconciliation of the change in fund flows from operations:
($M)
Fund flows from operations – Comparative period
Sales volume variance:
Canada
France
Netherlands
Germany
Ireland
Australia
United States
Pricing variance on sales volumes:
WTI
AECO
Dated Brent
TTF and NBP
Changes in:
Royalties
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest
Realized derivatives
Realized foreign exchange
Realized other income
Fund flows from operations – Current period
Q4/17 vs. Q3/17
130,755
Q4/17 vs. Q4/16
149,582
2017 vs. 2016
510,791
3,859
211
12,554
(1,012)
4,090
(6,252)
(1,189)
13,785
408
21,168
21,214
(6,547)
(1,186)
(3,408)
(3,827)
773
5,422
(310)
(16,216)
7,009
(48)
181,253
30,891
(4,828)
9,324
8,964
(4,573)
(8,446)
1,719
5,249
(11,601)
17,860
12,891
(8,542)
(2,421)
(5,624)
(4,477)
(2,004)
8,170
700
(9,413)
1,608
(3,776)
181,253
33,420
(25,361)
(15,383)
32,216
15,812
(10,948)
5,060
40,279
7,318
75,105
58,529
(20,192)
(3,937)
(20,082)
(1,544)
(18,251)
5,822
(356)
(60,655)
(1,725)
(3,353)
602,565
Please see CONSOLIDATED RESULTS OVERVIEW for a discussion of the key variances for the periods presented.
Fluctuations in fund flows from operations may occur as a result of changes in commodity prices and costs to produce petroleum and natural gas. In
addition, fund flows from operations may be significantly affected by the timing of crude oil shipments in Australia and France. When crude oil inventory
is built up, the related operating expense, royalties, and depletion expense are deferred and carried as inventory on the consolidated balance sheet.
When the crude oil inventory is subsequently drawn down, the related expenses are recognized.
15
Vermilion Energy Inc.
CANADA BUSINESS UNIT
2017 Annual Report
Overview
• Production and assets focused in West Pembina near Drayton Valley, Alberta and Northgate in southeast Saskatchewan.
• Potential for three significant resource plays sharing the same surface infrastructure in the West Pembina region in Alberta:
– Cardium light oil (1,800m depth) - in development phase
– Mannville condensate-rich gas (2,400 - 2,700m depth) - in development phase
– Duvernay condensate-rich gas (3,200 - 3,400m depth) - in appraisal phase with no investment at present
• Southeast Saskatchewan light oil development:
– Primary target is the Mississippian Midale formation (1,400 - 1,700m depth)
– Secondary targets of Mississippian Frobisher (1,400 - 1,700m depth) and Devonian Bakken/Three Forks (2,000 - 2,100m depth)
Operational and financial review
Canada business unit
($M except as indicated)
Production and sales
Crude oil and condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Production mix (% of total)
Crude oil and condensate
NGLs
Natural gas
Activity
Capital expenditures
Acquisitions
Gross wells drilled
Net wells drilled
Financial results
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations netback
Realized prices
Crude oil and condensate ($/bbl)
NGLs ($/bbl)
Natural gas ($/mmbtu)
Total ($/boe)
Reference prices
WTI (US $/bbl)
Edmonton Sweet index (US $/bbl)
Edmonton Sweet index ($/bbl)
AECO ($/mmbtu)
Three Months Ended
% change
Year Ended
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
% change
2017 vs.
2016
9,703
5,235
107.91
32,923
9,288
4,891
103.92
31,499
7,945
2,444
75.12
22,910
4 %
7 %
4 %
5 %
22 %
114 %
44 %
44 %
9,051
4,144
97.89
29,510
9,171
2,552
84.29
25,771
29%
16%
55%
29%
16%
55%
35%
11%
54%
31%
14%
55%
36%
10%
54%
26,865
788
6.00
4.00
94,522
(9,301)
(4,836)
(22,356)
(2,540)
55,489
31.21
(3.07)
(1.60)
(7.38)
(0.84)
18.32
69.20
29.18
1.88
31.21
55.40
54.26
68.98
1.69
43,746
19,712
15.00
12.75
77,238
(6,653)
(4,485)
(22,071)
(2,239)
41,790
26.65
(2.30)
(1.55)
(7.62)
(0.77)
14.41
57.15
23.93
1.84
26.65
48.20
45.32
56.76
1.45
16,895
1,378
11.00
7.02
70,573
(7,390)
(3,504)
(18,161)
(2,035)
39,483
33.48
(3.51)
(1.66)
(8.62)
(0.97)
18.72
62.13
18.12
3.05
33.48
49.29
46.18
61.60
3.09
16
(39)%
59 %
22 %
40 %
8 %
1 %
13 %
33 %
17 %
33 %
3 %
(3)%
9 %
27 %
21 %
22 %
2 %
17 %
15 %
20 %
22 %
17 %
34 %
26 %
38 %
23 %
25 %
41 %
(7)%
(13)%
(4)%
(14)%
(13)%
(2)%
11 %
61 %
(38)%
(7)%
12 %
17 %
12 %
(45)%
148,667
22,011
44.00
35.56
330,903
(33,258)
(17,368)
(80,444 )
(9,604)
190,229
30.72
(3.09)
(1.61)
(7.47)
(0.89)
17.66
63.41
25.00
2.34
30.72
50.95
48.49
62.94
2.16
62,706
13,309
29.00
17.62
252,867
(21,475)
(15,392)
(71,543)
(11,826)
132,631
26.81
(2.28)
(1.63)
(7.59)
(1.25)
14.06
52.44
11.75
2.14
26.81
43.32
40.11
53.17
2.16
(1)%
62 %
16 %
15 %
137 %
31 %
55 %
13 %
12 %
(19)%
43 %
15 %
36 %
(1)%
(2)%
(29)%
26 %
21 %
113 %
9 %
15 %
18 %
21 %
18 %
— %
Vermilion Energy Inc.
2017 Annual Report
Production
• Q4 2017 average production increased by 5% from Q3 2017, and 44% year-over-year primarily due to organic production growth in our Mannville
condensate-rich gas resource play.
• Mannville production averaged approximately 19,000 boe/d in Q4 2017, representing a 10% increase quarter-over-quarter. Full year 2017
production averaged more than 15,800 boe/d.
• Cardium production averaged approximately 5,400 boe/d in Q4 2017, a decrease of 7% quarter-over-quarter. Full year 2017 production averaged
nearly 5,700 boe/d.
• Production from southeast Saskatchewan averaged approximately 2,500 boe/d in Q4 2017, a decrease of 4% quarter-over-quarter.
Activity review
• Vermilion drilled or participated in the drilling of six (4.0 net) wells during Q4 2017. During 2017, Vermilion drilled or participated in the drilling of
44 (35.6 net) wells in Canada
Mannville
– During Q4 2017, we drilled or participated in the drilling of six (4.0 net) wells and brought nine (5.5 net) wells on production.
– We have drilled or participated in the drilling of 24 (17.5 net) wells in 2017. We plan to drill or participate in 17 (13.8 net) wells in 2018.
Cardium
–
–
In 2017, we drilled seven (7.0 net) operated wells.
In 2018, we plan to drill or participate in five (4.2 net) wells.
Saskatchewan
–
–
In 2017, we drilled 13 (11.1 net) wells.
In 2018, we plan to drill or participate in 21 (20.5 net) wells, which includes the planned drilling of an additional five (5.0 net) wells
associated with our acquisition of a private southeast Saskatchewan and southwest Manitoba light oil producer in Q1 2018.
• On February 15, 2018, Vermilion acquired all of the issued and outstanding shares of a private producer with assets in southeast Saskatchewan
and southwest Manitoba. The acquisition is comprised of light oil producing fields near Vermilion's existing operations in southeast Saskatchewan.
Total consideration of $90.8 million, which includes both cash paid to the shareholders' of the acquiree and the assumption of the acquiree's long-
term debt, was funded through Vermilion's revolving credit facility.
Sales
•
The realized price for our crude oil and condensate production in Canada is linked to WTI, and is also subject to market conditions in western
Canada. These market conditions can result in fluctuations in the pricing differential to WTI, as reflected by the Edmonton Sweet index price.
The realized price of our NGLs in Canada is based on product specific differentials pertaining to trading hubs in the United States. The realized
price of our natural gas in Canada is based on the AECO index in Canada.
• Q4 2017 sales per boe increased compared to Q3 2017, driven by higher crude oil and natural gas pricing.
• Sales per boe decreased for the three months ended December 31, 2017 versus the comparable period in the prior year, driven by lower natural
gas pricing but partially offset by higher crude oil pricing. For the year ended December 31, 2017, relatively flat natural gas pricing was coupled
with higher crude oil pricing, resulting in an increase to sales per boe compared to 2016.
Royalties
•
Fluctuations in royalties for all comparable periods were primarily due to the impact of commodity prices on the sliding scale used to determine
royalty rates.
Transportation
•
•
Transportation expense relates to the delivery of crude oil and natural gas production to major pipelines where legal title transfers.
Transportation expense on a per unit basis was consistent versus all comparable periods.
Operating
•
•
In Q4 2017, operating expense on a per unit and dollar basis was consistent as compared to Q3 2017.
For the three months and year ended December 31, 2017, operating expense on a dollar basis increased versus the comparable periods in the
prior year due to higher gas processing costs resulting from higher production volumes. On a per unit basis, operating expense for the three
months and year ended December 31, 2017 decreased versus the comparable periods in 2016 due to the impact of spreading fixed costs over
higher volumes.
17
Vermilion Energy Inc.
FRANCE BUSINESS UNIT
2017 Annual Report
Overview
• Entered France in 1997 and completed three subsequent acquisitions, including two in 2012.
•
•
Largest oil producer in France, constituting approximately three-quarters of domestic oil production.
Low base decline producing assets comprised of large conventional oil fields with high working interests located in the Aquitaine and Paris
Basins.
Identified inventory of workover, infill drilling, and secondary recovery opportunities.
•
Operational and financial review
Three Months Ended
% change
Year Ended
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
% change
2017 vs.
2016
France business unit
($M except as indicated)
Production
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Sales
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Inventory (mbbls)
Opening crude oil inventory
Crude oil production
Crude oil sales
Closing crude oil inventory
Activity
Capital expenditures
Gross wells drilled
Net wells drilled
Financial results
Sales
Royalties
Transportation
Operating
General and administration
Other income
Current income taxes
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Transportation
Operating
General and administration
Other income
Current income taxes
Fund flows from operations netback
Realized prices
Crude oil ($/bbl)
Natural gas ($/mmbtu)
Total ($/boe)
Reference prices
Dated Brent (US $/bbl)
Dated Brent ($/bbl)
11,215
—
11,215
11,397
—
11,397
214
1,032
(1,049)
197
20,027
2.00
2.00
78,778
(10,599)
(4,475)
(14,332)
(4,259)
—
(2,348)
42,765
75.13
(10.11)
(4.27)
(13.67)
(4.06)
—
(2.24)
40.78
75.13
—
75.13
61.39
78.05
10,918
—
10,918
11,360
—
11,360
254
1,004
(1,044)
214
15,756
—
—
66,100
(6,399)
(3,434)
(13,148)
(2,543)
—
(1,396)
39,180
63.24
(6.12)
(3.29)
(12.58)
(2.43)
—
(1.34)
37.48
63.24
—
63.24
52.08
65.22
11,220
0.38
11,283
12,209
0.38
12,272
239
1,032
(1,123)
148
31,127
4.00
4.00
71,926
(6,692)
(3,983)
(11,482)
(5,101)
3,822
(2,867)
45,623
63.71
(5.93)
(3.53)
(10.17)
(4.52)
3.39
(2.54)
40.41
63.99
1.55
63.71
49.46
65.97
18
3%
—%
3%
—%
—%
—%
— %
(100)%
(1)%
(7)%
(100)%
(7)%
27%
(36)%
19%
66%
30%
9%
67%
—%
68%
9%
19%
65%
30%
9%
67%
—%
67%
9%
19%
—%
19%
18%
20%
10 %
58 %
12 %
25 %
(17)%
(100)%
(18)%
(6)%
18 %
70 %
21 %
34 %
(10)%
(100)%
(12)%
1 %
17 %
(100)%
18 %
24 %
18 %
11,084
—
11,085
10,950
—
10,950
148
4,046
(3,997)
197
73,381
7.00
7.00
268,103
(28,565)
(14,627)
(51,002)
(13,585)
—
(10,556)
149,768
67.08
(7.15)
(3.66)
(12.76)
(3.40)
—
(2.64)
37.47
67.08
1.52
67.08
54.27
70.44
11,896
0.44
11,970
12,157
0.44
12,231
243
4,354
(4,449)
148
68,472
4.00
4.00
246,863
(27,091)
(14,758)
(50,000)
(19,101)
3,822
(2,867)
136,868
55.15
(6.05)
(3.30)
(11.17)
(4.27)
0.85
(0.64)
30.57
55.42
1.59
55.15
43.69
57.92
(7)%
(100)%
(7)%
(10)%
(100)%
(10)%
7 %
9 %
5 %
(1)%
2 %
(29)%
(100)%
268 %
9 %
22 %
18 %
11 %
14 %
(20)%
(100)%
313 %
23 %
21 %
(4)%
22 %
24 %
22 %
Vermilion Energy Inc.
2017 Annual Report
Production
• Q4 2017 production increased 3% versus the prior quarter and was relatively consistent with Q4 2016. Full year production decreased by 7%
from 2016 due to production declines, well downtime and third party restrictions impacting Vic Bilh gas production. These decreases more than
offset new well production and optimization activities.
Activity review
• During Q4 2017, we drilled two (2.0 net) Neocomian wells as we accelerated a portion of our 2018 drilling program into late 2017. We also
continued our workover and optimization programs in the Aquitaine and Paris Basins.
• Our 2017 capital activity included the drilling of six (6.0 net) and completion of four (4.0 net) Neocomian wells and one (1.0 net) horizontal sidetrack
well in the Vulaines field as well as the completion of four (4.0 net) Champotran wells that were drilled in Q4 2016.
Sales
• Crude oil in France is priced with reference to Dated Brent.
• Q4 2017 sales per boe increased versus Q3 2017, consistent with stronger Dated Brent pricing. This increase in price was combined with
relatively consistent sales volumes, resulting in an increase in sales.
• Sales per boe for the three months and year ended December 31, 2017 increased versus the comparable periods in the prior year, consistent
with stronger Dated Brent pricing. In dollar terms, the increase in price was partially offset by lower sales volumes.
Royalties
• Royalties in France relate to two components: RCDM (levied on units of production and not subject to changes in commodity prices) and R31
•
(based on a percentage of sales).
In December 2017, the French government enacted legislation resulting in increased rates for both RCDM and R31 royalties. The change in
RCDM royalties was applied retroactively to January 1, 2017 and the change in R31 royalties takes effect January 1, 2018. As a result of these
changes, we expect RCDM royalties in 2018 to be approximately €3.65/bbl (compared to approximately €2.90/bbl prior to the newly enacted
legislation) and R31 royalties to represent approximately 7.5% of sales (compared to approximately 3.5% in 2017).
• Royalties as a percentage of sales of 13.5% in Q4 2017 increased as compared to 9.7% in Q3 2017 and 9.3% in Q4 2016 due to the
aforementioned revision to RCDM royalties. Q4 2017 royalty expense included the entire impact of the retroactive increase in RCDM to the
beginning of 2017.
• Royalties as a percentage of sales for the year ended December 31, 2017 of 10.7% were relatively consistent with 11.0% in 2016 as the impact
of the higher per unit RCDM royalty rates were offset by higher realized pricing in the current year.
Transportation
•
Transportation expense increased in Q4 2017 compared to Q3 2017 and Q4 2016 due to the impact of a prior period adjustment recorded in the
current quarter.
For the year ended December 31, 2017, transportation expense was relatively consistent with the prior year.
•
Operating
• Operating expense on a per unit and dollar basis increased in Q4 2017 as compared to Q3 2017 due to the timing of maintenance activity and
•
higher electricity costs due to colder weather.
For the three months and year ended December 31, 2017, operating expense on a per unit basis increased versus the comparable periods in the
prior year due to the impact of spreading fixed costs over lower sales volumes. In dollars, the increase in operating expense in Q4 2017 as
compared to Q4 2016 is due to a favourable prior period adjustment recorded in the prior year.
General and administration
•
Fluctuations in general and administration expense for all comparable periods were due to the timing of expenditures and allocations from our
corporate segment.
Current income taxes
•
• Current income taxes for the year ended December 31, 2017 versus the comparative periods were higher mainly due to higher Dated Brent prices
In France, current income taxes are applied to taxable income, after eligible deductions, at a statutory rate of 34.4%.
resulting in increased sales.
• On December 21, 2017, the French Parliament approved the Finance Bill for 2018. The Finance Bill for 2018 provides for a progressive decrease
of the French corporate income tax rate from 34.43% to 25.825% by 2022, with the first reduction planned for 2019 to 32.02%
19
Vermilion Energy Inc.
NETHERLANDS BUSINESS UNIT
Overview
• Entered the Netherlands in 2004.
• Second largest onshore gas producer (excluding state-owned energy company EBN).
•
•
Interests include 24 onshore licenses and two offshore licenses.
Licenses include more than 800,000 net acres of land, 95% of which is undeveloped.
Operational and financial review
2017 Annual Report
% change
2017 vs.
2016
Three Months Ended
% change
Year Ended
Netherlands business unit
($M except as indicated)
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
Production and sales
Condensate (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Activity
Capital expenditures
Acquisitions
Gross wells drilled
Net wells drilled
Financial results
Sales
Royalties
Operating
General and administration
Current income taxes
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Operating
General and administration
Current income taxes
Fund flows from operations netback
Realized prices
Condensate ($/bbl)
Natural gas ($/mmbtu)
Total ($/boe)
Reference prices
TTF ($/mmbtu)
TTF (€/mmbtu)
105
55.66
9,381
12,300
(38)
—
—
40,914
(647)
(6,981)
(546)
6,975
39,715
47.41
(0.75)
(8.09)
(0.63)
8.08
46.02
66.38
7.87
47.41
8.36
5.58
74
34.90
5,890
11,590
14
2.00
1.02
21,258
(360)
(4,498)
(510)
(1,983)
13,907
39.23
(0.66)
(8.30)
(0.94)
(3.66)
25.67
52.10
6.51
39.23
6.93
4.71
57
41.15
6,915
5,737
28,259
—
—
25,978
(294)
(5,660)
(162)
100
19,962
40.84
(0.46)
(8.90)
(0.26)
0.16
31.38
63.18
6.78
40.84
7.21
5.01
42 %
59 %
59 %
84 %
35 %
36 %
6 %
114 %
92 %
80 %
55 %
7 %
N/A
186 %
21 %
14 %
(3)%
(33)%
N/A
79 %
27 %
21 %
21 %
21 %
18 %
57 %
120 %
23 %
237 %
6,875 %
99 %
16 %
63 %
(9)%
142 %
4,950 %
47 %
5 %
16 %
16 %
16 %
11 %
90
40.54
6,847
31,575
(24)
2.00
1.02
108,060
(1,722)
(21,212)
(2,212)
3,331
86,245
43.24
(0.69)
(8.49)
(0.89)
1.33
34.50
56.90
7.18
43.24
7.43
5.07
88
47.82
8,058
23,740
28,259
2.00
0.88
100,707
(1,462)
(20,796)
(1,525)
(6,624)
70,300
34.15
(0.50)
(7.05)
(0.52)
(2.25)
23.83
44.93
5.67
34.15
6.00
4.09
2 %
(15)%
(15)%
33 %
7 %
18 %
2 %
45 %
N/A
23 %
27 %
38 %
20 %
71 %
N/A
45 %
27 %
27 %
27 %
24 %
24 %
Production
• Q4 2017 production increased 59% quarter-over-quarter and 36% year-over-year following the receipt of permits to increase production on two
key pools, and also due to the impact of a major turnaround at the Garjip processing facility that occurred during Q2 2017. Year-over-year
production decreased 15% due to the restriction of production related to permitting delays earlier in 2017.
20
Vermilion Energy Inc.
2017 Annual Report
Activity review
•
In Q4 2017, we completed a 315 square kilometre 3D seismic survey in the Akkrum exploration licence and the South Friesland III production
licence.
The test rate from the Eesveen-2 well (60% working interest) drilled in the prior quarter was limited to approximately 10 mmcf/d net during the
test period.
•
The price of our natural gas in the Netherlands is based on the TTF index.
Sales
•
• Q4 2017 sales per boe increased versus Q3 2017, consistent with an increase in the TTF reference price.
• Sales per boe for the three months and year ended December 31, 2017 increased versus the comparable periods in the prior year, consistent
with increases in the TTF reference price.
Royalties
•
In the Netherlands, certain wells are subject to overriding royalties or royalties that take effect only when specified production levels are exceeded.
As such, fluctuations in royalty expense in the periods presented primarily relates to the amount of production from those wells subject to overriding
and production royalties.
Transportation
• Our production in the Netherlands is not subject to transportation expense as gas is sold at the plant gate.
Operating
• Q4 2017 per unit operating expense decreased slightly versus Q3 2017 and Q4 2016 due to the impact of higher volumes.
• Operating expense on a per unit basis increased compared to 2016 due to the impact of fixed expenditures on lower production volumes.
General and administration
•
Fluctuations in general and administration expense for all comparable periods were due to the timing of expenditures and allocations from our
corporate segment.
Current income taxes
•
In the Netherlands, current income taxes are applied to taxable income, after eligible deductions and a 10% uplift deduction applied to operating
expenses, eligible G&A and tax deductions for depletion and asset retirement obligations, at a tax rate of 50%.
• Current income taxes in Q4 2017 and for the year ended December 31, 2017 versus the comparative periods were lower mainly due to an
increased tax deduction for future asset retirement obligations resulting from a reduction in applicable discount rate assumptions.
21
Vermilion Energy Inc.
GERMANY BUSINESS UNIT
2017 Annual Report
Overview
• Entered Germany in February 2014.
• Successfully integrated the December 2016 acquisition of operated and non-operated interests in five oil and three gas producing fields from
Engie E&P Deutschland GmbH (“Engie Acquisition”). Vermilion has assumed operatorship of six of the eight producing fields, representing our
first operated producing properties in Germany.
• Hold a 25% interest in a four partner consortium at Dummersee-Uchte. Associated assets include four gas producing fields spanning 11
production licenses as well as an exploration license in surrounding fields. Total license area comprises 204,000 gross acres, of which 85% is in
the exploration license.
• Entered into a farm-in agreement in July 2015 that provides Vermilion with a participating interest in 18 onshore exploration licenses in northwest
Germany, comprising approximately 850,000 net undeveloped acres of oil and natural gas rights. Vermilion will operate 11 of the 18 licenses
during the exploration phase.
• Awarded Ossenbeck and Weesen licenses (110,000 net acres) in 2015 and Aller license (50,000 net acres) in March 2017 surrounding the
operated oil fields acquired in December 2016.
Operational and financial review
Germany business unit
($M except as indicated)
Production and sales
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Production mix (% of total)
Crude oil
Natural gas
Activity
Capital expenditures
Acquisitions
Financial results
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations netback
Realized prices
Crude oil ($/bbl)
Natural gas ($/mmbtu)
Total ($/boe)
Reference prices
Dated Brent (US $/bbl)
Dated Brent ($/bbl)
TTF ($/mmbtu)
TTF (€/mmbtu)
Three Months Ended
% change
Year Ended
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
% change
2017 vs.
2016
1,148
18.19
4,180
1,054
20.12
4,407
—
14.80
2,467
9 %
(10)%
(5)%
100 %
23 %
69 %
1,060
19.39
4,291
—
14.90
2,483
100 %
30 %
73 %
27%
73%
24%
76%
—%
100%
25%
75%
—%
100%
5,279
—
18,898
(1,798)
(1,164)
(6,025)
(2,080)
7,831
50.22
(4.78)
(3.09)
(16.01)
(5.53)
20.81
72.58
7.07
50.22
61.39
78.05
8.36
5.58
3,020
—
15,663
(2,261)
(1,603)
(3,477)
(1,708)
6,614
38.52
(5.56)
(3.94)
(8.55)
(4.20)
16.27
55.95
5.50
38.52
52.08
65.22
6.93
4.71
1,694
48,377
8,294
(12)
(375)
(3,959)
(1,755)
2,193
36.54
(0.06)
(1.65)
(17.44)
(7.73)
9.66
—
6.09
36.54
49.46
65.97
7.21
5.01
22
75 %
212 %
21 %
(20)%
(27)%
73 %
22 %
18 %
30 %
(14)%
(22)%
87 %
32 %
28 %
30 %
29 %
30 %
18 %
20 %
21 %
18 %
128 %
14,883 %
210 %
52 %
19 %
257 %
37 %
7,867 %
87 %
(8)%
(28)%
115 %
100 %
16 %
37 %
24 %
18 %
16 %
11 %
9,531
—
68,696
(6,655)
(6,207)
(20,176)
(7,767)
27,891
44.37
(4.30)
(4.01)
(13.03)
(5.02)
18.01
63.91
6.38
44.37
54.27
70.44
7.43
5.07
3,803
48,377
29,049
(2,089)
(2,869)
(12,379)
(8,314)
3,398
31.97
(2.30)
(3.16)
(13.62)
(9.15)
3.74
—
5.33
31.97
43.69
57.92
6.00
4.09
151 %
136 %
219 %
116 %
63 %
(7)%
721 %
39 %
87 %
27 %
(4)%
(45)%
382 %
100 %
20 %
39 %
24 %
22 %
24 %
24 %
Vermilion Energy Inc.
2017 Annual Report
Production
• Q4 2017 production decreased from the prior quarter due to longer than anticipated downtime on one of our wells in December following a SCADA
installation. Fourth quarter and full year 2017 production increased 69% and 73% year-over-year, respectively, due to production additions from
the Engie Acquisition that closed December 2016.
Activity review
•
•
2017 activity focused on workover and optimization opportunities on the assets included in the Engie Acquisition.
In 2018, we plan to continue permitting and pre-drill activities associated with our first operated well in Germany, Burgmoor Z5 (25% working
interest) in the Dümmersee-Uchte area, which we expect to drill in 2019.
Sales
•
• Sales per boe increased versus all comparable periods due to the timing of sales and increases in both crude oil and natural gas benchmark
The price of our natural gas in Germany is based on the TTF index. Crude oil in Germany is priced with reference to Dated Brent.
prices.
Royalties
• Our production in Germany is subject to state and private royalties on sales after certain eligible deductions.
• Royalties as a percentage of sales of 9.5% in Q4 2017 were lower than 14.4% in Q3 2017 due to the impact of an adjustment recorded in the
•
prior quarter.
For the three months ended December 31, 2017, royalties as a percentage of sales of 9.5% increased from a negligible amount in Q4 2016 due
to the impact of favourable prior period adjustments recorded in Q4 2016. For the year ended December 31, 2017, royalties as a percentage of
sales of 9.7% was higher than 7.2% in the prior year due the impact of the prior period adjustment recorded in 2016.
Transportation
•
Transportation expense in Germany relates to costs incurred to deliver natural gas from the processing facility to the customer and deliver crude
oil to the refinery.
• Q4 2017 per unit transportation expense was relatively consistent with Q3 2017.
•
For the three months and year ended December 31, 2017, transportation expense increased on a per unit and dollar basis relative to the
comparable periods in the prior year due to the impact of the aforementioned acquisition.
Operating
• Operating expense increased in Q4 2017 versus Q3 2017 due to the impact of a favourable prior period adjustment recorded in the prior
•
quarter.
For the three months and year ended December 31, 2017, operating expense on a per unit basis decreased slightly versus the comparable
periods in 2016 due to the impact of higher volumes.
General and administration
•
Fluctuations in general and administration expense for all comparable periods were due to the timing of expenditures and allocations from our
corporate segment.
• On a per unit basis, general and administration costs have improved compared to 2016 as a result of our growing production base in Germany.
Current income taxes
• As a result of our tax pools in Germany, we do not expect to incur current income taxes in the German Business Unit in for the foreseeable
future.
23
Vermilion Energy Inc.
IRELAND BUSINESS UNIT
2017 Annual Report
Overview
• Entered Ireland in 2009.
•
Initial investment was an 18.5% non-operating interest in the offshore Corrib gas field located approximately 83 km off the northwest coast of
Ireland.
• On July 12, 2017, Vermilion and Canada Pension Plan Investment Board (“CPPIB”) announced a strategic partnership that is expected to result
in Vermilion increasing ownership in Corrib to 20% and taking over operatorship upon close of the acquisition which is expected to occur in the
first half of 2018.
The Corrib gas development comprises six offshore wells, offshore and onshore sales and transportation pipeline segments as well as a natural
gas processing facility.
•
• Natural gas began to flow from our Corrib gas project on December 30, 2015 and production volumes reached full plant capacity of approximately
65 mmcf/d (10,900 boe/d), net to Vermilion at the end of Q2 2016.
Operational and financial review
Ireland business unit
($M except as indicated)
Production and sales
Natural gas (mmcf/d)
Total (boe/d)
Activity
Capital expenditures
Financial results
Sales
Transportation
Operating
General and administration
Fund flows from operations
Netbacks ($/boe)
Sales
Transportation
Operating
General and administration
Fund flows from operations netback
Reference prices
NBP ($/mmbtu)
NBP (€/mmbtu)
Three Months Ended
% change
Year Ended
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
% change
2017 vs.
2016
56.23
9,372
49.04
8,173
62.92
10,486
15 %
15 %
(11)%
(11)%
58.43
9,737
50.89
8,482
15 %
15 %
327
1,101
1,711
(70)%
(81)%
551
9,375
(94)%
43,793
(1,496)
(2,977)
(517)
38,803
50.79
(1.74)
(3.45)
(0.60)
45.00
8.70
5.81
28,218
(1,252)
(5,717)
(670)
20,579
37.53
(1.66)
(7.60)
(0.89)
27.38
6.78
4.61
42,727
(1,703)
(5,148)
(1,523)
34,353
44.29
(1.77)
(5.34)
(1.58)
35.60
7.51
5.22
55 %
19 %
(48)%
(23)%
89 %
35 %
5 %
(55)%
(33)%
64 %
28 %
26 %
2 %
(12)%
(42)%
(66)%
13 %
15 %
(2)%
(35)%
(62)%
26 %
16 %
11 %
153,330
(5,205)
(17,596)
(2,320)
128,209
109,156
(6,492)
(18,646)
(4,772)
79,246
43.14
(1.46)
(4.95)
(0.65)
36.08
7.49
5.12
35.16
(2.09)
(6.01)
(1.54)
25.52
6.15
4.19
40 %
(20)%
(6)%
(51)%
62 %
23 %
(30)%
(18)%
(58)%
41 %
22 %
22 %
Production
• Q4 2017 production increased by 15% quarter-over-quarter and decreased by 11% year-over-year. This was due to an extended downtime period
following a plant turnaround, which started during Q3 2017 and ended early Q4 2017.
Activity review
• On July 12, 2017 Vermilion and CPPIB announced a strategic partnership in Corrib, whereby CPPIB will acquire Shell E&P Ireland Limited’s 45%
interest in Corrib for total cash consideration of €830 million, subject to customary closing adjustments and future contingent value payments
based on performance and realized pricing. At closing, Vermilion expects to assume operatorship of Corrib. In addition to operatorship, CPPIB
plans to transfer a 1.5% working interest to Vermilion for €19.4 million ($28.4 million), before closing adjustments. Vermilion’s incremental 1.5%
ownership of Corrib would represent approximately 850 boe/d (100% gas) based on current production expectations for Corrib. The acquisition
has an effective date of January 1, 2017 and is anticipated to close in the first half of 2018.
The price of our natural gas in Ireland is based on the NBP index.
Sales
•
• Q4 2017 sales per boe increased versus Q3 2017, consistent with an increase in the NBP reference price.
•
For the three months and year ended December 31, 2017, sales per boe increased relatively to the comparable periods in the prior year, consistent
with increases in the NBP reference price.
24
Vermilion Energy Inc.
2017 Annual Report
Royalties
• Our production in Ireland is not subject to royalties.
Transportation expense in Ireland relates to payments under a ship-or-pay agreement related to the Corrib project.
Transportation
•
• Q4 2017 transportation expense was consistent with Q3 2017.
•
Transportation expense for the three months and year ended December 31, 2017 decreased relative to the comparable periods in the prior year
due to a decrease in the current year ship-or-pay obligation.
Operating
• Operating expense on a per unit and dollar basis decreased versus all comparable periods due to the timing of maintenance work.
General and administration
•
Fluctuations in general and administration expense for all comparable periods were due to the timing of expenditures and allocations from our
corporate segment.
Current income taxes
• Given the significant level of investment in Corrib and the resulting tax pools, we do not expect to incur current income taxes in the Ireland
Business Unit for the foreseeable future.
25
Vermilion Energy Inc.
AUSTRALIA BUSINESS UNIT
2017 Annual Report
Overview
• Entered Australia in 2005.
• Hold a 100% operated working interest in the Wandoo field, located approximately 80 km offshore on the northwest shelf of Australia.
• Production is operated from two off-shore platforms, and originates from 18 well bores and five lateral sidetrack wells.
• Wells that utilize horizontal legs (ranging in length from 500 to 3,000 plus metres) are located 600 metres below the seabed in approximately 55
metres of water depth.
Operational and financial review
Australia business unit
($M except as indicated)
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
2017 vs.
2016
Three Months Ended
% change
Year Ended
% change
Production
Crude oil (bbls/d)
Sales
Crude oil (bbls/d)
Inventory (mbbls)
Opening crude oil inventory
Crude oil production
Crude oil sales
Closing crude oil inventory
Activity
Capital expenditures
Gross wells drilled
Net wells drilled
Financial results
Sales
Operating
General and administration
Current income taxes
Fund flows from operations
Netbacks ($/boe)
Sales
Operating
General and administration
PRRT
Corporate income taxes
Fund flows from operations netback
Reference prices
Dated Brent (US $/bbl)
Dated Brent ($/bbl)
4,993
5,473
6,388
(9)%
(22)%
5,770
6,304
4,707
5,722
6,038
(18)%
(22)%
5,717
6,197
108
459
(433)
134
7,192
—
—
36,086
(12,172)
(3,193)
(5,327)
15,394
83.32
(28.11)
(7.37)
(8.25)
(4.05)
35.54
61.39
78.05
131
503
(526)
108
10,154
—
—
35,257
(12,292)
(1,675)
(4,538)
16,752
66.97
(23.35)
(3.18)
(8.25)
(0.37)
31.82
52.08
65.22
82
588
(555)
115
5,236
—
—
38,352
(14,905)
(1,998)
(4,271)
17,178
69.05
(26.83)
(3.60)
(2.82)
(4.87)
30.93
49.46
65.97
115
2,106
(2,087)
134
29,942
—
—
75
2,307
(2,267)
115
59,910
2.00
2.00
154,391
(50,139)
(8,194)
(24,355)
71,703
136,835
(47,507)
(6,400)
(9,090)
73,838
73.99
(24.03)
(3.93)
(9.50)
(2.17)
34.36
54.27
70.44
60.33
(20.95)
(2.82)
(0.69)
(3.32)
32.55
43.69
57.92
(29)%
37 %
2 %
(1)%
91 %
17 %
(8)%
24 %
20 %
132 %
— %
995 %
12 %
18 %
20 %
(6)%
(18)%
60 %
25 %
(10)%
21 %
5 %
105 %
193 %
(17)%
15 %
24 %
18 %
(8)%
(8)%
(50)%
13 %
6 %
28 %
168 %
(3)%
23 %
15 %
39 %
1,277 %
(35)%
6 %
24 %
22 %
Production
• Q4 2017 production decreased 9% quarter-over-quarter and 22% year-over-year, primarily due to planned maintenance during the quarter, which
resulted in eight days of downtime. Full year 2017 production decreased 8% versus 2016.
• Production volumes are managed within corporate targets while meeting customer demands and the requirements of long-term supply
agreements.
• We continue to plan for long-term annual production levels of approximately 6,000 bbls/d.
Activity review
•
2017 efforts were largely focused on facility enhancements, including work relating to platform life extension, and debottlenecking fluid handling
capabilities on Wandoo B.
Following our successful 2015 and 2016 drilling campaigns, we do not expect to drill any additional wells in Australia until 2019.
2018 activity will be focused on adding value through asset optimization and targeted proactive maintenance, in addition to preparing for our 2019
planned drilling campaign.
•
•
26
Vermilion Energy Inc.
2017 Annual Report
Sales
• Crude oil in Australia is priced with reference to Dated Brent.
• Q4 2017 sales per boe increased versus Q3 2017 and Q4 2016, consistent with an increase in the Dated Brent reference price. This increase in
price was offset by lower sales volumes in the current quarter versus the comparable quarters, resulting in relatively consistent sales.
• Sales per boe for the year ended December 31, 2017 increased versus the prior year, consistent with an increase in the Dated Brent reference
price. This increase in price was partially offset by lower sales volumes in the current year.
Royalties and transportation
• Our production in Australia is not subject to royalties or transportation expense as crude oil is sold directly at the Wandoo B platform.
Operating
• Operating expense on a per unit basis increased in Q4 2017 versus Q3 2017 due to lower sales volumes. On a dollar basis, operating expense
•
was relatively consistent.
For the three months and year ended December 31, 2017, operating expense on a per unit basis increased versus the comparable periods in the
prior year due to lower sales volumes in the current periods. On a dollar basis, fluctuations in operating expense versus the comparable periods
were due to the timing of maintenance work.
General and administration
•
Fluctuations in general and administration expense for all comparable periods are primarily due to the timing of expenditures and allocations from
our corporate segment. The increase in Q4 2017 over the prior quarter and prior year was primarily due to additional costs associated with the
evaluation of a discontinued acquisition opportunity.
Current income taxes
•
In Australia, current income taxes include both PRRT and corporate income taxes. PRRT is a profit based tax applied at a rate of 40% on sales
less eligible expenditures, including operating expenses and capital expenditures. Corporate income taxes are applied at a rate of 30% on taxable
income after eligible deductions, which include PRRT paid.
• Current income taxes in Q4 2017 and for the year ended December 31, 2017 versus the comparative periods were higher mainly due to increased
pre-tax fund flows from operations.
27
Vermilion Energy Inc.
UNITED STATES BUSINESS UNIT
2017 Annual Report
Overview
• Entered the United States in September 2014.
•
•
Interests include approximately 97,200 net acres of land (97% undeveloped) in the Powder River Basin of northeastern Wyoming.
Tight oil development targeting the Turner Sand at a depth of approximately 1,500 metres.
Operational and financial review
Three Months Ended
% change
Year Ended
United States business unit
($M except as indicated)
Dec 31,
2017
Sep 30,
2017
Dec 31,
2016
Q4/17 vs.
Q3/17
Q4/17 vs.
Q4/16
Dec 31,
2017
Dec 31,
2016
% change
2017 vs.
2016
Production and sales
Crude oil (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Activity
Capital expenditures
Acquisitions
Gross wells drilled
Net wells drilled
Financial results
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations netback
Realized prices
Crude oil ($/bbl)
NGLs ($/bbl)
Natural gas ($/mmbtu)
Total ($/boe)
Reference prices
WTI (US $/bbl)
WTI ($/bbl)
Henry Hub (US $/mmbtu)
Henry Hub ($/mmbtu)
667
43
0.29
758
1,018
91
—
—
4,350
(1,196)
(15)
(397)
(1,274)
1,468
62.40
(17.16)
(0.21)
(5.70)
(18.28)
21.05
67.15
41.25
2.48
62.40
55.40
70.43
2.93
3.73
880
56
0.64
1,043
1,362
1,250
—
—
4,771
(1,321)
(26)
(629)
(935)
1,860
49.72
(13.77)
(0.27)
(6.56)
(9.74)
19.38
55.74
26.35
2.07
49.72
48.20
60.37
3.00
3.76
362
23
0.18
414
4,037
377
1.00
1.00
2,041
(611)
—
(301)
(877)
252
53.58
(16.05)
—
(7.91)
(23.02)
6.60
59.09
19.48
1.93
53.58
49.29
65.75
2.98
3.98
(24)%
(23)%
(55)%
(27)%
84 %
87 %
61 %
83 %
(25)%
(75)%
(9)%
(9)%
(42)%
(37)%
36 %
(21)%
26 %
25 %
(22)%
(13)%
88 %
9 %
20 %
57 %
20 %
26 %
15 %
17 %
(2)%
(1)%
113 %
96 %
100 %
32 %
45 %
483 %
16 %
7 %
100 %
(28)%
(21)%
219 %
14 %
112 %
28 %
16 %
12 %
7 %
(2)%
(6)%
666
50
0.39
781
19,074
3,403
3.00
3.00
15,355
(4,276)
(41)
(1,698)
(4,341)
4,999
53.84
(14.99)
(0.14)
(5.95)
(15.22)
17.54
60.07
25.11
2.05
53.84
50.95
66.13
3.11
4.04
393
29
0.21
457
13,539
5,935
1.00
1.00
7,314
(2,167)
—
(1,314)
(3,624)
209
43.70
(12.95)
—
(7.85)
(21.65)
1.25
49.86
7.38
0.85
43.70
43.32
57.42
2.46
3.27
69 %
72 %
86 %
71 %
41 %
110 %
97 %
100 %
29 %
20 %
2,292 %
23 %
16 %
100 %
(24)%
(30)%
1,303 %
20 %
240 %
141 %
23 %
18 %
15 %
26 %
24 %
Production
• Q4 2017 production decreased 27% from the prior quarter as a result of depleted flush production from the three (3.0 net) wells placed on
production during Q2 2017 and due to a force majeure event at a third-party gas plant. Fourth quarter production increased 83% year-over-year
as a result of the 2017 drilling program.
Full year 2017 production increased 71% from 2016 as a result of our 2017 drilling program.
•
Activity
•
2017 activity was focused on drilling three (3.0 net) horizontal wells targeting the light oil bearing Turner Sand in the Powder River Basin. The
wells were completed late in the first quarter and into the second quarter with fracs ranging from 31 to 40 stages per well.
28
Vermilion Energy Inc.
2017 Annual Report
The price of crude oil in the United States is directly linked to WTI, but is also subject to market conditions in the United States.
Sales
•
• Q4 2017 sales per boe increased versus Q3 2017, consistent with an increase in the WTI reference price.
•
For the three months and year ended December 31, 2017, sales per boe increased relative to the comparable periods in the prior year, consistent
with stronger crude oil pricing.
Royalties
• Our production in the United States is subject to federal and private royalties, severance tax, and ad valorem tax.
• Royalties (including severance and ad valorem taxes) as a percentage of sales are approximately 28%, and remained relatively consistent in Q4
•
2017 as compared to Q3 2017.
For the three months and year ended December 31, 2017, royalties as a percentage of sales decreased to approximately 28% from approximately
30% in the comparable periods in the prior year. This decrease is a result of our purchase of overriding royalty interests (ranging from 0.83% to
5.00%) for US$1.5 million, effective January 1, 2017. On a go-forward basis, we expect royalties as a percentage of sales to remain at
approximately 28%.
Transportation
•
Transportation expense in the United States relates to the delivery of crude oil and condensate production to major pipelines where legal title
transfers.
Fluctuations in transportation expense for all periods presented relate to fluctuations in production subject to trucking costs.
•
Operating
• Operating expense on a per unit and dollar basis decreased in Q4 2017 as compared to Q3 2017 due to the timing of maintenance work.
•
For the three months and year ended December 31, 2017, operating expense on a per unit basis decreased versus the comparable periods in
the prior year due to the impact of higher volumes. In dollars, the increase in operating expense in both periods was attributable to higher
production.
General and administration
•
Fluctuations in general and administration expense for all comparable periods were due to the timing of expenditures and allocations from our
corporate segment.
Current income taxes
• As a result of our tax pools in the United States, we do not expect to incur current income taxes in the US Business Unit for the foreseeable
future.
29
Vermilion Energy Inc.
CORPORATE
2017 Annual Report
Overview
• Our Corporate segment includes costs related to our global hedging program, financing expenses, and general and administration expenses that
are primarily incurred in Canada and are not directly related to the operations of our business units. Expenditures relating to our activities in
Central and Eastern Europe are also included in the Corporate segment.
Financial review
CORPORATE
($M)
Activity
Capital expenditures
Acquisitions
Financial results
General and administration (expense) recovery
Current income taxes
Interest expense
Realized (loss) gain on derivatives
Realized foreign exchange gain (loss)
Realized other income
Fund flows from operations
Three Months Ended
Year Ended
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
1,295
2,207
(1,532)
(542)
(13,710)
(7,493)
2,899
166
(20,212)
4,653
—
(1,834)
480
(13,400)
8,723
(4,110)
214
(9,927)
445
322
1,987
(370)
(14,410)
1,920
1,291
120
(9,462)
7,728
2,247
(6,350)
(527)
(57,313)
4,721
2,316
674
(56,479)
863
2,644
2,733
(1,097)
(56,957)
65,376
4,041
205
14,301
General and administration
•
Fluctuations in general and administration costs for the three months and year ended December 31, 2017 versus all comparable periods were
due to allocations to the various business unit segments.
Current income taxes
•
Taxes in our corporate segment relate to holding companies that pay current taxes in foreign jurisdictions.
Interest expense
•
•
The decrease in interest expense for the three months ended December 31, 2017 versus the comparable period in the prior year was due to
lower drawings on the revolving credit facility.
The increase in interest expense for the year ended December 31, 2017 versus the prior year was due to the issuance of the senior unsecured
notes in Q1 2017, which bear interest at a higher fixed rate compared to the variable rates under the revolving credit facility. The impact of the
higher fixed rates was partially offset by lower drawings on the revolving credit facility and lower standby fees from a voluntary reduction of the
available credit on the revolving credit facility from $2.0 billion to $1.4 billion.
Realized gain or loss on derivatives
•
• A listing of derivative positions as at December 31, 2017 is included in “Supplemental Table 2” of this MD&A.
The realized gain on derivatives for the year ended December 31, 2017 related primarily to amounts received on European natural gas hedges.
30
Vermilion Energy Inc.
FINANCIAL PERFORMANCE REVIEW
($M except per share)
Total assets
Long-term debt
Petroleum and natural gas sales
Net earnings (loss)
Net earnings (loss) per share
Basic
Diluted
Cash dividends ($/share)
($M except per share)
Petroleum and natural gas sales
Net (loss) earnings
Net (loss) earnings per share
Basic
Diluted
2017 Annual Report
Year Ended
Dec 31,
2016
Dec 31,
2017
Dec 31,
2015
3,974,965 4,087,184 4,209,220
1,270,330 1,362,192 1,162,998
1,098,838
939,586
62,258
(217,302)
882,791
(160,051)
0.52
0.51
2.58
(1.38)
(1.38)
2.58
(1.98)
(1.98)
2.58
Three Months Ended
Dec 31,
2017
317,341
8,645
Sep 30,
2017
248,505
(39,191)
Jun 30,
2017
271,391
48,264
Mar 31,
2017
261,601
44,540
Dec 31,
2016
259,891
(4,032)
Sep 30,
2016
232,660
(14,475)
Jun 30,
2016
212,855
(55,696)
Mar 31,
2016
177,385
(85,848)
0.07
0.07
(0.32)
(0.32)
0.40
0.39
0.38
0.37
(0.03)
(0.03)
(0.12)
(0.12)
(0.48)
(0.48)
(0.76)
(0.76)
The following table shows a reconciliation from fund flows from operations to net earnings (loss):
Three Months Ended
Year Ended
Fund flows from operations
Equity based compensation
Unrealized loss on derivative instruments
Unrealized foreign exchange gain (loss)
Unrealized other expense
Accretion
Depletion and depreciation
Deferred tax
Gain on acquisition
Impairments
Net earnings (loss)
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
510,791
(69,235)
(137,993)
(792)
(131)
(24,783)
(528,002)
82,855
22,001
(14,762)
(160,051)
149,582
(19,489)
(74,943)
(2,457)
—
(6,308)
(126,855)
54,437
22,001
—
(4,032)
130,755
(12,858)
(24,198)
(3,016)
(200)
(6,850)
(120,826)
(1,998)
—
—
(39,191)
181,253
(16,087)
(80,012)
40,660
(197)
(6,991)
(129,179)
19,198
—
—
8,645
602,565
(61,579)
(1,062)
71,742
(637)
(26,971)
(491,683)
(30,117)
—
—
62,258
Fluctuations in net income from period-to-period are caused by changes in both cash and non-cash based income and charges. Cash based items
are reflected in fund flows from operations. Non-cash items include: equity based compensation expense, unrealized gains and losses on derivative
instruments, unrealized foreign exchange gains and losses, accretion, depletion and depreciation expense, and deferred taxes. In addition, non-cash
items may also include gains resulting from business combinations or charges resulting from impairment or impairment reversals.
Equity based compensation
Equity based compensation expense relates primarily to non-cash compensation expense attributable to long-term incentives granted to directors,
officers, and employees under the Vermilion Incentive Plan (“VIP”).
Equity based compensation expense increased in Q4 2017 compared to Q3 2017 due to a revision of performance estimates. For the three months
and year ended December 31, 2017, equity based compensation decreased versus the comparable periods in 2016 due to a reduction in the value of
awards outstanding under the VIP.
31
Vermilion Energy Inc.
2017 Annual Report
Unrealized gain or loss on derivative instruments
Unrealized gain or loss on derivative instruments arise as a result of changes in future commodity price forecasts. As Vermilion uses derivative
instruments to manage the commodity price exposure of our future crude oil and natural gas production, we will normally recognize unrealized gains
on derivative instruments when future commodity price forecasts decline and vice-versa.
For the three months ended December 31, 2017, we recognized an unrealized loss on derivative instruments of $80.0 million. This loss primarily
related to crude oil and European natural gas derivative instruments for 2018 and 2019, partially offset by unrealized gains on our North American
natural gas derivative instruments for 2018.
For the year ended December 31, 2017, we recognized an unrealized loss on derivative instruments of $1.1 million. This unrealized loss largely related
to crude oil derivative instruments for 2018, as well as the aforementioned offsetting cross-currency interest rate swap entered into in Q4 2017. This
loss was almost entirely offset by the reversal of the net derivative liability position of $69.7 million on our balance sheet as at December 31, 2016, as
well as unrealized gains on North American natural gas derivative instruments for 2018.
Unrealized foreign exchange gain or loss
As a result of Vermilion’s international operations, Vermilion has monetary assets and liabilities denominated in currencies other than the Canadian
dollar. These monetary assets and liabilities include cash, receivables, payables, long-term debt, derivative instruments and intercompany loans.
These monetary assets primarily relate to Euro denominated intercompany loans from Vermilion Energy Inc. to our international subsidiaries. These
monetary liabilities primarily relate to our US$300.0 million senior unsecured notes.
Unrealized foreign exchange gains and losses result from translating these monetary assets and liabilities from their underlying currency to the
Canadian dollar. Unrealized foreign exchange primarily results from the translation of Euro denominated intercompany loans and US dollar
denominated long-term debt. As such, an appreciation in the Euro against the Canadian dollar will result in an unrealized foreign exchange gain while
an appreciation in the US dollar against the Canadian dollar will result in an unrealized foreign exchange loss (and vice-versa).
For the three months ended December 31, 2017, the impact of the Canadian dollar weakening against the Euro was more significant than the impact
of the Canadian dollar weakening against the US dollar, resulting in an unrealized foreign exchange gain. For the year ended December 31, 2017,
the Canadian dollar weakened against the Euro and strengthened against the US dollar, resulting in an unrealized foreign exchange gain.
As at December 31, 2017, a $0.01 appreciation of the Euro against the Canadian dollar would result in a $4.6 million increase to net earnings. In
contrast, a $0.01 appreciation of the US dollar against the Canadian dollar would result in a $2.2 million decrease to net earnings.
Accretion
Accretion expense is recognized to update the present value of the asset retirement obligation balance. Accretion expense was relatively consistent
with all comparative periods.
Depletion and depreciation
Depletion and depreciation expense is recognized to allocate the cost of capital assets over the useful life of the respective assets. Depletion and
depreciation expense per unit of production is determined for each depletion unit (which are groups of assets within a specific production area that
have similar economic lives) by dividing the sum of the net book value of capital assets and future development costs by total proved plus probable
reserves.
Fluctuations in depletion and depreciation expense are primarily the result of changes in produced crude oil and natural gas volumes and changes in
depletion and depreciation per unit. Fluctuations in depletion and depreciation per unit are the result of changes in reserves, future development costs,
and relative production mix.
Depletion and depreciation on a per boe basis for Q4 2017 of $19.33 was consistent with $19.28 in Q3 2017. For the three months and year ended
December 31, 2017, depletion and depreciation on a per boe basis of $19.33 and $19.87 were lower than $22.42 and $22.65 in the respective
comparable periods in 2016 due to reduced depletion and depreciation rates as a result of increased reserves and lower estimated future development
costs.
Deferred tax
On our balance sheet, deferred tax assets arise when the tax basis of an asset exceeds its accounting basis (known as a deductible temporary
difference). Conversely, deferred tax liabilities arise when the tax basis of an asset is less than its accounting basis (known as a taxable temporary
difference). Deferred tax assets are recognized only to the extent that it is probable that there are future taxable profits against which the deductible
temporary difference can be utilized. Deferred tax assets and liabilities are measured at the enacted or substantively enacted tax rate that is expected
to apply when the asset is realized or the liability is settled.
32
Vermilion Energy Inc.
2017 Annual Report
As such, fluctuations in deferred tax expenses and recoveries primarily arise as a result of: changes in the accounting basis of an asset or liability
without a corresponding tax basis change (e.g. when derivative assets and liabilities are marked-to-market or when accounting depletion differs from
tax depletion), changes in available tax losses (e.g. if they are utilized to offset taxable income), changes in estimated future taxable profits resulting
in a de-recognition or re-recognition of deferred tax assets, and changes in enacted or substantively enacted tax rates.
In Q4 2017, a $19.2 million deferred tax recovery primarily resulted from the impact of the adoption by the French Parliament of the Finance Law for
2018. The Finance Law for 2018 included progressive reductions of the corporate tax rate from 34.43% to 25.825% by 2022 and thus reduced the
effective tax rate applied against Vermilion's taxable temporary differences in France. For the year ended December 31, 2017, the deferred tax
expense of $30.1 million related to the de-recognition of a portion of non-expiring tax loss pools in Ireland as there is uncertainty as to the Company’s
ability to fully utilize such losses based on forecasted commodity prices in effect as at December 31, 2017, partially offset by the aforementioned
change in effective tax rates in France.
TAXES
Current income tax rates
Vermilion pays corporate income taxes in France, the Netherlands, and Australia. In addition, Vermilion pays Petroleum Resource Rent Tax ("PRRT")
in Australia. PRRT is a profit based tax applied at a rate of 40% on sales less operating expenses, capital expenditures, and other eligible expenditures.
PRRT is deductible in the calculation of taxable income in Australia.
For 2017 and 2016, taxable income was subject to corporate income tax at the following rates:
2016
Jurisdiction
27.0%
Canada
34.4%
France
Netherlands (1)
50.0%
Germany
24.2%
25.0%
Ireland
30.0%
Australia
United States
35.0%
(1) In the Netherlands, an additional 10% uplift deduction is allowed against taxable income that is applied to operating expenses, eligible general and
administration expenses and tax deductions for depletion and abandonment retirement obligations.
2017
27.0%
34.4%
50.0%
26.3%
25.0%
30.0%
35.0%
Tax legislation changes
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law in the United States. The Tax Cuts and Jobs Act reduces the U.S. federal
corporate income tax rate to 21%.
On December 21, 2017, the French Parliament approved the Finance Bill for 2018. The Finance Bill for 2018 provides for a progressive decrease of
the French corporate income tax rate from 34.43% to 25.825% by 2022, with the first reduction planned for 2019 to 32.02%.
Tax pools
As at December 31, 2017, we had the following tax pools:
Total
Other
Tax Losses
Oil & Gas Assets
($M)
Canada
France
Netherlands
Germany
Ireland
Australia
United States
Total
(1) Deduction calculated using various declining balance rates
(2) Deduction calculated using a combination of straight-line over the assets life and unit of production method
(3) Deduction calculated using a unit of production method
(4) Tax losses can be carried forward at 100% against taxable income
(5) Tax losses carried forward are available to offset the first €1 million of taxable income and 50% of taxable profits in excess each taxation year
(6) Tax losses carried forward are available to offset the first €1 million of taxable income and 60% of taxable profits in excess each taxation year
914,071 (1)
332,435 (2)
78,417 (3)
184,549 (3)
—
266,208 (1)
37,022 (1)
517,687 (4)
10,688 (5)
7,078 (4)
88,712 (6)
1,327,743 (4)
20,113
—
—
18,878
—
—
1,783
40,774
1,451,871
343,123
85,495
292,139
1,327,743
266,208
82,110
3,848,689
—
43,305 (4)
1,812,702
1,995,213
33
Vermilion Energy Inc.
FINANCIAL POSITION REVIEW
2017 Annual Report
Balance sheet strategy
We believe that our balance sheet supports our defined growth initiatives and our focus is on managing and maintaining a conservative balance sheet.
To ensure that our balance sheet continues to support our defined growth initiatives, we regularly review whether forecasted fund flows from operations
is sufficient to finance planned capital expenditures, dividends, and abandonment and reclamation expenditures. To the extent that forecasted fund
flows from operations is not expected to be sufficient to fulfill such expenditures, we will evaluate our ability to finance any shortfall with debt (including
borrowing using the unutilized capacity of our existing revolving credit facility), issue equity, or by reducing some or all categories of expenditures to
ensure that total expenditures do not exceed available funds.
To ensure that we maintain a conservative balance sheet, we monitor the ratio of net debt to fund flows from operations. As at December 31, 2017
our ratio of net debt to trailing fund flows from operations was 2.3 (2016 - 2.8) and was 1.9 based on annualized Q4 2017 fund flows from operations.
We remain focused on maintaining and strengthening our balance sheet by aligning our exploration and development capital budget with forecasted
fund flows from operations to target a payout ratio (a non-GAAP financial measure) of at or less than 100%. We continually monitor for changes in
forecasted fund flows from operations as a result of changes to forward commodity prices and as appropriate we will make adjustments to our
exploration and development capital plans. As a result of our focus on this payout ratio target, we intend for the ratio of net debt to fund flows from
operations to trend towards 1.5 over time.
Net debt
Net debt is reconciled to long-term debt, as follows:
($M)
Long-term debt
Current liabilities
Current assets
Net debt
Ratio of net debt to fund flows from operations
Ratio of net debt to fourth quarter annualized fund flows from operations
As at
Dec 31, 2017
1,270,330
363,306
(261,846)
1,371,790
2.3
1.9
Dec 31, 2016
1,362,192
290,862
(225,906)
1,427,148
2.8
2.4
As at December 31, 2017, long term debt decreased to $1.27 billion (December 31, 2016 - $1.36 billion) as fund flows from operations generated in
excess of expenditures was used to reduce debt. This decrease in long-term debt decreased net debt from $1.43 billion at December 31, 2016 to
$1.37 billion at December 31, 2017. Stronger commodity prices and higher production versus the prior period increased fund flows from operations,
resulting in the ratio of net debt to fund flows from operations decreasing from 2.8 to 2.3.
Long term debt
The balances recognized on our balance sheet are as follows:
($M)
Revolving credit facility
Senior unsecured notes
Long-term debt
As at
Dec 31, 2017
899,595
370,735
1,270,330
Dec 31, 2016
1,362,192
—
1,362,192
Revolving Credit Facility
As at December 31, 2017, Vermilion had in place a bank revolving credit facility maturing May 31, 2021 with the following outstanding positions:
($M)
Total facility amount
Amount drawn
Letters of credit outstanding
Unutilized capacity
As at
Dec 31, 2017
1,400,000
(899,595)
(7,400)
493,005
Dec 31, 2016
2,000,000
(1,362,192)
(20,100)
617,708
In April of 2017, we negotiated an extension of our revolving credit facility with our syndicate of lenders from May 31, 2019 to May 31, 2021. Further,
as a result of projected liquidity requirements and the proceeds from our senior unsecured notes issuance, we elected to reduce the total facility amount
from $2.0 billion to $1.4 billion.
34
Vermilion Energy Inc.
2017 Annual Report
As at December 31, 2017, the revolving credit facility was subject to the following covenants:
Financial covenant
Consolidated total debt to consolidated EBITDA
Consolidated total senior debt to consolidated EBITDA
Consolidated total senior debt to total capitalization
Limit
4.0
3.5
55%
As at
Dec 31, 2017
1.87
1.3
32%
Dec 31, 2016
2.36
2.32
46%
Our covenants include financial measures defined within our revolving credit facility agreement that are not defined under IFRS. These financial
measures are defined by our revolving credit facility agreement as follows:
• Consolidated total debt: Includes all amounts classified as “Long-term debt”, and “Finance lease obligation” on our balance sheet.
• Consolidated total senior debt: Defined as consolidated total debt excluding unsecured and subordinated debt.
• Consolidated EBITDA: Defined as consolidated net earnings before interest, income taxes, depreciation, accretion and certain other non-cash
•
items.
Total capitalization: Includes all amounts on our balance sheet classified as “Shareholders’ equity” plus consolidated total debt as defined
above.
Senior Unsecured Notes
On March 13, 2017, Vermilion issued US$300 million of senior unsecured notes at par. The notes bear interest at a rate of 5.625% per annum, paid
semi-annually on March 15 and September 15, and mature on March 15, 2025. As direct senior unsecured obligations of Vermilion, the notes rank
equally in right of payment with existing and future senior indebtedness of the Company.
The senior unsecured notes were recognized at amortized cost and include the transaction costs directly related to the issuance.
Vermilion may, at its option, redeem the senior unsecured notes prior to maturity as follows:
• Prior to March 15, 2020, Vermilion may redeem up to 35% of the original principal amount of the senior unsecured notes with the proceeds of
certain equity offerings by the Company at a redemption price of 105.625% of the principal amount, plus any accrued and unpaid interest to but
excluding the applicable redemption date.
• Prior to March 15, 2020, Vermilion may redeem some or all of the senior unsecured notes at a price equal to 100% of the principal amount of the
senior unsecured notes, plus a “make-whole” premium and any accrued and unpaid interest.
• On or after March 15, 2020, Vermilion may redeem some or all of the senior unsecured notes at the redemption prices set forth in the following
table, plus any accrued and unpaid interest.
Year
2020
2021
2022
2023 and thereafter
Redemption price
104.219%
102.813%
101.406%
100.000%
Shareholders’ capital
During the year ended December 31, 2017 we maintained monthly dividends at $0.215 per share. In total, dividends declared in 2017 were $311.4
million.
The following table outlines our dividend payment history:
Date
January 2003 to December 2007
January 2008 to December 2012
January 2013 to December 31, 2013
January 2014 to Present
Monthly dividend per unit or share
$0.170
$0.190
$0.200
$0.215
35
Vermilion Energy Inc.
2017 Annual Report
Our policy with respect to dividends is to be conservative and maintain a low ratio of dividends to fund flows from operations. During low commodity
price cycles, we will initially maintain dividends and allow the ratio to rise. Should low commodity price cycles remain for an extended period of time,
we will evaluate the necessity of changing the level of dividends, taking into consideration capital development requirements, debt levels, and
acquisition opportunities.
Although we expect to be able to maintain our current dividend, fund flows from operations may not be sufficient to fund cash dividends, capital
expenditures, and asset retirement obligations. We will evaluate our ability to finance any shortfall with debt, issuances of equity, or by reducing some
or all categories of expenditures to ensure that total expenditures do not exceed available funds.
The following table reconciles the change in shareholders’ capital:
Shareholders’ Capital
Balance as at December 31, 2016
Shares issued for the Dividend Reinvestment Plan
Vesting of equity based awards
Equity based compensation
Share-settled dividends on vested equity based awards
Balance as at December 31, 2017
Number of Shares ('000s) Amount ($M)
118,263
2,429
1,060
197
170
122,119
2,452,722
110,493
69,743
9,270
8,478
2,650,706
As at December 31, 2017, there were approximately 1.7 million VIP awards outstanding. As at February 28, 2018, there were approximately 122.4
million common shares issued and outstanding.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As at December 31, 2017, we had the following contractual obligations and commitments:
($M)
Long-term debt
Operating lease obligations
Finance lease obligations
Processing and transportation agreements
Purchase obligations
Drilling and service agreements
Total contractual obligations and commitments
ASSET RETIREMENT OBLIGATIONS
Less than 1 year
21,295
10,716
6,680
26,002
21,105
10,255
96,053
1 - 3 years
42,339
19,129
10,207
34,343
16,649
46,129
168,796
3 - 5 years After 5 years
429,274
28
3,351
35,153
—
5,110
472,916
947,534
10,303
4,665
10,960
1,664
20,132
995,258
Total
1,440,442
40,176
24,903
106,458
39,418
81,626
1,733,023
As at December 31, 2017, asset retirement obligations were $517.2 million compared to $525.0 million as at December 31, 2016.
The decrease in asset retirement obligations is largely attributable to an extension to the estimated timing of abandonment spending. This decrease
was partially offset by accretion expense and a weakening of the Canadian dollar against the Euro.
Vermilion has estimated the asset retirement obligations based on a total undiscounted future liability of $1.6 billion (2016 - $1.4 billion). These
payments are expected to be made between 2018 and 2067, with the majority of spending occurring between 2027 and 2034 ($0.6 billion) and between
2063 and 2067 ($0.4 billion). Inflation rates used in determining the cash flow estimates were between 0.6% and 2.2% (2016 - between 0.5% and
2.2%). Vermilion calculated the present value of the obligations using a credit-adjusted risk-free rate, calculated using a credit spread of 3.8% (2016
- 3.8%) added to risk-free rates based on long-term, risk-free government bonds.
A 0.5% increase/decrease in the discount rate applied to asset retirement obligations would decrease/increase asset retirement obligations by
approximately $40.0 million. A one year increase/decrease in the expected timing of abandonment spend would decrease/increase asset retirement
obligations by approximately $20.0 million.
RISKS AND UNCERTAINTIES
Crude oil and natural gas exploration, production, acquisition and marketing operations involve a number of risks and uncertainties including financial
risks and uncertainties. These include fluctuations in commodity prices, exchange rates and interest rates as well as uncertainties associated with
reserve and resource volumes, sales volumes and government regulatory and income tax regime changes. These and other related risks and
uncertainties are discussed in additional detail below.
36
Vermilion Energy Inc.
2017 Annual Report
Commodity prices
Our operational results and financial condition are dependent on the prices received for crude oil and natural gas production. Crude oil and natural
gas prices have fluctuated significantly during recent years and are determined by supply and demand factors, including weather and general economic
conditions as well as conditions in other crude oil and natural gas producing regions.
Exchange rates
Much of our revenue stream is priced in US dollars and as such an increase in the strength of the Canadian dollar relative to the US dollar may result
in the receipt of fewer Canadian dollars with respect to our production. In addition, we incur expenses and capital costs in US dollars, Euros and
Australian dollars and accordingly, the Canadian dollar equivalent of these expenditures as reported in our financial results is impacted by the prevailing
exchange rates at the time the transaction occurs. We monitor risks associated with exchange rates and, when appropriate, use derivative financial
instruments to manage our exposure to these risks.
Production and sales volumes
The operation of crude oil and natural gas wells and facilities involves a number of operating and natural hazards which may result in blowouts,
environmental damage and other unexpected or dangerous conditions resulting in damage to us and possible liability to third parties. We maintain
liability insurance, where available, in amounts consistent with industry standards. Business interruption insurance may also be purchased for selected
operations, to the extent that such insurance is commercially viable. We may become liable for damages arising from such events against which we
cannot insure or against which we may elect not to insure because of high premium costs or other reasons. Costs incurred to repair such damage or
pay such liabilities may materially impact our financial results.
Continuing production from a property, and to some extent the marketing of produced volumes, is largely dependent upon the ability of the operator of
the property. To the extent the operator fails to perform these functions properly, revenue may be reduced. Payments from production generally flow
through the operator and there is a risk of delay and additional expense in receiving such revenues if the operator becomes insolvent. Although
satisfactory title reviews are generally conducted in accordance with industry standards, such reviews do not guarantee or certify that a defect in the
chain of title may not arise to defeat our claim to certain properties. Such circumstances could negatively affect our financial results.
An increase in operating costs or a decline in our production level could have an adverse effect on our financial results. The level of production may
decline at rates greater than anticipated due to unforeseen circumstances, many of which are beyond our control. A significant decline in production
could result in materially lower revenues.
Interest rates
An increase in interest rates could result in a significant increase in the amount we pay to service debt.
Reserve volumes
Our reserve volumes and related reserve values support the carrying value of our crude oil and natural gas assets on the consolidated balance sheets
and provide the basis to calculate the depletion of those assets. There are numerous uncertainties inherent in estimating quantities of reserves and
future net revenues to be derived therefrom, including many factors beyond our control. These include a number of assumptions relating to factors
such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of
production, future prices of crude oil, NGLs and natural gas, operating expenses, well abandonment and salvage values, royalties and any government
levies that may be imposed over the producing life of the reserves. These assumptions were based on estimated prices in use at the date the evaluation
was prepared, and many of these assumptions are subject to change and are beyond our control. Actual production and income derived therefrom
will vary from these evaluations, and such variations could be material.
Asset retirement obligations
Our asset retirement obligations are based on environmental regulations and estimates of future costs and the timing of expenditures. Changes in
environmental regulations, the estimated costs associated with reclamation activities and the related timing may impact our financial position and
results of operations.
Government regulation and income tax regime
Our operations are governed by many levels of government, including municipal, state, provincial and federal governments. We are subject to laws
and regulations regarding environment, health and safety issues, lease interests, taxes and royalties, among others. Failure to comply with the
applicable laws can result in significant increases in costs, penalties and even losses of operating licences. The regulatory process involved in each
of the countries in which we operate is not uniform and regulatory regimes vary as to complexity, timeliness of access to, and response from, regulatory
bodies and other matters specific to each jurisdiction. If regulatory approvals or permits are delayed or not obtained, there can also be delays or
abandonment of projects and decreases in production and increases in costs, potentially resulting in us being unable to fully execute our strategy.
Governments may also amend or create new legislation and regulatory bodies may also amend regulations or impose additional requirements which
could result in increased capital, operating and compliance costs.
There can be no assurance that income tax laws and government incentive programs relating to the crude oil and natural gas industry in Canada and
the foreign jurisdictions in which we operate, will not be changed in a manner which adversely affects the results of our operations.
37
Vermilion Energy Inc.
2017 Annual Report
A change in the royalty regime resulting in an increase in royalties would reduce our net earnings and could make future capital expenditures or our
operations uneconomic and could, in the event of a material increase in royalties, make it more difficult to service and repay outstanding debt. Any
material increase in royalties would also significantly reduce the value of the associated assets.
FINANCIAL RISK MANAGEMENT
To mitigate the aforementioned risks whenever possible, we seek to hire personnel with experience in specific areas. In addition, we provide continued
training and development to staff to further develop their skills. When appropriate, we use third party consultants with relevant experience to augment
our internal capabilities with respect to certain risks.
We consider our commodity price risk management program as a form of insurance that protects our cash flow and rate of return. The primary objective
of the risk management program is to support our dividends and our internal capital development program. The level of commodity price risk
management that occurs is dependent on the amount of debt that is carried. When debt levels are higher, we will be more active in protecting our
cash flow stream through our commodity price risk management strategy.
When executing our commodity price risk management programs, we use derivative financial instruments encompassing over-the-counter financial
structures as well as fixed and collar structures to economically hedge a part of our physical crude oil and natural gas production. We have strict
controls and guidelines in relation to these activities and contract principally with counterparties that have investment grade credit ratings.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect
reported assets, liabilities, income and expenses, as well as disclosures of any possible contingencies. These estimates and assumptions are
developed based on the best available information which management believed to be reasonable at the time such estimates and assumptions were
made. As such, these assumptions are uncertain at the time estimates are made and could change, resulting in a material impact on our consolidated
financial statements or financial performance. Estimates are reviewed by management on an ongoing basis, and as a result, certain estimates may
change from period to period due to the availability of new information or changes in circumstances. Additionally, as a result of the unique
circumstances of each jurisdiction in which we operate, the critical accounting estimates may affect one or more jurisdictions.
The following discussion outlines what management believes to be the most critical accounting policies involving the use of estimates and assumptions.
• Asset retirement obligations: Asset retirement obligations are based on judgments regarding regulatory requirements, estimates of future costs,
and the expected timing of expenditures. The carrying balance of asset retirement obligations and accretion expense may differ due to changes
in: laws and regulations, technology, the expected timing of expenditures, and market conditions affecting the discount rate applied.
• Determination of CGUs: CGU determination is subject to management’s judgment of the lowest level at which there are identifiable cash inflows
that are largely independent of the cash inflows of other groups of assets. The factors used by Vermilion to determine CGUs vary by jurisdiction
due to their unique operating and geographic conditions. In general, Vermilion will assess the following factors: geographic proximity of the assets
within a group to one another, geographic proximity of the group of assets to other groups of assets, homogeneity of the production from the
group of assets and the sharing of infrastructure used to process and/or transport production. The composition of CGUs can directly impact the
calculated recoverable amount of a CGU and the recorded impairment loss or recovery.
•
• Assessment of impairments or recovery of previous impairments: The calculation of the recoverable amount of a CGU is based on market factors
and estimates of reserves and resources. Reserve and resource estimates are based on: engineering data, estimated future commodity prices,
expected future rates of production, and assumptions regarding the timing and amount of future expenditures. Changes in these judgments,
estimates and assumptions can directly impact the calculated recoverable amount of a CGU and the recorded impairment loss or recovery.
Income Taxes: Tax interpretations, regulations, and legislation in the various jurisdictions in which Vermilion and its subsidiaries operate are
subject to change and interpretation. Changes in laws and interpretations can affect the timing of the reversal of temporary tax differences, the
tax rates in effect when such differences reverse and Vermilion’s ability to use tax losses and other tax pools in the future. The Company’s income
tax filings are subject to audit by taxation authorities in numerous jurisdictions and the results of such audits may increase or decrease the tax
liability. The determination of tax amounts recognized in the consolidated financial statements are based on management’s assessment of the
tax positions, which includes consideration of their technical merits, communications with tax authorities and management’s view of the most
likely outcome.
38
Vermilion Energy Inc.
OFF BALANCE SHEET ARRANGEMENTS
2017 Annual Report
We have certain lease agreements that are entered into in the normal course of operations, including operating leases for which no asset or liability
value has been assigned to the consolidated balance sheet as at December 31, 2017.
We have not entered into any guarantee or off balance sheet arrangements that would materially impact our financial position or results of operations.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
2018 Accounting Standards
On January 1, 2018, Vermilion will adopt IFRS 9 "Financial Instruments" and IFRS 15 "Revenue from Contracts with Customers".
IFRS 9 includes a new classification and measurement approach for financial assets and a forward-looking 'expected credit loss' model. Vermilion
expects that there will be no material impact as a result of adopting IFRS 9. These changes are discussed in greater detail below:
• New classification and measurement approach for financial assets: IFRS 9 contains three classifications for financial assets - measured at
amortized cost, fair value through other comprehensive income, and fair value through profit or loss. Vermilion's held for trading financial
instruments will be classified as fair value through profit or loss while Vermilion's loans and receivables will be classified as measured at
amortized cost. The new classification requirements are not expected to result in a change in the measured amounts of these financial
instruments.
Forward-looking 'expected credit loss' model: IFRS 9 includes a lifetime expected credit loss model that applies to Vermilion's accounts
receivable. Based on the Company's actual credit loss experience and creditworthiness of Vermilion's customers and joint operations
partners, the impact of adopting this credit loss model is not expected to be material.
•
IFRS 15 establishes a comprehensive framework for determining whether, how much, and when revenue from contracts with customers is recognized.
Vermilion's revenue consists of the sale of petroleum and natural gas to customers at specified delivery points with pricing determined based on
benchmark pricing plus or minus applicable offsets. Based on the Company's historic and outstanding contracts with customers, Vermilion anticipates
that there will be no changes to the timing, measurement, or presentation of revenue upon adoption of IFRS 15. However, there will be additional
disclosure requirements necessary to comply with IFRS 15. This additional disclosure will primarily relate to the disclosure of the disaggregation of
revenue by commodity, information which is currently available within Vermilion's Management's Discussion and Analysis.
2019 Accounting Standard
Vermilion is required to adopt IFRS 16 "Leases" by January 1, 2019. IFRS 16 requires lessees to recognize a lease obligation and right-of-use asset
for the majority of leases. On adoption, non-current assets, current liabilities, and non-current liabilities on Vermilion's consolidated balance sheet will
increase. Interest expense will be recognized on the lease obligation and lease payments will be applied against the lease obligation. This is expected
to result in a decrease to both operating expense and general and administration expense, and an increase to fund flows from operations. The
quantitative impact of the adoption of IFRS 16 is currently being evaluated.
HEALTH, SAFETY AND ENVIRONMENT
We are committed to ensuring we conduct our activities in a manner that will protect the health and safety of our employees, contractors, and the
public. Our health, safety, and environment (“HSE”) vision is to fully integrate health, safety, and environment into our business, where our culture is
recognized as a model by industry and stakeholders, resulting in a safe and healthy workplace. Our mantra is HSE: Everywhere. Everyday. Everyone.
We maintain health, safety and environmental practices and procedures in compliance with or exceeding regulatory requirements and industry
standards. All of our personnel are expected to work safely and in accordance with established regulations and procedures, and we seek to keep our
people safe and to reduce impacts to land, water and air. During 2017 we:
• Maintained clear priorities around 5 key focus areas of HSE Culture, Communication and Knowledge Management, Technical Safety
Management, Incident Prevention and Operational Stewardship & Sustainability;
• Continued comprehensive investigations of all our incidents and near misses to ensure root causes were identified and corrective actions
effectively implemented;
• Rolled out “Vermilion High 5”, an individual safety awareness initiative aimed at keeping front line workers safe;
• Conducted a company wide review of contractor management, field supervision selection and onboarding, management of new and inexperienced
workers, work procedures around mobile equipment;
Further developed and validated critical procedures and implemented fit-for-purpose training and competency programs;
Implemented a comprehensive HSE integration plan for Vermilion’s new and emerging operations;
•
•
• Reported our CO2e emissions to the CDP and have been recognized as a Climate Leadership level (A-) performer. We are one of only 18 Energy
Sector companies globally to receive a leadership score (Top 4%).
• Completed and published our Corporate Sustainability Report with emphasis on improving energy efficiency, greenhouse gas emissions
reduction and water efficiency optimization;
39
Vermilion Energy Inc.
2017 Annual Report
Further refined and expanded our enterprise wide corporate risk register;
• Managed our waste products by reducing, recycling and recovering;
• Reduced long-term environmental liabilities through decommissioning, abandoning and reclaiming well leases and facilities;
•
• Expanded a robust organization-wide HSE leadership training program to improve hazard identification and risk reduction;
• Maintained focus on our recently developed risk mitigation program around our top fatal risks and energy type exposures;
• Continued the development of a robust hazard identification and risk mitigation program specific to environmentally sensitive areas;
• Continued the development of our Corporate Process Safety Management System with emphasis on Process Hazards Analysis;
•
• Performed auditing, management inspections and workforce observations to measure compliance and identify potential hazards and apply risk
Further progressed our Asset Integrity Management System;
reduction measures;
• Developed, communicated and measured against leading and lagging HSE key performance indicators; and
• Continued risk management efforts in addition to detailed emergency-response planning.
We are a member of several organizations concerned with environment, health and safety, including numerous regional co-operatives and synergy
groups. In the area of stakeholder relations, we work to build long-term relationships with environmental stakeholders and communities.
SUSTAINABILITY
As a responsible oil and gas producer, we consistently seek to deliver long-term shareholder value by operating in an economically,
environmentally and socially sustainable manner that is recognized as a model in our industry.
Vermilion understands our stakeholders' expectations that we deliver strong financial results in a responsible and ethical way. We strive to operate in
a manner that protects the health and safety of our staff and communities, provides responsible stewardship over the environment, and treats staff,
contractors, partners and suppliers respectfully and fairly. Reflecting these priorities, we believe we are playing a meaningful role in the energy
transition that is unfolding globally, within the universal context of the United Nations Sustainable Development Goals. These Global Goals provide an
important call to action for sustainable, inclusive growth that supports an end to poverty, protection of the planet, and peace and prosperity for all
people.
Our sustainability performance demonstrates our contribution to long-term economic growth, and the way we have shown that delivering shareholder
value can go hand-in-hand with delivering sustainability. We began reporting on sustainability, or corporate social responsibility, in August 2014, using
the comprehensive option within the Global Reporting Initiative’s G4 reporting framework. We continue to report on this basis annually, as it provides
an opportunity to share how we identify our economic, environmental and social impacts, integrate their associated opportunities and risks into our
business strategies, and chart our progress.
In December 2015, we further prioritized sustainability by implementing Integrated Sustainability as one of six strategic objectives for our global
business. We believe that the integration of sustainability principles into our business is not only the right thing to do, it also increases shareholder
returns, enhances our business development opportunities and reduces long-term risks to our business model. We defined our strategic objective as
Integrated Sustainability because we believe sustainability impacts every business unit, department and employee in the company - and, in turn, they
impact our sustainability. In keeping with this approach, our Board of Directors provides oversight of Vermilion’s sustainability programs, with individual
committees offering insight and guidance on specific economic, environmental, social and governance factors.
To support our sustainability strategy, Vermilion regularly communicates with its stakeholders, and we continually monitor trends and best practices in
stakeholder engagement. As a result, we align expectations for economic success with the elements of our sustainability commitments, leading us to
prioritize our objectives as follows:
•
•
•
the safety and health of our staff and those involved directly or indirectly in our operations;
our responsibility to protect the environment. We follow the Precautionary Principle introduced in 1992 by the United Nations "Rio Declaration
on Environment and Development" by using environmental risk as part of our development decision criteria, and by continually seeking
improved environmental performance in our operations; and
economic success through a focus on operational excellence across our business, which includes technical and process excellence,
efficiency, expertise and stakeholder relations.
For more information about how we manage sustainability, including climate-related risks, please see our detailed Sustainability Report online.
Vermilion’s sustainability performance and reporting have earned consistently strong recognition from external stakeholders:
40
Vermilion Energy Inc.
Accomplishments:
2017 Annual Report
•
In 2017, Vermilion was named to the CDP (formerly Carbon Disclosure Project) Climate Leadership Level rating of (A-). We were the only
Canadian Energy Sector company, one of only two in North America, and 18 globally to achieve a Leadership Level score this year. As
context, only 9% of 6,020 companies achieved an 'A or A-' grade for performance in 2017.
• Vermilion was one of only 193 companies globally to achieve CDP Climate "A" List recognition in 2016 and the only North American energy
company on the list. Across all sectors, only three Canadian companies, including Vermilion, were awarded a position on 2016's Climate
"A" List. Vermilion was one of only five oil and gas companies in the world to be named to the Climate "A" List.
• Vermilion has earned recognition on the Corporate Knights Future 40 Responsible Corporate Leaders in Canada listing every year since the
list’s inception in 2014; in 2017, we ranked 13th, and were the highest rated oil and gas company on the list.
• Between 2016 and 2017, Vermilion's MSCI ESG (environment, social and governance) rating increased from BBB to A, and our score on
•
MSCI's Governance Metrics Report ranks Vermilion at 7.7/10 top decile performance globally.
The Montreal-based Finance and Sustainability Initiative has selected Vermilion as the winner of the FSI Competition for Best Sustainability
Report in the Non-Renewable Resources-Oil and Gas category for 2018.
CORPORATE GOVERNANCE
We are committed to a high standard of corporate governance practices, a dedication that begins at the Board level and extends throughout the
Company. We believe good corporate governance is in the best interest of our shareholders, and that successful companies are those that deliver
growth and a competitive return along with a commitment to the environment, to the communities where they operate and to their employees.
We comply with the objectives and guidelines relating to corporate governance adopted by the Canadian Securities Administrators and the Toronto
Stock Exchange. In addition, the Board monitors and considers the implementation of corporate governance standards proposed by various regulatory
and non-regulatory authorities in Canada. A discussion of corporate governance policies is included each year in our proxy materials for our annual
general meeting of shareholders, copies of which are available on SEDAR (www.sedar.com).
As a Canadian reporting issuer with securities listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”), Vermilion
Energy Inc. (“Vermilion”) is required to comply with all applicable Canadian requirements adopted by the Canadian Securities Administrators and the
TSX, and applicable rules for foreign private issuers adopted by the U.S. Securities and Exchange Commission which give effect to the provisions of
the Sarbanes-Oxley Act of 2002.
Our corporate governance practices also incorporate many “best practices” derived from those required to be followed by US domestic companies
under the NYSE listing standards. We are required by Section 303A.11 of the NYSE Listed Company Manual to identify any significant ways in which
our corporate governance practices differ from those required to be followed by US domestic companies under NYSE listing standards. We believe
that there are no such significant differences in our corporate governance practices, except as follows:
• Shareholder Approval of Equity Compensation Plans. Section 303A.8 of the NYSE Listed Company Manual requires shareholder approval of all
“equity compensation plans” and material revisions to those plans. The definition of “equity compensation plans” covers plans that provide for
the delivery of newly issued securities, and also plans which rely on securities reacquired on the market by the issuing company for the purpose
of redistribution to employees and directors. The TSX rules provide that equity compensation plans and material amendments thereto require
shareholder approval only if they involve newly issued securities and the amendments are not otherwise addressed in the plan’s amendment
procedures. In addition, the TSX rules require that every three years after institution, all unallocated options, rights or other entitlements under
equity compensation plans which does not have a fixed maximum aggregate of securities issuable must be approved by shareholders. Vermilion
follows the TSX rules with respect to shareholder approval of equity compensation plans and material revisions to those plans.
DISCLOSURE CONTROLS AND PROCEDURES
Our officers have established and maintained disclosure controls and procedures and evaluated the effectiveness of these controls in conjunction with
our filings.
As of December 31, 2017, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded and certified that our disclosure controls and procedures are
effective.
41
Vermilion Energy Inc.
2017 Annual Report
INTERNAL CONTROL OVER FINANCIAL REPORTING
A company's internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
The Chief Executive Officer and the Chief Financial Officer of Vermilion have assessed the effectiveness of Vermilion’s internal control over financial
reporting as defined in Rule 13a-15 under the US Securities Exchange Act of 1934 and as defined in Canada by National Instrument 52-109,
Certification of Disclosure in Issuers’ Annual and Interim Filings. The assessment was based on the framework in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Chief Executive Officer and the Chief
Financial Officer of Vermilion have concluded that Vermilion’s internal control over financial reporting was effective as of December 31, 2017. The
effectiveness of Vermilion’s internal control over financial reporting as of December 31, 2017 has been audited by Deloitte LLP, as reflected in their
report included in the 2017 audited annual financial statements filed with the US Securities and Exchange Commission. No changes were made to
Vermilion’s internal control over financial reporting during the year ended December 31, 2017, that have materially affected, or are reasonably likely to
materially affect, the internal controls over financial reporting.
42
Vermilion Energy Inc.
Supplemental Table 1: Netbacks
2017 Annual Report
The following table includes financial statement information on a per unit basis by business unit. Natural gas sales volumes have been converted on
a basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.
Three Months Ended Dec 31, 2017
Year Ended Dec 31, 2017
Three Months
Ended Dec 31,
2016
Year Ended
Dec 31, 2016
Crude Oil,
Condensate
& NGLs Natural Gas
$/mcf
$/bbl
51.36
(6.21)
(2.25)
(7.85)
35.05
67.08
(7.15)
(3.66)
(12.76)
43.51
56.90
—
—
56.90
63.91
(1.70)
(8.00)
(32.30)
21.91
—
—
—
—
2.34
(0.09)
(0.18)
(1.19)
0.88
1.52
(2.30)
—
—
(0.78)
7.18
(0.12)
(1.43)
5.63
6.38
(0.85)
(0.46)
(1.17)
3.90
7.19
(0.24)
(0.83)
6.12
Crude Oil,
Condensate
& NGLs Natural Gas
$/mcf
$/bbl
Canada
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Fund flows from operations netback
France
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Other income
Current income taxes
Fund flows from operations netback
Netherlands
Sales
Royalties
Operating
Operating netback
General and administration
Current income taxes
Fund flows from operations netback
Germany
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Fund flows from operations netback
Ireland
Sales
Transportation
Operating
Operating netback
General and administration
Fund flows from operations netback
55.17
(6.26)
(2.40)
(7.65)
38.86
75.13
(10.11)
(4.27)
(13.67)
47.08
66.38
—
—
66.38
72.58
(1.72)
(5.86)
(30.31)
34.69
—
—
—
—
1.88
(0.07)
(0.15)
(1.19)
0.47
—
—
—
—
—
7.87
(0.13)
(1.36)
6.38
7.07
(0.97)
(0.35)
(1.84)
3.91
8.47
(0.29)
(0.58)
7.60
Total
$/boe
31.21
(3.07)
(1.60)
(7.38)
19.16
(0.84)
18.32
75.13
(10.11)
(4.27)
(13.67)
47.08
(4.06)
—
(2.24)
40.78
47.41
(0.75)
(8.09)
38.57
(0.63)
8.08
46.02
50.22
(4.78)
(3.09)
(16.01)
26.34
(5.53)
20.81
50.79
(1.74)
(3.45)
45.60
(0.60)
45.00
43
Total
$/boe
30.72
(3.09)
(1.61)
(7.47)
18.55
(0.89)
17.66
67.08
(7.15)
(3.66)
(12.76)
43.51
(3.40)
—
(2.64)
37.47
43.24
(0.69)
(8.49)
34.06
(0.89)
1.33
34.50
44.37
(4.30)
(4.01)
(13.03)
23.03
(5.02)
18.01
43.14
(1.46)
(4.95)
36.73
(0.65)
36.08
Total
$/boe
33.48
(3.51)
(1.66)
(8.62)
19.69
(0.97)
18.72
63.71
(5.93)
(3.53)
(10.17)
44.08
(4.52)
3.39
(2.54)
40.41
40.84
(0.46)
(8.90)
31.48
(0.26)
0.16
31.38
36.54
(0.06)
(1.65)
(17.44)
17.39
(7.73)
9.66
44.29
(1.77)
(5.34)
37.18
(1.58)
35.60
Total
$/boe
26.81
(2.28)
(1.63)
(7.59)
15.31
(1.25)
14.06
55.15
(6.05)
(3.30)
(11.17)
34.63
(4.27)
0.85
(0.64)
30.57
34.15
(0.50)
(7.05)
26.60
(0.52)
(2.25)
23.83
31.97
(2.30)
(3.16)
(13.62)
12.89
(9.15)
3.74
35.16
(2.09)
(6.01)
27.06
(1.54)
25.52
Vermilion Energy Inc.
Australia
Sales
Operating
PRRT (1)
Operating netback
General and administration
Corporate income taxes
Fund flows from operations netback
United States
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Fund flows from operations netback
Total Company
Sales
Realized hedging gain
Royalties
Transportation
Operating
PRRT (1)
Operating netback
General and administration
Interest expense
Realized foreign exchange gain (loss)
Other income
Corporate income taxes (1)
Fund flows from operations netback
Three Months Ended Dec 31, 2017
Year Ended Dec 31, 2017
Crude Oil,
Condensate
& NGLs Natural Gas
$/mcf
$/bbl
73.99
(24.03)
(9.50)
40.46
57.64
(15.93)
(0.16)
(6.50)
35.05
61.44
0.50
(5.47)
(2.46)
(13.19)
(1.71)
39.11
—
—
—
—
2.05
(0.80)
—
—
1.25
4.91
(0.01)
(0.14)
(0.19)
(1.13)
—
3.44
Crude Oil,
Condensate
& NGLs Natural Gas
$/mcf
$/bbl
83.32
(28.11)
(8.25)
46.96
65.58
(17.96)
(0.22)
(6.08)
41.32
66.93
(0.88)
(6.78)
(2.76)
(13.33)
(1.18)
42.00
—
—
—
—
2.48
(0.88)
—
—
1.60
5.23
(0.22)
(0.14)
(0.17)
(1.13)
—
3.57
Total
$/boe
83.32
(28.11)
(8.25)
46.96
(7.37)
(4.05)
35.54
62.40
(17.16)
(0.21)
(5.70)
39.33
(18.28)
21.05
47.49
(1.12)
(3.52)
(1.79)
(9.76)
(0.53)
30.77
(2.39)
(2.05)
0.43
0.02
0.35
27.13
2017 Annual Report
Three Months
Ended Dec 31,
2016
Year Ended
Dec 31, 2016
Total
$/boe
73.99
(24.03)
(9.50)
40.46
(3.93)
(2.17)
34.36
53.84
(14.99)
(0.14)
(5.95)
32.76
(15.22)
17.54
44.41
0.19
(3.01)
(1.76)
(9.79)
(0.80)
29.24
(2.20)
(2.32)
0.09
0.03
(0.50)
24.34
Total
$/boe
69.05
(26.83)
(2.82)
39.40
(3.60)
(4.87)
30.93
53.58
(16.05)
—
(7.91)
29.62
(23.02)
6.60
45.93
0.34
(2.65)
(1.69)
(10.54)
(0.28)
31.11
(2.03)
(2.55)
0.23
0.70
(1.03)
26.43
Total
$/boe
60.33
(20.95)
(0.69)
38.69
(2.82)
(3.32)
32.55
43.70
(12.95)
—
(7.85)
22.90
(21.65)
1.25
37.88
2.81
(2.33)
(1.70)
(9.53)
(0.07)
27.06
(2.27)
(2.44)
0.17
0.17
(0.78)
21.91
(1) Vermilion considers Australian PRRT to be an operating item and, accordingly, has included PRRT in the calculation of operating netbacks. Current income taxes presented above
excludes PRRT.
44
Vermilion Energy Inc.
Supplemental Table 2: Hedges
2017 Annual Report
The prices in these tables may represent the weighted averages for several contracts. The weighted average price for the portfolio of options listed
below may not have the same payoff profile as the individual contracts. As such, the presentation of the weighted average prices is purely for
indicative purposes.
The following tables outline Vermilion’s outstanding risk management positions as at December 31, 2017:
Bought Put
Volume
Weighted
Average
Bought Put
Sold Call
Volume
Weighted
Average
Sold Call
Sold Put
Volume
Weighted
Average
Sold Put
Exercise date (1) Currency
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
Swap
Volume
Weighted
Average
Swap
(bbl/d) Price / bbl
Additional
Swap
Volume
(bbld) (2)
Crude Oil
Period
Dated Brent
Swap
Jan 2018 - Dec 2018
3-Way Collar
Jul 2017 - Jun 2018
3-Way Collar
Jul 2017 - Dec 2018
3-Way Collar
Oct 2017 - Dec 2018
3-Way Collar
Dec 2017 - Mar 2018
3-Way Collar
Jan 2018 - Jun 2018
Collar
Swap
Swap
Swaption
Swaption
WTI
Swap
Jan 2018 - Dec 2018
Jan 2018 - Mar 2018
Jan 2018 - Dec 2018
Apr 2018 - Mar 2019
Jan 31, 2018
Apr 2018 - Mar 2019
Mar 30, 2018
Jan 2018 - Jan 2018
3-Way Collar
Jan 2018 - Jun 2018
Collar
Swap
Swap
Jan 2018 - Dec 2018
Jan 2018 - Jun 2018
Jan 2018 - Dec 2018
Swaption
Apr 2018 - Mar 2019
Jan 31, 2018
CAD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
CAD
USD
USD
USD
USD
USD
—
2,000
2,000
2,000
500
1,000
1,000
—
—
—
—
—
500
500
—
—
—
—
55.00
48.89
50.50
57.50
53.58
50.00
—
—
—
—
—
48.50
50.00
—
—
—
—
2,000
2,000
2,000
500
1,000
1,000
—
—
—
—
—
500
500
—
—
—
—
64.06
55.00
55.75
62.50
59.50
57.50
—
—
—
—
—
56.00
55.00
—
—
—
—
2,000
2,000
2,000
500
1,000
—
—
—
—
—
—
500
—
—
—
—
—
45.00
42.50
43.00
52.50
46.25
—
—
—
—
—
—
42.50
—
—
—
—
500
—
—
—
—
—
—
750
1,000
500
750
1,000
—
—
500
1,000
250
76.25
—
—
—
—
—
—
67.22
55.00
60.00
64.33
75.50
—
—
54.00
54.00
54.00
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
North American Gas
Period
Exercise date (1) Currency
(mmbtu/d)
Bought Put
Volume
Weighted
Average
Bought
Put Price /
mmbtu
Sold Call
Volume
Weighted
Average
Sold
(mmbtu/d) Call Price /
mmbtu
Sold Put
Volume
(mmbtu/d)
Weighted
Average
Sold
Put Price /
mmbtu
Swap
Volume
(mmbtu/d)
Weighted
Average
Swap
Price /
mmbtu
Additional
Swap
Volume
(mmbtu/d) (2)
AECO
Swap
Jan 2018 - Dec 2018
AECO Basis (AECO less NYMEX HH)
Oct 2017 - Dec 2018
Jan 2018 - Dec 2018
Jan 2019 - Jun 2020
Swap
Swap
Swap
NYMEX HH
3-Way Collar
Oct 2017 - Dec 2018
3-Way Collar
Jan 2018 - Dec 2018
Swap
Apr 2018 - Dec 2018
CAD
USD
USD
USD
USD
USD
USD
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,000
10,000
—
3.11
3.06
—
10,000
10,000
—
3.40
3.40
—
10,000
10,000
—
—
9,478
2.80
—
—
—
2.40
2.40
—
10,000
20,000
2,500
—
—
10,000
(1.03)
(0.95)
(0.93)
—
—
3.10
—
—
—
—
—
—
—
(1) The sold swaption instrument allows the counterparty, at the specified date, to enter into a derivative instrument contract with Vermilion at the above detailed terms.
(2) On the last business day of each month, the counterparty has the option to increase the contracted volumes for the following month.
45
Vermilion Energy Inc.
2017 Annual Report
Period
Exercise date (1) Currency
(mmbtu/d)
Bought Put
Volume
Weighted
Average
Bought
Put Price /
mmbtu
Sold Call
Volume
Weighted
Average
Sold
(mmbtu/d) Call Price /
mmbtu
Sold Put
Volume
(mmbtu/d)
Weighted
Average
Sold
Put Price
/mmbtu
Swap
Volume
(mmbtu/d)
Weighted
Average
Swap
Price /
mmbtu
Additional
Swap
Volume
(mmbtu/d) (2)
European Gas
NBP
3-Way Collar
Apr 2018 - Sep 2018
3-Way Collar
Jan 2019 - Dec 2019
3-Way Collar
Jan 2019 - Dec 2020
3-Way Collar
Jan 2020 - Dec 2020
Swap
Call
Put
Collar
Swap
Swap
Jan 2018 - Jan 2018
Oct 2018 - Mar 2019
Apr 2018 - Sep 2018
Jan 2018 - Dec 2018
Apr 2017 - Mar 2018
Jan 2018 - Dec 2018
NBP Basis (NBP less NYMEX HH)
Jan 2018 - Dec 2018
Jan 2019 - Sep 2020
Collar
Collar
TTF
3-Way Collar
Oct 2017 - Dec 2019
3-Way Collar
Jan 2018 - Dec 2018
3-Way Collar
Jan 2018 - Dec 2019
3-Way Collar
Jan 2019 - Dec 2019
Collar
Collar
Swap
Swap
Swap
Swap
Swap
Swap
Swap
Jul 2016 - Mar 2018
Jan 2018 - Dec 2018
Jul 2016 - Jun 2018
Apr 2017 - Jun 2018
Oct 2017 - Dec 2018
Oct 2017 - Dec 2019
Jan 2018 - Dec 2019
Jul 2018 - Dec 2019
Jan 2019 - Dec 2019
Swaption
Jan 2019 - Dec 2020
April 30, 2018
EUR
EUR
EUR
EUR
EUR
EUR
EUR
GBP
GBP
GBP
USD
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
4,913
14,740
7,370
14,740
—
—
—
2,500
—
—
2,500
7,500
7,370
12,284
3,685
9,827
2,457
4,913
—
—
—
—
—
—
—
—
4.73
4.82
4.96
4.85
—
—
—
3.15
—
—
1.85
2.07
4.59
4.75
4.74
4.92
5.61
4.40
—
—
—
—
—
—
—
—
4,913
14,740
7,370
14,740
—
2,457
—
2,500
—
—
2,500
7,500
7,370
12,284
3,685
9,827
4,913
4,913
—
—
—
—
—
—
—
—
5.42
5.52
5.76
5.63
—
6.42
—
3.82
—
—
4.00
4.00
5.42
5.48
5.52
5.48
6.90
5.31
—
—
—
—
—
—
—
—
4,913
14,740
7,370
14,740
—
—
2,457
—
—
—
—
—
7,370
12,284
3,685
9,827
—
—
—
—
—
—
—
—
—
—
3.52
3.74
3.74
3.88
—
—
4.98
—
—
—
—
—
2.93
3.25
3.13
3.66
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,913
—
—
—
5,300
2,500
—
—
—
—
6.80
—
—
—
4.20
4.04
—
—
—
—
—
—
—
—
—
—
2,559
4,299
17,197
7,370
1,228
4,913
2,457
9,827
—
—
—
—
—
—
5.89
4.50
4.80
4.87
5.00
4.98
4.92
5.28
—
—
—
—
—
—
—
—
—
5,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cross Currency Interest Rate
Swap
Jan 2018
Receive Notional amount (USD)
Rate (LIBOR +)
Pay Notional amount(CAD)
603,793,015
1.70%
775,800,000
Rate (CDOR +)
1.11%
(1)
(2)
The sold swaption instrument allows the counterparty, at the specified date, to enter into a swap with Vermilion at the above detailed terms.
On the last business day of each month, the counterparty has the option to increase the contracted volumes for the following month.
46
Vermilion Energy Inc.
2017 Annual Report
Supplemental Table 3: Capital Expenditures and Acquisitions
Three Months Ended
Year Ended
By classification
($M)
Drilling and development
Exploration and evaluation
Capital expenditures
Property acquisition
Acquisitions
By category
($M)
Drilling, completion, new well equip and tie-in, workovers
and recompletions
Production equipment and facilities
Seismic, studies, land and other
Capital expenditures
Acquisitions
Total capital expenditures and acquisitions
Capital expenditures by country
($M)
Canada
France
Netherlands
Germany
Ireland
Australia
United States
Corporate
Total capital expenditures
Acquisitions by country
($M)
Canada
Netherlands
Germany
United States
Corporate
Total acquisitions
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
241,545
863
242,408
290,593
29,856
320,449
66,437
445
66,882
61,911
12,392
74,303
75,837
15,545
91,382
3,048
3,048
20,976
20,976
78,713
78,713
27,637
27,637
98,524
98,524
Three Months Ended
Year Ended
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
45,533
18,109
10,661
74,303
3,048
77,351
62,451
16,982
11,949
91,382
20,976
112,358
53,867
14,427
(1,412)
66,882
78,713
145,595
225,668
59,629
35,152
320,449
27,637
348,086
166,795
49,453
26,160
242,408
98,524
340,932
Three Months Ended
Year Ended
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
62,706
68,472
23,740
3,803
9,375
59,910
13,539
863
242,408
148,667
73,381
31,575
9,531
551
29,942
19,074
7,728
320,449
16,895
31,127
5,737
1,694
1,711
5,236
4,037
445
66,882
26,865
20,027
12,300
5,279
327
7,192
1,018
1,295
74,303
43,746
15,756
11,590
3,020
1,101
10,154
1,362
4,653
91,382
Three Months Ended
Year Ended
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
13,309
28,259
48,377
5,935
2,644
98,524
1,378
28,259
48,377
377
322
78,713
22,011
(24)
—
3,403
2,247
27,637
19,712
14
—
1,250
—
20,976
788
(38)
—
91
2,207
3,048
47
Vermilion Energy Inc.
Supplemental Table 4: Production
2017 Annual Report
Canada
Crude oil & condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
France
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Netherlands
Condensate (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Germany
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Ireland
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Australia
Crude oil (bbls/d)
% of consolidated
United States
Crude oil (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Consolidated
Crude oil, condensate
& NGLs (bbls/d)
% of consolidated
Natural gas (mmcf/d)
% of consolidated
Total (boe/d)
Q4/17
Q3/17
Q2/17
Q1/17
Q4/16
Q3/16
Q2/16
Q1/16
Q4/15
Q3/15
Q2/15
Q1/15
9,703
5,235
107.91
32,923
45 %
11,215
—
11,215
15 %
105
55.66
9,381
13 %
1,148
18.19
4,180
6 %
56.23
9,372
13 %
4,993
7 %
667
43
0.29
758
1 %
9,288
4,891
103.92
31,499
46 %
10,918
—
10,918
16 %
74
34.90
5,890
9 %
1,054
20.12
4,407
7 %
49.04
8,173
12 %
5,473
8 %
880
56
0.64
1,043
2 %
9,205
3,745
93.68
28,563
43 %
11,368
—
11,368
17 %
104
31.58
5,368
8 %
1,047
19.86
4,357
6 %
7,987
2,670
85.74
24,947
38 %
10,834
0.01
10,836
17 %
76
39.92
6,729
10 %
989
19.39
4,220
7 %
7,945
2,444
75.12
22,910
38 %
11,220
0.38
11,283
19 %
57
41.15
6,915
11 %
—
14.80
2,467
4 %
63.81
10,634
16 %
64.82
10,803
17 %
62.92
10,486
17 %
6,054
9 %
6,581
10 %
6,388
10 %
747
76
0.44
896
1 %
365
24
0.20
422
1 %
362
23
0.18
414
1 %
8,984
2,448
77.62
24,368
37 %
11,827
0.42
11,897
19 %
86
47.62
8,023
13 %
—
14.52
2,420
4 %
59.28
9,879
16 %
6,562
10 %
383
30
0.20
447
1 %
9,453
2,687
87.44
26,713
42 %
12,326
0.54
12,416
19 %
96
49.18
8,293
13 %
—
14.31
2,385
4 %
47.26
7,877
12 %
6,083
9 %
458
26
0.20
518
1 %
10,317
2,633
97.16
29,141
44 %
12,220
0.44
12,293
19 %
114
53.40
9,015
14 %
—
15.96
2,660
4 %
33.90
5,650
9 %
6,180
9 %
368
39
0.26
450
1 %
10,413
2,710
87.90
27,773
45 %
12,537
1.36
12,763
21 %
110
56.34
9,500
16 %
—
16.17
2,695
4 %
0.12
20
—
11,030
2,678
71.94
25,698
47 %
12,310
1.47
12,555
22 %
109
53.56
9,035
16 %
—
14.00
2,333
4 %
—
—
—
11,843
2,094
64.66
24,713
48 %
12,746
1.03
12,917
25 %
112
32.43
5,517
11 %
—
16.18
2,696
5 %
—
—
—
12,163
1,706
61.78
24,165
48 %
11,463
—
11,463
23 %
63
36.41
6,132
12 %
—
16.80
2,801
6 %
—
—
—
7,824
13 %
6,433
11 %
5,865
11 %
5,672
11 %
420
29
0.20
483
1 %
226
—
—
226
—
123
—
—
123
—
153
—
—
153
—
33,109
45 %
238.28
55 %
72,822
32,634
48 %
208.62
52 %
67,403
32,346
48 %
209.36
52 %
67,240
29,526
46 %
210.07
54 %
64,537
28,439
47 %
194.54
53 %
60,863
30,320
48 %
199.65
52 %
63,596
31,129
48 %
198.93
52 %
64,285
31,871
49 %
201.11
51 %
65,389
34,043
56 %
162.09
44 %
61,058
32,786
58 %
140.97
42 %
56,280
32,783
63 %
114.29
37 %
51,831
31,220
62 %
115.00
38 %
50,386
48
Vermilion Energy Inc.
2017 Annual Report
Canada
Crude oil & condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
France
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Netherlands
Condensate (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Germany
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Ireland
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Australia
Crude oil (bbls/d)
% of consolidated
United States
Crude oil (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Consolidated
Crude oil, condensate & NGLs (bbls/d)
% of consolidated
Natural gas (mmcf/d)
% of consolidated
Total (boe/d)
2017
2016
2015
2014
2013
2012
9,051
4,144
97.89
29,510
45 %
11,084
—
11,085
16 %
90
40.54
6,847
10 %
1,060
19.39
4,291
6 %
58.43
9,737
14 %
5,770
8 %
666
50
0.39
781
1 %
9,171
2,552
84.29
25,771
40 %
11,896
0.44
11,970
19 %
88
47.82
8,058
13 %
—
14.90
2,483
4 %
50.89
8,482
13 %
6,304
10 %
393
29
0.21
457
1 %
11,357
2,301
71.65
25,598
46 %
12,267
0.97
12,429
23 %
99
44.76
7,559
14 %
—
15.78
2,630
5 %
0.03
5
—
12,491
1,233
55.67
23,001
47 %
11,011
—
11,011
22 %
77
38.20
6,443
13 %
—
14.99
2,498
5 %
—
—
—
8,387
1,666
42.39
17,117
41 %
10,873
3.40
11,440
28 %
64
35.42
5,967
15 %
—
—
—
—
—
—
—
7,659
1,232
37.50
15,142
40 %
9,952
3.59
10,550
28 %
67
34.11
5,751
15 %
—
—
—
—
—
—
—
6,454
12 %
6,571
13 %
6,481
16 %
6,360
17 %
231
7
0.05
247
—
49
—
—
49
—
—
—
—
—
—
—
—
—
—
—
31,915
47 %
216.64
53 %
68,021
30,433
48 %
198.55
52 %
63,526
32,716
60 %
133.24
40 %
54,922
31,432
63 %
108.85
37 %
49,573
27,471
67 %
81.21
33 %
41,005
25,270
67 %
75.20
33 %
37,803
49
Vermilion Energy Inc.
2017 Annual Report
Supplemental Table 5: Segmented Financial Results
Three Months Ended Dec 31, 2017
($M)
Drilling and development
Exploration and evaluation
Oil and gas sales to external customers
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized gain on derivative instruments
Realized foreign exchange gain
Realized other income
Fund flows from operations
($M)
Total assets
Drilling and development
Exploration and evaluation
Oil and gas sales to external customers
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized gain on derivative instruments
Realized foreign exchange gain
Realized other income
Fund flows from operations
Canada
26,865
—
94,522
(9,301 )
85,221
(4,836 )
(22,356 )
(2,540 )
—
—
—
—
—
—
55,489
Canada
1,542,193
148,667
—
330,903
(33,258 )
297,645
(17,368 )
(80,444 )
(9,604 )
—
—
—
—
—
—
190,229
France Netherlands
2,874
19,557
9,426
470
40,914
78,778
(647 )
(10,599 )
40,267
68,179
—
(4,475 )
(6,981 )
(14,332 )
(546 )
(4,259 )
—
—
6,975
(2,348 )
—
—
—
—
—
—
—
—
39,715
42,765
Germany
4,078
1,201
18,898
(1,798 )
17,100
(1,164 )
(6,025 )
(2,080 )
—
—
—
—
—
—
7,831
Ireland
327
—
43,793
—
43,793
(1,496 )
(2,977 )
(517 )
—
—
—
—
—
—
38,803
Australia United States Corporate
—
1,295
—
—
—
—
—
(1,532)
—
(542)
(13,710)
(7,493)
2,899
166
(20,212)
7,192
—
36,086
—
36,086
—
(12,172 )
(3,193 )
(3,572 )
(1,755 )
—
—
—
—
15,394
1,018
—
4,350
(1,196)
3,154
(15)
(397)
(1,274)
—
—
—
—
—
—
1,468
Total
61,911
12,392
317,341
(23,541)
293,800
(11,986)
(65,240)
(15,941)
(3,572)
2,330
(13,710)
(7,493)
2,899
166
181,253
Year Ended December 31, 2017
France Netherlands
203,929
831,783
15,107
71,087
16,468
2,294
108,060
268,103
(1,722 )
(28,565 )
106,338
239,538
—
(14,627 )
(21,212 )
(51,002 )
(2,212 )
(13,585 )
—
—
3,331
(10,556 )
—
—
—
—
—
—
—
—
86,245
149,768
Germany
295,026
6,165
3,366
68,696
(6,655 )
62,041
(6,207 )
(20,176 )
(7,767 )
—
—
—
—
—
—
27,891
Ireland
667,068
551
—
153,330
—
153,330
(5,205 )
(17,596 )
(2,320 )
—
—
—
—
—
—
128,209
Australia United States Corporate
124,422
236,677
—
29,942
7,728
—
—
154,391
—
—
—
154,391
—
—
—
(50,139 )
(6,350)
(8,194 )
—
(19,819 )
(527)
(4,536 )
—
(57,313)
4,721
—
2,316
—
—
674
71,703
(56,479)
73,867
19,074
—
15,355
(4,276)
11,079
(41)
(1,698)
(4,341)
—
—
—
—
—
—
4,999
Total
3,974,965
290,593
29,856
1,098,838
(74,476)
1,024,362
(43,448)
(242,267)
(54,373)
(19,819)
(12,288)
(57,313)
4,721
2,316
674
602,565
50
Vermilion Energy Inc.
NON-GAAP FINANCIAL MEASURES
2017 Annual Report
This MD&A includes references to certain financial measures which do not have standardized meanings and may not be comparable to similar
measures presented by other issuers. These financial measures include fund flows from operations, a measure of profit or loss in accordance with
IFRS 8 “Operating Segments” (please see SEGMENTED INFORMATION in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS) and
net debt, a measure of capital in accordance with IAS 1 “Presentation of Financial Statements” (please see CAPITAL DISCLOSURES in the NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS).
In addition, this MD&A includes financial measures which are not specified, defined, or determined under IFRS and are therefore considered non-
GAAP financial measures and may not be comparable to similar measures presented by other issuers. These non-GAAP financial measures include:
Capital expenditures: The sum of drilling and development and exploration and evaluation from the Consolidated Statement of Cash Flows. We
consider capital expenditures to be a useful measure of our investment in our existing asset base. Capital expenditures are also referred to as E&D
capital.
Cash dividends per share: Represents cash dividends declared per share and is a useful measure of the dividends a common shareholder was
entitled to during the period.
Covenants: The financial covenants on our revolving credit facility contain non-GAAP measures. The definitions for these financial covenants are
included in FINANCIAL POSITION REVIEW.
Diluted shares outstanding: The sum of shares outstanding at the period end plus outstanding awards under the VIP, based on current estimates of
future performance factors and forfeiture rates.
Free cash flow: Represents fund flows from operations in excess of capital expenditures. We use free cash flow to determine the funding available
for investing and financing activities, including payment of dividends, repayment of long-term debt, reallocation to existing business units, and
deployment into new ventures. We also assess free cash flow as a percentage of fund flows from operations, which is a measure of the percentage
of fund flows from operations that is retained for incremental investing and financing activities.
Fund flows from operations per basic and diluted share: Management assesses fund flows from operations on a per share basis as we believe
this provides a measure of our operating performance after taking into account the issuance and potential future issuance of Vermilion common shares.
Fund flows from operations per basic share is calculated by dividing fund flows from operations by the basic weighted average shares outstanding as
defined under IFRS. Fund flows from operations per diluted share is calculated by dividing fund flows from operations by the sum of basic weighted
average shares outstanding and incremental shares issuable under the VIP as determined using the treasury stock method.
Net dividends: We define net dividends as dividends declared less proceeds received for the issuance of shares pursuant to the Dividend
Reinvestment Plan. Management monitors net dividends and net dividends as a percentage of fund flows from operations to assess our ability to pay
dividends.
Operating netback: Sales less royalties, operating expense, transportation costs, PRRT, and realized hedging gains and losses presented on a per
unit basis. Management assesses operating netback as a measure of the profitability and efficiency of our field operations. In contrast, fund flows
from operations netback also includes general and administration expense, corporate income taxes and interest. Fund flows from operations netback
is used by management to assess the profitability of our business units and Vermilion as a whole.
Payout: We define payout as net dividends plus drilling and development costs, exploration and evaluation costs, dispositions, and asset retirement
obligations settled. Management uses payout and payout as a percentage of fund flows from operations (also referred to as the sustainability ratio)
to assess the amount of cash distributed back to shareholders and re-invested in the business for maintaining production and organic growth.
The following tables reconcile net dividends, payout, and diluted shares outstanding from their most directly comparable GAAP measures as presented
in our financial statements:
51
Vermilion Energy Inc.
2017 Annual Report
Three Months Ended
Year Ended
($M)
Dividends declared
Shares issued for the Dividend Reinvestment Plan
Net dividends
Drilling and development
Exploration and evaluation
Asset retirement obligations settled
Payout
% of fund flows from operations
('000s of shares)
Shares outstanding
Potential shares issuable pursuant to the VIP
Diluted shares outstanding
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
299,070
76,096
(43,580)
(192,998)
106,072
32,516
241,545
66,437
445
863
9,617
3,327
358,097
102,725
70%
311,397
(110,493)
200,904
290,593
29,856
9,334
530,687
78,293
(23,929)
54,364
75,837
15,545
1,749
147,495
78,653
(21,817)
56,836
61,911
12,392
3,216
134,355
69%
113%
74%
88%
As at
Dec 31, 2017 Sep 30, 2017 Dec 31, 2016
118,263
3,090
121,353
122,119
3,021
125,140
121,585
2,868
124,453
52
Vermilion Energy Inc.
2017 Annual Report
MANAGEMENT’S REPORT TO SHAREHOLDERS
Management’s Responsibility for Financial Statements
The accompanying consolidated financial statements of Vermilion Energy Inc. are the responsibility of management and have been approved by the
Board of Directors of Vermilion Energy Inc. The consolidated financial statements have been prepared in accordance with the accounting policies
detailed in the notes to the consolidated financial statements and are prepared in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board. Where necessary, management has made informed judgments and estimates of transactions
that were not yet completed at the balance sheet date. Financial information throughout the Annual Report is consistent with the consolidated financial
statements.
Management ensures the integrity of the consolidated financial statements by maintaining high-quality systems of internal control. Procedures and
policies are designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded, and that the financial
records are reliable for preparation of the consolidated financial statements. Deloitte LLP, Vermilion’s Independent Registered Public Accounting Firm,
have conducted an audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States) and have provided their report.
The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and internal control. The Board
carries out this responsibility principally through the Audit Committee, which is appointed by the Board and is comprised entirely of independent
Directors. The Committee meets periodically with management and Deloitte LLP to satisfy itself that each party is properly discharging its
responsibilities and to review the consolidated financial statements, the Management’s Discussion and Analysis and the Report of the Independent
Registered Public Accounting Firm before they are presented to the Board of Directors.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Management conducted
an evaluation of the effectiveness of the system of internal control over financial reporting based on the criteria established in “Internal Control –
Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management has assessed the effectiveness of Vermilion’s internal control over financial reporting as defined in Rule 13a-15 under the US Securities
Exchange Act of 1934 and as defined in Canada by National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings.
Management concluded that Vermilion’s internal control over financial reporting was effective as of December 31, 2017. The effectiveness of Vermilion’s
internal control over financial reporting as of December 31, 2017 has been audited by Deloitte LLP, the Company’s Independent Registered Public
Accounting Firm, who also audited the Company’s consolidated financial statements for the year ended December 31, 2017.
(“Anthony Marino”)
(“Curtis W. Hicks”)
Anthony Marino
President & Chief Executive Officer
February 28, 2018
Curtis W. Hicks
Executive Vice President & Chief Financial Officer
53
Vermilion Energy Inc.
2017 Annual Report
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Vermilion Energy Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Vermilion Energy Inc. and subsidiaries (the “Company”) as of December 31, 2017,
based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and Canadian
generally accepted auditing standards, the consolidated financial statements as at and for the year ended December 31, 2017, of the Company and
our report dated February 28, 2018, expressed an unmodified/ unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report to Shareholders. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
(“/s/ Deloitte LLP”)
Chartered Professional Accountants
Calgary, Canada
February 28, 2018
54
Vermilion Energy Inc.
2017 Annual Report
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Vermilion Energy Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Vermilion Energy Inc. and subsidiaries (the “Company”), which comprise the
consolidated balance sheets as at December 31, 2017 and December 31, 2016, the consolidated statements of net earnings (loss) and comprehensive
income (loss), consolidated statements of cash flows, and consolidated statements of changes in shareholders’ equity for the years then ended, and
the related notes, including a summary of significant accounting policies and other explanatory information (collectively referred to as the “financial
statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2017 and
December 31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board.
Report on Internal Control over Financial Reporting
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2018 expressed an unqualified opinion
on the Company’s internal control over financial reporting.
Basis for Opinion
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian
generally accepted auditing standards and the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. Those standards
also require that we comply with ethical requirements. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB. Further, we are required to be independent of the Company in accordance with the ethical requirements that are relevant
to our audit of the financial statements in Canada and to fulfill our other ethical responsibilities in accordance with these requirements.
An audit includes performing procedures to assess the risks of material misstatement of the financial statements, whether due to fraud or error, and
performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the
Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances.
An audit also includes evaluating the appropriateness of accounting policies and principles used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a reasonable basis for our audit opinion.
(“/s/ Deloitte LLP”)
Chartered Professional Accountants
Calgary, Canada
February 28, 2018
We have served as the Company's auditor since 2000.
55
Vermilion Energy Inc.
2017 Annual Report
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF CANADIAN DOLLARS)
ASSETS
Current
Cash and cash equivalents
Accounts receivable
Crude oil inventory
Derivative instruments
Prepaid expenses
Derivative instruments
Deferred taxes
Exploration and evaluation assets
Capital assets
LIABILITIES
Current
Accounts payable and accrued liabilities
Dividends payable
Derivative instruments
Income taxes payable
Derivative instruments
Long-term debt
Finance lease obligation
Asset retirement obligations
Deferred taxes
SHAREHOLDERS’ EQUITY
Shareholders’ capital
Contributed surplus
Accumulated other comprehensive income
Deficit
APPROVED BY THE BOARD
(Signed “Catherine L. Williams”)
Catherine L. Williams, Director
Note
December 31, 2017 December 31, 2016
19
9
9
11
7
6
13
9
9
12
10
8
11
13
46,561
165,760
17,105
17,988
14,432
261,846
2,552
80,324
292,278
3,337,965
3,974,965
219,084
26,256
78,905
39,061
363,306
12,348
1,270,330
15,807
517,180
253,108
2,432,079
2,650,706
84,354
71,829
(1,264,003)
1,542,886
3,974,965
62,775
131,719
14,528
4,336
12,548
225,906
1,157
152,046
274,830
3,433,245
4,087,184
181,557
25,426
47,660
36,219
290,862
27,484
1,362,192
19,628
525,022
283,533
2,508,721
2,452,722
101,788
30,339
(1,006,386)
1,578,463
4,087,184
(Signed “Anthony Marino”)
Anthony Marino, Director
56
Vermilion Energy Inc.
2017 Annual Report
CONSOLIDATED STATEMENTS OF NET EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Note December 31, 2017 December 31, 2016
Year Ended
REVENUE
Petroleum and natural gas sales
Royalties
Petroleum and natural gas revenue
EXPENSES
Operating
Transportation
Equity based compensation
(Gain) loss on derivative instruments
Interest expense
General and administration
Foreign exchange gain
Other income
Accretion
Depletion and depreciation
Impairment
Gain on business combination
EARNINGS (LOSS) BEFORE INCOME TAXES
TAXES
Deferred
Current
NET EARNINGS (LOSS)
OTHER COMPREHENSIVE INCOME (LOSS)
Currency translation adjustments
COMPREHENSIVE INCOME (LOSS)
NET EARNINGS (LOSS) PER SHARE
Basic
Diluted
WEIGHTED AVERAGE SHARES OUTSTANDING ('000s)
Basic
Diluted
1,098,838
(74,476)
1,024,362
242,267
43,448
61,579
(3,659)
57,313
54,373
(74,058)
(37)
26,971
491,683
—
—
899,880
124,482
30,117
32,107
62,224
62,258
41,490
103,748
0.52
0.51
120,582
122,408
882,791
(54,284)
828,507
222,185
39,511
69,235
72,617
56,957
52,829
(3,249)
(3,896)
24,783
528,002
14,762
(22,001)
1,051,735
(223,228)
(82,855)
19,678
(63,177)
(160,051)
(83,308)
(243,359)
(1.38)
(1.38)
115,695
115,695
19
15
9
19
8
6, 7
6, 7
5
11
16
16
57
Vermilion Energy Inc.
2017 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF CANADIAN DOLLARS)
OPERATING
Net earnings (loss)
Adjustments:
Accretion
Depletion and depreciation
Impairment
Gain on business combination
Unrealized loss on derivative instruments
Equity based compensation
Unrealized foreign exchange (gain) loss
Unrealized other expense
Deferred taxes
Asset retirement obligations settled
Changes in non-cash operating working capital
Cash flows from operating activities
INVESTING
Drilling and development
Exploration and evaluation
Property acquisitions
Changes in non-cash investing working capital
Cash flows used in investing activities
FINANCING
(Repayments) borrowings on the revolving credit facility
Issuance (repayment) of senior unsecured notes
Decrease in finance lease obligation
Cash dividends
Cash flows used in investing activities
Foreign exchange gain (loss) on cash held in foreign currencies
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplementary information for cash flows from operating activities
Interest paid
Income taxes paid (refunded)
Note December 31, 2017 December 31, 2016
Year Ended
8
6, 7
6, 7
5
9
15
11
8
19
6
7
5, 6, 7
19
12
12
10
13
19
62,258
26,971
491,683
—
—
1,062
61,579
(71,742)
637
30,117
(9,334)
665
593,896
(290,593)
(29,856)
(27,637)
407
(347,679)
(450,646)
391,906
(4,874)
(200,074)
(263,688)
1,257
(16,214)
62,775
46,561
49,721
29,265
(160,051)
24,783
528,002
14,762
(22,001)
137,993
69,235
792
131
(82,855)
(9,617)
8,366
509,540
(241,545)
(863)
(98,524)
(12,298)
(353,230)
202,617
(225,000)
(4,270)
(104,723)
(131,376)
(3,835)
21,099
41,676
62,775
60,221
(10,535)
58
Vermilion Energy Inc.
2017 Annual Report
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(THOUSANDS OF CANADIAN DOLLARS)
SHAREHOLDERS' CAPITAL
Balance, beginning of period
Shares issued for the Dividend Reinvestment Plan
Vesting of equity based awards
Equity based compensation
Share-settled dividends on vested equity based awards
Balance, end of period
CONTRIBUTED SURPLUS
Balance, beginning of period
Equity based compensation
Vesting of equity based awards
Balance, end of period
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period
Currency translation adjustments
Balance, end of period
DEFICIT
Balance, beginning of period
Net earnings (loss)
Dividends declared
Share-settled dividends on vested equity based awards
Balance, end of period
Year Ended
December 31, 2017 December 31, 2016
2,452,722
110,493
69,743
9,270
8,478
2,650,706
101,788
52,309
(69,743)
84,354
30,339
41,490
71,829
(1,006,386)
62,258
(311,397)
(8,478)
(1,264,003)
2,181,089
192,998
67,146
8,247
3,242
2,452,722
107,946
60,988
(67,146)
101,788
113,647
(83,308)
30,339
(544,023)
(160,051)
(299,070)
(3,242)
(1,006,386)
TOTAL SHAREHOLDERS' EQUITY
1,542,886
1,578,463
Please refer to Financial Statement Note 13 (Shareholders’ Capital) and Note 15 (Equity Based Compensation) for additional information.
DESCRIPTION OF EQUITY RESERVES
Shareholders’ capital
Represents the recognized amount for common shares when issued, net of equity issuance costs and deferred taxes.
Contributed surplus
Represents the recognized value of equity based awards that are settled in shares. Once vested, the value of the awards are transferred to
shareholders’ capital.
Accumulated other comprehensive income
Represents currency translation adjustments resulting from translating the financial statements of subsidiaries with a foreign functional currency to
Canadian dollars at period-end rates. These amounts may be reclassified to net earnings if there is a disposal or partial disposal of a subsidiary.
Deficit
Represents the cumulative net earnings less distributed earnings of Vermilion Energy Inc.
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Vermilion Energy Inc.
2017 Annual Report
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2017 AND 2016
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Vermilion Energy Inc. and its subsidiaries (the “Company” or “Vermilion”) are engaged in the business of petroleum and natural gas exploration,
development, acquisition, and production.
Vermilion was incorporated in Canada and the Company’s registered office and principal place of business is located at 3500, 520, 3rd Avenue SW,
Calgary, Alberta, Canada.
These consolidated financial statements were approved and authorized for issuance by Vermilion’s Board of Directors on February 28, 2018.
2. SIGNIFICANT ACCOUNTING POLICIES
Accounting Framework
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”).
Principles of Consolidation
The consolidated financial statements included the accounts of Vermilion Energy Inc. and its subsidiaries. Vermilion’s subsidiaries include entities in
each of the jurisdictions that Vermilion operates as described in Note 4 including: Canada, France, Netherlands, Germany, Ireland (through an Irish
Branch of a Cayman Islands incorporated company), Australia, and the United States. Vermilion Energy Inc. directly or indirectly through holding
companies owns all of the voting securities of each material subsidiary. Transactions between Vermilion Energy Inc. and its subsidiaries have been
eliminated.
Vermilion accounts for joint operations by recognizing the Company’s share of assets, liabilities, income and expenses.
Exploration and Evaluation Assets
Vermilion classifies costs as Exploration and Evaluation (“E&E”) assets when they relate to exploring and evaluating an area for which the Company
has the licence or right to explore and extract resources. E&E costs may include: geological and geophysical costs; land and license acquisition costs;
and costs for the drilling, completion, and testing of exploration wells.
E&E costs are reclassified to capital assets if the technical feasibility and commercial viability of the area can be determined. E&E assets are assessed
for impairment prior to any reclassification. The technical feasibility and commercial viability of extracting the reserves is considered to be determinable
when proved and probable reserves are identified.
Costs incurred prior to the acquisition of the legal rights to explore an area are expensed as incurred. If reserves are not found within the license area
or the area is abandoned, the related E&E costs are amortized over a period not greater than five years. If an exploration license expires prior to the
commencement of exploration activities, the cost of the exploration license is written off through depletion in the year of expiration.
Capital Assets
Vermilion recognizes capital assets at cost less accumulated depletion, depreciation and impairment losses. Costs include directly attributable costs
incurred for the drilling and completion of wells and the construction of production and processing facilities.
When components of capital assets are replaced, disposed of, or no longer in use, they are derecognized. Gains and losses on disposal of capital
assets are determined by comparing the proceeds of disposal compared to the carrying amount.
Depletion and Depreciation
Capital assets are grouped into depletion units, which are groups of assets within a specific production area that have similar economic lives. Depletion
units represent the lowest level of disaggregation for which costs are accumulated for the purposes of calculating depletion and depreciation.
The net carrying value of each depletion unit is depleted using the unit of production method by reference to the ratio of production in the period to the
total proved and probable reserves, taking into account the future development costs necessary to bring the applicable reserves into production.
For the purposes of the depletion calculations, oil and gas reserves are converted to a common unit of measure on the basis of their relative energy
content based on a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent.
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Impairment of Capital Assets and Exploration and Evaluation Assets
Depletion units are aggregated into cash generating units (“CGUs”) for impairment testing. CGUs are the lowest level for which there are identifiable
cash inflows that are largely independent of cash inflows of other groups of assets. CGUs are reviewed for indicators of potential impairment at each
reporting date.
E&E assets are tested for impairment when reclassified to capital assets or when indicators of potential impairment are identified. E&E assets are
reviewed for indicators of potential impairment at each reporting date. If indicators of potential impairment are identified, E&E assets are tested for
impairment as part of the CGU attributable to the jurisdiction the exploration area resides.
If an indicator of potential impairment exists, the CGU’s carrying value is compared to its recoverable amount. A CGU’s recoverable amount is the
higher of its fair value less costs of disposal and its value in use. If the carrying amount of a CGU exceeds its recoverable amount, an impairment loss
is recognized to reduce the carrying value of the CGU to its recoverable amount.
If an impairment loss has been recognized in a prior period, an assessment is performed at each reporting date to determine if the circumstances
which led to the impairment loss have reversed. If the change in circumstances results in the recoverable amount being higher than the carrying value
after the impairment loss, then the impairment loss (net of depletion that would otherwise have been recorded) is reversed.
Finance Leases
Finance leases are leases which transfer substantially all of the risks and rewards incidental to legal ownership of the leased asset to Vermilion. A
finance lease obligation is recognized at the commencement of the lease term at the lower of fair value of the leased asset or the present value of the
minimum lease payments. Interest expense is recognized on the finance lease obligation using the effective interest method.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with financial institutions and guaranteed investment certificates.
Crude Oil Inventory
Crude oil inventory is valued at the lower of cost or net realizable value. The cost of crude oil inventory produced includes related operating expense,
royalties, and depletion determined on a weighted-average basis.
Asset Retirement Obligations
Vermilion recognizes a provision for asset retirement obligations when an event occurs giving rise to an obligation of uncertain timing or amount. Asset
retirement obligations are recognized on the consolidated balance sheet as a long-term liability with a corresponding increase to E&E or capital assets.
Asset retirement obligations reflect the present value of estimated future settlement costs. The discount rate used to calculate the present value is
specific to the jurisdiction the obligation relates to and is reflective of current market assessment of the time value of money and risks specific to the
liabilities that have not been reflected in the cash flow estimates.
Asset retirement obligations are remeasured at each reporting period to reflect changes in discount rates and estimated future settlement costs. Asset
retirement obligations are increased each reporting period to reflect the passage of time with a corresponding charge to accretion expense.
Revenue Recognition
Revenues associated with the sale of petroleum and natural gas are recorded when title passes to the customer. Revenue is recognized when all of
the following conditions have been satisfied:
• Vermilion has transferred the significant risks and rewards of ownership of the petroleum and natural gas to the customer;
• Vermilion retains no continuing managerial involvement to the degree usually associated with ownership or effective control over the
petroleum or natural gas sold;
The amount of the revenue can be reliably measured;
It is probable that the economic benefits associated with the transaction will flow to Vermilion; and
The costs incurred or to be incurred in respect of the transaction can be measured reliably.
•
•
•
Financial Instruments
On initial recognition, financial instruments are measured at fair value. Measurement in subsequent periods depends on the classification of the
financial instrument as described below:
• Held for trading: Held for trading financial instruments are subsequently measured at fair value on the consolidated balance sheet and gains
and losses are recognized in net earnings. Cash and cash equivalents and derivatives assets and liabilities are classified as held for trading.
Loans and receivables and other financial liabilities: Loans and receivables and other financial liabilities are subsequently measured at
amortized cost. Accounts receivable are classified as loans and receivables. Accounts payable and accrued liabilities, dividends payable,
finance lease, and long-term debt are classified as other financial liabilities.
•
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2017 Annual Report
Equity Based Compensation
Equity based compensation expense results from equity-settled awards issued under Vermilion’s long-term share-based compensation plan (the
“Vermilion Incentive Plan” or “VIP”) as well as the grant date fair value of Vermilion common shares issued under the Company’s bonus and employee
share savings plans.
Equity-settled awards issued under the VIP vest over a period of one to three years and awards outstanding are adjusted upon vesting by a performance
factor determined by the Company’s Board of Directors. Equity based compensation expense for the VIP is recognized over the vesting period with a
corresponding adjustment to contributed surplus. The expense recognized is based on the grant date fair value of the VIP awards, an estimate of the
performance factor that will be achieved, and an estimate of forfeiture rates based on historical vesting data. Dividends notionally accrue to the VIP
awards and are excluded in the determination of grant date fair values. Upon vesting, the amount recognized in contributed surplus is reclassified to
shareholders’ capital.
The grant date fair value of the equity-settled awards issued under the VIP and the grant date fair value of Vermilion common shares issued under the
Company’s bonus and employee share savings plans are determined as the closing price of Vermilion’s common shares on the Toronto Stock Exchange
on the grant date.
Per Share Amounts
Basic net earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted-average number of shares outstanding during the
period.
Diluted net earnings (loss) per share is calculated by dividing net earnings (loss) by the diluted weighted-average number of shares outstanding during
the period. The diluted weighted-average number of shares outstanding is the sum of the basic weighted-average number of shares outstanding and,
to the extent inclusion reduces diluted net earnings per share, the number of shares issuable under the VIP determined using the treasury stock
method. The treasury stock method assumes that the unrecognized equity based compensation expense are deemed proceeds used to repurchase
Vermilion common shares at the average market price during the period.
Foreign Currency Translation
Vermilion Energy Inc.’s functional and presentation currency is the Canadian dollar. Vermilion has subsidiaries that transact and operate in countries
other than Canada and have functional currencies other than the Canadian dollar.
Foreign currency translations include the translation of foreign currency transactions and the translation of foreign operations.
Foreign currency transaction translations occur when translating transactions in foreign currencies to the applicable functional currency of Vermilion
Energy Inc. and its subsidiaries. Gains and losses from foreign currency transactions are recorded as foreign exchange gains or losses. Foreign
currency transaction translations occur as follows:
Income and expenses are translated at the prevailing rates on the date of the transaction
•
• Non-monetary assets or liabilities are carried at the prevailing rates on the date of the transaction
• Monetary items are translated at the prevailing rates at the balance sheet date
Foreign operation translations occur when translating the financial statements of non-Canadian functional currency subsidiaries to the Canadian dollar
and when translating intercompany loans that are deemed to represent net investments in a foreign subsidiary. Gains and losses from foreign operation
translations are recorded as currency translation adjustments. Foreign operation translations occur as follows:
•
Income and expenses are translated at the average exchange rates for the period
• Assets and liabilities are translated at the prevailing rates on the balance sheet date.
Income Taxes
Deferred taxes are calculated using the balance sheet method. Deferred tax is recognized for the estimated effect of any temporary differences between
the amounts recognized on Vermilion’s consolidated balance sheet and the respective tax basis. This calculation uses enacted or substantively enacted
tax rates that are expected to be in effect when the temporary differences are expected to reverse. The effect of a change in tax rates on deferred
taxes is recognized in the period the related legislation is substantively enacted.
Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the deductible temporary
differences can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent it is no longer probable that the related
tax benefit will be realized.
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Business Combinations
Acquisitions of corporations or groups of assets are accounted for as business combinations using the acquisition method if the acquired assets
constitute a business. Under the acquisition method, assets acquired and liabilities assumed in a business combination are measured at the fair value.
If applicable, the excess or deficiency of net assets acquired compared to consideration paid is recognized as a gain on business combination or as
goodwill on the consolidated balance sheet. Acquisition-related costs incurred to effect a business combination are expensed in the period incurred.
Management Judgments and Estimation Uncertainty
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates, and
assumptions that affect the reported amount of assets, liabilities, income and expenses. Actual results could differ significantly from these estimates.
Key areas where management has made judgments, estimates, and assumptions include:
• Asset retirement obligations: Asset retirement obligations are based on judgments regarding regulatory requirements, estimates of future
costs, the expected timing of expenditures, and the underlying risk inherent to the asset based on the jurisdiction it relates to. The carrying
balance of asset retirement obligations and accretion expense may differ due to changes in: laws and regulations, technology, the expected
timing of expenditures, and market conditions affecting the discount rate applied.
• Determination of CGUs: CGU determination is subject to management’s judgment of the lowest level at which there are identifiable cash
inflows that are largely independent of the cash inflows of other groups of assets. The factors used by Vermilion to determine CGUs vary by
jurisdiction due to their unique operating and geographic conditions. In general, Vermilion will assess the following factors: geographic
proximity of the assets within a group to one another, geographic proximity of the group of assets to other groups of assets, homogeneity of
the production from the group of assets and the sharing of infrastructure used to process and/or transport production. The composition of
CGUs can directly impact the calculated recoverable amount of a CGU and the recorded impairment loss or recovery.
•
• Assessment of impairments or recovery of previous impairments: The calculation of the recoverable amount of a CGU is based on market
factors (including estimated future commodity prices) and estimates of reserves and resources. Reserve and resource estimates are based
on: engineering data, estimated future commodity prices, expected future rates of production, and assumptions regarding the timing and
amount of future expenditures. Changes in these judgments, estimates and assumptions can directly impact the calculated recoverable
amount of a CGU and the recorded impairment loss or recovery.
Income Taxes: Tax interpretations, regulations, and legislation in the various jurisdictions in which Vermilion and its subsidiaries operate are
subject to change and interpretation. Changes in laws and interpretations can affect the timing of the reversal of temporary tax differences,
the tax rates in effect when such differences reverse and Vermilion’s ability to use tax losses and other tax pools in the future. The Company’s
income tax filings are subject to audit by taxation authorities in numerous jurisdictions and the results of such audits may increase or decrease
the tax liability. The determination of tax amounts recognized in the consolidated financial statements are based on management’s
assessment of the tax positions, which includes consideration of their technical merits, communications with tax authorities and
management’s view of the most likely outcome. Deferred tax assets and related valuation assessments are based on estimates of future
profitability.
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Vermilion Energy Inc.
2017 Annual Report
3. CHANGES TO ACCOUNTING PRONOUNCEMENTS
On January 1, 2018, Vermilion will adopt IFRS 9 "Financial Instruments" and IFRS 15 "Revenue from Contracts with Customers".
IFRS 9 includes a new classification and measurement approach for financial assets and a forward-looking 'expected credit loss' model. Vermilion
expects that there will be no material impact as a result of adopting IFRS 9. These changes are discussed in greater detail below:
• New classification and measurement approach for financial assets: IFRS 9 contains three classifications for financial assets - measured at
amortized cost, fair value through other comprehensive income, and fair value through profit or loss. Vermilion's held for trading financial
instruments will be classified as fair value through profit or loss while Vermilion's loans and receivables will be classified as measured at
amortized cost. The new classification requirements are not expected to result in a change in the measured amounts of these financial
instruments.
Forward-looking 'expected credit loss' model: IFRS 9 includes a lifetime expected credit loss model that applies to Vermilion's accounts
receivable. Based on the Company's actual credit loss experience and creditworthiness of Vermilion's customers and joint operations
partners, the impact of adopting this credit loss model is not expected to be material.
•
IFRS 15 establishes a comprehensive framework for determining whether, how much, and when revenue from contracts with customers is recognized.
Vermilion's revenue consists of the sale of petroleum and natural gas to customers at specified delivery points with pricing determined based on
benchmark pricing plus or minus applicable offsets. Based on the Company's historic and outstanding contracts with customers, Vermilion anticipates
that there will be no material changes to the timing, measurement, or presentation of revenue upon adoption of IFRS 15. However, there will be
additional disclosure requirements necessary to comply with IFRS 15. This additional disclosure will primarily relate to the disclosure of the
disaggregation of revenue by commodity, information which is currently available within Vermilion's Management's Discussion and Analysis.
Vermilion is required to adopt IFRS 16 "Leases" by January 1, 2019. IFRS 16 requires lessees to recognize a lease obligation and right-of-use asset
for the majority of leases. On adoption, non-current assets, current liabilities, and non-current liabilities on Vermilion's consolidated balance sheet will
increase. Interest expense will be recognized on the lease obligation and lease payments will be applied against the lease obligation. This is expected
to result in a decrease to operating expense and general and administration expense. The quantitative impact of the adoption of IFRS 16 is currently
being evaluated.
4. SEGMENTED INFORMATION
Vermilion has a decentralized business unit structure designed to manage assets in each country the Company operates in. Excluding the Corporate
segment, each of the below operating segments derives its revenues solely from the production and sale of petroleum and natural gas.
Vermilion’s Corporate segment aggregates costs incurred at the Company’s Corporate head office located in Calgary, Alberta, Canada as well as costs
incurred relating to Vermilion’s exploration activities in Central and Eastern Europe. These operating segments have similar economic characteristics
as they do not currently generate revenue.
Vermilion’s chief operating decision maker regularly reviews fund flows from operations generated by each of Vermilion’s operating segments. Fund
flows from operations is a measure of profit or loss that provides the chief operating decision maker with the ability to assess the operating segments’
profitability and, correspondingly, the ability of each operating segment to fund its share of dividends, asset retirement obligations, and capital
investments.
Vermilion has three major customers with revenues in excess of 10% of consolidated revenues within the France, Netherlands, and Ireland operating
segments. Substantially all sales in the France, Netherlands, and Ireland operating segments for the years ended December 31, 2017 and 2016 were
to one customer in each respective segment.
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Vermilion Energy Inc.
2017 Annual Report
($M)
Total assets
Drilling and development
Exploration and evaluation
Oil and gas sales to external customers
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized gain on derivative instruments
Realized foreign exchange gain
Realized other income
Fund flows from operations
($M)
Total assets
Drilling and development
Exploration and evaluation
Oil and gas sales to external customers
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized gain on derivative instruments
Realized foreign exchange gain
Realized other income
Fund flows from operations
Canada
1,542,193
148,667
—
330,903
(33,258 )
297,645
(17,368 )
(80,444 )
(9,604 )
—
—
—
—
—
—
190,229
Canada
1,522,243
62,706
—
252,867
(21,475 )
231,392
(15,392 )
(71,543 )
(11,826 )
—
—
—
—
—
—
132,631
Year Ended December 31, 2017
France Netherlands
203,929
831,783
15,107
71,087
16,468
2,294
108,060
268,103
(1,722 )
(28,565 )
106,338
239,538
—
(14,627 )
(21,212 )
(51,002 )
(2,212 )
(13,585 )
—
—
3,331
(10,556 )
—
—
—
—
—
—
—
—
86,245
149,768
Germany
295,026
6,165
3,366
68,696
(6,655 )
62,041
(6,207 )
(20,176 )
(7,767 )
—
—
—
—
—
—
27,891
Ireland
667,068
551
—
153,330
—
153,330
(5,205 )
(17,596 )
(2,320 )
—
—
—
—
—
—
128,209
Australia United States Corporate
124,422
236,677
—
29,942
7,728
—
—
154,391
—
—
—
154,391
—
—
—
(50,139 )
(6,350)
(8,194 )
—
(19,819 )
(527)
(4,536 )
—
(57,313)
4,721
—
2,316
—
—
674
71,703
(56,479)
73,867
19,074
—
15,355
(4,276)
11,079
(41)
(1,698)
(4,341)
—
—
—
—
—
—
4,999
Year Ended December 31, 2016
France Netherlands
220,350
835,141
23,740
68,472
—
—
100,707
246,863
(1,462 )
(27,091 )
99,245
219,772
—
(14,758 )
(20,796 )
(50,000 )
(1,525 )
(19,101 )
—
—
(6,624 )
(2,867 )
—
—
—
—
—
—
—
3,822
70,300
136,868
Germany
292,885
3,803
—
29,049
(2,089 )
26,960
(2,869 )
(12,379 )
(8,314 )
—
—
—
—
—
—
3,398
Ireland
756,893
9,375
—
109,156
—
109,156
(6,492 )
(18,646 )
(4,772 )
—
—
—
—
—
—
79,246
Australia United States Corporate
131,294
267,183
—
59,910
863
—
—
136,835
—
—
—
136,835
—
—
—
(47,507 )
2,733
(6,400 )
—
(1,568 )
(1,097)
(7,522 )
—
(56,957)
65,376
—
4,041
—
205
—
14,301
73,838
61,195
13,539
—
7,314
(2,167)
5,147
—
(1,314)
(3,624)
—
—
—
—
—
—
209
Total
3,974,965
290,593
29,856
1,098,838
(74,476)
1,024,362
(43,448)
(242,267)
(54,373)
(19,819)
(12,288)
(57,313)
4,721
2,316
674
602,565
Total
4,087,184
241,545
863
882,791
(54,284)
828,507
(39,511)
(222,185)
(52,829)
(1,568)
(18,110)
(56,957)
65,376
4,041
4,027
510,791
Reconciliation of fund flows from operations to net earnings (loss):
($M)
Fund flows from operations
Accretion
Depletion and depreciation
Impairment
Gain on business combination
Unrealized loss on derivative instruments
Equity based compensation
Unrealized foreign exchange gain (loss)
Unrealized other expense
Deferred tax
Net earnings (loss)
65
Year Ended
Dec 31, 2017
602,565
(26,971)
(491,683)
—
—
(1,062)
(61,579)
71,742
(637)
(30,117)
62,258
Dec 31, 2016
510,791
(24,783)
(528,002)
(14,762)
22,001
(137,993)
(69,235)
(792)
(131)
82,855
(160,051)
Vermilion Energy Inc.
5. BUSINESS COMBINATIONS
2017 Annual Report
In December of 2016, Vermilion acquired, through a wholly-owned subsidiary, interests in production and exploration assets in Germany from Engie
E&P Deutschland GmbH. The acquisition includes operated and non-operated interests in five oil and three gas producing fields, along with an operated
interest in one exploration license. The acquisition provides Vermilion its first operated producing properties in Germany, and advances the Company’s
objective of developing a material business unit in this country.
The acquisition was accounted for as a business combination. The total consideration paid and the fair value of the assets acquired and liabilities
assumed at the date of acquisition are summarized as follows:
($M)
Cash paid to vendor
Total consideration
($M)
Capital assets
Asset retirement obligations
Deferred taxes
Crude oil inventory
Net assets acquired
Gain on business combination
Total net assets acquired, net of gain on business combination
Consideration
48,377
48,377
Allocation of Consideration
142,350
(66,965)
(7,767)
2,760
70,378
(22,001)
48,377
As the acquisition of control occurred late in 2016, the results of operations from the assets acquired were not significant to Vermilion's consolidated
financial statements for the year ended December 31, 2016. Had the acquisition occurred on January 1, 2016, management estimates that
consolidated revenues would have increased by $29.3 million and consolidated fund flows from operations would have increased by $8.1 million for
the year ended December 31, 2016.
The gain on business combination resulted from the recognition of additional reserve value when the acquisition closed in December 2016, compared
to the estimated value in June when Vermilion entered into a definitive purchase and sale agreement and the acquisition price was determined.
6. CAPITAL ASSETS
The following table reconciles the change in Vermilion's capital assets:
($M)
Balance at January 1
Additions
Transfers from exploration and evaluation assets
Property acquisitions
Changes in asset retirement obligations
Depletion and depreciation
Recognition of finance lease asset
Impairment
Foreign exchange
Balance at December 31
Cost
Accumulated depletion and depreciation
Carrying amount at December 31
2017
3,433,245
290,593
8,187
25,390
(48,187)
(479,698)
—
—
108,435
3,337,965
6,539,052
(3,201,087)
3,337,965
2016
3,467,369
241,545
—
189,853
149,492
(491,508)
960
(14,762)
(109,704)
3,433,245
6,256,485
(2,823,240)
3,433,245
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Vermilion Energy Inc.
2017 Annual Report
2017 Impairment Assessment
As at December 31, 2017, Vermilion did not identify any indicators of impairment.
On December 19, 2017, France's Parliament passed legislation impacting oil and gas exploration and production on French territories. The legislation
eliminates the issuance of future oil and gas exploration licenses and places restrictions on oil and gas development starting in 2040. Vermilion
assessed whether there are any indications of impairment in our cash generating units in France as a result of this legislation and determined that the
value of the cash generating units have not significantly declined. The impact of this legislation is a decrease of less than 2% of Vermilion's reserves
in France. As such, Vermilion concluded that the legislation does not constitute an indicator of impairment.
2016 Impairment
As at December 31, 2016 Vermilion did not identify any indicators of impairment. However, in the first quarter of 2016, as a result of declines in price
forecasts for European natural gas, Vermilion recorded a non-cash impairment charge of $14.8 million (based on a recoverable amount of $737.3
million) in the Ireland segment.
7. EXPLORATION AND EVALUATION ASSETS
The following table reconciles the change in Vermilion's exploration and evaluation assets:
($M)
Balance at January 1
Additions
Property acquisitions
Changes in asset retirement obligations
Transfers to capital assets
Depreciation
Foreign exchange
Balance at December 31
Cost
Accumulated depreciation
Carrying amount at December 31
8. ASSET RETIREMENT OBLIGATIONS
The following table reconciles the change in Vermilion’s asset retirement obligations:
($M)
Balance at January 1
Additional obligations recognized
Changes in estimates
Obligations settled
Accretion
Changes in discount rates
Foreign exchange
Balance at December 31
2017
274,830
29,856
2,247
(30)
(8,187)
(11,727)
5,289
292,278
354,615
(62,337)
292,278
2017
525,022
3,273
(48,904)
(9,334)
26,971
(2,586)
22,738
517,180
2016
308,192
863
2,644
14
—
(35,238)
(1,645)
274,830
333,835
(59,005)
274,830
2016
305,613
68,288
3,454
(9,617)
24,783
144,729
(12,228)
525,022
Vermilion has estimated the asset retirement obligations based on a total undiscounted future liability of $1.6 billion (2016 - $1.4 billion). These
payments are expected to be made between 2018 and 2067, with the majority of spending occurring between 2027 and 2034 ($0.6 billion) and between
2063 and 2067 ($0.4 billion). Inflation rates used in determining the cash flow estimates were between 0.6% and 2.2% (2016 - between 0.5% and
2.2%). Vermilion calculated the present value of the obligations using a credit-adjusted risk-free rate, calculated using a credit spread of 3.8% (2016
- 3.8%) added to risk-free rates based on long-term, risk-free government bonds.
The risk-free rates used as inputs to discount the obligations were as follows:
67
Vermilion Energy Inc.
Canada
France
Netherlands
Germany
Ireland
Australia
USA
2017 Annual Report
Dec 31, 2017
2.3%
1.8%
0.5%
1.0%
0.4%
2.9%
2.4%
Dec 31, 2016
2.3 %
1.7 %
(0.3)%
0.9 %
0.5 %
3.2 %
2.6 %
A 0.5% increase/decrease in the discount rate applied to asset retirement obligations would decrease/increase asset retirement obligations by
approximately $40.0 million. A one year increase/decrease in the expected timing of abandonment spend would decrease/increase asset retirement
obligations by approximately $20.0 million.
9. DERIVATIVE INSTRUMENTS
The following tables summarize Vermilion's outstanding risk management positions as at December 31, 2017:
Exercise date (1) Currency
Bought Put
Volume
(bbl/d)
Weighted
Average Bought
Put
Sold Call
Volume
Weighted
Average
Sold Call
Sold Put
Volume
Weighted
Average
Sold Put
Price / bbl
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
Swap
Volume
Weighted
Average
Swap
(bbl/d) Price / bbl
Additional
Swap
Volume
(bbld) (2)
Crude Oil
Period
Dated Brent
Swap
Jan 2018 - Dec 2018
3-Way Collar
Jul 2017 - Jun 2018
3-Way Collar
Jul 2017 - Dec 2018
3-Way Collar
Oct 2017 - Dec 2018
3-Way Collar
Dec 2017 - Mar 2018
3-Way Collar
Jan 2018 - Jun 2018
Collar
Swap
Swap
Swaption
Swaption
WTI
Swap
Jan 2018 - Dec 2018
Jan 2018 - Mar 2018
Jan 2018 - Dec 2018
Apr 2018 - Mar 2019
Jan 31, 2018
Apr 2018 - Mar 2019
Mar 30, 2018
Jan 2018 - Jan 2018
3-Way Collar
Jan 2018 - Jun 2018
Collar
Swap
Swap
Jan 2018 - Dec 2018
Jan 2018 - Jun 2018
Jan 2018 - Dec 2018
Swaption
Apr 2018 - Mar 2019
Jan 31, 2018
CAD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
CAD
USD
USD
USD
USD
USD
—
2,000
2,000
2,000
500
1,000
1,000
—
—
—
—
—
500
500
—
—
—
—
55.00
48.89
50.50
57.50
53.58
50.00
—
—
—
—
—
48.50
50.00
—
—
—
—
2,000
2,000
2,000
500
1,000
1,000
—
—
—
—
—
500
500
—
—
—
—
64.06
55.00
55.75
62.50
59.50
57.50
—
—
—
—
—
56.00
55.00
—
—
—
—
2,000
2,000
2,000
500
1,000
—
—
—
—
—
—
500
—
—
—
—
—
45.00
42.50
43.00
52.50
46.25
—
—
—
—
—
—
42.50
—
—
—
—
500
—
—
—
—
—
—
750
1,000
500
750
1,000
—
—
500
1,000
250
76.25
—
—
—
—
—
—
67.22
55.00
60.00
64.33
75.50
—
—
54.00
54.00
54.00
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Period Exercise date (1) Currency
Bought Put
Volume
(mmbtu/d)
Weighted
Average Bought
Put Price /
mmbtu
Sold Call
Volume
Weighted
Average
Sold
(mmbtu/d) Call Price /
mmbtu
Sold Put
Volume
(mmbtu/d)
Weighted
Average
Sold
Put Price /
mmbtu
Swap
Volume
(mmbtu/d)
Weighted
Average
Swap
Price /
mmbtu
Additional
Swap
Volume
(mmbtu/d) (2)
North American Gas
AECO
Swap
Jan 2018 - Dec 2018
AECO Basis (AECO less NYMEX HH)
Oct 2017 - Dec 2018
Jan 2018 - Dec 2018
Jan 2019 - Jun 2020
Swap
Swap
Swap
NYMEX HH
3-Way Collar
Oct 2017 - Dec 2018
3-Way Collar
Jan 2018 - Dec 2018
Swap
Apr 2018 - Dec 2018
CAD
USD
USD
USD
USD
USD
USD
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,000
10,000
—
3.11
3.06
—
10,000
10,000
—
3.40
3.40
—
10,000
10,000
—
—
—
—
—
2.40
2.40
—
9,478
2.80
10,000
20,000
2,500
—
—
10,000
(1.03)
(0.95)
(0.93)
—
—
3.10
—
—
—
—
—
—
—
(1) The sold swaption instrument allows the counterparty, at the specified date, to enter into a derivative instrument contract with Vermilion at the above detailed terms.
(2) On the last business day of each month, the counterparty has the option to increase the contracted volumes for the following month.
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Vermilion Energy Inc.
2017 Annual Report
Period Exercise date (1) Currency
Bought Put
Volume
(mmbtu/d)
Weighted
Average Bought
Put Price /
mmbtu
Sold Call
Volume
Weighted
Average
Sold
(mmbtu/d) Call Price /
mmbtu
Sold Put
Volume
(mmbtu/d)
Weighted
Average
Sold
Put Price
/mmbtu
Swap
Volume
(mmbtu/d)
Weighted
Average
Swap
Price /
mmbtu
Additional
Swap
Volume
(mmbtu/d) (2)
European Gas
NBP
3-Way Collar
Apr 2018 - Sep 2018
3-Way Collar
Jan 2019 - Dec 2019
3-Way Collar
Jan 2019 - Dec 2020
3-Way Collar
Jan 2020 - Dec 2020
Swap
Call
Put
Collar
Swap
Swap
Jan 2018 - Jan 2018
Oct 2018 - Mar 2019
Apr 2018 - Sep 2018
Jan 2018 - Dec 2018
Apr 2017 - Mar 2018
Jan 2018 - Dec 2018
NBP Basis (NBP less NYMEX HH)
Jan 2018 - Dec 2018
Jan 2019 - Sep 2020
Collar
Collar
TTF
3-Way Collar
Oct 2017 - Dec 2019
3-Way Collar
Jan 2018 - Dec 2018
3-Way Collar
Jan 2018 - Dec 2019
3-Way Collar
Jan 2019 - Dec 2019
Collar
Collar
Swap
Swap
Swap
Swap
Swap
Swap
Swap
Jul 2016 - Mar 2018
Jan 2018 - Dec 2018
Jul 2016 - Jun 2018
Apr 2017 - Jun 2018
Oct 2017 - Dec 2018
Oct 2017 - Dec 2019
Jan 2018 - Dec 2019
Jul 2018 - Dec 2019
Jan 2019 - Dec 2019
Swaption
Jan 2019 - Dec 2020
April 30, 2018
EUR
EUR
EUR
EUR
EUR
EUR
EUR
GBP
GBP
GBP
USD
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
4,913
14,740
7,370
14,740
—
—
—
2,500
—
—
2,500
7,500
7,370
12,284
3,685
9,827
2,457
4,913
—
—
—
—
—
—
—
—
4.73
4.82
4.96
4.85
—
—
—
3.15
—
—
1.85
2.07
4.59
4.75
4.74
4.92
5.61
4.40
—
—
—
—
—
—
—
—
4,913
14,740
7,370
14,740
—
2,457
—
2,500
—
—
2,500
7,500
7,370
12,284
3,685
9,827
4,913
4,913
—
—
—
—
—
—
—
—
5.42
5.52
5.76
5.63
—
6.42
—
3.82
—
—
4.00
4.00
5.42
5.48
5.52
5.48
6.90
5.31
—
—
—
—
—
—
—
—
4,913
14,740
7,370
14,740
—
—
2,457
—
—
—
—
—
7,370
12,284
3,685
9,827
—
—
—
—
—
—
—
—
—
—
3.52
3.74
3.74
3.88
—
—
4.98
—
—
—
—
—
2.93
3.25
3.13
3.66
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,913
—
—
—
5,300
2,500
—
—
—
—
6.80
—
—
—
4.20
4.04
—
—
—
—
—
—
—
—
—
—
2,559
4,299
17,197
7,370
1,228
4,913
2,457
9,827
—
—
—
—
—
—
5.89
4.50
4.80
4.87
5.00
4.98
4.92
5.28
—
—
—
—
—
—
—
—
—
5,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cross Currency Interest Rate
Swap
Jan 2018
Receive Notional amount (USD)
Rate (LIBOR +)
Pay Notional amount(CAD)
603,793,015
1.70%
775,800,000
Rate (CDOR +)
1.11%
(1) The sold swaption instrument allows the counterparty, at the specified date, to enter into a derivative instrument contract with Vermilion at the above detailed terms.
(2) On the last business day of each month, the counterparty has the option to increase the contracted volumes for the following month.
69
Vermilion Energy Inc.
2017 Annual Report
The following table reconciles the change in the fair value of Vermilion’s derivative instruments:
($M)
Fair value of contracts, beginning of year
Reversal of opening contracts settled during the year
Realized gain on contracts settled during the year
Unrealized loss during the year on contracts outstanding at the end of the year
Net receipt from counterparties on contract settlements during the year
Fair value of contracts, end of year
Comprised of:
Current derivative asset
Current derivative liability
Non-current derivative asset
Non-current derivative liability
Fair value of contracts, end of year
The (gain) loss on derivative instruments for 2017 and 2016 were comprised of the following:
($M)
Realized gain on contracts settled during the year
Reversal of opening contracts settled during the year
Unrealized loss during the year on contracts outstanding at the end of the year
(Gain) loss on derivative instruments
10. LEASES
Vermilion had the following future commitments associated with its operating leases:
($M)
Less than 1 year
1 - 3 years
4 - 5 years
After 5 years
Total minimum lease payments
Year Ended
Dec 31, 2017
(69,651)
43,324
4,721
(44,386)
(4,721)
(70,713)
17,988
(78,905)
2,552
(12,348)
(70,713)
Dec 31, 2016
68,342
(55,214)
65,376
(82,779)
(65,376)
(69,651)
4,336
(47,660)
1,157
(27,484)
(69,651)
Year Ended
Dec 31, 2017
(4,721)
(43,324)
44,386
(3,659)
Dec 31, 2016
(65,376)
55,214
82,779
72,617
As at
Dec 31, 2017
10,716
19,129
10,303
28
40,176
Dec 31, 2016
12,683
21,087
18,228
1,657
53,655
A solution gas facility used in Vermilion’s southeast Saskatchewan operations has been recorded as a finance lease. As at December 31, 2017 the
carrying amount of the asset included in capital assets is $22.9 million (2016 - $26.1 million).
Vermilion had the following future commitments associated with its finance lease:
($M)
Less than 1 year
1 - 3 years
4 - 5 years
After 5 years
Total minimum lease payments
Amounts representing interest
Present value of net minimum lease payments
Current portion of finance lease obligation
Non-current portion of finance lease obligation
70
As at
Dec 31, 2017
6,680
10,207
4,665
3,351
24,903
(3,526)
21,377
(5,570)
15,807
Dec 31, 2016
6,495
12,990
6,043
4,501
30,029
(3,894)
26,135
(6,507)
19,628
Vermilion Energy Inc.
11. TAXES
The following table reconciles Vermilion’s deferred tax asset and liability:
($M)
Deferred tax liabilities:
Capital assets
Non-capital losses
Asset retirement obligations
Unrealized foreign exchange
Derivative contracts
Other
Deferred tax liabilities
Deferred tax assets:
Non-capital losses
Capital assets
Asset retirement obligations
Derivative contracts
Unrealized foreign exchange
Other
Deferred tax assets
2017 Annual Report
As at
Dec 31, 2017
Dec 31, 2016
(259,236)
34,703
(27,868)
(13,355)
11,386
1,262
(253,108)
342,202
(294,178)
28,056
10,164
(7,927)
2,007
80,324
(265,772)
20,561
(20,577)
(15,386)
—
(2,359)
(283,533)
155,447
(55,718)
28,960
18,806
(72)
4,623
152,046
Income tax expense differs from the amount that would have been expected if the reported earnings had been subject only to the statutory Canadian
income tax rate as follows:
($M)
Earnings (loss) before income taxes
Canadian corporate tax rate
Expected tax expense (recovery)
Increase (decrease) in taxes resulting from:
Year Ended
Dec 31, 2017
124,482
27.0%
33,610
Dec 31, 2016
(223,228)
27.0%
(60,272)
Petroleum resource rent tax rate (PRRT) differential (1)
Foreign tax rate differentials (1), (2)
Equity based compensation expense
Amended returns and changes to estimated tax pools and tax positions
Statutory rate changes and the estimated reversal rates associated with temporary differences (3)
De-recognition of deferred tax assets
Adjustment for uncertain tax positions
Other non-deductible items
1,064
(16,675)
14,987
6,451
(53,150)
46,253
3,675
(5,510)
(63,177)
In Australia, current taxes include both corporate income tax rates and PRRT. Corporate income tax rates were applied at a rate of 30% and PRRT was applied
at a rate of 40%.
The applicable tax rates for 2017 were: 34.4% in France, 50.0% in the Netherlands, 26.3% in Germany, 25% in Ireland, and 35% in the United States.
3,531
7,146
10,343
(17,246)
(16,449)
44,608
2,191
(5,510)
62,224
(2)
(3) On December 22, 2017, the Tax Cuts and Jobs Act was signed into law in the United States reducing the U.S. federal corporate income tax rate from 35% to
21%. On December 21, 2017, the French Parliament approved the Finance Bill for 2018. The Finance Bill for 2018 provides for a progressive decrease of the
French standard corporate income tax rate from 34.43% to 25.825% by 2022.
Provision for income taxes
(1)
At December 31, 2017, Vermilion had $2.0 billion (2016 - $1.0 billion) of unused tax losses of which $0.5 billion (2016 - $0.5 billion) related to Vermilion's
Canada segment and expire between 2030 and 2037. The majority of the remaining unused tax losses relate to Vermilion's Ireland segment and do
not expire. The year-over-year increase in unused tax losses is due to a reclassification of Vermilion's Ireland tax pools from capital asset tax pools to
tax loss pools - both types of tax pools can be applied directly against taxable income and neither type of tax pool is subject to expiration.
At December 31, 2017, Vermilion has de-recognized $145.6 million (2016 - $96.1 million) of deferred tax assets relating to the aforementioned non-
expiring tax loss pools in Ireland as there is uncertainty as to the Company’s ability to fully utilize such losses based on forecasted commodity prices
in effect as at December 31, 2017.
71
Vermilion Energy Inc.
2017 Annual Report
The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognized
as at December 31, 2017 is approximately $1.2 billion (2016 – approximately $1.5 billion).
12. LONG-TERM DEBT
The following table summarizes Vermilion’s outstanding long-term debt:
($M)
Revolving credit facility
Senior unsecured notes
Long-term debt
The following table reconciles the change in Vermilion’s long-term debt:
($M)
Balance at January 1
(Repayments) borrowings on the revolving credit facility
Issuance (repayment) of senior unsecured notes
Amortization of transaction costs and prepaid interest
Foreign exchange
Balance at December 31
Revolving Credit Facility
As at
Dec 31, 2017
899,595
370,735
1,270,330
Dec 31, 2016
1,362,192
—
1,362,192
2017
1,362,192
(450,646)
391,906
2,012
(35,134)
1,270,330
2016
1,387,899
200,378
(225,000)
2,337
(3,422)
1,362,192
At December 31, 2017 and 2016, Vermilion had in place a bank revolving credit facility maturing May 31, 2021 with the following terms:
($M)
Total facility amount
Amount drawn
Letters of credit outstanding
Unutilized capacity
As at
Dec 31, 2017
1,400,000
(899,595)
(7,400)
493,005
Dec 31, 2016
2,000,000
(1,362,192)
(20,100)
617,708
The facility can be extended from time to time at the option of the lenders and upon notice from Vermilion. If no extension is granted by the lenders,
the amounts owing pursuant to the facility are due at the maturity date. The facility is secured by various fixed and floating charges against the
subsidiaries of Vermilion.
The facility bears interest at a rate applicable to demand loans plus applicable margins. For the year ended December 31, 2017, the effective interest
rate was 3.7% (2016 - 4.0%). For the year ended December 31, 2017, a 1% increase in the average Canadian prime interest rate would decrease net
earnings before tax by $8.0 million (2016 - $11.7 million).
In April 2017, as a result of proceeds from the issuance of the senior unsecured notes and projected liquidity requirements, Vermilion elected to reduce
the total facility amount from $2.0 billion to $1.4 billion.
As at December 31, 2017, the revolving credit facility was subject to the following financial covenants:
Financial covenant
Consolidated total debt to consolidated EBITDA
Consolidated total senior debt to consolidated EBITDA
Consolidated total senior debt to total capitalization
Limit
4.0
3.5
55%
As at
Dec 31, 2017
1.87
1.30
32%
Dec 31, 2016
2.36
2.32
46%
72
Vermilion Energy Inc.
2017 Annual Report
The financial covenants include financial measures defined within the revolving credit facility agreement that are not defined under IFRS. These
financial measures are defined by the revolving credit facility agreement as follows:
• Consolidated total debt: Includes all amounts classified as “Long-term debt”, “Current portion of long-term debt”, and “Finance lease obligation”
on our balance sheet.
• Consolidated total senior debt: Defined as consolidated total debt excluding unsecured and subordinated debt.
• Consolidated EBITDA: Defined as consolidated net earnings before interest, income taxes, depreciation, accretion and certain other non-cash
•
items.
Total capitalization: Includes all amounts on the balance sheet classified as “Shareholders’ equity” plus consolidated total debt as defined
above.
As at December 31, 2017 and 2016, Vermilion was in compliance with the above covenants.
Senior Unsecured Notes
On March 13, 2017, Vermilion issued US $300.0 million of senior unsecured notes at par. The notes bear interest at a rate of 5.625% per annum, to
be paid semi-annually on March 15 and September 15. The notes mature on March 15, 2025. As direct senior unsecured obligations of Vermilion,
the notes rank equally with existing and future senior unsecured indebtedness of the Company.
The senior unsecured notes were recognized at amortized cost and include the transaction costs directly related to the issuance.
Vermilion may, at its option, redeem the notes prior to maturity as follows:
• Prior to March 15, 2020, Vermilion may redeem up to 35% of the original principal amount of the senior unsecured notes with the proceeds of
certain equity offerings by the Company at a redemption price of 105.625% of the principal amount plus any accrued and unpaid interest to the
applicable redemption date.
• Prior to March 15, 2020, Vermilion may redeem some or all of the senior unsecured notes at a price equal to 100% of the principal amount of the
senior unsecured notes, plus an applicable premium and any accrued and unpaid interest.
• On or after March 15, 2020, Vermilion may redeem some or all of the senior unsecured notes at the redemption prices set forth in the following
table plus any accrued and unpaid interest.
Year
2020
2021
2022
2023 and thereafter
13. SHAREHOLDERS’ CAPITAL
Redemption price
104.219%
102.813%
101.406%
100.000%
The following table reconciles the change in Vermilion’s shareholders’ capital:
Shareholders’ Capital
Balance at January 1
Shares issued for the Dividend Reinvestment Plan
Vesting of equity based awards
Shares issued for equity based compensation
Share-settled dividends on vested equity based awards
Balance at December 31
2017
2016
Shares
('000s) Amount ($M)
2,452,722
118,263
110,493
2,429
69,743
1,060
9,270
197
8,478
170
2,650,706
122,119
Shares
('000s) Amount ($M)
2,181,089
111,991
192,998
4,672
1,320
67,146
8,247
193
87
3,242
2,452,722
118,263
Vermilion is authorized to issue an unlimited number of common shares with no par value.
Dividends are approved by the Board of Directors and are paid monthly. Dividends declared to shareholders for the year ended December 31, 2017
were $311.4 million or $2.58 per common share (2016 - $299.1 million or $2.58 per common share).
Subsequent to the end of year-end and prior to the consolidated financial statements being authorized for issue on February 28, 2018, Vermilion
declared dividends of $52.6 million or $0.215 per share for each of January and February of 2018.
73
Vermilion Energy Inc.
14. CAPITAL DISCLOSURES
2017 Annual Report
Vermilion defines capital as net debt (long-term debt plus net working capital) and shareholders’ capital.
Vermilion monitors the ratio of net debt to fund flows from operations. As at December 31, 2017 our ratio of net debt to trailing fund flows from
operations is 2.3 (2016 - 2.8). Vermilion manages the ratio of net debt to fund flows from operations (refer to Financial Statement Note 4 - Segmented
Information) by aligning capital expenditures, dividends, and asset retirement obligations with expected fund flows from operations. Vermilion intends
for the ratio of net debt to fund flows from operations to trend towards 1.5 over time.
The following table calculates Vermilion’s ratio of net debt to fund flows from operations:
($M except as indicated)
Long-term debt
Current liabilities
Current assets
Net debt
Fund flows from operations
Ratio of net debt to fund flows from operations
15. EQUITY BASED COMPENSATION
Year Ended
Dec 31, 2017
1,270,330
363,306
(261,846)
1,371,790
Dec 31, 2016
1,362,192
290,862
(225,906)
1,427,148
602,565
510,791
2.3
2.8
The following table summarizes the number of awards outstanding under the Vermilion Incentive Plan (“VIP”):
Number of Awards ('000s)
Opening balance
Granted
Vested
Modified
Forfeited
Closing balance
2017
1,738
563
(539)
—
(77)
1,685
2016
1,711
777
(628)
11
(133)
1,738
For the year ended December 31, 2017, the awards granted had a weighted average fair value of $49.44 (2016 - $38.41). Equity based compensation
expense is calculated based on the number of VIP awards outstanding multiplied by the estimated performance factor that will be realized upon vesting
(2017 - 1.9; 2016 - 1.9) adjusted by an estimated annual forfeiture rate (2017 - 4.4%; 2016 - 4.6%). Equity based compensation expense related to
the VIP of $52.3 million was recorded during the year ended December 31, 2017 (2016 - $61.0 million).
16. PER SHARE AMOUNTS
Basic and diluted net earnings (loss) per share have been determined based on the following:
($M except per share amounts)
Net earnings (loss)
Basic weighted average shares outstanding ('000s)
Dilutive impact of VIP ('000s)
Diluted weighted average shares outstanding ('000s)
Basic earnings per share
Diluted earnings per share
Year Ended
Dec 31, 2017
62,258
Dec 31, 2016
(160,051)
120,582
1,826
122,408
0.52
0.51
115,695
—
115,695
(1.38)
(1.38)
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Vermilion Energy Inc.
17. FINANCIAL INSTRUMENTS
Classification of Financial Instruments
The following table summarizes information relating to Vermilion’s financial instruments:
2017 Annual Report
FINANCIAL ASSETS
Held for trading
Cash and cash equivalents
Derivative assets
Loans and receivables
Accounts receivable
FINANCIAL LIABILITIES
Held for trading
Derivative liabilities
Other financial liabilities
As at Dec 31, 2017
As at Dec 31, 2016
Carrying value
Fair value
Carrying value
Fair value
46,561
20,540
165,760
46,561
20,540
165,760
62,775
5,493
131,719
62,775
5,493
131,719
(91,253)
(91,253)
(75,144)
(75,144)
Accounts payable and accrued liabilities
Dividends payable
Long-term debt
(219,084)
(26,256)
(1,270,330)
(219,084)
(26,256)
(1,274,891)
(181,557)
(25,426)
(1,362,192)
(181,557)
(25,426)
(1,362,192)
Fair value measurements are categorized into a fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
•
•
•
Level 1 inputs are determined by reference to unadjusted quoted prices in active markets for identical assets or liabilities. Inputs used in fair value
measurement of cash and cash equivalents and the senior unsecured notes (which are included in long-term debt as at December 31, 2017) are
categorized as Level 1.
Level 2 inputs are determined based on inputs other than unadjusted quoted prices that are observable, either directly or indirectly. The fair value
of Vermilion’s derivative assets and liabilities are determined using pricing models that incorporate future price forecasts (supported by prices
from observable market transactions) and credit risk adjustments.
Level 3 inputs are not based on observable market data. Vermilion does not have any financial instruments classified as Level 3.
There were no transfers between levels in the hierarchy in the years ended December 31, 2017 and 2016.
The carrying value of accounts receivable, accounts payable and accrued liabilities, and dividends payable are a reasonable approximation of their
fair value due to the short maturity of these financial instruments. The carrying value of long-term debt outstanding on the revolving credit facility
approximates its fair value due to the use of short-term borrowing instruments at market rates of interest.
Nature and Extent of Risks Associated with Financial Instruments
Vermilion is exposed to financial risks from its financial instruments. These financial risks include: market risk, credit risk, and liquidity risk.
Market Risk
Market risk includes: commodity price risk, interest rate risk, and currency risk.
Commodity price risk
Vermilion is exposed to commodity price risk on its derivative assets and liabilities which are used as part of the Company’s risk management program
to mitigate the effects of changes in commodity prices on future cash flows. While transactions of this nature relate to a forecasted future petroleum
and natural gas production, Vermilion does not designate these derivative assets and liabilities as accounting hedges. As such, changes in commodity
prices impact the fair value of derivative instruments and the corresponding gains or losses on derivative instruments.
Currency risk
Vermilion is exposed to currency risk on its financial instruments denominated in foreign currencies. These financial instruments include cash and
cash equivalents, accounts receivables, accounts payables, long-term debt, derivative assets and derivative liabilities. These financial instruments
are primarily denominated in the US dollar and the Euro. Vermilion monitors its exposure to currency risk and reviews whether the use of derivative
financial instruments is appropriate to manage potential fluctuations in foreign exchange rates.
75
Vermilion Energy Inc.
2017 Annual Report
Interest rate risk
Vermilion is exposed to interest rate risk on its revolving credit facility, which consists of short-term borrowing instruments that bear interest at market
rates. Thus, changes in interest rates could result in an increase or decrease in the amount paid by Vermilion to service this debt.
Vermilion managed exposure to interest rate risk in 2017 by reducing the drawn amount on its revolving credit facility through the issuance of the US
$300.0 million of senior unsecured notes which bear interest at a fixed 5.625% per annum. Additionally, throughout both 2016 and 2017, Vermilion
had in place $200 million in interest rate swaps that mitigated some of the effects of changes in variable interest rates. Subsequent to 2017, as a result
of favourable changes to interest rate curves resulting in an increase in the mark-to-market value of these interest rate swaps, these interest rate
swaps were monetized.
The following table summarizes the increase (positive values) or decrease (negative values) to net earnings before tax due to a change in the value
of Vermilion’s financial instruments as a result of a change in the relevant market risk variable. This analysis does not attempt to reflect any
interdependencies between the relevant risk variables.
($M)
Currency risk - Euro to Canadian dollar
$0.01 increase in strength of the Canadian dollar against the Euro
$0.01 decrease in strength of the Canadian dollar against the Euro
Currency risk - US dollar to Canadian dollar
$0.01 increase in strength of the Canadian dollar against the US $
$0.01 decrease in strength of the Canadian dollar against the US $
Commodity price risk - Crude oil
US $5.00/bbl increase in crude oil price used to determine the fair value of derivatives
US $5.00/bbl decrease in crude oil price used to determine the fair value of derivatives
Commodity price risk - European natural gas
€ 0.5/GJ increase in European natural gas price used to determine the fair value of derivatives
€ 0.5/GJ decrease in European natural gas price used to determine the fair value of derivatives
Dec 31, 2017
Dec 31, 2016
(4,607)
4,607
2,239
(2,239)
(21,616)
19,845
(32,642)
25,321
(859)
859
(9,184)
9,184
(26,513)
18,882
36,999
(33,019)
The table above shows the before tax effect on net earnings for a $0.01 change in the Canadian dollar against the US dollar based on long-term debt
and other financial instruments.
As at December 31, 2017, Vermilion had US $0.6 billion in cross currency interest rate swaps as well as offsetting borrowings of $US 0.6 billion on the
revolving credit facility. As such, the $2.2 million increase or decrease shown above for the year ended December 31, 2017 primarily related to
Vermilion's US $300.0 million in senior unsecured notes issued in 2017.
As at December 31, 2016, Vermilion had US $0.9 billion in cross currency interest rate swaps effective for January 2017. Subsequent to December
31, 2016, Vermilion repaid $1.2 billion of borrowings on the revolving credit facility bearing interest at CDOR (Canadian Dollar Offered Rate) plus
applicable margins, and simultaneously borrowed US $0.9 billion on the revolving credit facility bearing interest at LIBOR (London Interbank Offered
Rate) plus applicable margins. As this transaction occurred subsequent to December 31, 2016, it was not included in the calculations shown in the
above table. If included, the before tax effect on net earnings for a $0.01 increase/decrease in the Canadian dollar against the US dollar as at
December 31, 2016 would have been a decrease/increase of $0.3 million.
76
Vermilion Energy Inc.
2017 Annual Report
Credit Risk:
Vermilion is exposed to credit risk on accounts receivable and derivative assets in the event that customers, joint operation partners, or counterparties
fail to discharge their contractual obligations. As at December 31, 2017, Vermilion’s maximum exposure to receivable credit risk was $186.3 million
(December 31, 2016 - $137.2 million) which is the value of accounts receivable and derivative assets on the balance sheet.
Vermilion’s accounts receivable primarily relates to customers and joint operations partners in the petroleum and natural gas industry. These amounts
are subject to normal industry payment terms and credit risks. Vermilion manages these risks by monitoring the creditworthiness of customers and
joint operations partners and, where appropriate, obtaining assurances such as parental guarantees and letters of credit. As at the balance sheet
date, approximately 0.7% (2016 - 2.1%) of the accounts receivable balance was outstanding for more than 90 days. Vermilion considers the balance
of accounts receivable to be collectible.
Vermilion’s derivative assets primarily relates to the fair value of financial instruments used as part of the Company’s risk management program to
mitigate the effects of changes in commodity prices on future cash flows. Vermilion manages this risk by monitoring the creditworthiness of
counterparties, transacting primarily with counterparties that have investment grade third party credit ratings, and by limiting the concentration of
financial exposure to individual counterparties. As a result, Vermilion has not obtained collateral or other security to support its financial derivatives.
Vermilion’s cash deposited in financial institutions and guaranteed investment certificates are also subject to counterparty credit risk. Vermilion
mitigates this risk by transacting with financial institutions with high third party credit ratings.
Liquidity Risk:
Liquidity risk is the risk that Vermilion will encounter difficulty in meeting obligations associated with its financial liabilities. Vermilion does not consider
this to be a significant risk as its financial position and available committed borrowing facility provide significant financial flexibility and allow Vermilion
to meet its obligations as they come due.
The following table summarizes Vermilion’s undiscounted non-derivative financial liabilities and their contractual maturities:
($M)
December 31, 2017
December 31, 2016
18. RELATED PARTY DISCLOSURES
1 month
99,092
79,509
1 month to
3 months
138,273
120,233
3 months to
1 year
7,974
7,241
1 year to
5 years
912,306
1,377,819
The compensation of directors and management is reviewed annually by the independent Governance and Human Resources Committee against
industry practices for oil and gas companies of similar size and scope.
The following table summarizes the compensation of directors and other members of key management personnel during the years ended December 31,
2017 and 2016:
($M)
Short-term benefits
Share-based payments
Number of individuals included in the above amounts
Year Ended
Dec 31, 2017
5,183
20,135
25,318
20
Dec 31, 2016
4,748
20,169
24,917
18
During the year ended December 31, 2017, Vermilion recorded $0.2 million of office rent recoveries (2016 - $0.2 million) relating to an office sub-lease
to a company whose Managing Director is also a member of Vermilion's Board of Directors. This related party transaction is provided in the normal
course of business under the same commercial terms and conditions as transactions with unrelated companies and is recorded at the exchange
amount.
77
Vermilion Energy Inc.
19. SUPPLEMENTAL INFORMATION
Changes in non-cash working capital was comprised of the following:
($M)
Changes in:
Accounts receivable
Crude oil inventory
Prepaid expenses
Accounts payable and accrued liabilities
Income taxes payable
Foreign exchange
Changes in non-cash working capital
Changes in non-cash operating working capital
Changes in non-cash investing working capital
Changes in non-cash working capital
Cash and cash equivalents was comprised of the following:
($M)
Cash on deposit with financial institutions
Guaranteed investment certificates
Cash and cash equivalents
Wages and benefits included in operating expenses and general and administration expenses were:
($M)
Operating expense
General and administration expense
Wages and benefits
20. SUBSEQUENT EVENTS
2017 Annual Report
Year Ended
Dec 31, 2017
Dec 31, 2016
(34,041)
(2,577)
(1,884)
37,527
2,842
(795)
1,072
665
407
1,072
28,780
1,311
1,762
(67,190)
30,213
1,192
(3,932)
8,366
(12,298)
(3,932)
As at
Dec 31, 2017
46,229
332
46,561
Dec 31, 2016
62,614
161
62,775
Year Ended
2017
48,823
36,708
85,531
2016
45,061
35,347
80,408
On February 15, 2018, Vermilion acquired all of the issued and outstanding shares of a private producer with assets in southeast Saskatchewan and
southwest Manitoba. The acquisition is comprised of light oil producing fields near Vermilion's existing operations in southeast Saskatchewan. Total
consideration of $90.8 million, which includes both cash paid to the shareholders' of the acquiree and the assumption of the acquiree's long-term
debt, was funded through Vermilion's revolving credit facility.
Given the recent timing of the acquisition, at the time these financial statements were authorized for issue, the initial accounting for the business
combination is incomplete. Accordingly, not all relevant disclosures are available for the business combination. The Company will report the
purchase price allocation and related disclosures in Vermilion's interim consolidated financial statements for the three months ended March 31, 2018.
78
Vermilion Energy Inc.
2017 Annual Report
DIRECTORS
Lorenzo Donadeo 1
Calgary, Alberta
Larry J. Macdonald 2, 3, 4, 5
Chairman & CEO, Point Energy Ltd.
Calgary, Alberta
Stephen P. Larke 3, 4
Calgary, Alberta
Loren M. Leiker 6
Houston, Texas
William F. Madison 5, 6
Sugar Land, Texas
Timothy R. Marchant 5, 6
Calgary, Alberta
Anthony Marino
Calgary, Alberta
Robert Michaleski 3, 4
Calgary, Alberta
Sarah E. Raiss 4, 5
Calgary, Alberta
William Roby 5, 6
Katy, Texas
Catherine L. Williams 3, 4
Calgary, Alberta
1 Chairman of the Board
2 Lead Director
3 Audit Committee
4 Governance and Human Resources Committee
5 Health, Safety and Environment Committee
6 Independent Reserves Committee
thousand dollars
ABBREVIATIONS
$M
$MM million dollars
AECO
the daily average benchmark price for natural gas at the
AECO
‘C’ hub in Alberta
bbl(s)
barrel(s)
bbls/d barrels per day
boe
barrel of oil equivalent, including: crude oil, condensate,
natural gas liquids, and natural gas (converted on the basis
of one boe for six mcf of natural gas)
barrel of oil equivalent per day
gigajoules
Henry Hub, a reference price paid for natural gas in US
dollars at Erath, Louisiana
thousand barrels
mbbls
mcf
thousand cubic feet
mmbtu million British thermal units
mmcf/d million cubic feet per day
MWh megawatt hour
NBP
boe/d
GJ
HH
the reference price paid for natural gas in the United
Kingdom at the National Balancing Point Virtual Trading
Point.
natural gas liquids, which includes butane, propane, and
ethane
NGLs
PRRT Petroleum Resource Rent Tax, a profit based tax levied on
TTF
WTI
petroleum projects in Australia
the price for natural gas in the Netherlands at the Title
Transfer Facility Virtual Trading Point.
West Texas Intermediate, the reference price paid for crude
oil of standard grade in US dollars at Cushing, Oklahoma
OFFICERS AND KEY PERSONNEL
CANADA
Anthony Marino
President & Chief Executive Officer
AUDITORS
Deloitte LLP
Calgary, Alberta
BANKERS
The Toronto-Dominion Bank
Bank of Montreal
Canadian Imperial Bank of Commerce
National Bank of Canada
Royal Bank of Canada
The Bank of Nova Scotia
Alberta Treasury Branches
Bank of America N.A., Canada Branch
BNP Paribas, Canada Branch
Citibank N.A., Canadian Branch - Citibank Canada
HSBC Bank Canada
JPMorgan Chase Bank, N.A., Toronto Branch
La Caisse Centrale Desjardins du Québec
Wells Fargo Bank N.A., Canadian Branch
Barclays Bank PLC
Canadian Western Bank
Goldman Sachs Lending Partners LLC
EVALUATION ENGINEERS
GLJ Petroleum Consultants Ltd.
Calgary, Alberta
LEGAL COUNSEL
Norton Rose Fulbright Canada LLP
Calgary, Alberta
TRANSFER AGENT
Computershare Trust Company of Canada
STOCK EXCHANGE LISTINGS
The Toronto Stock Exchange (“VET”)
The New York Stock Exchange (“VET”)
INVESTOR RELATIONS
Kyle Preston
Director Investor Relations
403-476-8431 TEL
403-476-8100 FAX
1-866-895-8101 IR TOLL FREE
investor_relations@vermilionenergy.com
Curtis W. Hicks
Executive Vice President & Chief Financial Officer
Mona Jasinski
Executive Vice President, People and Culture
Michael Kaluza
Executive Vice President & Chief Operating Officer
Dion Hatcher
Vice President Canada Business Unit
Terry Hergott
Vice President Marketing
Jenson Tan
Vice President Business Development
Lars Glemser
Director Finance
Daniel Goulet
Director Corporate HSE
Jeremy Kalanuk
Director Operations Accounting
Bryce Kremnica
Director Field Operations - Canada Business Unit
Kyle Preston
Director Investor Relations
Mike Prinz
Director Information Technology & Information Systems
Robert (Bob) J. Engbloom
Corporate Secretary
UNITED STATES
Daniel G. Anderson
Managing Director - U.S. Business Unit
Timothy R. Morris
Director U.S. Business Development - U.S.
Business Unit
EUROPE
Gerard Schut
Vice President European Operations
Sylvain Nothhelfer
Managing Director - France Business Unit
Scott Seatter
Managing Director - Netherlands Business Unit
Albrecht Moehring
Managing Director - Germany Business Unit
Darcy Kerwin
Managing Director - Ireland Business Unit
Bryan Sralla
Managing Director - Central & Eastern Europe Business Unit
AUSTRALIA
Bruce D. Lake
Managing Director - Australia Business Unit
79
EXCELLENCE
We aim for exceptional
results in everything we do.
TRUST
At Vermilion, we operate with honesty
and fairness, and can be counted on to
do what we say we will.
RESPECT
We embrace diversity, value our people and believe every
employee and business associate worldwide deserves to be
treated with the utmost dignity and respect.
RESPONSIBILITY
Vermilion continually shows its commitment to the care of our
people and environment, and enrichment of the communities in
which we live and work.
Vermilion Energy Inc.
3500, 520 3rd Avenue SW
Calgary, Alberta T2P 0R3
Telephone:
Facsimile:
IR Toll Free:
investor_relations@vermilionenergy.com
1.403.269.4884
1.403.476.8100
1.866.895.8101
vermilionenergy.com