Front Cover Theme
Sustainability is integrated into every facet of Vermilion’s business. This 15-hectare greenhouse is an example of
how Vermilion reduces greenhouse emissions with geothermal energy. At Vermilion’s production facility in Parentis-en-
Born, France, heat from our produced water is transferred to the heating system of the adjacent greenhouse. The result is
an economically and ecologically viable greenhouse operation growing tomatoes with heat generated without carbon
emissions.
Across the company, Vermilion has decreased our emissions intensity on a per unit of production basis. This is
due
that
maximizes production while reducing our footprint and energy consumption intensity.
to our energy efficiency programs, emission
initiatives and an operational structure
reduction
Read more about Vermilion's renewable energy projects in our Sustainability Report online at www.vermilionenergy.com.
Table of Contents
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Corporate Information
Annual General Meeting
April 25, 2019
3:00 PM MST
The Ballroom
Metropolitan Centre
333 - 4th Avenue S.W.
Calgary, Alberta
Disclaimer
7
12
65
72
94
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 and Vermilion’s ability to fund such expenditures;
Vermilion’s additional debt capacity providing it with additional working capital; the flexibility of Vermilion’s capital program and operations; business
strategies and objectives; operational and financial performance; estimated volumes of reserves and resources; petroleum and natural gas sales; future
production levels and the timing thereof, including Vermilion’s 2019 guidance, and rates of average annual production growth; the effect of changes in
crude oil and natural gas prices, changes in exchange rates and significant declines in production or sales volumes due to unforeseen circumstances;
the effect of possible changes in critical accounting estimates; statements regarding the growth and size of Vermilion’s future project inventory, and the
wells expected to be drilled in 2019; exploration and development plans and the timing thereof; Vermilion’s ability to reduce its debt, including its ability
to redeem senior unsecured notes prior to maturity; statements regarding Vermilion’s hedging program, its plans to add to its hedging positions, and
the anticipated impact of Vermilion’s hedging program on project economics and free cash flows; the potential financial impact of climate-related risks;
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 Vermilion’s expectations regarding future taxes and taxability; 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
Vermilion Energy Inc. ■ Page 1 ■ 2018 Annual Report
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 crude oil and natural gas reserve and resource 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. Reserves estimates have
been made assuming that development of each property in respect of which the estimate is made will occur, without regard to the likely availability of
funding required for such development. The actual crude oil and natural gas reserves and future production will be greater than or less than the estimates
provided in this document.
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.
Vermilion Energy Inc. ■ Page 2 ■ 2018 Annual Report
Abbreviations
$M
$MM
AECO
bbl(s)
bbls/d
boe
boe/d
GJ
LSB
mbbls
mcf
mmcf/d
NBP
NGLs
PRRT
tCO2e
TTF
WTI
thousand dollars
million dollars
the daily average benchmark price for natural gas at the AECO ‘C’ hub in 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
light sour blend crude oil reference price
thousand barrels
thousand cubic feet
million cubic feet per day
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
Petroleum Resource Rent Tax, a profit based tax levied on petroleum projects in Australia
tonnes of carbon dioxide equivalent
the price for natural gas in the Netherlands, quoted in megawatt hours 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
Vermilion Energy Inc. ■ Page 3 ■ 2018 Annual Report
Highlights
•
•
•
•
•
•
•
•
•
Q4 2018 production averaged 101,621 boe/d, representing a 6% increase over the prior quarter, primarily due to strong performance from our
Netherlands, Canadian and US business units.
2018 production increased by 28% year-over-year to 87,270 boe/d (10% on a per share basis), within 1% of the mid-point of our guidance range.
Fund flows from operations ("FFO")(1) for Q4 2018 was $222 million ($1.46/basic share(1)), down 15% from the previous quarter as higher production
was more than offset by lower commodity prices. FFO in 2018 was $839 million ($5.96/basic share(1)), an increase of 39% from the prior year
(19% on a per share basis), due to higher production volumes and commodity prices, which were partially offset by $111 million of realized hedging
losses.
Net earnings in 2018 were $272 million ($1.93/basic share), representing a 336% increase over the prior year (271% on a per share basis). We
generated a Return on Capital Employed(1) ("ROCE") of 9%, compared to our 5-year average ROCE of 4%.
Production in the Netherlands in Q4 2018 averaged 8,749 boe/d, an increase of 17% from the prior quarter. The increase is primarily due to the
benefit of a full quarter contribution from the Eesveen-02 well (60% working interest), which we brought on production late in the third quarter at
a restricted rate of 10 mmcf/d net.
In Ireland, production from the Corrib Natural Gas Project (the "Corrib Project") averaged 52 mmcf/d (8,672 boe/d) in Q4 2018, an increase of 1%
from the prior quarter. On November 30, 2018, we assumed operatorship of the Corrib Project and completed the transfer of Shell E&P Ireland
Limited ("SEPIL") along with an incremental 1.5% working interest in the Corrib Project to Vermilion from Nephin Energy Holdings Limited, a wholly
owned subsidiary of Canada Pension Plan Investment Board ("CPPIB"). Cash consideration at closing was $9 million, which was more than offset
by the assumption of $15 million in positive net working capital associated with the acquisition.
In Canada, production averaged a record 60,814 boe/d in Q4 2018, representing an increase of 6% from the previous quarter. The increase was
primarily due to new well completions in both our southeast Saskatchewan assets and Alberta assets.
In the United States, Q4 2018 production averaged 3,545 boe/d, an increase of 19% from the prior quarter, due to a full quarter of production
associated with the Powder River Basin acquisition completed in the prior quarter.
In Australia, production averaged 4,174 bbl/d in Q4 2018, down 11% from the previous quarter primarily due to a planned shutdown for maintenance
and other downtime which was required to allow drilling of two new wells. We commenced drilling of the B15 and B16 wells in early November
2018 and completed the wells in late January 2019. The wells were tested in February 2019. The B15 well tested at an oil rate of 8,800 bbls/d
over a 48-hour period and the B16 well tested at an oil rate of 7,600 bbls/d over a 36-hour period(2). We plan to intermittently produce the new
wells at restricted rates to maximize long-term value.
•
Our 2018 reserves as evaluated by GLJ as at December 31, 2018 are as follows:
◦
◦
◦
Proved plus probable ("2P") reserves increased 63% from year-end 2017 to 488.1(3) mmboe. We replaced 187% of 2P reserves through
development activities and 695% including acquisitions. Our 2P finding and development ("F&D") cost(4) was $7.79 per boe, including
future development capital (“FDC”)(4), resulting in an organic 2P Operating Recycle Ratio(5) (including FDC) of 4.1x compared to 2.8x in
2017.
Proved ("1P") reserves increased 69% from year-end 2017 to 298.2(3) mmboe. We replaced 157% of 1P reserves through development
activities and 481% including acquisitions. Our 1P F&D cost was $13.49 per boe, including FDC, resulting in an organic 1P Operating
Recycle Ratio(5) (including FDC) of 2.3x.
Proved developed producing ("PDP") reserves increased 55% from year-end 2017 to 192.1(3) mmboe. We replaced 130% of PDP
reserves through development activities and 314% including acquisitions. Our PDP F&D cost was $15.65 per boe, including FDC,
resulting in an organic PDP Operating Recycle Ratio(5) (including FDC) of 2.0x.
•
Our independent 2018 GLJ Resources Report(6) indicates risked low, best, and high estimates for contingent resources in the Development Pending
category of 156(6) mmboe, 240(6) mmboe, and 334(6) mmboe respectively, increases of 45%, 36% and 32% from year-end 2017. The GLJ 2018
Resources Report also indicates risked low, best, and high estimates for contingent resources in the Development Unclarified category of 11(6)
mmboe, 37(6) mmboe, and 53(6) mmboe respectively, increases of 47%, 13% and 15% from year-end 2017. Over 86% of our risked contingent
resources reside in the Development Pending category. Prospective resources were assessed at risked low, best and high estimates of 55(6)
Vermilion Energy Inc. ■ Page 4 ■ 2018 Annual Report
•
(1)
(2)
(3)
(4)
(5)
(6)
mmboe, 161(6) mmboe, and 284(6) mmboe respectively, increases of 7%, 5% and 9% from year-end 2017. Our contingent and prospective resource
bases remain a source of reserve additions, with 17 mmboe of contingent resources converted to 2P reserves during 2018.(6)
Vermilion was named to the CDP Climate Leadership Level (-A) for the second consecutive year in 2018. We were the only Canadian oil and gas
company and one of only two North American oil and gas companies to receive this designation, ranking Vermilion in the top 5% of oil and gas
companies globally. Vermilion ranked second within the oil and gas sector, and was among the top quartile of all companies in the S&P/TSX
Composite Index in the annual Globe and Mail Board Games evaluation for 2018. We were also a finalist for the Finance and Sustainability
Initiative's award for Best Sustainability Report in the Non-Renewable Resources - Oil and Gas category for our 2017 Sustainability Report, an
award which we won last year for our 2016 Sustainability Report.
Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of the accompanying Management’s Discussion and Analysis.
B15ST1 well tested oil at an average rate of 8,769 bbls/d and zero barrels of water per day ("bwpd") over a 48-hour period at a flowing wellhead pressure of
900 kpa (130 psi) on a 100% open choke (130 mm or 5.1 inch diameter) with applied gas-lift of 22,000 m3/d (775 mcf/d). The well was estimated to be flowing
with a 30% drawdown of reservoir pressure.
B16ST2 well tested oil at an average rate of 7,600 bbls/d and 770 bwpd over a 36-hour period at a flowing wellhead pressure of 900 kpa (130 psi) on a 100%
open choke (130 mm or 5.1 inch diameter) with applied gas-lift of 45,000 m3/d (1,590 mcf/d). The well was estimated to be flowing with a 15% drawdown of
reservoir pressure.
Estimated proved and proved plus probable reserves as evaluated by GLJ Petroleum Consultants Ltd. (“GLJ”) in a report dated February 7, 2019 with an
effective date of December 31, 2018 (the “2018 GLJ Reserves Report”).
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 FDC (future development capital), 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 7, 2019 to assess contingent and prospective resources across all of the
Company’s key operating regions with an effective date of December 31, 2018 (the “GLJ 2018 Resources Report”). The aggregate associated chance of
development for each of the low, best and high estimate for contingent resources in the Development Pending category are 82%, 81% and 81%, respectively.
The aggregate associated chance of commerciality for each of the low, best and high estimate for prospective resources in the Prospect category are 24%, 23%
and 24%, respectively. There is uncertainty that it will be commercially viable to produce any portion of the resources. Project maturity subclass development
pending is defined as contingent resources where resolution of the final conditions for development is being actively pursued (high chance of development.
Project maturity subclass development unclarified is defined as contingent resources when the evaluation is incomplete and there is ongoing activity to resolve
any risks or uncertainties. Prospective resources are defined as those quantities of petroleum estimated, as of a given date, to be potentially recoverable from
unknown accumulations by application of future development projects. There is no certainty that it will be commercially viable to produce any portion of the
contingent resources or that Vermilion will produce any portion of the volumes currently classified as contingent resources. There is no certainty that any
portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the
prospective resources or that Vermilion will produce any portion of the volumes currently classified as prospective resources. Please refer to Vermilion's 2018
Annual Information Form for further information on Vermilion’s contingent resources and prospectus resources.
Vermilion Energy Inc. ■ Page 5 ■ 2018 Annual Report
2017
1,098,838
602,565
5.00
4.92
62,258
0.52
320,449
27,637
9,334
2.580
311,397
200,904
530,687
52%
33%
88%
1,371,790
2.28
39%
45%
46%
40%
43%
31%
47%
40%
96%
74%
122%
104%
2018
56,836
100,195
100,872
270,337
339,060
250,043
134,355
873,039
Q4 2018
Q3 2018
Q4 2017
2,034,086
1.95
1,929,529
2.17
1,929,529
2.30
1,371,790
1.89
47,152
6,839
253.38
96,222
47,678
7,815
276.77
101,621
317,341
181,253
1.49
1.47
8,645
0.07
74,303
3,048
3,216
0.645
78,653
456,939
222,342
1.46
1.44
323,373
2.12
163,580
2,689
6,562
0.690
105,310
508,411
260,705
1.71
1.69
(15,099)
(0.10)
146,185
198,173
2,986
0.690
105,192
1,678,117
838,652
5.96
5.89
271,650
1.93
518,214
1,759,425
15,765
2.715
388,111
($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 earnings (loss)
Net earnings (loss) ($/basic share)
Capital expenditures
Acquisitions
Asset retirement obligations settled
Cash dividends ($/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 ($/mcf)
Production mix (% of production)
% priced with reference to WTI
% priced with reference to Dated Brent
% priced with reference to AECO
% priced with reference to TTF and NBP
Netbacks ($/boe)
Operating netback (1)
Fund flows from operations netback
Operating expenses
Average reference prices
WTI (US $/bbl)
Edmonton Sweet index (US $/bbl)
Saskatchewan LSB index (US $/bbl)
Dated Brent (US $/bbl)
AECO ($/mcf)
NBP ($/mcf)
TTF ($/mcf)
Average foreign currency exchange rates
CDN $/US $
CDN $/Euro
Share information ('000s)
152,704
Shares outstanding - basic
156,173
Shares outstanding - diluted (1)
152,588
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted (1)
153,880
(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 the accompanying Management’s Discussion and Analysis.
58.81
32.51
44.03
67.76
1.56
11.03
10.91
69.50
62.68
63.35
75.27
1.19
10.95
10.92
64.77
53.65
56.46
71.04
1.50
10.35
10.23
55.40
54.26
54.04
61.39
1.69
8.70
8.36
152,704
156,173
140,619
142,335
152,497
155,747
152,432
153,839
122,119
125,140
121,858
123,450
27,830
5,279
238.27
72,821
39,182
6,366
250.33
87,270
32%
20%
26%
22%
37%
18%
26%
19%
37%
18%
26%
19%
21%
24%
25%
30%
66.19
25.69
5.83
30.77
27.13
9.76
74.12
29.28
5.23
85.84
27.97
5.35
79.16
26.33
5.45
31.59
26.47
11.26
27.58
23.79
12.04
34.85
29.69
11.13
1.32
1.51
1.31
1.52
1.27
1.50
1.30
1.53
29.24
24.34
9.79
50.95
48.49
47.85
54.27
2.16
7.49
7.43
1.30
1.46
122,119
125,140
120,582
122,408
27,721
4,194
216.64
68,021
67.00
25.00
4.91
20%
26%
25%
29%
Vermilion Energy Inc. ■ Page 6 ■ 2018 Annual Report
Message to Shareholders
In 2018, we drilled a total of 148.9 net wells and completed four acquisitions within our existing core areas, including the acquisition of Spartan Energy
during Q2 2018, making this our most active year ever in terms of both organic and M&A activity. As a result, we delivered record annual production
of 87,270 boe/d, representing a year-over-year increase of 28%, or 10% on a per share basis. Similarly, we increased our proved plus probable reserves
by 63% to 488.1 mmboe(3), reflecting a year-over-year increase of 31% on a per share basis.
Our 2018 acquisitions added high netback, low decline and free cash flow(1) generating producing assets while also significantly expanding our future
project inventory. We are very disciplined in our M&A approach and apply a rigorous strategic framework, comprehensive technical evaluation
methodology, and consistent decision criteria for any assets that we consider in our three operating regions. Prior to 2018, we had been less active in
M&A in North America due to the overly competitive nature of the North American market and consequent lower M&A returns as compared to Europe.
However, market conditions became more favourable under our criteria in North America in 2018, and we were able to opportunistically conclude the
Spartan acquisition, a Saskatchewan/Manitoba waterflood purchase, a Powder River Basin stacked zone land and production acquisition, and the
consolidation of additional Corrib interest. These important acquisitions enhanced our margins, reduced risk in our operating and financial profiles,
expanded our development project inventory, increased our operating control, and diversified our asset base away from Alberta, with its particularly-
challenged product pricing. As a result of our organic and acquisition activities, we generated a ROCE of 9% in 2018, compared to our five-year average
ROCE of 4%.
We achieved a significant operational milestone in Q4 2018 as our production exceeded 100,000 boe/d for the first time in our history. Q4 2018 production
increased 6% from the prior quarter to an average of 101,621 boe/d, primarily as a result of organic activities which were aided by a full quarter of the
Powder River Basin acquisition and a minor contribution from our increased ownership in Corrib. Looking forward, we are pleased with the continued
expansion of project inventory arising from our acquisition of Spartan. As we noted at our Investor Day in November 2018, we have increased our
internally-estimated drilling inventory from the Spartan assets by approximately 50% to over 1,500 locations. At our Investor Day, we also related that
we have internally-estimated the potential for approximately 60 mmbbls of net waterflood recovery potential on the Spartan assets, which is a project
class we did not count in our original evaluation of the Spartan deal. Our year-end reserve and resources reports(6) recognizes 11.8 mmboe of 2P
reserves and 30.0 mmboe of best-estimate contingent resources, respectively, for the new waterflood projects that came with Spartan.
Our international diversification provided a significant strategic advantage to Vermilion in Q4 2018. Oil prices weakened during Q4 2018, especially
Canadian benchmarks, as differentials for both heavy and light oil widened substantially due to a combination of factors which included above average
refinery turnaround activity in PADD 2 and resulting high storage levels in western Canada. While Vermilion’s Canadian oil production was affected by
these wider differentials, it was impacted to a lesser degree than Alberta light and heavy oil, as our Alberta condensate and Saskatchewan light oil
displayed relative pricing advantages over the Alberta black oil products. This is most evident when comparing the Saskatchewan LSB index price
versus the Edmonton Sweet (MSW) index price. During Q4 2018, LSB traded at an US$11.52/bbl premium over MSW, compared to a US$0.22/bbl
discount in Q4 2017. Approximately 41% of our total 2019 oil production is indexed to LSB while only 8% is indexed to MSW. In additional contrast,
Brent oil traded at nearly a US$9/bbl premium over WTI and European natural gas traded at an approximate $9.40/mcf premium over AECO during Q4
2018. Approximately 36% of our total 2019 oil production is price referenced to Brent while roughly 45% of our total 2019 natural gas production is
price referenced to European gas benchmarks.
Despite the volatile commodity prices, we delivered strong financial results in Q4 2018 with FFO of $222 million ($1.46/basic share(1)) and net earnings
of $323 million ($2.12/basic share). Realized hedging losses were $28 million in Q4 2018. We estimate that cash dividends will constitute approximately
$400 million in 2019. Our capital budget of $530 million for 2019 is designed to deliver a production range of 101,000 to 106,000 boe/d, resulting in
year-over-year production per share growth of 8% at the mid-point of guidance. At current differentials and using the current commodity strip for Brent,
WTI and European natural gas, we estimate that we will be more than self-funded for our dividends and capital program for 2019, with excess cash
generation earmarked for further debt reduction. As we have noted in the past, we have significant flexibility in our capital program and could reduce
capital spending if commodity prices weaken substantially. In that event, we would reduce our growth capital first in order to protect the balance sheet
and the dividend. We believe this level of organic growth combined with a dividend yield over 8% represents an attractive option for investors.
Vermilion Energy Inc. ■ Page 7 ■ 2018 Annual Report
Q4 2018 Operations Review
Europe
In France, Q4 2018 production averaged 11,454 boe/d, which was up slightly from the prior quarter. Production from our 2018 three (3.0 net) well drilling
program in the Champotran field continued to outperform expectations, contributing 725 boe/d of production in the fourth quarter.
In the Netherlands, Q4 2018 production averaged 8,749 boe/d, an increase of 17% from the prior quarter. The increase is primarily due to the benefit
of a full quarter contribution from the Eesveen-02 well (60% working interest), which we brought on production late in the third quarter at a restricted
rate of 10 mmcf/d net.
In Ireland, production from the Corrib Project averaged 52 mmcf/d (8,672 boe/d) in Q4 2018, an increase of 1% from the prior quarter. On November
30, we assumed operatorship of the Corrib Project and completed the transfer of SEPIL along with an incremental 1.5% working interest in the Corrib
Project to Vermilion from Nephin Energy Holdings Limited, a wholly owned subsidiary of CPPIB. Cash consideration at closing was $9 million, which
was more than offset by the assumption of $15 million in positive net working capital as a result of the acquisition. Integration of the staff, processes
and systems have been completed, and we welcome the addition of former-Shell employees to Vermilion. Most importantly, Vermilion now has operating
control of the Corrib Project, bringing the proportion of our production that we operate to approximately 90% on a worldwide basis.
In Germany, production in Q4 2018 averaged 3,736 boe/d, an increase of 7% from the prior quarter, primarily due to the restoration of gas processing
at a non-operated gas processing facility during the third quarter. During the fourth quarter, we completed site construction for the Burgmoor Z5 well
(46% working interest) and have secured all drilling permits necessary to proceed. Drilling is expected to commence by the end of Q1 2019.
In Central and Eastern Europe ("CEE"), production averaged 477 boe/d in Q4 2018, an increase of 145% over the prior quarter due to production from
the well drilled earlier in 2018 on the South Battonya concession in Hungary. In Croatia, we acquired an additional 150 linear kilometres of 2D seismic
data in our DR-04 license to expand on the first phase of 2D seismic data we acquired in Q2 2018. We continued to progress the permitting activities
associated with our 10.0 (7.0 net) well program for 2019 in the CEE business unit, and have received all the permits for our second well in Hungary. In
Slovakia, we were granted the Topolcany license which is adjacent to our existing Trnava license. The Topolcany license is owned 50/50 with our partner
in Slovakia (NAFTA) and adds 301,000 acres (150,500 net) to our portfolio.
North America
In Canada, production averaged a record 60,814 boe/d in Q4 2018, representing an increase of 6% from the previous quarter. The increase was
primarily due to strong operating performance and new well completions in both Saskatchewan and Alberta. The strong production results were partially
restrained by a system-wide power outage in Saskatchewan in December, which reduced production volumes by approximately 500 boe/d for the
quarter. We drilled or participated in 72 (44.1 net) wells and brought on production 86 (56.6 net) wells in the fourth quarter. We executed a five rig
program in Saskatchewan, drilling or participating in 61 (34.8 net) wells across our combined Spartan and legacy land bases. In Alberta, we drilled nine
(7.3 net) Mannville wells and two (2.0 net) long-reach Cardium wells.
In the United States, Q4 2018 production averaged 3,545 boe/d, an increase of 19% from the prior quarter, due to a full quarter of production associated
with the Powder River Basin acquisition completed in Q3. We drilled and completed our first (1.0 net) well on the newly acquired Hilight assets late in
the fourth quarter. Production from this well commenced in mid-December. We elected to use a rod pump artificial lift system on this well, which offers
lower pump displacement than previously-utilized electrical submersible pumps on new wells at Hilight, but reduces sand flowback and pump failure
frequency. As a result, the current rate is 290 boe/d (86% oil) and is increasing as the well cleans up.
Australia
In Australia, production averaged 4,174 bbl/d in Q4 2018, down 11% from the previous quarter primarily due to a planned shutdown for maintenance
and other downtime which was required to allow drilling of two new wells. We began drilling the two wells in early November 2018 and completed the
wells in late January 2019. These were the most technically challenging wells ever executed at Vermilion. Both wells were drilled at vertical depths of
approximately 650 meters, but with measured depths of 4,960 meters and 3,697 meters for the B15 and B16 wells respectively, making these some of
the most extreme extended reach wells at shallow depth in the world. The B15 well also featured an approximately 180 degree turn to allow drainage
of oil trapped against the updip bounding fault for the Wandoo field. We achieved our reservoir and mechanical objectives on both wells, and the wells
were successfully tested in February 2019. The B15 well tested at an oil rate of 8,800 bbl/d over a 48-hour period and the B16 well tested at an oil rate
of 7,600 bbl/d over a 36-hour period(2). We plan to intermittently produce the new wells at restricted rates to maximize long-term value. The total cost
of the program was $75 million, which is approximately $10 million over budget due to slower-than-expected drilling in the vertical sections of the wells,
lost circulation in part of the B15 horizontal section along the bounding fault, and a cyclone which required down-manning of the drilling rig for approximately
a week.
Vermilion Energy Inc. ■ Page 8 ■ 2018 Annual Report
Commodity Hedging
Vermilion hedges to manage commodity price exposures and increase the stability of cash flows, providing additional certainty with regard to the
execution of our dividend and capital programs. In aggregate, we currently have 34% of our expected net-of-royalty production hedged for Q1 2019.
Over half of the Q1 2019 corporate hedge position consists of two-way collars and three-way structures, which allow participation in price increases,
up to contract ceilings.
We have currently hedged 67% of anticipated European natural gas volumes for Q1 2019. In view of the compelling longer-term forward market for
European natural gas, we have also hedged 66% and 38% of our anticipated full-year 2019 and 2020 volumes at prices which will provide for strong
project economics and free cash flows. As of February 26, 2019, 29% of our Q1 2019, and 21% of our full year 2019 oil production is hedged. We will
continue to add to our hedge positions in all products as suitable opportunities arise. For Q1 2019, 30% of our North American natural gas production
is priced away from AECO, by virtue of diversification hedges to sell at the SoCal Border, Chicago and Henry Hub for a portion of our Alberta gas
production, and because 14% of our production comes from Saskatchewan and Wyoming.
Environmental, Social and Governance ("ESG")
Vermilion was named to the CDP Climate Leadership Level (A-) for the second consecutive year in 2018. We were the only Canadian oil and gas
company and one of only two North American oil and gas companies to receive this designation, ranking Vermilion in the top 5% of oil and gas companies
globally. We are proud of this achievement and believe this ranking is a reflection of our responsible operating practices and positive track record of
reducing emissions on our oil and gas assets. We will continue to seek new and innovative ways to improve our overall operating performance while
reducing the emission intensity of our assets.
In February 2019, we were a finalist for the Finance and Sustainability Initiative's ("FSI") award for Best Sustainability Report in the Non-Renewable
Resources - Oil and Gas category for our 2017 Sustainability Report. Last year, we received this award for 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.
is available now on our corporate website at http://
sustainability.vermilionenergy.com.
Our recently published 2018 Sustainability Report
Vermilion ranked second within the oil and gas sector, and among the top quartile of companies in the S&P/TSX Composite Index in the annual Globe
and Mail Board Games evaluation for 2018. The evaluation uses a rigorous set of governance criteria that goes beyond minimum mandatory rules
imposed by regulators and validates our commitment to, and execution of, best governance practices.
2018 Reserves and Resources
In 2018 we significantly increased our reserves and resources through a combination of development and acquisition activities. Based on the 2018
GLJ Reserves Report, our 2P reserves increased 63% from year-end 2017 to 488.1(3) mmboe, while our 1P reserves increased 69% from year-end
2017 to 298.2(3) mmboe in 2018. PDP reserves increased 55% from year-end 2017 to 192.1(3) mmboe. Our PDP reserves represent 64% of our 1P
reserves.
The following table provides a summary of company interest reserves by reserve category and country on an oil equivalent basis. Please refer to
Vermilion's 2018 Annual Information Form for detailed by product type information.
BOE (Mboe)
Australia
Canada
France
Germany
Hungary
Ireland
Netherlands
United States
Vermilion
Proved Developed
Producing
8,048
103,992
37,596
9,879
131
13,093
7,629
11,705
192,073
Proved Developed
Non-Producing Proved Undeveloped
—
68,451
5,429
1,069
—
—
705
13,442
89,096
1,620
9,496
441
2,043
—
—
3,469
—
17,069
Proved
9,668
181,939
43,466
12,991
131
13,093
11,802
25,147
298,237
Probable
4,812
102,897
20,452
12,744
59
7,482
10,395
31,068
189,909
Proved Plus
Probable
14,480
284,836
63,918
25,735
191
20,575
22,196
56,214
488,145
Vermilion Energy Inc. ■ Page 9 ■ 2018 Annual Report
Through development activities, we replaced 187% of 2P reserves, 157% of 1P reserves and 130% of PDP reserves, respectively. Including acquisitions,
we replaced 695% of 2P reserves, 481% of 1P reserves and 314% of PDP reserves, respectively.
Our Operating Recycle Ratio(5) (including FDC) at the 2P level increased to 4.1x in 2018, compared to 2.8x in 2017, as a result of higher operating
netbacks and a significant decrease to our F&D costs (including FDC). Organic F&D costs (including FDC) decreased 26% in 2018 to $7.79/boe,
compared to $10.57/boe in 2017. These metrics remain strong relative to historical industry averages, and reflect the significant improvement in our
capital efficiencies over the last several years.
The following table summarizes the finding and development costs and associated operating recycle ratios by reserve category for the year ended
December 31, 2018:
Finding and Development Costs, including FDC (F&D)(3) ($/boe)
Finding, Development and Acquisition Costs, including FDC (FD&A)(3) ($/boe)
F&D Operating Recycle Ratio(4) (x)
FD&A Operating Recycle Ratio(4) (x)
PDP
$15.65
$23.92
2018
1P
$13.49
$19.95
2.0
1.3
2.3
1.6
2P
$7.79
$14.99
4.1
2.1
3-Year Average
1P
$10.96
$16.87
PDP
$11.94
$18.71
2.5
1.6
2.7
1.8
2P
$7.85
$13.16
3.8
2.2
In addition to increasing our reserve base, we pursued various initiatives to expand our resource base to support our longer-term growth profile. According
to the 2018 GLJ Resources Report, risked low, best, and high estimates for our contingent resources in the Development Pending category we evaluated
as 156(6) mmboe, 240(6) mmboe, and 334(6) mmboe, respectively. The 2018 GLJ Resources Report also indicates risked low, best, and high estimates
for contingent resources in the Development Unclarified category of 11(6) mmboe, 37(6) mmboe, and 53(6) mmboe, respectively. Over 86% of our risked
contingent resources reside in the Development Pending category. Prospective resources were assessed at risked low, best and high estimates of 55
(6) mmboe, 161(6) mmboe, and 284(6) mmboe, respectively. Our contingent and prospective resource bases remain a source of reserve additions, with
17 mmboe of contingent resources converted to 2P reserves during 2018.(6)
The following table provides a reconciliation of changes in reserves by reserve category and country. Please refer to Vermilion's 2018 Annual Information
Form for detailed by product type information.
1P (Mboe)
December 31, 2017
Discoveries
Extensions & Improved Recovery
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
December 31, 2018
2P (Mboe)
December 31, 2017
Discoveries
Extensions & Improved Recovery
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
December 31, 2018
Australia
Canada
France
Germany
Hungary
Ireland Netherlands
10,915
—
—
393
—
—
—
(1,640)
9,668
81,388
—
31,289
6,977
81,328
(134)
(1,162)
(17,750)
181,938
42,094
—
2,249
3,244
—
—
40
(4,160)
43,467
12,640
—
673
979
—
—
17
(1,319)
12,990
—
193
—
—
—
—
—
(62)
131
13,634
—
—
1,575
1,241
—
—
(3,356)
13,094
10,347
—
256
206
3,838
—
(4)
(2,839)
11,804
Australia
Canada
France
Germany
Hungary
Ireland Netherlands
15,565
—
—
555
—
—
—
(1,640)
14,480
139,294
—
37,024
5,573
121,537
(227)
(616)
(17,750)
284,835
64,189
—
1,934
2,713
—
—
(758)
(4,160)
63,918
24,496
—
2,158
393
—
—
5
(1,319)
25,733
—
252
—
—
—
—
—
(62)
190
22,199
—
—
(253)
1,986
—
—
(3,356)
20,576
17,863
—
2,201
16
4,973
—
(14)
(2,839)
22,200
United
States
5,613
—
1,359
298
18,604
—
(1)
(727)
25,146
United
States
14,969
—
6,265
1,880
33,828
—
(2)
(727)
56,213
Vermilion
176,631
193
35,826
13,671
105,012
(134)
(1,110)
(31,853)
298,236
Vermilion
298,575
252
49,581
10,875
162,324
(227)
(1,383)
(31,853)
488,145
Additional information about our 2018 GLJ Reserves Report and GLJ 2018 Resources Report can be found in our 2018 Annual Information Form on
our website at www.vermilionenergy.com and on SEDAR at www.sedar.com.
Vermilion Energy Inc. ■ Page 10 ■ 2018 Annual Report
(signed “Anthony Marino”)
Anthony Marino
President & Chief Executive Officer
February 27, 2019
(1)
(2)
(3)
(4)
(5)
(6)
Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of Management’s Discussion and Analysis.
B15ST1 well tested oil at an average rate of 8,769 bbls/d and zero barrels of water per day ("bwpd") over a 48-hour period at a flowing wellhead pressure of
900 kpa (130 psi) on a 100% open choke (130 mm or 5.1 inch diameter) with applied gas-lift of 22,000 m3/d (775 mcf/d). The well was estimated to be flowing
with a 30% drawdown of reservoir pressure.
B16ST2 well tested oil at an average rate of 7,600 bbls/d and 770 bwpd over a 36-hour period at a flowing wellhead pressure of 900 kpa (130 psi) on a 100%
open choke (130 mm or 5.1 inch diameter) with applied gas-lift of 45,000 m3/d (1,590 mcf/d). The well was estimated to be flowing with a 15% drawdown of
reservoir pressure.
Estimated proved and proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. (“GLJ”) in a report dated
February 7, 2019 with an effective date of December 31, 2018 (the “2018 GLJ Reserves Report”).
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 7, 2019 to assess contingent and prospective resources across all of the
Company’s key operating regions with an effective date of December 31, 2018 (the “GLJ 2018 Resources Report”). The aggregate associated chance of
development for each of the low, best and high estimate for contingent resources in the Development Pending category are 82%, 81% and 81%, respectively.
The aggregate associated chance of commerciality for each of the low, best and high estimate for prospective resources in the Prospect category are 24%, 23%
and 24%, respectively. There is uncertainty that it will be commercially viable to produce any portion of the resources. Project maturity subclass development
pending is defined as contingent resources where resolution of the final conditions for development is being actively pursued (high chance of development.
Project maturity subclass development unclarified is defined as contingent resources when the evaluation is incomplete and there is ongoing activity to resolve
any risks or uncertainties. Prospective resources are defined as those quantities of petroleum estimated, as of a given date, to be potentially recoverable from
unknown accumulations by application of future development projects. There is no certainty that it will be commercially viable to produce any portion of the
contingent resources or that Vermilion will produce any portion of the volumes currently classified as contingent resources. There is no certainty that any
portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the
prospective resources or that Vermilion will produce any portion of the volumes currently classified as prospective resources. Please refer to Vermilion's 2018
Annual Information Form for further information on Vermilion’s contingent resources and prospectus resources.
Vermilion Energy Inc. ■ Page 11 ■ 2018 Annual Report
Management's Discussion and Analysis
The following is Management’s Discussion and Analysis (“MD&A”), dated February 27, 2019, 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, 2018 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, 2018 and 2017,
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, 2018 and comparative information have been prepared in Canadian
dollars and in accordance with International Financial Reporting Standards (“IFRS” or, alternatively, “GAAP”) as issued by the International Accounting
Standards Board ("IASB").
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.
Net debt: Net debt is a capital management measure in accordance with IAS 1 "Presentation of Financial Statements". Net debt is comprised of
long-term debt plus current liabilities less current assets and represents Vermilion's net financing obligations after adjusting for the timing of working
capital fluctuations. Net debt excludes lease obligations which are secured by a corresponding right-of-use asset. Please see "Capital disclosures"
in the "Notes to the Consolidated Financial Statements" for additional information.
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”.
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).
Vermilion Energy Inc. ■ Page 12 ■ 2018 Annual Report
Guidance
On October 30, 2017, we released our 2018 capital expenditure guidance of $315 million and associated production guidance of between 74,500 to
76,500 boe/d. On January 15, 2018, we increased our capital expenditure guidance to $325 million and production guidance to between 75,000 to
77,500 boe/d to reflect the post-closing impact of the acquisition of a private southeast Saskatchewan and southwest Manitoba light oil producer. On
April 16, 2018, we increased our capital expenditure guidance to $430 million and production guidance to between 86,000 to 90,000 boe/d to reflect
the post-closing impact of the acquisition of Spartan Energy Corp. On July 30, 2018, we increased our capital expenditure guidance to $500 million to
reflect the acceleration of our Australia drilling campaign into Q4 2018, and to a lesser extent to account for the impact of foreign exchange fluctuations
on our Canadian dollar capital levels. On October 25, 2018, we increased our capital expenditure guidance to $510 million to reflect additional capital
activity associated with the assets acquired in the Powder River Basin in August of 2018. Actual 2018 capital spending of $518 million was within 2%
of our guidance and 2018 average production of 87,270 boe/d was within 1% of the mid-point of our guidance range.
On October 25, 2018, we released our 2019 capital budget and related guidance. The 2019 total budget and production guidance remain unchanged,
although we have deferred some activity to later in the year and reallocated capital between business units, the breakdown of which can be found in
our corporate presentation located on our website.
The following table summarizes our guidance:
Date
Capital Expenditures ($MM)
Production (boe/d)
2018 Guidance
2018 Guidance
2018 Guidance
2018 Guidance
2018 Guidance
2018 Guidance
2018 Actual Results
2019 Guidance
2019 Guidance
October 30, 2017
January 15, 2018
April 16, 2018
July 30, 2018
October 25, 2018
October 25, 2018
315
325
430
500
510
518
530
74,500 to 76,500
75,000 to 77,500
86,000 to 90,000
86,000 to 90,000
86,000 to 90,000
87,270
101,000 to 106,000
Vermilion Energy Inc. ■ Page 13 ■ 2018 Annual Report
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.
Vermilion Energy Inc. ■ Page 14 ■ 2018 Annual Report
Consolidated Results Overview
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
47,678
7,815
276.77
101,621
47,620
7,815
276.77
101,563
5
47,152
6,839
253.38
96,222
46,368
6,839
253.38
95,437
73
27,830
5,279
238.27
72,821
27,638
5,279
238.27
72,628
18
222,342
260,705
181,253
1.46
323,373
2.12
1.71
(15,099)
(0.10)
1.49
8,645
0.07
1,929,529
2,034,086
1,371,790
0.690
0.690
0.645
163,580
2,689
73.00
45.08
146,185
198,173
65.00
58.97
74,303
3,048
8.00
6.00
1%
14%
9%
6%
3%
14%
9%
6%
(15)%
(15)%
N/A
N/A
(5)%
—%
12%
71%
48%
16%
40%
72%
48%
16%
40%
23%
(2)%
3,641%
2,929%
41%
7%
120%
41%
52%
16%
28%
41%
52%
16%
28%
39%
19%
336%
271%
41%
5%
62%
39,182
6,366
250.33
87,270
38,741
6,366
250.33
86,829
160
27,721
4,194
216.64
68,021
27,483
4,194
216.64
67,784
87
838,652
602,565
5.96
271,650
1.93
5.00
62,258
0.52
1,929,529
1,371,790
2.715
2.580
518,214
1,759,425
185.00
147.93
320,449
27,637
56.00
46.58
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 in inventory (mbbls)
Financial metrics
Fund flows from operations ($M)
Per share ($/basic share)
Net earnings
Per share ($/basic share)
Net debt ($M)
Cash dividends ($/share)
Activity
Capital expenditures ($M)
Acquisitions ($M)
Gross wells drilled
Net wells drilled
Financial performance review
Q4 2018 vs. Q3 2018
450
M
M
$
200
-50
U n r e a li z e d
Net earnings of $323.4MM in Q4 2018 compared to a net loss of $15.1MM in Q3 2018
$128.2
$335.6
$(74.8)
$(38.4)
$(12.1)
$323.4
$(15.1)
2 0 1 8
i v a t i v e s ,
Q 3
d e r
f o r e i g n
e x c h a n g e
o n
G a i n
b u s i n e s s
c o m b i n a t i o n s
D e f e r
t a x
r e d
F u n d
f l o w s
r o m o p e r a t i o n s
f
O t h e r
2 0 1 8
Q 4
"Other" contains depletion and depreciation, equity based compensation, accretion, and unrealized other
• We recorded net earnings for Q4 2018 of $323.4 million ($2.12/basic share) compared to a net loss of $15.1 million ($0.10/basic share) in Q3
2018. This net earnings growth was primarily attributable to a $348.9 million increase in unrealized gains on derivative instruments and a $128.2
million gain recorded on business combinations. These increases were partially offset by a $38.4 million decrease in fund flows from operations.
Vermilion Energy Inc. ■ Page 15 ■ 2018 Annual Report
15% decrease in fund flows from operations from Q3 2018 to Q4 2018
$260.7
$26.9
$12.0
$(69.3)
$(8.0)
$222.3
330
M
M
$
230
130
2 0 1 8
Q 3
v o l u m e
S a l e s
O t h e r
P r
d e r
i v a t i v e s
r a n s p o r
t
t a t i o n ,
i c i n g
o f
n e t
R o y a l t i e s ,
e x p e n s e
o p e r a t i n g
2 0 1 8
Q 4
"Other" contains general and administration, corporate income taxes, interest, realized foreign exchange, and realized other
• We generated fund flows from operations of $222.3 million during Q4 2018, a decrease of 15% from Q3 2018. This quarter-over-quarter decrease
was primarily due to weaker crude oil prices during the current period, including a 48% decrease in in the Edmonton sweet index. The diversified
nature of our production somewhat mitigated this 48% decrease in the Edmonton sweet index as illustrated by an attenuated 23% decrease in our
crude oil and condensate realized price and a 16% decrease in our consolidated realized price.
Q4 2018 vs. Q4 2017
450
M
M
$
200
-50
$8.6
Net earnings of $323.4MM in Q4 2018 compared to $8.6MM in Q4 2017
$128.2
$41.1
$276.1
$(83.3)
$(47.3)
$323.4
2 0 1 7
i v a t i v e s ,
Q 4
d e r
f o r e i g n
e x c h a n g e
o n
G a i n
b u s i n e s s
c o m b i n a t i o n s
F u n d
f l o w s
U n r e a li z e d
r o m o p e r a t i o n s
f
t a x
r e d
D e f e r
O t h e r
2 0 1 8
Q 4
"Other" contains depletion and depreciation, equity based compensation, accretion, and unrealized other
• We recorded net earnings for Q4 2018 of $323.4 million ($2.12/basic share) compared to net earnings of $8.6 million ($0.07/basic share) in Q4
2017. The net earnings growth was the result of a 23% increase in fund flows from operations driven by increased sales volumes in Q4 2018 as
compared to Q4 2017, an increase in unrealized gain on derivative instruments ($193.1 million), and a $128.2 million gain on business combinations.
Vermilion Energy Inc. ■ Page 16 ■ 2018 Annual Report
23% increase in fund flows from operations from Q4 2017 to Q4 2018
$118.0
$0.7
315
M
M
$
215
115
$181.3
2 0 1 7
Q 4
v o l u m e
S a l e s
P r
d e r
i v a t i v e s
r a n s p o r
t
t a t i o n ,
i c i n g
o f
n e t
R o y a l t i e s ,
$(72.5)
$(5.2)
$222.3
e x p e n s e
o p e r a t i n g
O t h e r
2 0 1 8
Q 4
"Other" contains general and administration, corporate income taxes, interest, realized FX, and realized other
•
Fund flows from operations increased 23% in Q4 2018 versus Q4 2017. This increase occurred due to higher sales volumes in Q4 2018 partially
offset by increased royalties, transportation, and operating expense associated with these higher volumes.
2018 vs. 2017
M
M
$
600
400
200
0
Net earnings of $271.7MM in 2018 compared to net earnings of $62.3MM in 2017
$128.2
$236.1
$271.7
$62.3
$(120.9)
$(24.6)
$(9.4)
2 0 1 7
F u n d
f l o w s
f
r o m o p e r a t i o n s
o n
G a i n
b u s i n e s s
c o m b i n a t i o n s
i v a t i v e s ,
d e r
U n r e a li z e d
O t h e r
f o r e i g n
e x c h a n g e ,
o t h e r
a n d
t a x
r e d
D e f e r
2 0 1 8
"Other" contains depletion and depreciation, equity based compensation, accretion, and unrealized other
•
For the year ended December 31, 2018, net earnings of $271.7 million compared to net earnings of $62.3 million in 2017. The increase in net
earnings primarily resulted from a year-over-year increase in fund flows from operations of $236.1 million and a gain on business combinations of
$128.2 million. These increases were partially offset by increased depletion and depreciation expense resulting from higher production volumes.
Vermilion Energy Inc. ■ Page 17 ■ 2018 Annual Report
M
M
$
1,000
800
600
400
39% increase in fund flows from operations from 2017 to 2018
$190.5
$272.8
$838.7
$602.6
2 0 1 7
v o l u m e
S a l e s
P r
i v a t i v e s
d e r
r a n s p o r
t
t a t i o n ,
i c i n g
o f
n e t
R o y a l t i e s ,
$(200.9)
$(26.3)
e x p e n s e
o p e r a t i n g
O t h e r
2 0 1 8
"Other" contains general and administration, current income taxes, interest, realized foreign exchange, and realized other
•
•
Fund flows from operations increased 39% for the year ended December 31, 2018 versus 2017 due to increased sales volumes and higher realized
pricing offset by an increase in royalties, transportation and operating expense. Our consolidated realized price increased by 19% from $44.41/
boe to $52.95/boe due to an increase in our relative crude oil production and stronger crude oil and European gas pricing. Our sales volumes
increased by 28% due to production increases in Canada, the Netherlands, and the United States.
On a per unit basis, fund flows from operations increased by 9% from $24.34/boe for the year ended December 31, 2017 to $26.47/boe in 2018.
This increase reflects the improvement in our realized price per boe and includes a 25% decrease in per boe general and administration expenses
as our overall expense decreased by 4% despite production growth. These decreases were partially offset by higher per unit costs for royalties
(resulting from the stronger commodity price environment and higher royalty rates) and operating expenses. Per boe operating expenses increased
by $1.47/boe from $9.79/boe in 2017 to $11.26/boe in 2018 due in part to a stronger Euro relative to the Canadian dollar in 2018 and increased
expenses associated with higher value crude oil production in Canada.
Production review
Q4 2018 vs. Q3 2018
•
Consolidated average production of 101,621 boe/d during Q4 2018 increased 6% versus Q3 2018. The increase in production was primarily
attributable to new wells brought on production in Canada, growth in the United States through an acquisition closed in Q3 2018, and a full quarter
of production from wells brought on production in Q3 2018 in the Netherlands and Hungary. These production increases were partially offset by
an 11% decrease in Australia resulting from a planned shutdown of the Wandoo field for maintenance and downtime associated with drilling.
Q4 2018 vs. Q4 2017
•
Consolidated average production of 101,621 boe/d in Q4 2018 represented an increase of 40% from Q4 2017 due to growth in Canada and the
United States. In Canada, year-over-year growth was the result of both acquisitions and continued development of our Mannville condensate-rich
resource play and southeast Saskatchewan light oil development. In the United States, production growth resulted from an acquisition in Q3 2018
and organic drilling activity.
2018 vs. 2017
•
For the year ended December 31, 2018, consolidated average production of 87,270 boe/d represented an increase of 28% from 2017 due to
production growth in Canada, the United States, and the Netherlands. In Canada, production increased by 19,120 boe/d due to contributions from
acquisitions and continued development of our Mannville condensate-rich resource play and southeast Saskatchewan light oil development. In
the United States, production growth resulted from an acquisition in Q3 2018 and organic drilling activity. In the Netherlands, year-over-year
production growth occurred following the receipt of production permits (the absence of which restricted production from certain wells in the
comparable period in 2017).
Vermilion Energy Inc. ■ Page 18 ■ 2018 Annual Report
Activity review
Q4 2018 capital expenditures of $164MM by business unit
Australia: 27%
Germany: 3%
Netherlands: 2%
France: 10%
Corporate: 2%
United States: 2%
Canada: 54%
•
For the three months ended December 31, 2018, capital expenditures of $163.6 million primarily related to activity in Canada and Australia. In
Canada, capital expenditures of $90.2 million included the drilling of 72.0 (44.1 net) wells, primarily in southeast Saskatchewan. In Australia,
capital expenditures of $43.8 million related to the two (2.0 net) well drilling program.
Sustainability review
Dividends
•
•
•
•
Declared dividends of $0.23 per common share per month for Q4 2018, resulting in total dividends declared of $2.715 per common share for the
year ended December 31, 2018.
In Q2 2018, we increased our monthly dividend by 7% resulting in a year-over-year increase in cash dividends. The Q2 2018 increase was our
fourth dividend increase (previously Vermilion's distribution in the income trust era) since we began paying a distribution in 2003.
Long-term debt and net debt
•
Long-term debt increased from $1.3 billion as at December 31, 2017 to $1.8 billion as at December 31, 2018. This increase was primarily a result
of increased borrowings on the revolving credit facility to fund acquisitions in 2018. These increases were coupled with the impact of the stronger
US dollar on our US denominated Sr. Unsecured Notes.
Net debt increased to $1.9 billion as at December 31, 2018 from $1.4 billion at December 31, 2017, primarily due to acquisition activity in 2018,
partially offset by a $115.6 million decrease in net current derivative liability at December 31, 2018 (from a net liability position of $60.9 million as
at December 31, 2017 to a net asset position of $54.7 million).
The ratio of net debt to fund flows from operations remained consistent at 2.30 (2017 - 2.28) as the increase in net debt was offset by a partial
year of contribution from the acquisitions that closed in 2018.
Vermilion Energy Inc. ■ Page 19 ■ 2018 Annual Report
Commodity Prices
Crude oil
WTI ($/bbl)
WTI (US $/bbl)
Edmonton Sweet index ($/bbl)
Edmonton Sweet index (US $/bbl)
Saskatchewan LSB index ($/bbl)
Saskatchewan LSB index (US $/bbl)
Dated Brent ($/bbl)
Dated Brent (US $/bbl)
Hardisty Heavy ($/bbl)
Hardisty Heavy (US $/bbl)
Natural gas
AECO ($/mcf)
NBP ($/mcf)
NBP (€/mcf)
TTF ($/mcf)
TTF (€/mcf)
Henry Hub ($/mcf)
Henry Hub (US $/mcf)
Average exchange rates
CDN $/US $
CDN $/Euro
Realized Prices
Crude oil and condensate ($/bbl)
NGLs ($/bbl)
Natural gas ($/mcf)
Total ($/boe)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
77.71
58.81
42.96
32.51
58.18
44.03
89.54
67.76
15.28
11.56
1.56
11.03
7.31
10.91
7.23
4.82
3.65
1.32
1.51
66.19
25.69
5.83
48.90
90.83
69.50
81.92
62.68
82.79
63.35
98.37
75.27
54.11
41.40
1.19
10.95
7.20
10.92
7.18
3.80
2.90
1.31
1.52
85.84
27.97
5.35
57.90
70.43
55.40
68.98
54.26
68.70
54.04
78.05
61.39
49.19
38.69
1.69
8.70
5.81
8.36
5.58
3.73
2.93
1.27
1.50
(14)%
(15)%
(48)%
(48)%
(30)%
(30)%
(9)%
(10)%
(72)%
(72)%
31%
1%
2%
—%
1%
27%
26%
1%
(1)%
74.12
29.28
5.23
47.49
(23)%
(8)%
9%
(16)%
10%
6%
(38)%
(40)%
(15)%
(19)%
15%
10%
(69)%
(70)%
(8)%
27%
26%
31%
30%
29%
25%
4%
1%
(11)%
(12)%
11%
3%
83.94
64.77
69.53
53.65
73.17
56.46
92.07
71.04
41.07
31.69
1.50
10.35
6.76
10.23
6.69
4.01
3.09
1.30
1.53
79.16
26.33
5.45
52.95
66.13
50.95
62.94
48.49
62.10
47.85
70.44
54.27
45.67
35.19
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
27%
27%
10%
11%
18%
18%
31%
31%
(10)%
(10)%
(31)%
38%
32%
38%
32%
(1)%
(1)%
—%
5%
18%
5%
11%
19%
Realized crude oil and condensate price was a 54% premium to the Edmonton Sweet Index
Dated Brent (35% of Q4 2018
sales volumes)
WTI (3% of Q4 2018 sales
volumes)
Saskatchewan LSB (41% of Q4
2018 sales volumes)
l
b
b
$
/
Edmonton Sweet index (21% of
Q4 2018 sales volumes)
Hardisty Heavy (0% of Q4 2018
sales volumes)
Crude oil and condensate
realized price
90.00
70.00
50.00
30.00
10.00
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
•
Crude oil prices decreased throughout Q4 2018, driven by record global production levels and macroeconomic concerns. Quarter-over-
quarter, WTI and Brent decreased by 14% and 9%, respectively, in Canadian dollar terms. Despite the end-of-year weakness in 2018, for
the three months and year ended December 31, 2018, WTI increased 10% and 27%, respectively, in Canadian dollar terms versus the
Vermilion Energy Inc. ■ Page 20 ■ 2018 Annual Report
comparable periods in the prior year. Similarly, Brent increased 15% and 31%, respectively, in Canadian dollar terms for the three months
and year ended December 31, 2018 versus the comparable periods in 2017.
•
• Western Canadian takeaway capacity constraints negatively impacted differentials in Q4 2018 versus Q3 2018; the Edmonton Sweet differential
widened by $19.48/bbl, the Saskatchewan LSB differential widened by $14.78/bbl, and the Hardisty WCS differential widened by $19.15/bbl.
Vermilion's crude oil production benefits from light oil pricing and no exposure to significantly discounted heavy crude oil. Approximately 35%
of our Q4 2018 crude oil and condensate production was priced at the Dated Brent index (which averaged a premium to WTI of US$8.95/bbl)
while the remainder of our crude oil and condensate production was priced at the Saskatchewan LSB, Edmonton Sweet, and WTI indices.
As a result, our Q4 2018 crude oil and condensate realized price of $66.19/bbl represented a 54% premium to the Edmonton Sweet index
and a 333% premium to Hardisty Heavy.
Realized natural gas pricing was a $4.27/mcf premium to AECO
NBP (19% of Q4 2018 sales
volumes)
TTF (26% of Q4 2018 sales
volumes)
Henry Hub (2% of Q4 2018
sales volumes)
AECO (53% of Q4 2018 sales
volumes)
Natural gas realized price
u
t
b
m
m
$
/
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
•
•
•
•
•
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
European natural gas prices were relatively unchanged in Q4 2018 compared to Q3 2018. For the year ended December 31, 2018, TTF and
NBP prices in Canadian dollar terms increased 38% compared to 2017. Competition from Asia for liquefied natural gas ("LNG") supply, strong
demand from both the power sector and for storage injections, and surging carbon prices in the European Union, all played a role in 2018
price strength.
Natural gas prices at AECO increased by 31% in Q4 2018 as compared to Q3 2018. While the AECO gas market continues to face egress
challenges, the seasonal shift from a summer quarter to a winter quarter drove stronger domestic gas demand.
For Q4 2018, average European natural gas prices represented a $9.41/mcf premium to AECO and a $6.15/mcf premium to Henry Hub
pricing. Approximately 45% of our natural gas production in Q4 2018 benefited from this premium European pricing. As a result, our consolidated
natural gas realized price was a $4.27/mcf premium to AECO and a $1.01/mcf premium to Henry Hub pricing.
Quarter-over-quarter, the Canadian dollar was relatively flat versus the Euro and USD
CDN $/Euro
CDN $/US $
/
X
F
$
N
D
C
1.60
1.50
1.40
1.30
1.20
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
For the three months ended December 31, 2018, the Canadian dollar weakened by 1% against the US dollar quarter-over-quarter. The annual
average in 2018 was nearly unchanged versus 2017.
For the three months ended December 31, 2018, the Canadian dollar strengthened by 1% against the Euro quarter-over-quarter. The annual
average in 2018 was 5% weaker versus 2017.
Vermilion Energy Inc. ■ Page 21 ■ 2018 Annual Report
Canada Business Unit
Overview
Production and assets focused in West Pembina near Drayton Valley, Alberta and in southeast Saskatchewan and Manitoba.
•
Potential for three significant resource plays sharing the same surface infrastructure in the West Pembina region in Alberta:
– Mannville condensate-rich gas (2,400 - 2,700m depth) - in development phase
–
–
Southeast Saskatchewan light oil development:
–
Cardium light oil (1,800m depth) - in development phase
Duvernay condensate-rich gas (3,200 - 3,400m depth) - no investment at present
•
Targeting the Mississippian Midale (1,400 - 1,700m depth), Frobisher/Alida (1,200 - 1,400m depth) and Ratcliffe (1,800 - 1,900m) formations
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 ($/mcf)
Total ($/boe)
Reference prices
WTI (US $/bbl)
Edmonton Sweet index ($/bbl)
Saskatchewan LSB index ($/bbl)
AECO ($/mcf)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
29,557
6,816
146.65
60,814
28,477
6,126
136.77
57,397
9,703
5,235
107.91
32,923
4%
11%
7%
6%
205%
30%
36%
85%
21,154
5,914
129.37
48,630
9,051
4,144
97.89
29,510
134%
43%
32%
65%
49%
11%
40%
50%
10%
40%
29%
16%
55%
43%
13%
44%
31%
14%
55%
90,211
12,233
72.00
44.08
186,308
(25,584)
(11,129)
(62,064)
(2,150)
85,381
33.30
(4.57)
(1.99)
(11.09)
(0.38)
15.27
54.04
25.53
1.73
33.30
58.81
42.96
58.18
1.56
89,837
6,146
65.00
58.97
243,016
(33,801)
(9,057)
(55,577)
(1,316)
143,265
46.02
(6.40)
(1.72)
(10.52)
(0.25)
27.13
79.86
27.82
1.44
46.02
69.50
81.92
82.79
1.19
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
68.98
68.70
1.69
—%
236%
(23)%
(24)%
23%
12%
63%
(40)%
(28)%
(29)%
16%
5%
52%
(44)%
(32)%
(8)%
20%
(28)%
(15)%
(48)%
(30)%
31%
97%
175%
130%
178%
(15)%
54%
7%
49%
24%
50%
(55)%
(17)%
(22)%
(13)%
(8)%
7%
6%
(38)%
(15)%
(8)%
Vermilion Energy Inc. ■ Page 22 ■ 2018 Annual Report
277,857
1,573,964
173.00
135.93
671,172
(84,696)
(29,912)
(177,499)
(6,057)
373,008
37.81
(4.77)
(1.69)
(10.00)
(0.34)
21.01
70.16
26.20
1.54
37.81
64.77
69.53
73.17
1.50
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
62.94
62.10
2.16
87%
103%
155%
72%
121%
(37)%
96%
23%
54%
5%
34%
(62)%
19%
11%
5%
(34)%
23%
27%
10%
18%
(31)%
Production
•
Q4 2018 production increased 6% from the prior quarter due to strong operating performance and new well completions from our Saskatchewan
and Alberta assets. Quarterly production increased 82% year-over-year primarily due to our acquisition of Spartan Energy Corp. in May 2018.
Production in Alberta averaged approximately 34,000 boe/d in Q4 2018, an increase of 4% quarter-over-quarter.
Production in Saskatchewan averaged approximately 26,800 boe/d in Q4 2018, an increase of 9% quarter-over-quarter.
•
•
Activity review
•
Vermilion drilled 43 (41.1 net) operated wells and participated in the drilling of 29 (2.9 net) non-operated wells in Canada during Q4 2018.
In Q4 2018, we drilled or participated in nine (8.9 net) operated and two (0.4 net) non-operated wells, completed four (3.9 net) operated and
three (0.8 net) non-operated wells, and brought on production four (4.0 net) operated and four (1.1 net) non-operated wells in Alberta.
In 2018, we drilled or participated in 27 (23.4 net) wells in Alberta, which included the drilling of 23 (20.7 net) Mannville wells.
In Q4 2018, we drilled or participated in 34 (32.3 net) operated wells and 27 (2.5 net) non-operated wells, completed 40 (37.3 net) operated
and 26 (2.8 net) non-operated wells, and brought 51 (48.3 net) operated and 27 (3.2 net) non-operated wells on production.
In 2018, we drilled or participated in 146 (112.6 net) wells in Saskatchewan.
•
On May 28, 2018, Vermilion acquired 100% of the issued and outstanding common shares of Spartan, a publicly traded southeast Saskatchewan
oil and gas producer. Consideration consisted of the issuance of 27.9 million Vermilion common shares valued at approximately $1.2 billion (based
on the closing price per Vermilion common share of $44.30 on the Toronto Stock Exchange on May 28, 2018). Vermilion also assumed approximately
$172 million of Spartan's outstanding debt at the time the transaction closed.
The realized price for our crude oil and condensate production in Canada is linked to WTI subject to market conditions in western Canada (as
reflected by the Saskatchewan LSB index price in Saskatchewan and the Edmonton Sweet index price in Alberta). The realized price of our natural
gas in Canada is based on the AECO index.
Q4 2018 sales per boe decreased 28% compared to Q3 2018 consistent with the decrease in crude oil and condensate pricing. Quarter-over-
quarter, our crude oil and condensate production mix remained stable at approximately 50% of production.
For the year ended December 31, 2018, sales per boe increased versus 2017 due to increased Saskatchewan LSB and Edmonton Sweet index
pricing coupled with an increased weighting towards higher-priced crude oil and condensate production.
Royalties
•
Royalties as a percentage of sales for the three months and year ended December 31, 2018 of 13.7% and 12.6%, respectively, increased from
the comparable periods in 2017 due to the impact of the Spartan assets, which have higher associated royalty rates.
Transportation
•
Transportation expense for the three months and year ended December 31, 2018 increased on a per unit basis versus all comparable periods due
to an increase in production that incurs higher transportation expense.
Alberta
–
–
–
Saskatchewan
–
Sales
•
•
•
•
Operating
•
Operating expense increased in Q4 2018 versus Q3 2018 on both a dollar and per unit basis. On a dollar basis, this increase was due to higher
production volumes and the per unit increase was caused by a favourable adjustment recorded in the prior quarter.
For the three months and year ended December 31, 2018, operating expense increased on both a dollar and per unit basis versus the comparable
periods in 2017. On a dollar basis, the increase in operating expense was driven by higher production volumes during Q4 2018. On a per unit
basis, the increase in operating expense was primarily attributable to the impact of production from the Spartan assets, which have higher associated
per unit operating expense.
Vermilion Energy Inc. ■ Page 23 ■ 2018 Annual Report
France Business Unit
Overview
•
•
•
•
Entered France in 1997.
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
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
Current income taxes
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Transportation
Operating
General and administration
Current income taxes
Fund flows from operations netback
Reference prices
Dated Brent (US $/bbl)
Dated Brent ($/bbl)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
11,317
0.82
11,454
10,975
0.82
11,111
293
1,041
(1,009)
325
17,008
—
—
85,889
(11,976)
(3,242)
(14,015)
(3,792)
(884)
51,980
84.02
(11.72)
(3.17)
(13.71)
(3.71)
(0.86)
50.85
67.76
89.54
11,407
—
11,407
11,482
—
11,482
300
1,049
(1,056)
293
15,779
—
—
100,840
(12,765)
(2,013)
(13,733)
(3,365)
(6,913)
62,051
95.46
(12.08)
(1.91)
(13.00)
(3.19)
(6.54)
58.74
75.27
98.37
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
61.39
78.05
(1)%
100%
—%
(4)%
100%
(3)%
1%
100%
2%
(4)%
100%
(3)%
8%
(15)%
(15)%
(6)%
61%
2%
13%
(87)%
(16)%
(12)%
(3)%
66%
5%
16%
(87)%
(13)%
(10)%
(9)%
9%
13%
(28)%
(2)%
(11)%
(62)%
22%
12%
16%
(26)%
—%
(9)%
(62)%
25%
10%
15%
11,362
0.21
11,396
11,012
0.21
11,047
197
4,147
(4,019)
325
79,758
5.00
5.00
360,602
(46,781)
(10,426)
(54,690)
(14,170)
(15,084)
219,451
89.44
(11.60)
(2.59)
(13.56)
(3.51)
(3.74)
54.44
71.04
92.07
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
54.27
70.44
3%
100%
3%
1%
100%
1%
9%
35%
64%
(29)%
7%
4%
43%
47%
33%
62%
(29)%
6%
3%
42%
45%
31%
31%
Vermilion Energy Inc. ■ Page 24 ■ 2018 Annual Report
Production
•
Q4 2018 production increased slightly from the prior quarter due continued strong performance from the 2018 Champotran wells and continued
workover success in the Aquitaine Basin. Production increased 2% year-over-year primarily due to production additions from our 2018 drilling
program.
Activity review
•
Our 2018 capital program included the drilling and completion of two (2.0 net) Neocomian wells and three (3.0 net) Champotran wells in the first
quarter of 2018. In addition to the drilling and completion activity, we continued our workover and optimization programs in the Aquitaine and Paris
Basins throughout 2018.
Sales
•
•
•
Crude oil in France is priced with reference to Dated Brent.
Q4 2018 sales per boe decreased versus Q3 2018, consistent with the weakening in the Dated Brent reference price.
For the three months and year ended December 31, 2018 versus the comparable periods in the prior year, the increase in sales per boe was
consistent with increases in the Dated Brent benchmark price.
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).
Royalties as a percentage of sales was 13.9% in Q4 2018 compared to 12.7% in Q3 2018. This increase was due the impact of fixed per-unit
RCDM royalties relative to lower revenues resulting from weaker commodity prices.
For the three months and year ended December 31, 2018, royalties as a percentage of sales of 13.9% and 13.0% increased from 13.5% and
10.7%, respectively, in the comparable periods in the prior year. These increases were due to the impact of a royalty rate increase enacted in
2017.
Transportation
•
•
Transportation expense increased in Q4 2018 compared to Q3 2018 due to higher pipeline and terminal maintenance work performed in Q4 2018.
Transportation expense for the three months and year ended December 31, 2018 decreased versus the comparable periods in the prior year,
primarily due to the impact of IFRS 16 adoption in 2018. Please refer to "Recently Adopted Accounting Pronouncements" for additional information.
Operating expense in Q4 2018 was relatively consistent with Q3 2018 and Q4 2017 on a dollar basis. On a per unit basis, operating expense
increased in Q4 2018 versus Q3 2018 due to the impact of fixed costs on lower sales volumes, which was a result of shipment timing.
For the year ended December 31, 2018, operating expense increased versus 2017 on both a dollar and per unit basis. These increases were
primarily due to the impact of a stronger Euro versus the Canadian dollar, increased cost and usage of electricity, and higher maintenance activity
in 2018.
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 France, current income taxes are applied to taxable income, after eligible deductions, at a statutory rate of 34.4%.
Current income taxes for the year ended December 31, 2018 versus the comparative period were higher mainly due to higher Dated Brent prices
resulting in increased sales.
Current income taxes for Q4 2018 versus Q3 2018 and Q4 2017 were lower due to increased tax deductions for depletion.
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 34.4% to 25.8% by 2022, with the first reduction planned for 2019 to 32.0%.
Royalties
•
Operating
•
•
•
•
•
•
Vermilion Energy Inc. ■ Page 25 ■ 2018 Annual Report
Netherlands Business Unit
Overview
•
•
•
•
Entered the Netherlands in 2004.
Second largest onshore operator.
Interests include 26 onshore licenses (all operated) and 17 offshore licenses (all non-operated).
Licenses include more than 930,000 net acres of land, 90% of which is undeveloped.
Operational and financial review
Netherlands business unit
($M except as indicated)
Production and sales
Condensate (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Activity
Capital expenditures
Acquisitions
Gross wells drilled
Net wells drilled
Financial results
Sales
Royalties
Operating
General and administration
Current income taxes
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Operating
General and administration
Current income taxes
Fund flows from operations netback
Realized prices
Condensate ($/bbl)
Natural gas ($/mcf)
Total ($/boe)
Reference prices
TTF ($/mcf)
TTF (€/mcf)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
90
46.13
7,779
17,483
(2,087)
—
—
90
40.54
6,847
—%
14%
14%
31,575
(45)%
(24)
2.00
1.02
165,916
108,060
(3,181)
(26,681)
(1,947)
(16,561)
117,546
58.44
(1.12)
(9.40)
(0.69)
(5.83)
41.40
74.85
9.71
58.44
10.23
6.69
(1,722)
(21,212)
54%
85%
26%
(2,212)
(12)%
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
N/A
36%
35%
62%
11%
(22)%
N/A
20%
32%
35%
35%
38%
32%
112
51.82
8,749
2,454
(7,860)
—
—
52,937
(537)
(6,765)
(709)
(7,492)
37,434
65.77
(0.67)
(8.40)
(0.88)
(9.31)
46.51
69.95
10.95
65.77
10.91
7.23
84
44.37
7,479
5,056
2,874
—
—
41,793
(1,049)
(5,812)
(320)
1,729
36,341
60.74
(1.52)
(8.45)
(0.47)
2.51
52.81
82.32
10.08
60.74
10.92
7.18
105
55.66
9,381
33%
17%
17%
7%
(7)%
(7)%
12,300
(51)%
(80)%
(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
27%
(49)%
16%
122%
N/A
3%
8%
(56)%
(1)%
87%
N/A
(12)%
(15)%
9%
8%
—%
1%
29%
(17)%
(3)%
30%
N/A
(6)%
39%
(11)%
4%
40%
N/A
1%
5%
39%
39%
31%
30%
Vermilion Energy Inc. ■ Page 26 ■ 2018 Annual Report
Production
•
Q4 2018 production increased 17% from the prior quarter due to the contribution of a full quarter of production from the Eesveen-02 well (60%
working interest), which we brought on production at a restricted rate of 10 mmcf/d net late in the third quarter of 2018. Production decreased 7%
year-over-year primarily due to natural declines and permitting delays of certain drilling and workover activities, which impacted 2018 full-year
volumes.
Activity review
•
Sales
•
•
Our 2018 capital activity was primarily focused on planned workovers, facilities maintenance, and advancing our drilling permits ahead of our 2019
drilling campaign.
In September 2018 we brought the Eesveen-02 well on production at a restricted rate of 10 mmcf/d net.
In Q4 2018 we consolidated working interests on some of our existing assets and added minor working interest ownerships in several non-operated
offshore licenses. The acquisition contributed approximately 200 boe/d to our Q4 2018 production results. Consideration for the acquisition required
no cash payment but included the assumption of the full ARO associated with the incremental working interest. The ARO is estimated at a PV10
of €20 million. At closing we received a cash payment and positive working capital totaling €5.8 million due to the transaction having an effective
date of January 1, 2018.
The price of our natural gas in the Netherlands is based on the TTF index.
Q4 2018 sales increased on a dollar basis versus Q3 2018 due to higher sales volumes coupled with increased TTF commodity pricing. Sales for
the year ended December 31, 2018 increased versus the same period in the prior year due to the stronger TTF reference price in 2018, as well
as an increase in sold volumes in 2018.
For the three months and year ended December 31, 2018, sales per boe increased versus all comparable periods, consistent with increases in
the TTF reference price.
Royalties
•
In the Netherlands, certain wells are subject to overriding royalties while some wells are subject to royalties that take effect only when specified
production levels are exceeded. As such, royalty expense may fluctuate from period to period depending on the amount of production from those
wells. Royalties in the three months and year ended December 31, 2018 represented 1.0% and 1.9% of sales, respectively.
Transportation
•
Our production in the Netherlands is not subject to transportation expense as gas is sold at the plant gate.
Operating
•
Q4 2018 operating expense increased on a dollar basis versus Q3 2018 due to a prior period adjustment booked in Q4 2018 relating to power
usage, as well as increased permitting costs. On a per boe basis, operating expense was relatively consistent with the prior quarter as higher
costs were offset by an increase in sales volumes. Operating expense on a per unit basis increased Q4 2018 versus Q4 2017 due to the impact
of fixed costs over lower sales volumes.
For the year ended December 31, 2018, operating expense increased on a dollar basis versus the comparable period in 2017 primarily due to
increased maintenance activity coupled with an unfavourable foreign exchange impact. On a per unit basis, operating expense increased due to
the strengthening of the Euro versus the Canadian Dollar.
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 general and administration and tax deductions for depletion and asset retirement obligations, at a tax rate of 50%.
Current income taxes in Q4 2018 and for the year ended December 31, 2018 versus the comparative periods were higher mainly due to higher
TTF prices and volumes resulting in increased sales and an increased tax deduction taken in Q4 2017 for future asset retirement obligations
resulting from a reduction in the applicable discount rate assumption.
On December 18, 2018, the Dutch government approved the 2019 Tax Plan. The Bill provides for reduced corporate tax rates from 25.0% to
20.5% by 2021, with the first reduction planned for 2020 to 22.55%. Due to the tax regime applicable to natural gas producers in the Netherlands,
the reduction to the corporate tax rate is not expected to have a material impact to Vermilion taxes in the Netherlands.
•
•
•
•
•
•
Vermilion Energy Inc. ■ Page 27 ■ 2018 Annual Report
Germany Business Unit
Overview
•
•
•
•
Entered Germany in 2014 through the acquisition of a non-operated natural gas producing property.
Executed a significant exploration license farm-in agreement in 2015 and acquired operated producing properties in 2016.
Producing assets consist of seven gas and eight oil producing fields with extensive infrastructure in place.
Significant land position of approximately 1.2 million net acres (97% undeveloped).
Operational and financial review
Germany business unit
($M except as indicated)
Production
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Sales
Crude oil (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Production mix (% of total)
Crude oil
Natural gas
Activity
Capital expenditures
Acquisitions
Financial results
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations
Netbacks ($/boe)
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations netback
Realized prices
Crude oil ($/bbl)
Natural gas ($/mcf)
Total ($/boe)
Reference prices
Dated Brent (US $/bbl)
Dated Brent ($/bbl)
TTF ($/mcf)
TTF (€/mcf)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
913
16.94
3,736
970
16.94
3,794
1,019
14.88
3,498
929
14.88
3,408
1,148
18.19
4,180
1,067
20.12
4,420
(10)%
14%
7%
4%
14%
11%
(20)%
(7)%
(11)%
(9)%
(16)%
(14)%
24%
76%
29%
71%
27%
73%
1,004
15.66
3,614
1,065
15.66
3,675
1,060
19.39
4,291
993
19.79
4,292
(5)%
(19)%
(16)%
7%
(21)%
(14)%
28%
72%
25%
75%
4,580
706
21,897
(1,190)
(1,452)
(6,615)
(2,308)
10,332
62.74
(3.41)
(4.16)
(18.95)
(6.61)
29.61
75.53
9.72
62.74
67.76
89.54
10.91
7.23
6,497
959
21,052
(2,448)
(1,191)
(4,863)
(2,073)
10,477
67.15
(7.81)
(3.80)
(15.51)
(6.61)
33.42
92.45
9.61
67.15
75.27
98.37
10.92
7.18
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
(30)%
(13)%
4%
(51)%
22%
36%
11%
(1)%
(7)%
(56)%
9%
22%
—%
(11)%
(18)%
1%
(7)%
(10)%
(9)%
—%
1%
16%
(34)%
25%
10%
11%
32%
25%
(29)%
35%
18%
20%
42%
4%
37%
25%
10%
15%
31%
30%
15,806
1,665
82,449
(6,626)
(6,420)
(23,048)
(7,401)
38,954
61.47
(4.94)
(4.79)
(17.18)
(5.52)
29.04
84.14
8.70
61.47
71.04
92.07
10.23
6.69
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
66%
20%
—%
3%
14%
(5)%
40%
39%
15%
19%
32%
10%
61%
32%
36%
39%
31%
31%
38%
32%
Vermilion Energy Inc. ■ Page 28 ■ 2018 Annual Report
Production
•
Q4 2018 production increased 7% from the prior quarter due to the restoration of a non-operated gas processing facility in the prior quarter, partially
offset by other minor unplanned downtime events on our non-operated oil assets. Production decreased 11% year-over-year due to downtime at
a non-operated gas processing plant that began in the middle of Q2 2018 and continued through the middle of Q3 2018.
Activity review
•
Our 2018 capital program focused on permitting and other pre-drill activities associated with our first operated well in Germany, Burgmoor Z5 (46%
working interest) in the Dümmersee-Uchte area, which we expect to drill in 2019, in addition to performing workovers opportunities on our operated
asset base.
The price of our natural gas in Germany is based on the NCG and GPL indexes, which are both highly correlated to the TTF benchmark. Crude
oil in Germany is priced with reference to Dated Brent.
Sales per boe for Q4 2018 decreased versus Q3 2018, and increased versus the comparable periods in 2017, consistent with fluctuations in crude
oil and natural gas benchmark prices.
Sales per boe for 2018 increased versus 2017 due to the increase in crude oil and natural gas benchmark 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 were lower in Q4 2018 versus Q3 2018 and Q4 2017 due to an annual rate adjustment recorded in Q4 2018.
Royalties as a percentage of sales for the year ended December 31, 2018 were lower than the comparable period in the prior year due to increased
production of crude oil with lower associated royalty rates.
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.
Transportation expense in Q4 2018 was higher than Q3 2018 due to the impact of a favourable prior period adjustment recorded in Q3 2018.
Transportation expense increased versus Q4 2017 due to higher volumes of crude oil transported in Q4 2018.
Transportation expense for the year ended December 31, 2018 increased slightly versus the comparable period in the prior year due to higher
tariffs on crude oil transport in 2018.
Sales
•
•
•
•
•
•
Transportation
•
Operating
•
Operating expense on a per unit basis in Q4 2018 was higher versus Q3 2018 due to higher activity levels at non-operated properties and increased
gas processing fees.
Operating expense on a per unit basis increased for the three months and year ended December 31, 2018, versus the comparable periods in the
prior year. The increase was primarily due to increased gas processing tariffs, the impact of fixed costs on lower volumes and the impact of a
stronger Euro versus the Canadian dollar.
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 Germany, we do not expect to incur current income taxes for 2019 in the German Business Unit. This is subject to
change in response to production variations, commodity price fluctuations, the timing of capital expenditures, and other eligible in-country
adjustments.
Vermilion Energy Inc. ■ Page 29 ■ 2018 Annual Report
Ireland Business Unit
Overview
•
•
•
Entered Ireland in 2009 with an investment in the offshore Corrib gas field.
The Corrib gas field is located offshore northwest Ireland and comprises six offshore wells, offshore and onshore sales and transportation pipeline
segments, as well as a natural gas processing facility.
In Q4 2018, Vermilion assumed operatorship of the Corrib Natural Gas Project (the "Corrib Project") and increased its ownership stake by 1.5%
to 20% following the completion of a strategic partnership with Canada Pension Plan Investment Board (“CPPIB”).
Operational and financial review
Ireland business unit
($M except as indicated)
Production and sales
Natural gas (mmcf/d)
Total (boe/d)
Activity
Capital expenditures
Acquisitions
Financial results
Sales
Transportation
Operating
General and administration
Fund flows from operations
Netbacks ($/boe)
Sales
Transportation
Operating
General and administration
Fund flows from operations netback
Reference prices
NBP ($/mcf)
NBP (€/mcf)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
52.03
8,672
140
(5,572)
53,385
(1,115)
(4,497)
(2,037)
45,736
66.91
(1.40)
(5.64)
(2.55)
57.32
11.03
7.31
51.38
8,563
(50)
—
50,228
(1,460)
(3,354)
(3,597)
41,817
63.76
(1.85)
(4.26)
(4.57)
53.08
10.95
7.20
56.23
9,372
327
—
43,793
(1,496)
(2,977)
(517)
38,803
50.79
(1.74)
(3.45)
(0.60)
45.00
8.70
5.81
1%
1%
N/A
6%
(24)%
34%
(43)%
9%
5%
(24)%
32%
(44)%
8%
1%
2%
(7)%
(7)%
(57)%
22%
(25)%
51%
294%
18%
32%
(20)%
63%
325%
27%
27%
26%
55.17
9,195
224
(5,572)
205,150
(5,129)
(15,366)
(8,386)
176,269
61.12
(1.53)
(4.58)
(2.50)
52.51
10.35
6.76
58.43
9,737
551
—
153,330
(5,205)
(17,596)
(2,320)
128,209
43.14
(1.46)
(4.95)
(0.65)
36.08
7.49
5.12
(6)%
(6)%
(59)%
34%
(1)%
(13)%
261%
37%
42%
5%
(7)%
285%
46%
38%
32%
Vermilion Energy Inc. ■ Page 30 ■ 2018 Annual Report
Production
•
Q4 2018 production increased 1% from the prior quarter primarily due to the production contribution from the closing of our acquisition of an
additional 1.5% working interest in the Corrib Project. Production also benefited from the absence of maintenance downtime that had occurred in
Q3 2018, which was partially offset by natural decline.
Activity review
•
In December 2018, Vermilion acquired all of the issued and outstanding common shares of Shell E&P Ireland Limited, along with an incremental
1.5% working interest in the Corrib Project in Ireland from Nephin Energy Holdings Limited, a wholly owned subsidiary of CPPIB. The acquisition
increased Vermilion's total ownership in Corrib to 20%. As part of this transaction, Vermilion assumed operatorship of the Corrib Project, providing
us with day-to-day control over Corrib operations.
Sales
•
•
The price of our natural gas in Ireland is based on the NBP index.
Sales per boe for the three months and year ended December 31, 2018 increased versus all comparable periods consistent with increases in the
NBP reference price.
Royalties
•
Our production in Ireland is not subject to royalties.
Transportation
•
•
Transportation expense in Ireland relates to payments under a ship-or-pay agreement related to the Corrib project.
Transportation expense for the three months ended December 31, 2018 decreased versus Q3 2018 and Q4 2017 due to a decrease in tariffs in
Q4 2018. For the year ended December 31, 2018, transportation expense was consistent with the comparable period in 2017.
Operating
•
Q4 2018 operating expense was higher versus Q3 2018 and Q4 2017 due to an increase in offshore operations and terminal maintenance activity
completed during Q4 2018.
For the year ended December 31, 2018, operating expense was lower versus the comparable period in 2017 due to higher offshore maintenance
activities which occurred in 2017.
•
General and administration
•
The increase in general and administration expense versus all comparable periods is primarily due to transition costs associated with the
aforementioned strategic partnership in Corrib.
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.
Vermilion Energy Inc. ■ Page 31 ■ 2018 Annual Report
Australia Business Unit
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 20 producing wells including five dual lateral wells for a total of 25 producing
laterals.
• Wells that utilize horizontal legs (ranging in length from 500 to 3,000 plus metres) are located 600m below the seabed in approximately 55m of
water depth.
Operational and financial review
Australia business unit
($M except as indicated)
Production
Crude oil (bbls/d)
Sales
Crude oil (bbls/d)
Inventory (mbbls)
Opening crude oil inventory
Crude oil production
Crude oil sales
Closing crude oil inventory
Activity
Capital expenditures
Financial results
Sales
Operating
General and administration
Current income taxes
Fund flows from operations
Netbacks ($/boe)
Sales
Operating
General and administration
PRRT
Corporate income taxes
Fund flows from operations netback
Reference prices
Dated Brent (US $/bbl)
Dated Brent ($/bbl)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
4,174
4,704
4,993
(11)%
(16)%
4,494
5,770
(22)%
4,401
3,935
4,707
12%
(7)%
4,342
5,717
(24)%
210
384
(405)
189
139
433
(362)
210
108
459
(433)
134
134
1,640
(1,585)
189
115
2,106
(2,087)
134
43,760
16,061
7,192
172%
508%
75,638
29,942
153%
39,351
(15,757)
(1,391)
2,206
24,409
97.19
(38.92)
(3.44)
5.98
(0.53)
60.28
67.76
89.54
35,848
(11,585)
(1,020)
(3,101)
20,142
99.01
(32.00)
(2.82)
0.70
(9.27)
55.62
75.27
98.37
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
10%
36%
36%
N/A
21%
(2)%
22%
22%
754%
(94)%
8%
(10)%
(9)%
9%
29%
(56)%
N/A
59%
17%
38%
(53)%
N/A
(87)%
70%
10%
15%
150,733
(53,199)
(4,918)
(11,419)
81,197
95.11
(33.57)
(3.10)
(3.04)
(4.16)
51.24
71.04
92.07
154,391
(50,139)
(8,194)
(24,355)
71,703
73.99
(24.03)
(3.93)
(9.50)
(2.17)
34.36
54.27
70.44
(2)%
6%
(40)%
(53)%
13%
29%
40%
(21)%
(68)%
92%
49%
31%
31%
Vermilion Energy Inc. ■ Page 32 ■ 2018 Annual Report
Production
•
Q4 2018 production decreased 11% quarter-over-quarter and 16% year-over-year due to a planned shutdown of the Wandoo field for maintenance
and other well downtime, including that which was associated with drilling two new wells.
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
•
In Q4 2018, we initiated our two (2.0 net) well drilling program, which was successfully completed in early 2019. The total cost of the program was
$75 million, which was approximately $10 million over budget due to some minor drilling complications and weather-related delays.
• We also continued to focus on adding value through asset optimization and proactive maintenance.
Sales
•
•
•
Crude oil in Australia is priced with reference to Dated Brent.
Q4 2018 sales per boe were consistent with Q3 2018, but higher sales volumes resulted in an increase in sales quarter-over-quarter.
Sales per boe for the three months and year ended December 31, 2018 increased versus the comparable periods in the prior year, consistent with
increases in the Dated Brent reference price.
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
•
•
Q4 2018 operating expense increased versus Q3 2018 due to higher diesel usage and increased maintenance activity in Q4 2018.
For the three months and year ended December 31, 2018, per unit operating expense increased versus the comparable periods in the prior year
due to increased diesel usage and helicopter costs, coupled with the impact of fixed costs on lower volumes.
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. In addition, the decrease in general and administration expense for the three months and year ended December 31, 2018
versus the comparable periods in 2017 is primarily due to the impact of IFRS 16 adoption in 2018. As a result of this new accounting pronouncement,
certain arrangements associated with office space in Australia have been accounted for as leases. Please refer to "Recently Adopted Accounting
Pronouncements" for additional information.
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 2018 and for the year ended December 31, 2018 versus all comparative periods were lower mainly due to increased
PRRT tax deductions for the Q4 2018 capital expenditures related to the drilling campaign.
•
Vermilion Energy Inc. ■ Page 33 ■ 2018 Annual Report
United States Business Unit
Overview
•
•
•
Entered the United States in September 2014.
Interests include approximately 148,700 net acres of land (71% undeveloped) in the Powder River Basin of northeastern Wyoming.
Tight oil development targeting the Turner Sands at depths of approximately 1,500m (East Finn) and 2,600m (Hilight).
Operational and financial review
United States business unit
($M except as indicated)
Production and sales
Crude oil (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
Production mix (% of total)
Crude oil
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 ($/boe)
Sales
Royalties
Transportation
Operating
General and administration
Fund flows from operations netback
Realized prices
Crude oil ($/bbl)
NGLs ($/bbl)
Natural gas ($/mcf)
Total ($/boe)
Reference prices
WTI (US $/bbl)
WTI ($/bbl)
Henry Hub (US $/mcf)
Henry Hub ($/mcf)
Q4 2018
Q3 2018
Q4 2017
Q4/18 vs.
Q3/18
Q4/18 vs.
Q4/17
2018
2017
2018 vs.
2017
1,605
998
5.65
3,545
45%
28%
27%
2,881
3,674
1.00
1.00
14,625
(4,053)
—
(2,848)
(1,396)
6,328
44.85
(12.43)
—
(8.73)
(4.28)
19.41
70.78
26.81
3.29
44.85
58.81
77.71
3.65
4.82
1,461
714
4.82
2,979
49%
24%
27%
11,386
187,987
—
—
14,551
(3,444)
—
(2,633)
(2,397)
6,077
53.10
(12.57)
—
(9.61)
(8.75)
22.17
87.34
29.22
2.01
53.10
69.50
90.83
2.90
3.80
667
43
0.29
758
88%
6%
6%
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
10%
40%
17%
19%
141%
2,221%
1,848%
368%
(75)%
183%
1%
18%
—%
8%
(42)%
4%
(16)%
(1)%
—%
(9)%
(51)%
(12)%
(19)%
(8)%
64%
(16)%
(15)%
(14)%
26%
27%
236%
239%
(100)%
617%
10%
331%
(28)%
(28)%
(100)%
53%
(77)%
(8)%
5%
(35)%
33%
(28)%
6%
10%
25%
29%
1,078
452
2.78
1,992
54%
23%
23%
666
50
0.39
781
85%
6%
9%
40,837
191,740
6.00
6.00
38,465
(10,070)
—
(6,421)
(6,306)
15,668
52.90
(13.85)
—
(8.83)
(8.67)
21.55
79.18
28.02
2.67
52.90
64.77
83.94
3.09
4.01
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
62%
804%
613%
155%
114%
151%
136%
(100)%
278%
45%
213%
(2)%
(8)%
(100)%
48%
(43)%
23%
32%
12%
30%
(2)%
27%
27%
(1)%
(1)%
Vermilion Energy Inc. ■ Page 34 ■ 2018 Annual Report
Production
•
Q4 2018 production increased 19% from the prior quarter and 368% year-over-year primarily due to the production associated with an acquisition
we completed in August 2018.
Activity
•
In August 2018, we acquired all of the assets of a private oil company in the Powder River Basin for total cash consideration of approximately $189
million. The assets are located in Campbell County, Wyoming, approximately 40 miles (65 kilometres) northwest of Vermilion’s existing operations.
The assets included approximately 55,700 net acres of land (approximately 96% working interest) and approximately 2,500 boe/d (63% oil and
NGLs) of production with an estimated annual base decline rate of 13%.
Our 2018 drilling program consisted of the drilling and completion of five (5.0 net) wells on our East Finn asset, along with the drilling and completion
of one (1.0 net) well on our recently acquired Hilight asset, both located in the Powder River Basin.
•
Sales
•
•
•
The price of crude oil in the United States is directly linked to WTI, subject to local market differentials within the United States.
Q4 2018 sales per boe decreased versus Q3 2018 consistent with the decrease in crude oil pricing.
Q4 2018 sales per boe decreased versus Q4 2017 due to an increase in natural gas production from assets acquired in 2018. For the year ended
December 31, 2018, sales per boe remained relatively stable versus the comparable period in 2017. This was due to the strengthening of WTI
reference pricing offset by the increase in gas production from newly acquired assets.
Royalties
•
•
Our production in the United States is subject to federal and private royalties, severance tax, and ad valorem tax.
Royalties as a percentage of sales were higher in Q4 2018 versus Q3 2018 due to the impact of a favourable prior period adjustment recorded in
Q3 2018, which also reduced royalties as a percentage of sales for 2018 versus 2017.
Operating
•
Fluctuations in operating expense versus all comparable periods were due to the timing of maintenance activity and incremental costs from the
assets acquired in Q3 2018.
General and administration
•
Fluctuations in general and administration expense for all comparable periods were due to the incremental staffing of the United States corporate
office, 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.
Vermilion Energy Inc. ■ Page 35 ■ 2018 Annual Report
Corporate
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. Gains or losses relating to Vermilion's global
hedging program are allocated to Vermilion's business units for statutory reporting and income tax purposes.
Results of our activities in Central and Eastern Europe are also included in the Corporate segment, including production, revenues, and expenditures
relating to our first exploratory well in the South Battonya concession in Hungary.
Operational and financial review
Corporate
($M)
Production and sales
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 recovery (expense)
Current income taxes
Interest expense
Realized (loss) gain on derivatives
Realized foreign exchange gain (loss)
Realized other income
Fund flows from operations
Q4 2018
Q3 2018
Q4 2017
2.86
477
2,546
(492)
—
—
2,547
(534)
—
969
646
(20,827)
(28,319)
5,894
275
(39,258)
1.17
195
1,619
207
—
—
1,083
(279)
(201)
854
(862)
(19,772)
(37,365)
(3,100)
177
(59,465)
—
—
1,295
2,207
—
—
—
—
—
(1,532)
(542)
(13,710)
(7,493)
2,899
166
(20,212)
2018
1.02
169
10,611
(285)
1.00
1.00
3,630
(813)
(110)
(2,744)
(513)
(72,759)
(111,258)
243
883
(183,441)
2017
—
—
7,728
2,247
—
—
—
—
—
(6,350)
(527)
(57,313)
4,721
2,316
674
(56,479)
Vermilion Energy Inc. ■ Page 36 ■ 2018 Annual Report
Production review
•
Production in our Central and Eastern Europe business unit averaged 477 boe/d in Q4 2018 representing the first full quarter of gas production
for the business unit from our South Battonya concession in Hungary.
Activity review
•
In 2018, we brought on production our first exploratory well (100% working interest) in the South Battonya concession of Hungary, which we drilled
and tested in the first quarter of 2018. We also continued to prepare for our 2019 drilling campaigns in Hungary, Slovakia and Croatia. Other
exploration activities performed through 2018 included the acquisition of 2D seismic data in Croatia, further interpretation of 3D seismic data in
Hungary, and expanding our land position in Slovakia.
General and administration
•
Fluctuations in general and administration expense for the three months and year ended December 31, 2018 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 increase in interest expense in Q4 2018 versus Q3 2018 was due to higher drawings on the revolving credit facility.
For the three months and year ended December 31, 2018, interest expense increased versus the comparative periods in 2017 due to the impact
of higher drawings on the revolving credit facility, as well as the impact of IFRS 16 adoption in 2018. Please refer to "Recently Adopted Accounting
Pronouncements" for additional information regarding the adoption of IFRS 16.
Realized gain or loss on derivatives
•
The realized loss on derivatives for the year ended December 31, 2018 is related primarily to amounts paid on crude oil and European natural gas
hedges.
A listing of derivative positions as at December 31, 2018 is included in “Supplemental Table 2” of this MD&A.
•
Vermilion Energy Inc. ■ Page 37 ■ 2018 Annual Report
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)
Dec 31, 2018
6,270,671
1,796,207
1,678,117
271,650
Dec 31, 2017
3,974,965
1,270,330
1,098,838
62,258
Dec 31, 2016
4,087,184
1,362,192
882,791
(160,051)
1.93
1.91
2.72
0.52
0.51
2.58
(1.38)
(1.38)
2.58
($M except per share)
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Q4 2017
Q3 2017
Q2 2017
Q1 2017
Petroleum and natural gas sales
Net earnings (loss)
Net earnings (loss) per share
Basic
Diluted
456,939
323,373
508,411
(15,099)
394,498
(61,364)
318,269
317,341
24,740
8,645
248,505
(39,191)
271,391
261,601
48,264
44,540
2.12
2.10
(0.10)
(0.10)
(0.46)
(0.46)
0.20
0.20
0.07
0.07
(0.32)
(0.32)
0.40
0.39
0.38
0.37
The following table shows the calculation of 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 loss
Realized other income
Q4 2018
$M
456,939
(43,874)
413,065
(16,938)
$/boe
48.90
(4.70)
44.20
(1.81)
Q3 2018
$M
508,411
(53,786)
454,625
(13,721)
$/boe
57.90
(6.13)
51.77
(1.56)
(112,470)
(12.04)
(97,758)
(11.13)
(12,814)
2,422
(7,946)
(20,827)
(28,319)
5,894
275
(1.37)
0.26
(0.85)
(2.23)
(3.03)
0.63
0.03
(13,234)
254
(9,401)
(19,772)
(37,365)
(3,100)
177
(1.51)
0.03
(1.07)
(2.25)
(4.26)
(0.35)
0.02
29.69
Q4 2017
$M
317,341
$/boe
47.49
2018
$M
1,678,117
$/boe
52.95
2017
$M
1,098,838
(23,541)
(3.52)
(152,167)
(4.80)
(74,476)
293,800
43.97
1,525,950
48.15
1,024,362
(11,986)
(65,240)
(15,941)
(3,572)
2,330
(13,710)
(7,493)
2,899
166
(1.79)
(9.76)
(2.39)
(0.53)
0.35
(2.05)
(1.12)
0.43
0.02
(51,887)
(1.64)
(43,448)
(357,014)
(11.26)
(242,267)
(51,929)
(4,824)
(38,753)
(72,759)
(111,258)
243
883
(1.64)
(0.15)
(1.22)
(2.30)
(3.51)
0.01
0.03
(54,373)
(19,819)
(12,288)
(57,313)
4,721
2,316
674
$/boe
44.41
(3.01)
41.40
(1.76)
(9.79)
(2.20)
(0.80)
(0.50)
(2.32)
0.19
0.09
0.03
181,253
27.13
838,652
26.47
602,565
24.34
Fund flows from operations
222,342
23.79
260,705
Fluctuations in fund flows from operations may occur as a result of changes in production levels, commodity prices, and costs to produce petroleum
and natural gas. In addition, fund flows from operations may be 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.
Vermilion Energy Inc. ■ Page 38 ■ 2018 Annual Report
The following table shows a reconciliation from fund flows from operations to net earnings:
Fund flows from operations
Equity based compensation
Unrealized gain (loss) on derivative instruments
Unrealized foreign exchange (loss) gain
Unrealized other expense
Accretion
Depletion and depreciation
Deferred tax
Gain on business combinations
Net earnings
Q4 2018
222,342
(16,979)
273,096
(36,366)
(204)
(8,205)
(174,435)
(64,084)
128,208
323,373
Q3 2018
260,705
(13,056)
(75,829)
(23,044)
(203)
(8,041)
(166,343)
10,712
—
(15,099)
Q4 2017
181,253
(16,087)
(80,012)
40,660
(197)
(6,991)
(129,179)
19,198
—
8,645
2018
838,652
(60,746)
109,326
(63,243)
(801)
(31,219)
(609,056)
(39,471)
128,208
271,650
2017
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 security-based arrangements, including the Vermilion Incentive Plan ("VIP") and a security-based compensation
arrangement ("Five-Year Compensation Arrangement").
Equity based compensation expense increased in Q4 2018 compared to Q3 2018 and Q4 2017, primarily due to a higher number of outstanding share
awards in Q4 2018. For the year ended December 31, 2018, equity based compensation was relatively consistent versus the comparable period in
2017.
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. As derivative instruments are settled, the unrealized gain or loss previously
recognized is reversed, and the settlement results in a realized gain or loss on derivative instruments.
For the three months and year ended December 31, 2018, we recognized unrealized gains on derivative instruments of $273.1 million and $109.3
million, respectively. The unrealized gains primarily related to European natural gas and crude oil derivative instruments for 2019 through 2021.
Unrealized foreign exchange gains or losses
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 gains and losses 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 and year ended December 31, 2018, the impact of the Canadian dollar weakening against the US dollar was more significant
than the impact of the Canadian dollar weakening against the Euro, resulting in unrealized losses on foreign exchange of $36.4 million and $63.2 million,
respectively.
As at December 31, 2018, a $0.01 appreciation of the Euro against the Canadian dollar would result in a $2.2 million increase to net earnings as a
result of an unrealized gain on foreign exchange. In contrast, a $0.01 appreciation of the US dollar against the Canadian dollar would result in a $3.0
million decrease to net earnings as a result of an unrealized loss on foreign exchange.
Vermilion Energy Inc. ■ Page 39 ■ 2018 Annual Report
Accretion
Accretion expense is recognized to update the present value of the asset retirement obligation balance. The increase in accretion expense for the three
months and year ended December 31, 2018 versus the comparable periods in 2017 was primarily attributable to new obligations recognized following
acquisitions in 2018. For the three months ended December 31, 2018, accretion expense was relatively consistent with the prior quarter.
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 the year ended December 31, 2018 of $19.22 was slightly lower than the $19.87 per boe rate in 2017,
despite a significant increase in higher cost crude oil production and an increase in depreciation expense following the recognition of right-of-use assets
under IFRS 16 due to continued increases in our proved plus probable reserves.
Deferred tax
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.
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.
For the three months and year ended December 31, 2018, deferred tax expense of $64.1 million and $39.5 million were primarily attributable to unrealized
gains on derivative instruments and the accelerated deduction of capital expenditures incurred on the drilling program in Australia for PRRT purposes
(which decreased PRRT expense but correspondingly increased deferred tax expense). These taxable temporary differences were partially offset by
the recognition of additional tax losses in Ireland that are expected to be utilized due to higher European natural gas pricing forecasts.
Vermilion Energy Inc. ■ Page 40 ■ 2018 Annual Report
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 2018 and 2017, taxable income was subject to corporate income tax at the following rates:
Jurisdiction
Canada
France
Netherlands (1)
Germany (2)
Ireland
Australia
United States
(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.
(2) In 2018, the German Business Unit moved its central office to a new German municipality with a higher trade tax rate.
2018
27.0%
34.4%
50.0%
30.2%
25.0%
30.0%
21.0%
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%.
On December 18, 2018, the Dutch government approved the 2019 Tax Plan. The Bill provides for reduced corporate tax rates from 25.0% to 20.5%
by 2021, with the first reduction planned for 2020 to 22.55%. Due to the tax regime applicable to natural gas producers in the Netherlands, the reduction
to the corporate tax rate is not expected to have a material impact to Vermilion taxes in the Netherlands.
Tax pools
As at December 31, 2018, we had the following tax pools:
Total
Other
Tax Losses
Oil & Gas Assets
2,317,044 (1)
317,062 (2)
66,947 (3)
175,756 (3)
—
298,054 (1)
214,965 (1)
($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 and applied 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
(7) Tax losses created prior to January 1, 2018 are carried forward and applied at 100% against taxable income, tax losses created after January 1,
1,052,664 (4)
11,086 (5)
—
98,787 (6)
1,301,395 (4)
10,486 (4)
101,928 (7)
3,405,900
328,148
66,947
286,475
1,301,395
308,540
327,077
6,024,482
36,192
—
—
11,932
—
—
10,184
58,308
2,576,346
3,389,828
2018 are carried forward and applied to 80% of taxable income in each taxation year
Vermilion Energy Inc. ■ Page 41 ■ 2018 Annual Report
Financial Position Review
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 our forecast of 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.
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 approximately 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 adjust 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.
Due to the timing of payments on our fourth quarter drilling activity in Canada and Australia, we had a working capital deficit of $133.3 million as at
December 31, 2018. Vermilion intends to fund this working capital deficiency through fund flows from operations generated in 2019 and unutilized
capacity on our revolving credit facility.
Net debt
Net debt is reconciled to long-term debt, as follows:
($M)
Long-term debt
Current liabilities
Current assets
Net debt
Ratio of net debt to quarterly annualized fund flows from operations
Ratio of net debt to fund flows from operations
As at
Dec 31, 2018
1,796,207
563,199
(429,877)
1,929,529
2.17
2.30
Dec 31, 2017
1,270,330
363,306
(261,846)
1,371,790
1.89
2.28
As at December 31, 2018, net debt increased to $1.93 billion (December 31, 2017 - $1.37 billion) due to the impact of the acquisitions closed in 2018.
This increase was partially offset by a $115.6 million decrease in net current derivative liability and an increase in fund flows from operations, which
resulted in an increase in the ratio of net debt to fund flows from operations from 2.28 for 2017 to 2.30 for 2018.
Year-end net debt to fund flows from operations of 2.30 compares to our previous forecast of year end net debt to fund flows from operations of 1.7
times as announced in our press release on April 16, 2018 ("Vermilion Energy Inc. Announces Acquisition of Spartan Energy Corp."). The increase in
the ratio of net debt to fund flows from operations from forecast resulted from a decrease in crude oil prices in Q4 2018 and incremental debt assumed
on our acquisition in the United States in Q3 2018.
Long-term debt
The balances recognized on our balance sheet are as follows:
($M)
Revolving credit facility
Senior unsecured notes
Long-term debt
As at
Dec 31, 2018
1,392,206
404,001
1,796,207
Dec 31, 2017
899,595
370,735
1,270,330
Vermilion Energy Inc. ■ Page 42 ■ 2018 Annual Report
Revolving Credit Facility
In Q2 2018, we negotiated an increase in our revolving credit facility from $1.4 billion to $1.6 billion and an extension of the maturity from May 31, 2021
to May 31, 2022. In Q3 2018, we negotiated a further increase in our revolving credit from $1.6 billion to $1.8 billion.
Subsequent to December 31, 2018, we negotiated an additional increase in our revolving credit facility from $1.8 billion to $2.1 billion. This additional
debt capacity provides us with additional working capital and operational flexibility. There were no changes to the facility maturity date or applicable
covenants as a result of this increase.
As at December 31, 2018, Vermilion had in place a bank revolving credit facility maturing May 31, 2022 with terms, outstanding positions, and covenants.
as follows:
($M)
Total facility amount
Amount drawn
Letters of credit outstanding
Unutilized capacity
As at
Dec 31, 2018
1,800,000
(1,392,206)
(15,400)
392,394
Dec 31, 2017
1,400,000
(899,595)
(7,400)
493,005
As at December 31, 2018, 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, 2018
1.72
1.34
30%
Dec 31, 2017
1.87
1.30
32%
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”, “Current portion of long-term debt”, and “Lease obligations” (including
the current portion included within "Accounts payable and accrued liabilities" but excluding operating leases as defined under IAS 17) 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, adjusted for the impact of the acquisition of a material subsidiary.
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%
Vermilion Energy Inc. ■ Page 43 ■ 2018 Annual Report
Shareholders' capital
Beginning with the April 2018 dividend paid on May 15, 2018, we increased our monthly dividend by 7%, to $0.23 per share from $0.215 per share.
The dividend increase in Q2 2018 was our fourth dividend increase (previously Vermilion's distribution in the income trust era) since we began paying
a distribution in 2003.
In total, dividends declared in 2018 were $388.1 million.
The following table outlines our dividend payment history:
Date
January 2003 to December 2007
January 2008 to December 2012
January 2013 to December 2013
January 2014 to March 2018
April 2018 onwards
Monthly dividend per unit or share
$0.170
$0.190
$0.200
$0.215
$0.230
Our policy with respect to dividends is to be conservative and maintain a low ratio of dividends to fund flows from operations. During low commodity
price cycles, we will initially maintain dividends and allow the ratio to rise. Should low commodity price cycles remain for an extended period of time,
we will evaluate the necessity of changing the level of dividends, taking into consideration capital development requirements, debt levels, and acquisition
opportunities.
Although we expect to be able to maintain our current dividend, fund flows from operations may not be sufficient to fund cash dividends, capital
expenditures, and asset retirement obligations. We will evaluate our ability to finance any shortfall with debt, issuances of equity, or by reducing some
or all categories of expenditures to ensure that total expenditures do not exceed available funds.
The following table reconciles the change in shareholders’ capital:
Shareholders’ Capital
Balance at December 31, 2017
Shares issued for corporate acquisition
Shares issued for the Dividend Reinvestment Plan
Vesting of equity based awards
Equity based compensation
Share-settled dividends on vested equity based awards
Balance as at December 31, 2018
Number of Shares ('000s)
122,119
27,883
1,179
1,025
314
184
152,704
Amount ($M)
2,650,706
1,234,676
49,051
54,057
12,565
7,773
4,008,828
As at December 31, 2018, there were approximately 1.9 million equity based compensation awards outstanding. As at February 27, 2019, there were
approximately 152.8 million common shares issued and outstanding.
Contractual Obligations and Commitments
As at December 31, 2018, we had the following contractual obligations and commitments:
($M)
Long-term debt (1)
Lease obligations
Processing and transportation agreements
Purchase obligations
Drilling and service agreements
Total contractual obligations and commitments
(1) Interest on revolving credit facility calculated assuming an annual interest rate of 4%.
Less than 1 year
78,604
30,798
25,844
33,223
26,667
195,136
1 - 3 years
157,208
49,743
24,835
16,223
28,933
276,942
3 - 5 years
1,435,616
34,313
10,902
1,379
41,976
1,524,186
After 5 years
443,791
42,739
34,371
—
5,301
526,202
Total
2,115,219
157,593
95,952
50,825
102,877
2,522,466
Vermilion Energy Inc. ■ Page 44 ■ 2018 Annual Report
Asset Retirement Obligations
As at December 31, 2018, asset retirement obligations were $650.2 million compared to $517.2 million as at December 31, 2017.
The increase in asset retirement obligations is largely attributable to additional obligations recognized as a result of acquisitions completed in 2018.
Risks and Uncertainties
Crude oil and natural gas exploration, production, acquisition and marketing operations involve a number of risks and uncertainties that have affected
the financial statements and are reasonably likely to affect them in the future. These risks and uncertainties are discussed further below.
Commodity prices
Crude oil and natural gas prices have fluctuated significantly in recent years due to supply and demand factors. Changes in crude oil and natural gas
prices affect the level of revenue we generate, the amount of proceeds we receive and payments we make on our commodity derivative instruments,
and the level of taxes that we pay. In addition, lower crude oil and natural gas prices would reduce the recoverable amount of our capital assets and
could result in impairments or impairment reversals.
Exchange rates
Exchange rate changes impact the Canadian dollar equivalent revenue and costs that we recognize. The majority of our crude oil and condensate
revenue stream is priced in US dollars and as such an increase in the strength of the Canadian dollar relative to the US dollar would result in the receipt
of fewer Canadian dollars for our revenue. We also incur expenses and capital costs in US dollars, Euros and Australian dollars and thus a decrease
in strength of the Canadian dollar relative to those currencies may result in the payment of more Canadian dollars for our expenditures.
In addition, exchange rate changes impact the Canadian equivalent carrying balances for our assets and liabilities. For foreign currency denominated
monetary assets (such as cash and cash equivalents, long-term debt, and intercompany loans), the impact of changes in exchange rates is recorded
in net earnings as a foreign exchange gain or loss.
Production and sales volumes
Our production and sales volumes affect the level of revenue we generate and correspondingly the royalties and taxes that we pay. In addition, significant
declines in production or sales volumes due to unforeseen circumstances, may also result in an indicator of impairment and potential impairment charges.
Interest rates
Changes in interest rates impact the amount of interest expense we pay on our variable rate debt and also our ability to obtain fixed rate financing in
the future.
Tax and royalty rates
Changes in tax and royalty rates in the jurisdictions that we operate in would impact the amount of current taxes and royalties that we pay. In addition,
changes to substantively enacted tax rates would impact the carrying balance of deferred tax assets and liabilities, potentially resulting in a deferred
tax recovery or incremental deferred tax expense.
In addition to the above, we are exposed to risk factors that impact our company and business. For further information on these risk factors, please
refer to our Annual Information Form, available on SEDAR at www.sedar.com or on our website at www.vermilionenergy.com.
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.
Vermilion Energy Inc. ■ Page 45 ■ 2018 Annual Report
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 us to make estimates. Critical accounting estimates are those accounting
estimates that require us to make assumptions about matters that are highly uncertain at the time the estimate is made and a different estimate could
have been made in the current period or the estimate could change period-to-period.
The carrying amount of asset retirement obligations
The carrying amount of asset retirement obligations ($650.2 million as at December 31, 2018) is the present value of estimated future costs, discounted
from the estimated abandonment date using a credit-adjusted risk-free rate. Estimated future costs are based on our assessment of regulatory
requirements and the present condition of our assets. The estimated abandonment date is based on the reserve life of the associated assets. The
credit-adjusted risk-free rate is based on prevailing interest rates for appropriate term, risk-free government bonds adjusted for our estimated credit
spread (determined by reference to the trading prices for debt issued by similarly rated independent oil and gas producers, including our own senior
unsecured notes). Changes in these estimates would result in a change in the carrying amount of asset retirement obligations and capital assets and,
to a significantly lesser degree, future accretion and depletion expense.
The estimated abandonment date may change from period to period as the estimated abandonment date changes in response to new information, such
as changes in reserve life assumptions or regulations. A one year increase or decrease in the estimated abandonment date would decrease or increase
asset retirement obligations (with an offsetting increase to capital assets) by approximately $25.0 million.
The estimated credit-adjusted risk-free rate may change from period to period in response to market conditions in Canada and the international jurisdictions
that we operate in. An 0.5% increase or decrease in the credit-adjusted risk-free rate would decrease or increase asset retirement obligations by
approximately $55.0 million.
The recognition of deferred tax assets in Ireland
In Ireland, we have $0.5 billion of non-expiring tax loss pools where $127.9 million of deferred tax assets has not been recognized as there is uncertainty
on our ability to fully use these losses based on estimated future taxable profits. Estimated future taxable profits are calculated using proved and
probable reserves and forecast pricing for European natural gas.
As a result, the carrying value of deferred tax assets may change from period-to-period due to changes in forecast pricing for European natural gas. A
5% increase or decrease in proved and probable reserves in our Ireland segment would increase or decrease deferred tax assets (with a corresponding
deferred tax recovery or expense) by approximately $17.0 million. A €0.50/GJ increase or decrease in forecast European natural gas prices would
increase or decrease deferred tax assets (with a corresponding deferred tax recovery or expense) by approximately $26.0 million.
The amount of finance lease obligations recognized on adoption of IFRS 16
Effective January 1, 2018, Vermilion adopted IFRS 16 using the modified retrospective approach, whereby the cumulative effect of initially applying the
standard was recognized as a $97.1 million increase to lease obligations with a corresponding increase to right-of-use assets. The amount of lease
obligation (and therefore the amount of right-of-use assets) recognized was calculated as the present value of future lease payments, discounted using
our estimated incremental borrowing rate. The estimated incremental borrowing rate reflects the interest rate we would estimate receiving to borrow
funds for a similar term and security to acquire the right-of-use asset. Changes in the estimated incremental borrowing rate would change the amount
of lease obligations and right-of-use assets recognized on initial adoption and, to a significantly lesser degree, would impact future interest expense
and depreciation expense. Based on attributes of our identified leases (including the term of the lease and the country the asset is leased in), we applied
a weighted average incremental borrowing rate of 5.4%. A 1% increase or decrease in the estimated incremental borrowing rate would have decreased
or increased lease obligations and right-of-use assets recognized on initial adoption by approximately $4.0 million.
The fair value of capital assets acquired in business combinations
In preparing the purchase price allocations for the business combinations completed in 2018, we estimate the fair value of assets acquired. Assets
acquired in an acquisition primarily relates to the crude oil and natural gas reserves. The estimated fair value of the crude oil and natural gas reserves
acquired is based on the present value of proved plus probable reserves and forecast commodity prices. Changes in these assumptions would change
the amount of capital assets recognized and as a result would also impact any goodwill or gain recognized on the acquisition and future depletion and
depreciation expense.
Vermilion Energy Inc. ■ Page 46 ■ 2018 Annual Report
The estimated recoverable amount of cash generating units
Each reporting period, we assess our cash generating units for indicators of impairment or impairment reversal. If an indicator of impairment or impairment
reversal is identified, we estimate the recoverable amount of the cash generating unit. During the years ended December 31, 2017 and 2018, no
indicators of impairment were identified. As a result, the recoverable amount of cash generating units were not critical accounting estimates.
Off Balance Sheet Arrangements
We have not entered into any guarantee or off balance sheet arrangements that would materially impact our financial position or results of operations.
Recently Adopted Accounting Pronouncements
IFRS 9 "Financial Instruments"
On January 1, 2018, Vermilion adopted IFRS 9 "Financial Instruments" as issued by the IASB. IFRS 9 includes a new classification and measurement
approach for financial assets and a forward-looking 'expected credit loss' model. The adoption of IFRS 9 did not have a material impact on Vermilion's
consolidated financial statements.
IFRS 15 "Revenue from contracts with customers"
On January 1, 2018, Vermilion adopted IFRS 15 "Revenue from Contracts with Customers" IFRS 15 establishes a comprehensive framework for
determining whether, how much, and when revenue from contracts with customers is recognized. Vermilion's revenue relates to the sale of petroleum
and natural gas to customers at specified delivery points at benchmark prices.
Vermilion adopted IFRS 15 using the modified retrospective approach. Under this transitional provision, the cumulative effect of initially applying IFRS
15 is recognized on the date of initial application as an adjustment to retained earnings. No adjustment to retained earnings was required upon adoption
of IFRS 15.
IFRS 16 "Leases"
IFRS 16 "Leases" is required to be applied on or after January 1, 2019. The stated objective of IFRS 16 is to provide information that faithfully represents
lease transactions and provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
IFRS 16 accomplishes this by introducing a single lessee accounting model that requires lessees to recognize a lease obligation and right-of-use asset
for the majority of leases. As the Company completed the assessment of the standard and applicable contracts during Q3 2018, Vermilion elected for
earlier application of IFRS 16 to achieve the stated objectives of the standard and to increase comparability of results in future periods. Vermilion began
applying the standard effective January 1, 2018.
Effective January 1, 2018, Vermilion applied IFRS 16 retrospectively with the cumulative effect of initially applying the standard recognized as a $97.1
million increase to right-of-use assets (included in "Capital assets") and lease obligations ($86.1 million recorded in "Lease obligations" and $11.0 million
recorded in "Accounts payable and accrued liabilities"). The right-of-use assets and lease obligations recognized largely relate to the Company's head
office lease in Calgary and long-term leases for oil storage facilities in France.
Health, Safety and Environment
We are committed to ensuring our activities are conducted 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 reduce
impacts to land, water and air. During 2018 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 our incidents and near misses to ensure root causes were identified and corrective actions
effectively implemented;
Completed and gained regulatory acceptance of the Corrib Production Safety Case;
Completed maturity assessments of the HSE MS elements for each business unit;
Received ISO 5001 certification for the German Business Unit energy management program;
Vermilion Energy Inc. ■ Page 47 ■ 2018 Annual Report
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Completed numerous corporate policy/standard audits/assessments related to operational risk management, contractor management,
marine transportation and drug and alcohol;
Implemented “Vermilion High 5”, an individual safety awareness initiative aimed at keeping front line workers safe;
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 (includes Central and Eastern Europe,
Germany, United States, Ireland and Canada expansion);
Reported our CO2e emissions to the CDP highlighting the implementation of 40 projects that reduced our gross emissions by 15,000
tonnes CO2e while increasing production;
Completed and published our Corporate Sustainability Report with emphasis on improving energy efficiency, greenhouse gas emissions
reduction and water efficiency optimization;
Managed our waste products by reducing, recycling and recovering;
Reduced long-term environmental liabilities through decommissioning, abandoning and reclaiming well leases and facilities;
Further refined and expanded our enterprise wide corporate risk register;
Expanded our company-wide HSE leadership training program to improve hazard identification and risk reduction;
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 and risk
reduction measures;
Performed auditing, management inspections and workforce observations to measure compliance and identify potential hazards and apply
risk reduction measures; and
Developed, communicated and measured against leading and lagging HSE key performance indicators;
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.
Environmental, Social and Governance (ESG)
Furthering our focus on sustainability (ESG) strategy, in 2018 we reviewed recommendations from the Task Force on Climate-related Financial Disclosures
(TCFD). We subsequently updated our sustainability reporting in general to illustrate Vermilion’s alignment with these recommendations, focusing on
climate, but also on sustainability issues and opportunities in a wider context. In 2018, our Board of Directors also established a Sustainability Committee
to provide further support on issues related to sustainability, including climate. Our 2018 performance in sustainability rankings such as CDP, RobecoSAM
and Sustainalytics continued to be top of our peer group.
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. As a result, we align our
strategic priorities in the following order:
•
•
•
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, stakeholder relations, and respectful and fair treatment of staff, contractors, partners and suppliers.
Reflecting these priorities, we have positioned Vermilion purposefully within the energy transition. Predictions differ about the manner and speed of the
transition, but our own scenario analyses are clear that Vermilion can best contribute by focusing on producing energy responsibly: reliably, cost-
effectively and safely. We also believe those stakeholders who are concerned about sustainability, including investors, governments, regulators,
communities and citizens, should turn to best-in-class operators such as Vermilion. Our crude oil and natural gas assets are strategic resources that
can, and should, be deployed in the service of the transition and, indeed, of the framework for the planet’s health and wellbeing represented by the
United Nations Sustainable Development Goals (SDGs).
To support our strategy, we regularly communicate with our stakeholders, including via our sustainability reporting. In 2018, reflecting our review of
TCFD recommendations, we updated our engagement to include a broader inclusion of sustainability in regulatory reporting.
Vermilion Energy Inc. ■ Page 48 ■ 2018 Annual Report
For more information, please see references to sustainability throughout this document, including the Climate Risk discussion. For additional context,
our Sustainability Report is available online at www.vermilionenergy.com (under the heading “Our Responsibility”).
Vermilion’s sustainability performance and reporting have earned consistently strong recognition from external stakeholders:
Accomplishments
•
•
•
•
Vermilion was named to the CDP Climate Leadership Level (A-) for the second consecutive year in 2018. We were the only Canadian oil
and gas company and one of only two North American oil and gas companies to receive this designation, ranking Vermilion in the top 5%
of oil and gas companies globally.
The Company received a top quartile ranking for our industry sector in RobecoSAM's annual Corporate Sustainability Assessment ("CSA").
The CSA analyzes sustainability performance across economic, environmental, governance and social criteria, and is the basis of the Dow
Jones Sustainability Indices.
Vermilion was ranked top of our peer group in the Sustainalytics ESG (environment, social, governance) rankings.
Vermilion's MSCI ESG rating continued at A for 2018, marking the second consecutive year Vermilion has scored at this level, and our
Governance Metrics score ranked in the top decile globally.
• We received ISS QualityScore decile ratings of 1 for Environmental and 2 for Social, which assess corporate disclosure and transparency
•
•
practices in these areas, where 1 indicates lowest risk.
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 2018, we ranked 11th, and were the highest rated oil and gas company on the list.
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. In 2019, we were a finalist for the same award. 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.
Climate-related Disclosures
Vermilion has publicly released our identified climate risks and opportunities since our first annual CDP Climate Response in 2014. In alignment with
recommendations from the Task Force on Climate-related Financial Disclosures, under the TCFD’s Strategy category, we are also including them in
this document. For more information on our sustainability-related governance, strategy, risk management, and metrics and targets, including those
related to climate, please see our 2019 Proxy Statement and Information Circular, and our online sustainability reporting, particularly the Performance
Metrics section and our 2018 CDP Response.
Risk /
Opportunity
Increased Pricing
of GHG Emissions
e.g. Carbon Tax
Enhanced
Emissions
Reporting
Obligations
Description of Impacts1,2
- Risk Category
- Risk Timeframe
- Policy and Legal
- Short-term
Vermilion's operations were subject to carbon
taxation in Alberta, Canada starting in January 2017
and potentially in Saskatchewan as a result of a
Canada-wide carbon tax in 2019, affecting the cost
of operating in our Canada Business Unit.
- Policy and Legal
- Short-term
Emissions reporting obligations are an ongoing risk
and have the can change due to political and
regulatory evolution. The impact to Vermilion would
be a decreased netback on a per BOE basis, due to
increased expenditures for personnel time and
system development and implementation, to allow
for more robust emissions quantification.
Potential Financial Impact
Management Context
The current financial impact of taxation currently
does not exceed $0.5MM per annum. We anticipate
this to increase in the medium-term.
The potential financial impact is based on proposed
changes to carbon pricing in our operating regions
out to 2023, resulting in expansion of emission
sources covered. This estimate is based on the
probable cost scenario identified in our Carbon
Liability Assessment Tool.
Based on our current output in Alberta, France and
the Netherlands, current regulated thresholds,
and growth, we anticipate that cost associated with
meeting emission reporting obligations will increase
in the short-term, likely as a small increase in
operational costs.
Regulations in all of our business units are
monitored on an ongoing basis, and assumptions/
scenario planning is used annually to assess risk.
Vermilion also engages stakeholders relating to
emissions reporting obligations. Management of
this risk is built into Vermilion's operations and our
Enterprise Risk Matrix.
Mandates on and
Regulation of
Existing Products
and Services
- Policy and Legal; Technology
- Short-term
Vermilion's operations are subject to regional
regulatory changes that result in changes to
equipment requirements such as engineering and
equipment modifications to reduce carbon emissions
and / or emissions of criteria air contaminants.
In Canada, operational modifications required to
comply with Directive 039 are estimated to have
cost $1MM by the end of implementation in 2018.
The costs associated with the Netherlands MJA3
program are built into our operating costs and no
significant expenditures are anticipated in the near
term.
Vermilion’s participation in the MJA3 program in the
Netherlands since 2005, for example, has resulted
in projects that have reduced our operations energy
intensity by 76%. Such regulatory changes continue
to lead Vermilion to complete engineering reviews
and facility updates resulting in emission reductions
beyond regulatory requirements.
Vermilion Energy Inc. ■ Page 49 ■ 2018 Annual Report
Risk /
Opportunity
Description of Impacts1,2
- Risk Category
- Risk Timeframe
Changes in
Emissions
Regulations
Changes in
Temperature
Extremes
Changes In
Precipitation
Patterns and
Extreme Variability
in Weather
Patterns
Rising Sea Levels
Increased Severity
of Extreme
Weather Events
such as Cyclones
and Floods
- Policy and Legal
- Medium-term
The risk associated with a change in emission
regulations in one or more of our business units is
accounted for by Vermilion's Enterprise Risk Matrix,
with mitigation measures are reviewed, updated and
implemented on an annual basis. A shift in
international regulations may also result in an impact
to Vermilion's supply chain, resulting in a limitation of
market access or direct impact to the price of our
products. As Vermilion maintains a diversified asset
base, we believe the risk to the marketability of our
products is low.
- Physical
- Long-term
A decrease in temperature extremes experienced in
the winter months (i.e. lower seasonal lows) could
increase the amount of fuel gas used by a variety of
equipment essential for safe production. Additional
equipment could also be required (e.g. building
heaters, line heaters) to ensure safe and efficient
operation, thus increasing our carbon footprint and
costs. Temperature extremes could also increase
capital costs associated with drilling, completion and
workover operations due to increased timelines,
decreased productivity, equipment breakdown, etc.
For example, warmer winters would have a direct
impact on Vermilion's more northern operations,
through a decreased ability to access lands and
increased construction capital requirements.
- Physical
- Long-term
Vermilion holds assets inland, in coastal regions,
and offshore. A change in precipitation in any of
these locations could have a negative impact on
operations due to drought or flooding. Flooding
could result in limited access to locations / facilities,
and poses a risk to our corporate headquarters.
Alternatively, drought conditions could impact the
availability of surface and / or groundwater, which
Vermilion, in part, relies on for drilling and
completion activities. This could negatively impact
forecasted growth by increasing the timelines and
capital costs to bring new infrastructure onto
production.
- Physical
- Long-term
Vermilion owns and operates assets in the
Netherlands. We have identified and assessed the
potential risk associated with rising sea levels here,
as it has the potential to physically impact our
operations due to issues such as flooding,
transportation difficulties and supply chain
interruptions. Rising sea levels also pose a threat
related to the salinization of groundwater.
- Physical
- Medium-term
Vermilion owns and operates an offshore platform in
the Wandoo field off northwestern Australia, and co-
owns and operates the Corrib project off the Irish
coast. Extreme weather events such as cyclones
have the potential to directly impact our offshore
operations resulting in down time or damage to
infrastructure, and can impact the downstream
handling capacity of our partners, resulting in a
limitation to the distribution and sale of our products.
Potential Financial Impact
Management Context
Following the COP21 conference, the importance of
sustainable development and reduction of emission
levels was confirmed by the commitments made by
national governments. Based on the anticipated
changes in the various regulatory regimes under
which Vermilion operates, the financial impact due to
a regulatory change over the next 3 years is
anticipated to be less than $2.5MM. This does not
include the cost associated with emission reduction
projects completed on an annual basis, or previous
projects that have annual emissions reductions.
The formalization of Integrated Sustainability as a
strategic objective in Vermilion’s long-term strategic
plan allows us to better understand, identify,
proactively respond and manage the potential risk
and uncertainty inherent in an evolving sustainability
framework, both at a regional and corporate level.
As an example, beginning in 2017, Vermilion added
requirements to assess capital expenditures for
potential sustainability-related impacts.
The financial implications on an annual basis are
difficult to quantify; however, based on Vermilion's
experience, the most significant financial
implications would result from shutdowns in drilling
or completions locations. The estimated cost of this
would be $0.5MM per day of delay.
As extreme weather cannot be controlled, Vermilion
uses our various Management Systems and
processes to protect the health and safety of our
workers, contractors and the public, and to protect
the environment from adverse effect. As an
example of how we have reduced the potential
impact related to access in remote assets, we use
multi-well pads wherever possible, with multiple
horizontal wells drilled from a single location. This
reduces the aerial impact of these activities on the
environment, habitat fragmentation and carbon
emissions associated with lease construction and
equipment mobilization/demobilization. Using multi-
well locations would significantly decrease capital
considerations in the event that limited frost days
were realized in the coming years.
The financial implications of a single time event (e.g.
wildfire) and continued strain event (e.g. drought)
have been assessed on a case-specific basis, and
the financial implications of these events is believed
to be manageable (impact under $10MM). Vermilion
maintains insurance to mitigate the potential impact
of precipitation extreme events (e.g. flooding).
Insurance for locations that have been identified as
potentially being impacted by drought-induced
events (e.g. wildfire) is estimated at $0.45MM per
annum.
As these incidents are beyond Vermilion's control,
we take measures to ensure effective emergency
response to extreme weather events, to protect the
health and safety of our workers, contractors and
the public, to protect the environment, and to limit
the financial impact of the event. In the case of a
longer term extreme precipitation event or drought,
Vermilion has implemented water management
programs to reduce our reliance on fresh water
sources.
Vermilion reviews the potential impact of rising sea
levels annually as part of our Corporate Risk Matrix.
We estimate the potential total financial implication
to be $153MM, before mitigation measures, in our
Netherland operations.
Based on the value of the Wandoo Platform and a 1-
in-2000 year cyclonic event, the financial
implications associated with damage due to a
severe weather event is estimated at $179MM (total
impact before insurance). The third-party costs
associated with potential damages from extreme
weather events are not tracked by Vermilion.
There is no measure available to protect Vermilion's
Netherlands assets in the event that water levels
rise to a level that would impact facilities below sea
level. Salinization of the groundwater regime would
impact the entire region; similarly, no measures are
currently available to protect against this. Based on
Vermilion's assessment of the probability of these
events occurring over the next 5 years being less
than 0.5%, we have accepted this level of risk
exposure.
Vermilion maintains insurance as a mitigative
measure to reduce the financial impact associated
with damage to our assets due to
severe weather events. We also have protocols for
monitoring and preparing for cyclones, and have
invested in our emergency response capabilities in
the event of damage to our assets as a result of a
cyclone or severe weather event. Operational
changes are made as required to ensure (in order of
priority) worker health and safety, protection of the
environment, and protection of Vermilion’s assets.
Vermilion Energy Inc. ■ Page 50 ■ 2018 Annual Report
Risk /
Opportunity
Description of Impacts1,2
- Risk Category
- Risk Timeframe
Potential Financial Impact
Management Context
Changing
Customer
Behaviour
- Market; Reputational
- Long-term
As consumers and governments become more
socially aware of the sources of their energy,
negative perceptions of organizations
or production methods have the potential to impact
energy sector companies through company
valuations, restricted licensing and permitting, and
stakeholder opposition.
The impact of decreased consumer confidence and
perception is not calculable. On a per share basis,
the market impact of the loss of $1 per share would
be approximately $152MM. The direct cost of
Vermilion's operating excellence and risk
management cannot be quantified on a single risk
basis.
Opportunity:
Participation in
Carbon Market
Opportunity:
Development of
New Products and
Services through
R&D and
Innovation
Opportunity: Shift
in Consumer
Preferences
Opportunity: Ability
to Diversify
Business Activities
Opportunity: Shift
Toward
Decentralized
Energy Generation
- Financial
- Medium term
The European Union Emissions Trading Scheme
(ETS) allows for the generation and movement of
certified carbon credits from emissions-saving
projects around the world. With the revisions
pending in Phase 4, it is anticipated that there will be
an active market and consumers for the offset
credits generated at some of our sustainability
initiatives around the world, likely providing
opportunities for Vermilion to generate certified
energy reduction and offset credits.
- Products
- Short-term
As Vermilion has developed our emissions
quantification programs across the globe, we have
developed more robust methods for sharing of
technologies and techniques from across our
operations, both internally and externally. Our
increased focus on tracking emissions has
supported the assessment of opportunities across
business units and sharing of technical expertise.
- Products, Reputational
- Long-term
Under the Canadian Environmental Protection Act
and based on commitments made by the Canadian
and Alberta governments relating to COP21, there is
a commitment to reduce emissions for coal-fired
power generation. Based on this and with a number
of power generating facilities in Alberta nearing the
end of their service life, the demand for natural gas
is likely to increase due to increased use of
combined cycle gas turbine (CCGT) power
generation. Alberta has also committed to
significantly reducing its demand for coal for power
generation by 2050.
- Products
- Long-term
Vermilion maintains a diverse, stable global portfolio
of oil and gas assets. Our strong record of safe and
socially conscious development of energy resources
has provided opportunities to access and develop
these resources. We see our commitment to
sustainability as core to our business, which has
provided important organizational focus on
emissions quantification and management. As
consumers become more aware of and involved in
the selection of their energy sources and associated
carbon intensity, we believe that Vermilion will
continue to be a top quartile choice, providing us
with opportunities not available to peer
organizations.
- Products, Reputational
- Long-term
The carbon intensity of energy used around the
world has a direct relationship to where the energy
product was generated. Vermilion’s business unit
structure supports production and distribution of
energy products into local markets. This strategy
results in the significant reduction of the carbon
footprint of our energy when compared to non-local
sources.
Vermilion is not accounting for any short term
financial impact. It is estimated that following the
change to the EU ETS in Phase 4, the carbon price
will stabilize at between approximately €15 and €30
per tCO2e. The financial impact to Vermilion
annually is estimated to be up to $1MM.
As this opportunity is in the early stage of
assessment, it is difficult to quantify the financial
impact, but it is estimated at up to $2MM per year.
Potential also exists for significant cost adjustments,
as assets slated for abandonment could be
repurposed to generate geothermal energy.
The short term impact on gas pricing is anticipated
to be low, increasing to medium in the mid to long
term. Once the regulations are implemented, there
is a potential for an increase in the demand and
pricing for natural gas, from which Vermilion would
benefit. Based on current estimates, an increase in
gas price of $1 per mcf would result in a positive
impact to sales of approximately $35MM.
The financial impact of changing consumer
preferences is difficult to quantify. We foresee
opportunities in two distinct areas: first, in
consumers selecting premium energy products (top
quartile, low carbon intensity), with these products
demanding a higher price than other energy sources
on the market. Currently we estimate the potential
impact of premium pricing in the long term to be
$1-5 per boe (24.8MM based on $1 per boe). The
second opportunity, which we are already receiving
benefit from, is access to more stringent markets,
supported by our environmental and sustainability
performance, such as our entry into German,
Hungarian and Croatian oil and gas operations in
the last several years.
On an operating netback (sales) basis, based on
current estimates, the financial premium of our non-
Canadian assets was $340.8MM. The potential
future advantage is anticipated to increase as we
expand production in markets outside North America
and provide sources of energy to local markets. The
costs associated with adjustment of our
organizational structure are built into our costs
across the company.
Vermilion is positioned within the evolving energy
transition, with an unwavering commitment to our
priorities of health and safety, environmental
protection, and economic prosperity. We believe
that those commitments, and our contributions to the
UN SDGs constitute qualitative advantages that set
us apart from our competitors. Sustainable
practices are ingrained into the way we operate, and
we will continue to focus on our Integrated
Sustainability strategic objective. We believe this
advantage attracts investors to Vermilion and will
continue to give Vermilion a competitive advantage
in the future.
We are currently evaluating the benefit that certified
offset credits from various emission reduction
projects across our operations
could provide. Examples of projects with this
potential include our Tomato Greenhouse
Cogeneration project in France, our partnerships for
geothermal applications in residential
neighborhoods in France, and our developing
geothermal projects in the Netherlands. Vermilion's
project assessment framework is applied to each
identified opportunity, including considerations
associated with emissions offset.
We have technical experts who provide input into
potential geothermal projects as they are identified.
These teams are supported by corporate
sustainability staff in connecting internal and
external stakeholders. These teams have
responsibilities specific to geothermal opportunities
as these projects move through their preliminary
stages. To further support identification of
opportunities, and engagement with stakeholders,
Vermilion has appointed sustainability leads in all
our business units.
As we move further into the energy transition, we
foresee natural gas playing an impactful role as a
less carbon intense fuel than other options (i.e.
coal). Vermilion continues to focus on the
identification of resources and assets where we
have the opportunity to apply our industry leading
expertise to optimize production while reducing
emissions. An example of our strategy to realize
this opportunity is our asset base in Alberta, which
currently includes a large liquids rich gas play.
Vermilion's marketing team is also actively pursuing
options for our natural gas production that will
enable Vermilion to achieve the best netbacks on
production.
Vermilion made the organizational change to
established Integrated Sustainability as one of our
strategic objectives in 2015. This provided
important organizational focus on matters such as
environmental performance, including climate
change. Our strategy is to continue to support
Integrated Sustainability, with personnel who are
experts in their field, as well as financially supporting
programs and projects that reduce emissions while
optimizing production. An example of this is the
addition of personnel who have specific
responsibilities associated with sustainability in our
business units, including study and feasibility
assessment of green energy generation.
Vermilion continues to assess where we can access
local markets for our production, while exploring
regions to expand our operations. The actions
taken in the past several years to realize this
opportunity include alterations to our structure, our
strategic objectives and our operational
development plans to support Vermilion as a
distributed energy provider, and exploration and
development programs in regions with relatively low
energy production as compared to consumption (i.e.
Hungary).
Vermilion Energy Inc. ■ Page 51 ■ 2018 Annual Report
Note 1: Short term (0 to 3 years); Medium term (3 to 6 years); Long term (6 to 50 years)
Note 2: Risk summary is based on our fiscal year 2017 environmental reporting through CDP. Fiscal year 2018 environmental reporting will be available
in mid-2019.
Vermilion Energy Inc. ■ Page 52 ■ 2018 Annual Report
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 ("TSX"). 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 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 that 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, 2018, 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.
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, 2018. The effectiveness of
Vermilion’s internal control over financial reporting as of December 31, 2018 has been audited by Deloitte LLP, as reflected in their report included in
the 2018 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, 2018, that have materially affected, or are reasonably likely to materially affect, the
internal controls over financial reporting.
Vermilion Energy Inc. ■ Page 53 ■ 2018 Annual Report
Vermilion has limited the scope of design controls and procedures ("DC&P") and internal controls over financial reporting to exclude the controls, policies,
and procedures of Spartan Energy Corp (which was acquired in May of 2018) and Shell E&P Ireland Limited (which was acquired in December of 2018).
The scope limitation is in accordance with section 3.3(1)(b) of NI 52-109 which allows an issuer to limit the design of DC&P and ICFR to exclude controls,
policies, and procedures of a business that the issuer acquired not more than 365 days before the end of the fiscal period.
The table below presents the summary financial information of Spartan and Shell E&P Ireland Limited included in Vermilion's financial statements as
at and for the year ended December 31, 2018:
($MM)
Non-current assets
Non-current liabilities
Net assets
($MM)
Revenue
Net earnings
As at December 31, 2018
1,556
69
1,422
Year ended December 31, 2018
243
45
Vermilion Energy Inc. ■ Page 54 ■ 2018 Annual Report
Supplemental Table 1: Netbacks
The following table includes financial statement information on a per unit basis by business unit. Liquids includes crude oil, condensate, and NGLs.
Natural gas sales volumes have been converted on a basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.
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
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
Liquids
$/bbl
48.70
(7.29)
(2.62)
(13.09)
25.70
84.94
(11.86)
(3.21)
(13.88)
55.99
69.95
—
—
69.95
75.53
(3.32)
(9.14)
(24.48)
38.59
—
—
—
—
Q4 2018
Natural Gas
$/mcf
1.73
(0.09)
(0.17)
(1.35)
0.12
1.74
(0.03)
—
—
1.71
10.95
(0.11)
(1.42)
9.42
9.72
(0.57)
(0.41)
(2.84)
5.90
11.15
(0.23)
(0.94)
9.98
Total
$/boe
33.30
(4.57)
(1.99)
(11.09)
15.65
(0.38)
15.27
84.02
(11.72)
(3.17)
(13.71)
55.42
(3.71)
(0.86)
50.85
65.77
(0.67)
(8.40)
56.70
(0.88)
(9.31)
46.51
62.74
(3.41)
(4.16)
(18.95)
36.22
(6.61)
29.61
66.91
(1.40)
(5.64)
59.87
(2.55)
57.32
Liquids
$/bbl
60.57
(8.67)
(2.26)
(11.68)
37.96
89.68
(11.64)
(2.59)
(13.61)
61.84
74.85
—
—
74.85
84.14
(2.55)
(9.53)
(22.53)
49.53
—
—
—
—
2018
Natural Gas
$/mcf
1.54
0.02
(0.16)
(1.32)
0.08
1.74
(0.04)
—
—
1.70
9.71
(0.19)
(1.58)
7.94
8.70
(0.99)
(0.48)
(2.50)
4.73
10.19
(0.25)
(0.76)
9.18
Total
$/boe
37.81
(4.77)
(1.69)
(10.00)
21.35
(0.34)
21.01
89.44
(11.60)
(2.59)
(13.56)
61.69
(3.51)
(3.74)
54.44
58.44
(1.12)
(9.40)
47.92
(0.69)
(5.83)
41.40
61.47
(4.94)
(4.79)
(17.18)
34.56
(5.52)
29.04
61.12
(1.53)
(4.58)
55.01
(2.50)
52.51
Q4 2017
Total
$/boe
2017
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
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
Vermilion Energy Inc. ■ Page 55 ■ 2018 Annual Report
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 (loss) gain
Royalties
Transportation
Operating
PRRT (1)
Operating netback
General and administration
Interest expense
Realized foreign exchange loss
Other income
Corporate income taxes
Fund flows from operations netback
Q4 2018
Liquids
Natural Gas
$/bbl
$/mcf
97.19
(38.92)
5.98
64.25
53.92
(14.96)
—
(8.68)
30.28
60.48
(1.84)
(7.89)
(2.52)
(15.26)
0.47
33.44
—
—
—
—
3.29
(0.90)
—
(1.48)
0.91
5.83
(0.74)
(0.14)
(0.16)
(1.36)
—
3.43
Total
$/boe
97.19
(38.92)
5.98
64.25
(3.44)
(0.53)
60.28
44.85
(12.43)
—
(8.73)
23.69
(4.28)
19.41
48.90
(3.03)
(4.70)
(1.81)
(12.04)
0.26
27.58
(1.37)
(2.23)
0.63
0.03
(0.85)
23.79
2018
Liquids
Natural Gas
$/bbl
$/mcf
95.11
(33.57)
(3.04)
58.50
64.06
(16.71)
—
(8.97)
38.38
71.70
(3.72)
(8.67)
(2.22)
(14.40)
(0.29)
42.40
—
—
—
—
2.67
(0.73)
—
(1.39)
0.55
5.45
(0.55)
(0.10)
(0.17)
(1.31)
—
3.32
Total
$/boe
95.11
(33.57)
(3.04)
58.50
(3.10)
(4.16)
51.24
52.90
(13.85)
—
(8.83)
30.22
(8.67)
21.55
52.95
(3.51)
(4.80)
(1.64)
(11.26)
(0.15)
31.59
(1.64)
(2.30)
0.01
0.03
(1.22)
26.47
Q4 2017
Total
$/boe
2017
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
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
(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.
Vermilion Energy Inc. ■ Page 56 ■ 2018 Annual Report
Supplemental Table 2: Hedges
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, 2018:
Crude Oil
Dated Brent
3-Way Collar
Swap
3-Way Collar
3-Way Collar
Swap
Swap
Swap
WTI
Swap
3-Way Collar
Swap
Period
Exercise date (1)
Currency
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
Bought Put
Volume
Weighted
Average
Bought Put
Sold Call
Volume
Weighted
Average
Sold Call
Sold Put
Volume
Weighted
Average
Sold Put
Swap
Volume
Weighted
Average
Swap
Sep 2018 - Jun 2019
Jan 2019 - Dec 2019
Aug 2018 - Jun 2019
Jan 2019 - Dec 2019
Apr 2018 - Mar 2019
Jul 2018 - Jun 2019
Jan 2019 - Dec 2019
Jan 2019 - Dec 2019
Jan 2019 - Dec 2019
Apr 2018 - Mar 2019
CAD
CAD
USD
USD
USD
USD
USD
CAD
USD
USD
2,500
91.20
2,500
—
500
500
—
—
—
—
250
—
—
66.92
70.00
—
—
—
—
70.00
—
—
500
500
—
—
—
—
250
—
98.63
—
80.00
80.00
—
—
—
—
80.25
—
2,500
—
500
500
—
—
—
—
250
—
76.00
—
55.00
60.00
—
—
—
—
60.00
—
—
1,350
—
—
750
1,500
2,250
1,050
—
250
—
91.76
—
—
61.33
68.52
73.17
81.41
—
54.00
North American Gas
Period
Exercise date (1)
Currency
(mcf/d)
Price / mcf
(mcf/d)
Bought Put
Volume
Weighted
Average
Bought Put
Sold Call
Volume
Weighted
Average
Sold Call
Price /
mcf
Sold Put
Volume
Weighted
Average
Sold Put
Swap
Volume
(mcf/d)
Price /mcf
(mcf/d)
Weighted
Average
Swap
Price /
mcf
AECO
Swap
Dec 2018 - Mar 2019
AECO Basis (AECO less NYMEX Henry Hub)
Swap
Jan 2019 - Jun 2020
AECO Basis (AECO less Chicago NGI)
Swap
NYMEX Henry Hub
Swap
Chicago NGI
Swap
SOCAL Border
Swap (2)
Swap (2)
Swap (2)
Nov 2018 - Mar 2019
Jan 2019 - Mar 2019
Dec 2018 - Mar 2019
Jan 2019
Feb 2019
Mar 2019
CAD
USD
USD
USD
USD
USD
USD
USD
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,500
2.41
2,500
(0.93)
5,000
(1.46)
5,000
5,000
10,000
10,000
10,000
4.00
4.40
5.50
4.39
3.36
(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) These swaps hedge a physical sales agreement to sell Alberta natural gas production at SOCAL Border pricing less a fixed differential.
Vermilion Energy Inc. ■ Page 57 ■ 2018 Annual Report
European Gas
Period
Exercise date (1)
Currency
(mcf/d)
Price / mcf
(mcf/d)
Bought Put
Volume
Weighted
Average
Bought Put
Sold Call
Volume
Weighted
Average
Sold Call
Price /
mcf
Sold Put
Volume
Weighted
Average
Sold Put
Swap
Volume
(mcf/d)
Price /mcf
(mcf/d)
Weighted
Average
Swap
Price /
mcf
NBP
3-Way Collar
3-Way Collar
3-Way Collar
Collar
Call
Swap
Swaption
Swaption
Swaption
Swaption
Jan 2019 - Dec 2019
Jan 2019 - Dec 2020
Jan 2020 - Dec 2020
Oct 2018 - Mar 2019
Oct 2018 - Mar 2019
Oct 2018 - Mar 2019
Jul 2019 - Jun 2021
June 28, 2019
Oct 2019 - Mar 2020
June 28, 2019
Oct 2020 - Mar 2021
June 28, 2019
Oct 2021 - Mar 2022
June 28, 2019
NBP Basis (NBP less NYMEX HH)
Collar
TTF
3-Way Collar
3-Way Collar
3-Way Collar
3-Way Collar
Swap
Swap
Swap
Swap
Jan 2019 - Sep 2020
Oct 2017 - Dec 2019
Jan 2018 - Dec 2019
Jan 2019 - Dec 2019
Jan 2020 - Dec 2020
Oct 2017 - Dec 2019
Jan 2018 - Dec 2019
Jul 2018 - Dec 2019
Jan 2019 - Dec 2019
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
17,197
7,370
19,654
3,685
—
—
—
—
—
—
4.97
4.96
5.10
6.40
—
—
—
—
—
—
17,197
7,370
19,654
2,457
12,327
—
—
—
—
—
5.65
5.76
5.92
7.62
6.28
—
—
—
—
—
7,500
2.07
7,500
4.00
7,370
3,685
12,284
7,370
—
—
—
—
4.59
4.74
5.05
5.37
—
—
—
—
7,370
3,685
12,284
7,370
—
—
—
—
5.42
5.52
5.72
6.25
—
—
—
—
17,197
7,370
19,654
—
—
—
—
—
—
—
—
7,370
3,685
12,284
7,370
—
—
—
—
3.79
3.74
4.01
—
—
—
—
—
—
—
—
2.93
3.13
3.69
3.81
—
—
—
—
—
—
—
—
—
4,913
9,827
7,370
7,370
7,370
—
—
—
—
—
7,370
1,228
4,913
2,457
—
—
—
—
—
7.92
5.64
5.86
5.86
5.86
—
—
—
—
—
4.87
5.00
4.98
4.92
Cross Currency Interest Rate
Receive Notional Amount (USD)
Rate (LIBOR +)
Pay Notional Amount (CAD)
Rate (CDOR +)
Swap
Jan 2019
1,018,563,000
1.70%
1,354,900,000
1.02%
(1)
The sold swaption instrument allows the counterparty, at the specified date, to enter into a swap with Vermilion at the above detailed terms.
Vermilion Energy Inc. ■ Page 58 ■ 2018 Annual Report
Supplemental Table 3: Capital Expenditures and Acquisitions
By classification ($M)
Drilling and development
Exploration and evaluation
Capital expenditures
Acquisitions
Shares issued for acquisition
Contingent consideration
Long-term debt net of working capital assumed
Acquisitions
By category ($M)
Drilling, completion, new well equip and tie-in, workovers and
recompletions
Production equipment and facilities
Seismic, studies, land and other
Capital expenditures
Acquisitions
Total capital expenditures and acquisitions
Q4 2018
160,359
3,221
163,580
(31,314)
—
2
34,005
2,689
Q3 2018
142,116
4,069
146,185
193,677
—
—
4,496
198,173
Q4 2017
61,911
12,392
74,303
3,048
—
—
—
3,048
2018
503,842
14,372
518,214
276,308
1,235,221
2
247,898
1,759,425
2017
290,593
29,856
320,449
27,637
—
—
—
27,637
Q4 2018
Q3 2018
Q4 2017
2018
2017
151,511
9,166
2,903
163,580
2,689
166,269
118,317
26,964
904
146,185
198,173
344,358
45,533
18,109
10,661
74,303
3,048
77,351
Capital expenditures by country ($M)
Q4 2018
Q3 2018
Q4 2017
Canada
France
Netherlands
Germany
Ireland
Australia
United States
Corporate
90,211
17,008
2,454
4,580
140
43,760
2,881
2,546
89,837
15,779
5,056
6,497
(50)
16,061
11,386
1,619
26,865
20,027
12,300
5,279
327
7,192
1,018
1,295
Total capital expenditures
163,580
146,185
74,303
518,214
320,449
Acquisitions by country ($M)
Q4 2018
Q3 2018
Q4 2017
Canada
Netherlands
Germany
Ireland
United States
Corporate
Total acquisitions
12,233
(7,860)
706
(5,572)
3,674
(492)
2,689
6,146
2,874
959
—
187,987
207
198,173
788
(38)
—
—
91
2,207
3,048
2018
1,573,964
(2,087)
1,665
(5,572)
191,740
(285)
1,759,425
2017
22,011
(24)
—
—
3,403
2,247
27,637
In 2018, included in cash expenditures on acquisitions of $276.3 million is: $257.8 million net paid to vendors in relation to business combinations ($339.9 million paid
net of $82.1 million cash acquired); $9.9 million in asset improvements incurred subsequent to acquisitions for compliance with safety, environmental, and Vermilion's
operating standards; $7.0 million paid to acquire land; and $1.6 million relating to the carry component of farm-in arrangements.
Vermilion Energy Inc. ■ Page 59 ■ 2018 Annual Report
434,875
62,496
20,843
518,214
1,759,425
2,277,639
2018
277,857
79,758
17,483
15,806
224
75,638
40,837
10,611
225,668
59,629
35,152
320,449
27,637
348,086
2017
148,667
73,381
31,575
9,531
551
29,942
19,074
7,728
Supplemental Table 4: Production
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
Corporate
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Consolidated
Liquids (bbls/d)
% of consolidated
Natural gas (mmcf/d)
% of consolidated
Total (boe/d)
Q4/18
Q3/18
Q2/18
Q1/18
Q4/17
Q3/17
Q2/17
Q1/17
Q4/16
Q3/16
Q2/16
Q1/16
29,557
6,816
146.65
60,814
60%
11,317
0.82
11,454
11%
112
51.82
8,749
9%
913
16.94
3,736
4%
52.03
8,672
9%
4,174
4%
1,605
998
5.65
3,545
3%
2.86
477
—
28,477
6,126
136.77
57,397
17,009
5,589
127.32
43,817
9,272
5,106
106.21
32,078
9,703
5,235
107.91
32,923
9,288
4,891
103.92
31,499
9,205
3,745
93.68
28,563
7,987
2,670
85.74
24,947
7,945
2,444
75.12
22,910
8,984
2,448
77.62
24,368
9,453
2,687
87.44
26,713
10,317
2,633
97.16
29,141
59%
55%
46%
45%
46%
43%
38%
38%
37%
42%
44%
11,407
—
11,407
11,683
—
11,683
11,037
—
11,037
11,215
—
11,215
10,918
—
10,918
11,368
—
11,368
10,834
0.01
10,836
11,220
0.38
11,283
11,827
0.42
11,897
12,326
0.54
12,416
12,220
0.44
12,293
12%
14%
16%
15%
16%
17%
17%
19%
19%
19%
19%
84
44.37
7,479
87
43.49
7,335
77
44.79
7,541
105
55.66
9,381
74
34.90
5,890
104
31.58
5,368
76
39.92
6,729
57
41.15
6,915
86
47.62
8,023
96
49.18
8,293
114
53.40
9,015
8%
9%
11%
13%
9%
8%
10%
11%
13%
13%
14%
1,019
14.88
3,498
1,008
14.63
3,447
1,078
16.19
3,777
1,148
18.19
4,180
1,054
20.12
4,407
1,047
19.86
4,357
989
19.39
4,220
—
14.80
2,467
—
14.52
2,420
—
14.31
2,385
—
15.96
2,660
4%
4%
5%
6%
7%
6%
7%
4%
4%
4%
4%
51.38
8,563
56.56
9,426
60.87
10,144
56.23
9,372
49.04
8,173
63.81
10,634
64.82
10,803
62.92
10,486
59.28
9,879
47.26
7,877
33.90
5,650
9%
12%
14%
13%
12%
16%
17%
17%
16%
12%
9%
4,704
4,132
4,971
4,993
5,473
6,054
5%
5%
7%
7%
8%
9%
6,581
10%
6,388
10%
6,562
10%
6,083
6,180
9%
9%
1,461
714
4.82
2,979
655
62
0.40
784
574
20
0.15
618
667
43
0.29
758
880
56
0.64
1,043
747
76
0.44
896
365
24
0.20
422
362
23
0.18
414
383
30
0.20
447
458
26
0.20
518
368
39
0.26
450
3%
1%
1%
1%
2%
1%
1%
1%
1%
1%
1%
1.17
195
—%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
55,493
55%
276.77
45%
101,621
53,991
40,225
32,134
33,109
32,634
32,346
29,526
28,439
30,320
31,129
31,871
56%
50%
46%
45%
48%
48%
46%
47%
48%
48%
49%
253.38
242.40
228.20
238.28
208.62
209.36
210.07
194.54
199.65
198.93
201.11
44%
50%
54%
55%
52%
52%
54%
53%
52%
52%
51%
96,222
80,625
70,167
72,821
67,403
67,240
64,537
60,863
63,596
64,285
65,389
Vermilion Energy Inc. ■ Page 60 ■ 2018 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
Corporate
Natural gas (mmcf/d)
Total (boe/d)
% of consolidated
Consolidated
Liquids (bbls/d)
% of consolidated
Natural gas (mmcf/d)
% of consolidated
Total (boe/d)
2018
2017
2016
2015
2014
2013
21,154
5,914
129.37
48,630
9,051
4,144
97.89
29,510
9,171
2,552
84.29
25,771
11,357
2,301
71.65
25,598
12,491
1,233
55.67
23,001
8,387
1,666
42.39
17,117
56%
45%
40%
46%
47%
41%
11,362
0.21
11,396
11,084
—
11,085
11,896
0.44
11,970
12,267
0.97
12,429
11,011
—
11,011
10,873
3.40
11,440
13%
16%
19%
23%
22%
28%
90
46.13
7,779
90
40.54
6,847
88
47.82
8,058
99
44.76
7,559
77
38.20
6,443
64
35.42
5,967
9%
10%
13%
14%
13%
15%
1,004
15.66
3,614
1,060
19.39
4,291
—
14.90
2,483
—
15.78
2,630
—
14.99
2,498
4%
6%
4%
5%
5%
55.17
9,195
58.43
9,737
50.89
8,482
11%
14%
13%
0.03
5
—
—
—
—
—
—
—
—
—
—
—
4,494
5,770
5%
8%
6,304
10%
6,454
12%
6,571
13%
6,481
16%
1,078
452
2.78
1,992
666
50
0.39
781
393
29
0.21
457
2%
1%
1%
1.02
169
—
—
—
—
—
—
—
231
7
0.05
247
—
—
—
—
49
—
—
49
—
—
—
—
—
—
—
—
—
—
—
—
45,548
31,915
30,433
32,716
31,432
27,471
52%
47%
48%
60%
63%
250.33
216.64
198.55
133.24
108.85
48%
53%
52%
40%
37%
67%
81.21
33%
87,270
68,021
63,526
54,922
49,573
41,005
Vermilion Energy Inc. ■ Page 61 ■ 2018 Annual Report
Supplemental Table 5: Segmented Financial Results
($M)
Drilling and development
Exploration and evaluation
Crude oil and condensate sales
NGL sales
Natural gas sales
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized loss on derivative instruments
Realized foreign exchange gain
Realized other income
Canada
90,211
—
146,947
16,010
23,351
(25,584)
160,724
(11,129)
(62,064)
(2,150)
—
—
—
—
—
—
France
Netherlands
Germany
Ireland
Australia
Three Months Ended December 31, 2018
16,870
138
85,758
—
131
(11,976)
73,913
(3,242)
(14,015)
(3,792)
—
(884)
—
—
—
—
2,292
162
721
—
52,216
(537)
52,400
—
(6,765)
(709)
—
(7,492)
—
—
—
—
3,087
1,493
6,742
—
15,155
(1,190)
20,707
(1,452)
(6,615)
(2,308)
—
—
—
—
—
—
140
—
—
—
53,385
—
53,385
(1,115)
(4,497)
(2,037)
—
—
—
—
—
—
43,760
—
39,351
—
—
—
39,351
—
(15,757)
(1,391)
2,422
(216)
—
—
—
—
USA
2,881
—
10,452
2,462
1,711
(4,053)
10,572
—
(2,848)
(1,396)
—
—
—
—
—
—
Corporate
1,118
1,428
—
—
2,547
(534)
2,013
—
91
969
—
646
(20,827)
(28,319)
5,894
275
Total
160,359
3,221
289,971
18,472
148,496
(43,874)
413,065
(16,938)
(112,470)
(12,814)
2,422
(7,946)
(20,827)
(28,319)
5,894
275
Fund flows from operations
85,381
51,980
37,434
10,332
45,736
24,409
6,328
(39,258)
222,342
($M)
Total assets
Drilling and development
Exploration and evaluation
Crude oil and condensate sales
NGL sales
Natural gas sales
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized loss on derivative instruments
Realized foreign exchange gain
Realized other income
Year Ended December 31, 2018
Canada
3,060,291
277,857
—
541,844
56,554
72,774
(84,696)
586,476
(29,912)
(177,499)
(6,057)
—
—
—
—
—
—
France
Netherlands
Germany
918,398
79,451
307
360,471
—
131
(46,781)
313,821
(10,426)
(54,690)
(14,170)
—
277,348
17,963
(480)
2,462
—
163,454
(3,181)
162,735
—
(26,681)
(1,947)
—
(15,084)
(16,561)
—
—
—
—
—
—
—
—
284,063
10,863
4,943
32,704
—
49,745
(6,626)
75,823
(6,420)
(23,048)
(7,401)
—
—
—
—
—
—
Ireland
709,585
224
—
—
—
205,150
—
205,150
(5,129)
(15,366)
(8,386)
—
—
—
—
—
—
Australia
263,739
75,638
—
150,733
—
—
—
150,733
—
(53,199)
(4,918)
(4,824)
(6,595)
—
—
—
—
USA
Corporate
Total
407,323
40,837
—
31,142
4,622
2,701
(10,070)
28,395
—
(6,421)
(6,306)
—
—
—
—
—
—
349,924
6,270,671
1,009
9,602
—
—
3,630
(813)
2,817
—
(110)
(2,744)
—
(513)
(72,759)
(111,258)
243
883
503,842
14,372
1,119,356
61,176
497,585
(152,167)
1,525,950
(51,887)
(357,014)
(51,929)
(4,824)
(38,753)
(72,759)
(111,258)
243
883
Fund flows from operations
373,008
219,451
117,546
38,954
176,269
81,197
15,668
(183,441)
838,652
Vermilion Energy Inc. ■ Page 62 ■ 2018 Annual Report
Non-GAAP Financial Measures
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:
Acquisitions: The sum of acquisitions from the Consolidated Statement of Cash Flows, Vermilion common shares issued as consideration, the estimated
value of contingent consideration, the amount of acquiree's outstanding long-term debt assumed plus or net of acquired working capital deficit or surplus.
We believe that including these components provides a useful measure of the economic investment associated with our acquisition activity.
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 equity based compensation plans 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 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.
Return on capital employed (ROCE): ROCE is a measure that we use to analyze our profitability and the efficiency of our capital allocation process.
ROCE is calculated by dividing net earnings before interest and taxes ("EBIT") by average capital employed over the preceding twelve months. Capital
employed is calculated as total assets less current liabilities while average capital employed is calculated using the current period balance sheet and
the previous year-end balance sheet.
Vermilion Energy Inc. ■ Page 63 ■ 2018 Annual Report
The following tables reconcile net dividends, payout, and diluted shares outstanding from their most directly comparable GAAP measures as presented
in our financial statements:
($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
Q4 2018
105,310
(5,115)
100,195
160,359
3,221
6,562
270,337
Q3 2018
105,192
(4,320)
100,872
142,116
4,069
2,986
250,043
Q4 2017
78,653
(21,817)
56,836
61,911
12,392
3,216
134,355
2018
388,111
(49,051)
339,060
503,842
14,372
15,765
873,039
2017
311,397
(110,493)
200,904
290,593
29,856
9,334
530,687
122%
96%
74%
104%
88%
Q4 2018
152,704
3,469
156,173
Q3 2018
152,497
3,250
155,747
Q4 2017
122,119
3,021
125,140
The following tables reconciles the calculation of return on capital employed:
($M)
Net earnings
Taxes
Interest expense
EBIT
Average capital employed
Return on capital employed
2018
271,650
83,048
72,759
427,457
4,659,566
2017
62,258
62,224
57,313
181,795
3,703,991
9%
5%
Vermilion Energy Inc. ■ Page 64 ■ 2018 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 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, 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 under the
supervision and with the participation of the principal executive officer and principle financial officer 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(f) and 15d-15(f) 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, 2018. Management has limited the scope of design controls and
procedures ("DC&P") and internal controls over financial reporting to exclude the controls, policies, and procedures of Spartan Energy Corp (which was
acquired in May of 2018) and Shell E&P Ireland Limited (which was acquired in December of 2018). Total assets and revenues excluded from
management's assessment of internal control over financial reporting represents 23% and 14%, respectively, of the related Consolidated Financial
Statement amounts as at and for the year ended December 31, 2018.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even those systems determined
to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation.
The effectiveness of Vermilion’s internal control over financial reporting as of December 31, 2018 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,
2018.
(“Anthony Marino”)
(“Lars Glemser”)
Anthony Marino
President & Chief Executive Officer
February 27, 2019
Lars Glemser
Vice President & Chief Financial Officer
Vermilion Energy Inc. ■ Page 65 ■ 2018 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors 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, 2018, 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, 2018, 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), the
consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 27, 2019,
expressed an unqualified opinion on those financial statements.
As described in Management’s Report to Shareholders, management excluded from its assessment the internal control over financial reporting of
Spartan Energy Inc. and Shell E&P Ireland Limited, which were acquired in 2018, and whose financial statements constitute 23% and 14% of total
assets and revenues, respectively, of the consolidated financial statement amounts as of and for the year ended December 31, 2018. Accordingly, our
audit did not include the internal control over financial reporting at Spartan Energy Inc. and Shell E&P Ireland Limited.
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 27, 2019
Vermilion Energy Inc. ■ Page 66 ■ 2018 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Vermilion Energy Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vermilion Energy Inc. and subsidiaries (the "Company") as of December 31, 2018
and 2017, the related consolidated statements of net earnings and comprehensive income, consolidated statements of cash flows, and consolidated
statements of changes in shareholders’ equity for the years then ended and the related notes (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 of December 31, 2018 and 2017,
and the results of its operations and its cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued
by the International Accounting Standards Board.
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, 2018, 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 27, 2019, expressed an
unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. 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 audits in accordance with 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 of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Canada
February 27, 2019
We have served as the Company's auditor since 2000.
Vermilion Energy Inc. ■ Page 67 ■ 2018 Annual Report
Consolidated Financial Statements
Consolidated Balance Sheet
thousands of Canadian dollars
Note
December 31, 2018
December 31, 2017
Assets
Current
Cash and cash equivalents
Accounts receivable
Crude oil inventory
Derivative instruments
Prepaid expenses
Total current assets
Derivative instruments
Deferred taxes
Exploration and evaluation assets
Capital assets
Total assets
Liabilities
Current
Accounts payable and accrued liabilities
Dividends payable
Derivative instruments
Income taxes payable
Total current liabilities
Derivative instruments
Long-term debt
Lease obligations
Asset retirement obligations
Deferred taxes
Total liabilities
Shareholders' equity
Shareholders’ capital
Contributed surplus
Accumulated other comprehensive income
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
Approved by the Board
(Signed “Catherine L. Williams”)
Catherine L. Williams, Director
19
9
9
11
7
6
13
9
9
12
10
8
11
13
26,809
260,322
27,751
95,667
19,328
429,877
1,215
219,411
303,295
5,316,873
6,270,671
449,651
35,122
41,016
37,410
563,199
17,527
1,796,207
108,189
650,164
318,134
3,453,420
4,008,828
78,478
118,182
(1,388,237)
2,817,251
6,270,671
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
(Signed “Anthony Marino”)
Anthony Marino, Director
Vermilion Energy Inc. ■ Page 68 ■ 2018 Annual Report
Consolidated Statements of Net Earnings and Comprehensive Income
thousands of Canadian dollars, except share and per share amounts
Note
Dec 31, 2018
Dec 31, 2017
Year Ended
Revenue
Petroleum and natural gas sales
Royalties
Petroleum and natural gas revenue
Expenses
Operating
Transportation
Equity based compensation
Loss (gain) on derivative instruments
Interest expense
General and administration
Foreign exchange loss (gain)
Other income
Accretion
Depletion and depreciation
Gain on business combinations
Earnings before income taxes
Taxes
Deferred
Current
Net earnings
Other comprehensive income
Currency translation adjustments
Comprehensive income
Net earnings per share
Basic
Diluted
Weighted average shares outstanding ('000s)
Basic
Diluted
1,678,117
(152,167)
1,525,950
357,014
51,887
60,746
1,932
72,759
51,929
63,000
(82)
31,219
609,056
(128,208)
1,171,252
354,698
39,471
43,577
83,048
271,650
46,353
318,003
1.93
1.91
140,619
142,335
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
19
15
9
19
8
6, 7
5
11
16
16
Vermilion Energy Inc. ■ Page 69 ■ 2018 Annual Report
Consolidated Statements of Cash Flows
thousands of Canadian dollars
Operating
Net earnings
Adjustments:
Accretion
Depletion and depreciation
Gain on business combinations
Unrealized (gain) loss on derivative instruments
Equity based compensation
Unrealized foreign exchange loss (gain)
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
Acquisitions
Changes in non-cash investing working capital
Cash flows used in investing activities
Financing
Borrowings (repayments) on the revolving credit facility
Issuance of senior unsecured notes
Payments on lease obligations
Cash dividends
Cash flows used in financing activities
Foreign exchange gain on cash held in foreign currencies
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary information for cash flows from operating activities
Interest paid
Income taxes paid
Note
Dec 31, 2018
Dec 31, 2017
Year Ended
8
6, 7
5
9
15
11
8
19
6
7
5
19
12
12
10
13
19
271,650
31,219
609,056
(128,208)
(109,326)
60,746
63,243
801
39,471
(15,765)
(6,876)
816,011
(503,842)
(14,372)
(276,308)
55,491
(739,031)
251,155
—
(18,884)
(330,194)
(97,923)
1,191
(19,752)
46,561
26,809
70,049
45,228
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
Vermilion Energy Inc. ■ Page 70 ■ 2018 Annual Report
Consolidated Statements of Changes in Shareholders' Equity
thousands of Canadian dollars
Shareholders' capital
Balance, beginning of year
Shares issued for acquisition
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 year
Contributed surplus
Balance, beginning of year
Equity based compensation
Vesting of equity based awards
Balance, end of year
Accumulated other comprehensive income
Balance, beginning of year
Currency translation adjustments
Balance, end of year
Deficit
Balance, beginning of year
Net earnings
Dividends declared
Share-settled dividends on vested equity based awards
Balance, end of year
Year Ended
Dec 31, 2018
Dec 31, 2017
2,650,706
1,234,676
49,051
54,057
12,565
7,773
4,008,828
84,354
48,181
(54,057)
78,478
71,829
46,353
118,182
(1,264,003)
271,650
(388,111)
(7,773)
(1,388,237)
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)
Total shareholders' equity
2,817,251
1,542,886
Please refer to 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 unvested equity based awards that will be 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.
Vermilion Energy Inc. ■ Page 71 ■ 2018 Annual Report
Notes to the Consolidated Financial Statements for the year ended December 31, 2018
and 2017
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 27, 2019.
2. Significant accounting policies
Accounting framework
The consolidated financial statements are 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 include 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, the United States, Hungary, Slovakia, and Croatia. 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 license 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 depreciated 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 depreciation 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, completion, and tie-in 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.
Vermilion Energy Inc. ■ Page 72 ■ 2018 Annual Report
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.
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 in which 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 there are indicators that
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.
Lease obligations and right-of-use assets
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
At the lease commencement date, a lease obligation is recognized at the present value of future lease payments, typically using the applicable incremental
borrowing rate. A corresponding right-of-use asset is recognized at the amount of the lease obligation, adjusted for lease incentives received and initial
direct costs. Vermilion does not recognize leases for short-term leases with a lease term of 12 months or less, or leases for low-value assets.
Payments are applied against the lease obligation and interest expense is recognized on the lease obligations using the effective interest rate method.
Depreciation is recognized on the right-of-use asset over the lease term.
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 market 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
Revenue associated with the sale of crude oil and condensate, natural gas, and natural gas liquids is measured based on the consideration specified
in contracts with customers.
Vermilion Energy Inc. ■ Page 73 ■ 2018 Annual Report
Revenue from contracts with customers is recognized when or as Vermilion satisfies a performance obligation by transferring control of crude oil and
condensate, natural gas, or natural gas liquids to a customer at contractually specified transfer points. This transfer coincides with title passing to the
customer and the customer taking physical possession of the commodity. Vermilion principally satisfies its performance obligations at a point in time
and the amounts of revenue recognized relating to performance obligations satisfied over time are not significant.
Vermilion invoices customers for delivered products monthly and payment occurs shortly thereafter. Vermilion does not have any contracts where the
period between the transfer of control of the commodity to the customer and payment by the customer exceeds one year. As a result, Vermilion does
not adjust its revenue transactions to reflect significant financing components.
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:
•
•
Fair value through profit or loss: Financial instruments under this classification include cash and cash equivalents and derivative assets and
liabilities.
Amortized cost: Financial instruments under this classification include accounts receivable, accounts payable and accrued liabilities, dividends
payable, lease obligations, and long-term debt.
Accounts receivable are measured net of a loss allowance equal to the lifetime expected credit loss.
Equity based compensation
Equity based compensation expense results from equity-settled awards issued under Vermilion’s long-term share-based compensation plans as well
as the grant date fair value of Vermilion common shares issued under the Company’s bonus and employee share savings plans.
Vermilion's long-term share-based compensation plans consist of the Vermilion Incentive Plan (“VIP”) and a security-based compensation arrangement
("Five-Year Compensation Arrangement"). Equity-settled awards issued under the VIP vest over a period of one to three years while awards issued
under the Five-Year Compensation Arrangement vest in the fifth year following the grant date. Awards under both plans are adjusted upon vesting by
a performance factor determined by the Company’s Board of Directors. Equity based compensation expense for both plans 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 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 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 Five-Year Compensation Arrangement 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 per share is calculated by dividing net earnings by the weighted-average number of shares outstanding during the period.
Diluted net earnings per share is calculated by dividing net earnings 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 for equity-settled awards 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.
Vermilion Energy Inc. ■ Page 74 ■ 2018 Annual Report
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 translation includes the translation of foreign currency transactions and the translation of foreign operations.
Foreign currency transaction translation occur when translating transactions and balances 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 translation occurs 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, including intercompany loans that are not deemed to represent net investments in a foreign subsidiary, are translated at the
prevailing rates at the balance sheet date
Foreign operation translation occurs 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 tax assets and liabilities are calculated using the balance sheet method. Deferred tax assets and liabilities are 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.
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 (with the exception of deferred tax assets
and liabilities) are measured at their fair value. Deferred tax assets or liabilities arising from the assets acquired and liabilities assumed are measured
in accordance with the policies described in "Income taxes" above.
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.
Segmented information
Vermilion has a decentralized business unit structure designed to manage assets in each country the Company operates in. Each of Vermilion's
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 and production activities in Hungary, Slovakia, and Croatia (Central and Eastern Europe). These operating
segments have similar economic characteristics as they do not currently generate material 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 profitability of each
operating segment and, correspondingly, the ability of each operating segment to fund its share of dividends, asset retirement obligations, and capital
investments.
Vermilion Energy Inc. ■ Page 75 ■ 2018 Annual Report
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 are described below.
The measurement of the fair value of capital assets acquired in a business combination and the determination of the recoverable amount of cash
generating units:
•
•
Calculating the fair value of capital assets acquired in a business combination and the recoverable amount of cash generating units (in the
assessment of impairments or reversals of previous impairments if indicators of impairment or impairment reversal are identified) are based
on estimated future commodity prices and estimated 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 estimates and assumptions can directly impact the calculated fair value of capital assets acquired (and thus
the resulting goodwill or gain on business combination) and the recoverable amount of a CGU (and thus the resulting impairment loss or
recovery).
In addition, the recoverable amount of a CGU is impacted by the composition of CGUs, which are 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. Changes in these judgments can directly impact the calculated recoverable amount of a CGU (and thus the resulting
impairment loss or recovery).
The measurement of the carrying value of asset retirement obligations on the balance sheet, including the fair value and subsequent carrying value of
asset retirement obligations assumed in a business combination:
•
Asset retirement obligations are based on judgments regarding regulatory requirements, estimates of future costs, assumptions on the expected
timing of expenditures, and estimates of the underlying risk inherent to the obligation. 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.
The recognition and measurement of deferred tax assets and liabilities:
•
•
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.
The extent to which deferred tax assets are recognized are based on estimates of future profitability. These estimates are based on estimated
future commodity prices and estimates of reserves. Judgments, estimates, and assumptions inherent in reserve estimates are described
above.
The measurement of lease obligations and corresponding right-of-use assets:
•
The measurement of lease obligations are subject to management's judgments of the applicable incremental borrowing rate and the expected
lease term. The carrying balance of the right-of-use assets, lease obligations, and the resulting interest and depletion and depreciation
expense, may differ due to changes in the market conditions and expected lease terms. Applicable incremental borrowing rates are based
on judgments of the economic environment, term, currency, and the underlying risk inherent to the asset. Lease terms are based on
assumptions regarding cancellation and extension terms that allow for operational flexibility based on future market conditions.
3. Changes in accounting pronouncements
IFRS 9 "Financial instruments"
On January 1, 2018, Vermilion adopted IFRS 9 "Financial instruments" as issued by the IASB. IFRS 9 includes a new classification and measurement
approach for financial assets and a forward-looking 'expected credit loss' model. The adoption of IFRS 9 did not have a material impact on Vermilion's
consolidated financial statements.
Vermilion Energy Inc. ■ Page 76 ■ 2018 Annual Report
IFRS 15 "Revenue from contracts with customers"
On January 1, 2018, Vermilion adopted IFRS 15 "Revenue from contracts with customers". IFRS 15 establishes a comprehensive framework for
determining whether, how much, and when revenue from contracts with customers is recognized.
Vermilion adopted IFRS 15 using the modified retrospective approach. Under this transitional provision, the cumulative effect of initially applying IFRS
15 is recognized on the date of initial application as an adjustment to retained earnings. No adjustment to retained earnings was required upon adoption
of IFRS 15.
IFRS 15 requires additional disclosure relating to the disaggregation of revenue - this additional disclosure is included in Note 4 (Segmented Information).
IFRS 16 "Leases"
Vermilion has elected to early adopt IFRS 16 effective January 1, 2018. IFRS 16 introduces a single lease accounting model for lessees which requires
a right-of-use asset and lease liability to be recognized on the balance sheet for contracts that are, or contain, a lease.
Vermilion adopted IFRS 16 using the modified retrospective approach, whereby the cumulative effect of initially applying the standard was recognized
as a $97.1 million increase to right-of-use assets (included in "Capital assets") with a corresponding increase to lease obligations (the non-current
portion of $86.1 million recorded in "lease obligations" and the current $11.0 million portion recorded in "Accounts payable and accrued liabilities"). The
right-of-use assets recognized were measured at amounts equal to the lease obligations. The weighted average incremental borrowing rate used to
determine the lease obligation at adoption was approximately 5.4%. The right-of-use assets and lease obligations recognized largely relate to the
Company's head office lease in Calgary and long-term leases for oil storage facilities in France.
The adoption of IFRS 16 included the following elections:
•
•
•
Vermilion elected to retain the classification of contracts previously identified as leases under IAS 17 and IFRIC 4.
Vermilion elected to use hindsight in determining lease term.
Vermilion elected to not apply lease accounting to certain leases for which the lease term ends within 12 months of the date of initial application.
As at December 31, 2017, Vermilion disclosed operating lease commitments of $40.2 million, which would have resulted in a lease obligation of $34.3
million when discounted at the weighted average incremental borrowing rate at adoption of IFRS 16 of 5.4%. The total current and non-current lease
liability recognized on January 1, 2018 of $97.1 million represented an increase of $62.8 million compared to the disclosed operating lease commitments
due the application of IFRS 16 in determining lease terms.
Vermilion Energy Inc. ■ Page 77 ■ 2018 Annual Report
4. Segmented information
Vermilion has three major customers within the France, Netherlands, and Ireland operating segments that each comprise in excess of 10% of Vermilion's
consolidated revenues. Substantially all sales in the France, Netherlands, and Ireland operating segments for the years ended December 31, 2018
and 2017 were to one customer in each respective segment.
Year Ended December 31, 2018
($M)
Total assets
Drilling and development
Exploration and evaluation
Canada
3,060,291
277,857
—
Crude oil and condensate sales
541,844
360,471
NGL sales
Natural gas sales
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized loss on derivative instruments
Realized foreign exchange gain
Realized other income
Fund flows from operations
France
Netherlands
Germany
918,398
79,451
307
—
131
(46,781)
313,821
(10,426)
(54,690)
(14,170)
—
277,348
17,963
(480)
2,462
—
163,454
(3,181)
162,735
—
(26,681)
(1,947)
—
(15,084)
(16,561)
—
—
—
—
—
—
—
—
284,063
10,863
4,943
32,704
—
49,745
(6,626)
75,823
(6,420)
(23,048)
(7,401)
—
—
—
—
—
—
Ireland
709,585
224
—
—
—
205,150
—
Australia
263,739
75,638
—
150,733
—
—
—
205,150
150,733
(5,129)
(15,366)
(8,386)
—
—
—
—
—
—
—
(53,199)
(4,918)
(4,824)
(6,595)
—
—
—
—
USA
Corporate
Total
407,323
40,837
—
31,142
4,622
2,701
(10,070)
28,395
—
(6,421)
(6,306)
—
—
—
—
—
—
349,924
6,270,671
1,009
9,602
503,842
14,372
—
—
3,630
(813)
2,817
—
(110)
(2,744)
—
(513)
(72,759)
1,119,356
61,176
497,585
(152,167)
1,525,950
(51,887)
(357,014)
(51,929)
(4,824)
(38,753)
(72,759)
(111,258)
(111,258)
243
883
243
883
56,554
72,774
(84,696)
586,476
(29,912)
(177,499)
(6,057)
—
—
—
—
—
—
373,008
219,451
117,546
38,954
176,269
81,197
15,668
(183,441)
838,652
Year Ended December 31, 2017
($M)
Total assets
Drilling and development
Exploration and evaluation
Canada
1,542,193
148,667
—
831,783
71,087
2,294
France
Netherlands
Germany
Australia
236,677
29,942
—
USA
Corporate
Total
73,867
19,074
—
124,422
3,974,965
—
7,728
290,593
29,856
Crude oil and condensate sales
209,560
268,102
154,391
14,605
203,929
295,026
15,107
16,468
1,864
—
106,196
(1,722)
106,338
—
(21,212)
(2,212)
—
3,331
—
—
—
—
6,165
3,366
23,554
—
45,142
(6,655)
62,041
(6,207)
(20,176)
(7,767)
—
—
—
—
—
—
Ireland
667,068
551
—
—
—
153,330
—
—
—
—
153,330
154,391
(5,205)
(17,596)
(2,320)
—
—
—
—
—
—
—
(50,139)
(8,194)
(19,819)
(4,536)
—
—
—
—
456
294
(4,276)
11,079
(41)
(1,698)
(4,341)
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,350)
—
(527)
(57,313)
4,721
2,316
674
672,076
38,265
388,497
(74,476)
1,024,362
(43,448)
(242,267)
(54,373)
(19,819)
(12,288)
(57,313)
4,721
2,316
674
NGL sales
Natural gas sales
Royalties
Revenue from external customers
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Interest expense
Realized gain on derivative instruments
Realized foreign exchange gain
Realized other income
Fund flows from operations
37,809
83,534
(33,258)
297,645
(17,368)
(80,444)
(9,604)
—
—
—
—
—
—
—
1
(28,565)
239,538
(14,627)
(51,002)
(13,585)
—
(10,556)
—
—
—
—
190,229
149,768
86,245
27,891
128,209
71,703
4,999
(56,479)
602,565
Vermilion Energy Inc. ■ Page 78 ■ 2018 Annual Report
Reconciliation of fund flows from operations to net earnings:
($M)
Fund flows from operations
Accretion
Depletion and depreciation
Gain on business combinations
Unrealized gain (loss) on derivative instruments
Equity based compensation
Unrealized foreign exchange (loss) gain
Unrealized other expense
Deferred tax
Net earnings
5. Business combinations
Year Ended
Dec 31, 2018
838,652
(31,219)
(609,056)
128,208
109,326
(60,746)
(63,243)
(801)
(39,471)
271,650
Dec 31, 2017
602,565
(26,971)
(491,683)
—
(1,062)
(61,579)
71,742
(637)
(30,117)
62,258
Private Producer in Southeast Saskatchewan and Southwest Manitoba
On February 15, 2018, Vermilion acquired all of the issued and outstanding common shares of a private producer with assets in southeast Saskatchewan
and southwest Manitoba. The acquisition comprised of light oil producing fields near Vermilion’s existing operations in southeast Saskatchewan. The
acquisition complements Vermilion’s existing southeast Saskatchewan operations and aligns with the Company's sustainable growth-and-income model.
The acquisition was funded through Vermilion’s revolving credit facility.
The total consideration paid and the fair value of the assets acquired and liabilities assumed at the date of acquisition are detailed in the table below.
($M)
Cash paid to vendor
Total consideration
($M)
Capital assets
Deferred tax assets
Acquired working capital
Long-term debt
Asset retirement obligations
Net assets acquired
Consideration
53,288
53,288
Allocation of consideration
67,549
26,914
1,577
(38,300)
(4,452)
53,288
For the year ended December 31, 2018, the acquisition contributed revenues of $18.7 million and net earnings of $6.7 million. Had the acquisition
occurred on January 1, 2018, revenues would have increased by $2.9 million and net earnings would have increased by $1.0 million for the year ended
December 31, 2018.
Spartan Energy Corp.
On May 28, 2018, Vermilion acquired all of the issued and outstanding common shares of Spartan Energy Corp., a publicly traded oil and gas producer
with light oil producing properties in southeast Saskatchewan as well as other areas in Saskatchewan, Alberta, and Manitoba. The acquisition increases
Vermilion’s position in southeast Saskatchewan and aligns with the Company's sustainable growth-and-income model.
Consideration consisted of the issuance of 27.9 million Vermilion common shares valued at approximately $1.2 billion (based on the closing price per
Vermilion common share of $44.30 on the Toronto Stock Exchange on May 28, 2018). Acquisition-related costs of $1.3 million were incurred in the
year ended December 31, 2018.
The total consideration paid and the fair value of the assets acquired and liabilities assumed as at the date of the acquisition are detailed in the table
below.
Vermilion Energy Inc. ■ Page 79 ■ 2018 Annual Report
($M)
Shares issued for acquisition
Total consideration
($M)
Capital assets
Deferred tax assets
Long-term debt
Asset retirement obligations
Lease obligations
Assumed working capital deficit
Net assets acquired
Consideration
1,235,221
1,235,221
Allocation of consideration
1,401,686
123,813
(150,196)
(92,149)
(25,455)
(22,478)
1,235,221
For the year ended December 31, 2018, the acquisition contributed revenues of $242.1 million and net earnings of $45.1 million. Had the acquisition
occurred on January 1, 2018, revenues would have increased by $182.4 million and net earnings would have increased by $35.0 million for the year
ended December 31, 2018.
Assets in Wyoming
In August 2018, Vermilion acquired oil and gas producing assets and mineral leasehold land from a private oil company for total cash consideration of
approximately $189 million. The assets are located in Campbell County, Wyoming in the Powder River Basin, approximately 65 kilometres northwest
of Vermilion’s existing operations. The acquired assets complement Vermilion's existing Powder River operations and align with the Company's
sustainable growth-and-income model. The acquisition was funded through Vermilion’s revolving credit facility.
The total consideration paid and the fair value of the assets acquired and liabilities assumed at the date of acquisition are detailed in the table below.
($M)
Cash paid to vendor
Total consideration
($M)
Capital assets
Deferred tax liability
Asset retirement obligations
Assumed working capital deficit
Net assets acquired
Gain on business combination
Total net assets acquired, net of gain on business combination
Consideration
189,014
189,014
Allocation of consideration
284,333
(19,019)
(4,821)
(2,651)
257,842
(68,828)
189,014
The gain on the business combination primarily resulted from the recognition of additional reserve value when the acquisition closed compared to the
estimated value when Vermilion entered into the purchase and sale agreement and the acquisition price was determined.
For the year ended December 31, 2018, the acquisition contributed revenues of $11.6 million and net earnings of $0.3 million. Had the acquisition
occurred on January 1, 2018, revenues would have increased by $11.1 million and net earnings would have decreased by $0.1 million for the year
ended December 31, 2018.
Vermilion Energy Inc. ■ Page 80 ■ 2018 Annual Report
Shell E&P Ireland Limited
In December 2018, Vermilion acquired all of the issued and outstanding common shares of Shell E&P Ireland Limited, along with an incremental 1.5%
working interest in the Corrib Natural Gas Project ("Corrib") in Ireland from Nephin Energy Holdings Limited, a wholly owned subsidiary of Canada
Pension Plan Investment Board. The acquisition increases Vermilion's total ownership in Corrib to 20% and aligns with the Company's sustainable
growth-and-income model. In addition to this transaction, Vermilion has assumed operatorship of Corrib.
The total consideration paid and the fair value of the assets acquired and liabilities assumed as at the date of the acquisition are detailed in the table
below.
($M)
Cash paid to vendor
Cash acquired
Contingent consideration
Total consideration
($M)
Capital assets
Deferred tax assets
Assumed working capital deficit
Lease obligations
Asset retirement obligations
Net assets acquired
Gain on business combination
Total net assets acquired, net of gain on business combination
Consideration
40,805
(82,116)
290
(41,021)
Allocation of consideration
53,368
4,239
(35,449)
(2,234)
(1,565)
18,359
(59,380)
(41,021)
The fair value of the contingent consideration obligation is estimated to be approximately $0.3 million based on estimated future commodity prices and
estimated reserves. Maximum contingent payments are €5.8 million (approximately $9.1 million) through 2025.
The gain on the business combination primarily resulted from increases in working capital and the fair value of capital assets from when the purchase
and sale agreement was entered into in July 2017 and when the acquisition closed in December 2018.
For the year ended December 31, 2018, the acquisition contributed revenues of $1.3 million and net earnings of $0.4 million. Had the acquisition
occurred on January 1, 2018, revenues would have increased by $15.2 million and net earnings would have increased by $4.3 million for the year ended
December 31, 2018.
Minor acquisitions
Vermilion completed a number of minor acquisitions during the year ended December 31, 2018 for total cash consideration of $56.0 million, in which
$147.4 million of capital assets, $28.6 million of exploration and evaluation assets, and $104.0 million of asset retirement obligations were recognized.
Vermilion Energy Inc. ■ Page 81 ■ 2018 Annual Report
6. Capital assets
The following table reconciles the change in Vermilion's capital assets:
($M)
Balance at January 1
Acquisitions
Additions
Increase in right-of-use assets
Transfers from exploration and evaluation assets
Depletion and depreciation
Changes in asset retirement obligations
Foreign exchange
Balance at December 31
Cost
Accumulated depletion and depreciation
Carrying amount at December 31
2018
3,337,965
1,975,327
503,842
98,343
29,615
(605,994)
(100,876)
78,651
5,316,873
9,202,604
(3,885,731)
5,316,873
2017
3,433,245
25,390
290,593
—
8,187
(479,698)
(48,187)
108,435
3,337,965
6,539,052
(3,201,087)
3,337,965
The following table discloses the carrying balance and depreciation charge relating to right-of-use assets by class of underlying asset as at and for the
year ended December 31, 2018:
($M)
Office space
Gas processing facilities
Oil storage facilities
Vehicles and equipment
Total
2018 and 2017 impairment assessment
As at December 31, 2018 and 2017, Vermilion did not identify any indicators of impairment.
7. Exploration and evaluation assets
The following table reconciles the change in Vermilion's exploration and evaluation assets:
($M)
Balance at January 1
Acquisitions
Additions
Changes in asset retirement obligations
Transfers to capital assets
Depreciation
Foreign exchange
Balance at December 31
Cost
Accumulated depreciation
Carrying amount at December 31
Depreciation
9,119
5,491
2,728
2,020
19,358
Balance
62,279
41,788
20,758
9,121
133,946
2018
292,278
28,572
14,372
629
(29,615)
(5,942)
3,001
303,295
371,015
(67,720)
303,295
2017
274,830
2,247
29,856
(30)
(8,187)
(11,727)
5,289
292,278
354,615
(62,337)
292,278
Vermilion Energy Inc. ■ Page 82 ■ 2018 Annual Report
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 estimated abandonment timing and costs
Obligations settled
Accretion
Changes in discount rates
Foreign exchange
Balance at December 31
2018
517,180
211,580
(98,158)
(15,765)
31,219
(6,646)
10,754
650,164
2017
525,022
3,273
(48,904)
(9,334)
26,971
(2,586)
22,738
517,180
Vermilion has estimated the asset retirement obligations based on a total undiscounted future liability of $2.6 billion (2017 - $1.6 billion). These payments
are expected to be made between 2020 and 2078, with the majority of spending occurring between 2029 and 2036 ($0.6 billion), 2047 to 2055 ($0.6
billion), and 2063 and 2068 ($0.9 billion). Inflation rates used in determining the cash flow estimates were between 0.5% and 2.9% (2017 - between
0.6% and 2.2%). Vermilion calculated the present value of the obligations using a credit-adjusted risk-free rate, calculated using a credit spread of 4.0%
(2017 - 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:
Canada
France
Netherlands
Germany
Ireland
Australia
USA
Dec 31, 2018
2.2%
1.6%
0.4%
0.9%
1.6%
2.6%
2.7%
Dec 31, 2017
2.3%
1.8%
0.5%
1.0%
0.4%
2.9%
2.4%
A 0.5% increase/decrease in the discount rate applied to asset retirement obligations would decrease/increase asset retirement obligations by
approximately $55.0 million. A one-year increase/decrease in the expected timing of abandonment spend would decrease/increase asset retirement
obligations by approximately $25.0 million.
9. Derivative instruments
The following table reconciles the change in the fair value of Vermilion’s derivative instruments:
($M)
Fair value of contracts, beginning of year
Reversal of opening contracts settled during the year
Assumed in acquisitions
Realized (loss) gain on contracts settled during the year
Unrealized gain (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
Vermilion Energy Inc. ■ Page 83 ■ 2018 Annual Report
Year Ended
Dec 31, 2018
(70,713)
57,719
(274)
(111,258)
51,607
111,258
38,339
95,667
(41,016)
1,215
(17,527)
38,339
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)
The loss (gain) on derivative instruments for 2018 and 2017 were comprised of the following:
($M)
Realized loss (gain) on contracts settled during the year
Reversal of opening contracts settled during the year
Unrealized (gain) loss on contracts outstanding at the end of the year
Loss (gain) on derivative instruments
Year Ended
Dec 31, 2018
111,258
(57,719)
(51,607)
1,932
Dec 31, 2017
(4,721)
(43,324)
44,386
(3,659)
Please refer to Note 19 (Supplemental information) for a listing of Vermilion's outstanding derivative instruments as at December 31, 2018.
10. Leases
Vermilion had the following future commitments associated with its lease obligations:
($M)
Less than 1 year
1 - 3 years
4 - 5 years
After 5 years
Total lease payments
Amounts representing interest
Present value of net lease payments
Current portion of lease obligations
Non-current portion of lease obligations
As at
Dec 31, 2018
30,641
Dec 31, 2017
6,680
50,024
34,313
42,739
157,717
(24,583)
133,134
(24,945)
108,189
10,207
4,665
3,351
24,903
(3,526)
21,377
(5,570)
15,807
The significant increase in total lease payments as at December 31, 2018 compared to December 31, 2017 primarily relates to the adoption of IFRS
16 effective January 1, 2018 and lease obligations assumed on acquisitions. Please refer to Note 3 (Changes to accounting pronouncements), Note
5 (Business combinations), and Note 6 (Capital assets) for additional information.
For the year ended December 31, 2018, interest expense of $7.2 million and total cash outflow of $28.0 million were recognized relating to lease
obligations.
Vermilion Energy Inc. ■ Page 84 ■ 2018 Annual Report
11. Taxes
The following table reconciles Vermilion’s deferred tax asset and liability:
($M)
Deferred tax assets:
Non-capital losses
Capital assets
Asset retirement obligations
Derivative contracts
Unrealized foreign exchange
Other
Deferred tax assets
Deferred tax liabilities:
Capital assets
Non-capital losses
Asset retirement obligations
Unrealized foreign exchange
Derivative contracts
Other
Deferred tax liabilities
As at
Dec 31, 2018
Dec 31, 2017
487,398
(296,591)
38,429
(11,937)
(1,873)
3,985
219,411
(319,553)
57,785
(51,031)
(10,715)
—
5,380
(318,134)
342,202
(294,178)
28,056
10,164
(7,927)
2,007
80,324
(259,236)
34,703
(27,868)
(13,355)
11,386
1,262
(253,108)
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 before income taxes
Canadian corporate tax rate
Expected tax expense
Increase (decrease) in taxes resulting from:
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)
(Re-recognition) de-recognition of deferred tax assets
Adjustment for uncertain tax positions
Gain on business combinations
Other non-deductible items
Provision for income taxes
(1)
Year Ended
Dec 31, 2018
354,698
27.0%
95,768
Dec 31, 2017
124,482
27.0%
33,610
5,349
3,086
13,883
(873)
—
(26,931)
8,080
(28,812)
13,498
83,048
3,531
7,146
10,343
(17,246)
(16,449)
44,608
2,191
—
(5,510)
62,224
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 2018 were: 34.4% in France, 50.0% in the Netherlands, 30.2% in Germany, 25.0% in Ireland, and 21.0% in the United
States.
(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. On December 18, 2018, the Dutch
government approved the 2019 Tax Plan. The Bill provides for reduced corporate tax rates from 25.0% to 20.5% by 2021, with the first reduction
planned for 2020 to 22.55%. Due to the tax regime applicable to natural gas producers in the Netherlands, the reduction to the corporate tax rate
is not expected to have a material impact to Vermilion taxes in the Netherlands.
At December 31, 2018, Vermilion had $2.6 billion (2017 - $2.0 billion) of unused tax losses of which $1.1 billion (2017 - $0.5 billion) relates to Vermilion's
Canada segment and expire between 2025 and 2038 and $1.3 billion (2017 - $1.3 billion) relates to Vermilion's Ireland segment and do not expire. The
Vermilion Energy Inc. ■ Page 85 ■ 2018 Annual Report
year-over-year increase in unused tax losses in Vermilion's Canada segment was the result of tax losses acquired in the business combinations described
in Note 5.
At December 31, 2018, Vermilion re-recognized $90.6 million (2017 - de-recognized $145.6 million) of deductible temporary differences relating to the
aforementioned non-expiring tax loss pools in Ireland based on the Company’s expected ability to fully utilize such losses based on commodity price
forecasts in effect as at December 31, 2018.
The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognized
as at December 31, 2018 is approximately $0.5 billion (2017 – approximately $0.4 billion).
12. Long-term debt
The following table summarizes Vermilion’s outstanding long-term debt:
($M)
Revolving credit facility
Senior unsecured notes
Long-term debt
The following table reconciles the change in Vermilion’s long-term debt:
As at
Dec 31, 2018
1,392,206
404,001
1,796,207
Dec 31, 2017
899,595
370,735
1,270,330
($M)
Balance at January 1
Borrowings (repayments) on the revolving credit facility
Issuance of senior unsecured notes
Assumed on acquisitions (1)
Amortization of transaction costs and prepaid interest
Foreign exchange
Balance at December 31
(1) Pursuant to the acquisitions described in Note 5 (Business Combinations), Vermilion assumed the credit facilities of the acquired companies and immediately
extinguished them following the respective acquisitions using proceeds from Vermilion's revolving credit facility.
2018
1,270,330
251,155
—
188,496
2,286
83,940
1,796,207
2017
1,362,192
(450,646)
391,906
—
2,012
(35,134)
1,270,330
Revolving credit facility
At December 31, 2018, Vermilion had in place a bank revolving credit facility maturing May 31, 2022 with the following terms:
($M)
Total facility amount
Amount drawn
Letters of credit outstanding
Unutilized capacity
As at
Dec 31, 2018
1,800,000
(1,392,206)
(15,400)
392,394
Dec 31, 2017
1,400,000
(899,595)
(7,400)
493,005
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.
As at December 31, 2018, 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, 2018
1.72
1.34
30%
Dec 31, 2017
1.87
1.30
32%
Vermilion Energy Inc. ■ Page 86 ■ 2018 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” and “Lease obligations” (including the current portion included within
"Accounts payable and accrued liabilities" but excluding operating leases as defined under IAS 17) on the 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, adjusted for the impact of the acquisition of a material subsidiary.
Total capitalization: Includes all amounts classified as “Shareholders’ equity” plus consolidated total debt as defined above.
As at December 31, 2018 and 2017, Vermilion was in compliance with the above covenants.
Senior unsecured notes
On March 13, 2017, Vermilion issued US $300.0 million of senior unsecured notes at par. The notes bear interest at a rate of 5.625% per annum, to
be paid semi-annually on March 15 and September 15. The notes mature on March 15, 2025. As direct senior unsecured obligations of Vermilion, the
notes rank equally with existing and future senior unsecured indebtedness of the Company.
The senior unsecured notes were recognized at amortized cost and include the transaction costs directly related to the issuance.
Vermilion may, at its option, redeem the notes prior to maturity as follows:
•
Prior to March 15, 2020, Vermilion may redeem up to 35% of the original principal amount of the senior unsecured notes with the proceeds of
certain equity offerings by the Company at a redemption price of 105.625% of the principal amount plus any accrued and unpaid interest to the
applicable redemption date.
Prior to March 15, 2020, Vermilion may redeem some or all of the senior unsecured notes at a price equal to 100% of the principal amount of the
senior unsecured notes, plus an applicable premium and any accrued and unpaid interest.
On or after March 15, 2020, Vermilion may redeem some or all of the senior unsecured notes at the redemption prices set forth in the following
table plus any accrued and unpaid interest.
•
•
Year
2020
2021
2022
2023 and thereafter
Redemption price
104.219%
102.813%
101.406%
100.000%
13. Shareholders' capital
The following table reconciles the change in Vermilion’s shareholders’ capital:
Shareholders’ Capital
Balance at January 1
Shares issued for acquisition
Shares issued for the Dividend Reinvestment Plan
Vesting of equity based awards
Shares issued for equity based compensation
Share-settled dividends on vested equity based awards
Balance at December 31
2018
2017
Shares
('000s)
122,119
27,883
1,179
1,025
314
184
152,704
Amount ($M)
2,650,706
1,234,676
49,051
54,057
12,565
7,773
4,008,828
Shares
('000s)
118,263
—
2,429
1,060
197
170
122,119
Amount ($M)
2,452,722
—
110,493
69,743
9,270
8,478
2,650,706
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, 2018
were $388.1 million or $2.72 per common share (2017 - $311.4 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 27, 2019, Vermilion
declared dividends of $70.3 million or $0.230 per share for each of January and February of 2019.
Vermilion Energy Inc. ■ Page 87 ■ 2018 Annual Report
14. Capital disclosures
Vermilion defines capital as net debt (long-term debt plus net working capital) and shareholders’ capital. Vermilion excludes from its definition of capital
any obligations secured by an offsetting asset, such as lease obligations.
Vermilion monitors the ratio of net debt to fund flows from operations. As at December 31, 2018, our ratio of net debt to trailing fund flows from operations
is 2.30 (2017 - 2.28). Vermilion manages the ratio of net debt to fund flows from operations (refer to Note 4 - Segmented Information) by aligning capital
expenditures, dividends, and asset retirement obligations with expected fund flows from operations. Vermilion intends for the ratio of net debt to fund
flows from operations to trend towards 1.5 over time.
The following table calculates Vermilion’s ratio of net debt to fund flows from operations:
($M except as indicated)
Long-term debt
Current liabilities
Current assets
Net debt
Year Ended
Dec 31, 2018
1,796,207
563,199
(429,877)
1,929,529
Dec 31, 2017
1,270,330
363,306
(261,846)
1,371,790
Ratio of net debt to fund flows from operations
2.30
2.28
15. Equity based compensation
The following table summarizes the number of awards outstanding under the VIP and the Five-Year Compensation Arrangement:
Number of Awards ('000s)
Opening balance
Granted
Vested
Forfeited
Closing balance
2018
1,685
932
(520)
(166)
1,931
2017
1,738
563
(539)
(77)
1,685
For the year ended December 31, 2018, the awards granted had a weighted average fair value of $40.57 (2017 - $49.44). Equity based compensation
expense is calculated based on the number of awards outstanding multiplied by the estimated performance factor that will be realized upon vesting
(2018 - 1.9; 2017 - 1.9) adjusted by an estimated annual forfeiture rate (2018 - 4.6%; 2017 - 4.4%). Equity based compensation expense of $48.2
million was recorded during the year ended December 31, 2018 (2017 - $52.3 million) relating to the awards.
As at December 31, 2018, 36,845 awards included in the closing balance related to the Five-Year Compensation Arrangement.
16. Per share amounts
Basic and diluted net earnings per share have been determined based on the following:
($M except per share amounts)
Net earnings
Basic weighted average shares outstanding ('000s)
Dilutive impact of equity based compensation ('000s)
Diluted weighted average shares outstanding ('000s)
Basic earnings per share
Diluted earnings per share
Year Ended
Dec 31, 2018
271,650
Dec 31, 2017
62,258
140,619
1,716
142,335
1.93
1.91
120,582
1,826
122,408
0.52
0.51
Vermilion Energy Inc. ■ Page 88 ■ 2018 Annual Report
17. Financial instruments
Classification of financial instruments
The following table summarizes information relating to Vermilion’s financial instruments:
($M)
Fair value through profit or loss
Cash and cash equivalents
Derivative assets
Derivative liabilities
Amortized cost
Accounts receivable
Accounts payable and accrued liabilities
Dividends payable
Long-term debt
As at Dec 31, 2018
As at Dec 31, 2017
Carrying value
Fair value
Carrying value
Fair value
26,809
96,882
(58,543)
260,322
(449,651)
(35,122)
(1,796,207)
26,809
96,882
(58,543)
260,322
(449,651)
(35,122)
(1,781,809)
46,561
20,540
(91,253)
165,760
(219,084)
(26,256)
(1,270,330)
46,561
20,540
(91,253)
165,760
(219,084)
(26,256)
(1,274,891)
On January 1, 2018, Vermilion adopted IFRS 9 "Financial instruments". As a result, Vermilion's financial instruments were re-categorized following
IFRS 9's new measurement categories. There were no changes in the carry amounts of financial instruments as a result of this re-categorization. Under
IAS 39 "Financial instruments: recognition and measurement", Vermilion's financial instruments were classified as follows:
•
•
Cash and cash equivalents and derivative assets were classified as held for trading. Held for trading financial instruments were subsequently
measured at fair value on the consolidated balance sheet with gains and losses recognized in net earnings.
Accounts receivable were classified as loans and receivables while accounts payable and accrued liabilities, dividends payable, lease
obligations, and long-term debt were classified as other financial liabilities. Loans and receivables and other financial liabilities were
subsequently measured at amortized cost on the consolidated balance sheet.
•
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 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, 2018 and 2017.
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 (includes commodity price risk, interest
rate risk, and currency risk), credit risk, and liquidity 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 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 recognized 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, lease obligations, 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.
Vermilion Energy Inc. ■ Page 89 ■ 2018 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.
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, 2018
Dec 31, 2017
(2,205)
2,205
2,981
(2,981)
(18,421)
17,351
(36,508)
33,005
(4,607)
4,607
2,239
(2,239)
(21,616)
19,845
(32,642)
25,321
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, 2018, Vermilion’s maximum exposure to receivable credit risk was $357.2 million
(December 31, 2017 - $186.3 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. Vermilion determines the lifetime
expected credit losses recognized on accounts receivable using a provision matrix. In preparing the provision matrix, the Company takes into account
historical credit loss experience based on the aging of accounts receivable, adjusted as necessary for current and future petroleum and natural gas
prices to the extent that changes in pricing may negatively impact the Company's customers and joint operations partners. The lifetime expected credit
losses on accounts receivable as at December 31, 2018 and 2017 is not material. As at the balance sheet date, approximately 0.7% (2017 - 0.7%) 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.
Vermilion Energy Inc. ■ Page 90 ■ 2018 Annual Report
The following table summarizes Vermilion’s undiscounted non-derivative financial liabilities and their contractual maturities:
($M)
December 31, 2018
December 31, 2017
18. Related party disclosures
1 month
167,491
99,092
1 month to
3 months
306,927
138,273
3 months to
1 year
10,355
7,974
1 year to
5 years
1,472,087
912,306
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,
2018 and 2017:
($M)
Short-term benefits
Share-based payments
Number of individuals included in the above amounts
Year Ended
Dec 31, 2018
6,018
16,309
22,327
18
Dec 31, 2017
5,183
20,135
25,318
20
During the year ended December 31, 2018, Vermilion recorded $0.2 million of office rent recoveries (2017 - $0.2 million) relating to an office sub-lease
to a company whose Managing Director is also a member of Vermilion's Board of Directors. This related party transaction is provided in the normal
course of business under the same commercial terms and conditions as transactions with unrelated companies and is recorded at the exchange amount.
19. Supplemental information
Changes in non-cash working capital was comprised of the following:
($M)
Changes in:
Accounts receivable
Crude oil inventory
Prepaid expenses
Accounts payable and accrued liabilities
Income taxes payable
Working capital assumed from acquisitions
Initial recognition of IFRS 16 liability
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:
($M)
Cash on deposit with financial institutions
Guaranteed investment certificates
Cash and cash equivalents
Vermilion Energy Inc. ■ Page 91 ■ 2018 Annual Report
Year Ended
Dec 31, 2018
Dec 31, 2017
(94,562)
(10,646)
(4,896)
230,567
(1,651)
(58,841)
(10,483)
(873)
48,615
(6,876)
55,491
48,615
(34,041)
(2,577)
(1,884)
37,527
2,842
—
—
(795)
1,072
665
407
1,072
As at
Dec 31, 2018
26,604
205
26,809
Dec 31, 2017
46,229
332
46,561
Wages and benefits included in operating expenses and general and administration expenses were:
($M)
Operating expense
General and administration expense
Wages and benefits
Year Ended
2018
66,095
42,496
108,591
2017
48,823
36,708
85,531
The following tables summarize Vermilion's outstanding risk management positions as at December 31, 2018:
Crude Oil
Dated Brent
3-Way Collar
Swap
3-Way Collar
3-Way Collar
Swap
Swap
Swap
WTI
Swap
3-Way Collar
Swap
Period
Exercise date (1)
Currency
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
(bbl/d)
Price / bbl
Bought Put
Volume
Weighted
Average
Bought Put
Sold Call
Volume
Weighted
Average
Sold Call
Sold Put
Volume
Weighted
Average
Sold Put
Swap
Volume
Weighted
Average
Swap
Sep 2018 - Jun 2019
Jan 2019 - Dec 2019
Aug 2018 - Jun 2019
Jan 2019 - Dec 2019
Apr 2018 - Mar 2019
Jul 2018 - Jun 2019
Jan 2019 - Dec 2019
Jan 2019 - Dec 2019
Jan 2019 - Dec 2019
Apr 2018 - Mar 2019
CAD
CAD
USD
USD
USD
USD
USD
CAD
USD
USD
2,500
91.20
2,500
—
500
500
—
—
—
—
250
—
—
66.92
70.00
—
—
—
—
70.00
—
—
500
500
—
—
—
—
250
—
98.63
—
80.00
80.00
—
—
—
—
80.25
—
2,500
—
500
500
—
—
—
—
250
—
76.00
—
55.00
60.00
—
—
—
—
60.00
—
—
1,350
—
—
750
1,500
2,250
1,050
—
250
—
91.76
—
—
61.33
68.52
73.17
81.41
—
54.00
North American Gas
Period
Exercise date (1)
Currency
(mcf/d)
Price / mcf
(mcf/d)
Bought Put
Volume
Weighted
Average
Bought Put
Sold Call
Volume
Weighted
Average
Sold Call
Price /
mcf
Sold Put
Volume
Weighted
Average
Sold Put
Swap
Volume
Weighted
Average
Swap
(mcf/d)
Price /mcf
(mcf/d)
Price / mcf
2,500
2.41
2,500
(0.93)
5,000
(1.46)
5,000
5,000
10,000
10,000
4.00
4.40
5.50
4.39
3.36
AECO
Swap
Dec 2018 - Mar 2019
AECO Basis (AECO less NYMEX Henry Hub)
Swap
Jan 2019 - Jun 2020
AECO Basis (AECO less Chicago NGI)
Swap
Nov 2018 - Mar 2019
NYMEX Henry Hub
Swap
Chicago NGI
Swap
SOCAL Border
Swap (2)
Swap (2)
Jan 2019 - Mar 2019
Dec 2018 - Mar 2019
Jan 2019
Feb 2019
CAD
USD
USD
USD
USD
USD
USD
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Swap (2)
10,000
(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) These swaps hedge a physical sales agreement to sell Alberta natural gas production at SOCAL Border pricing less a fixed differential.
Mar 2019
USD
—
—
—
—
—
—
Vermilion Energy Inc. ■ Page 92 ■ 2018 Annual Report
European Gas
Period
Exercise date (1)
Currency
(mcf/d)
Price / mcf
(mcf/d)
Bought Put
Volume
Weighted
Average
Bought Put
Sold Call
Volume
Weighted
Average
Sold Call
Price /
mcf
Sold Put
Volume
Weighted
Average
Sold Put
Swap
Volume
Weighted
Average
Swap
(mcf/d)
Price /mcf
(mcf/d)
Price / mcf
NBP
3-Way Collar
3-Way Collar
3-Way Collar
Collar
Call
Swap
Swaption
Swaption
Swaption
Swaption
Jan 2019 - Dec 2019
Jan 2019 - Dec 2020
Jan 2020 - Dec 2020
Oct 2018 - Mar 2019
Oct 2018 - Mar 2019
Oct 2018 - Mar 2019
Jul 2019 - Jun 2021
June 28, 2019
Oct 2019 - Mar 2020
June 28, 2019
Oct 2020 - Mar 2021
June 28, 2019
Oct 2021 - Mar 2022
June 28, 2019
NBP Basis (NBP less NYMEX HH)
Collar
TTF
3-Way Collar
3-Way Collar
3-Way Collar
3-Way Collar
Swap
Swap
Swap
Swap
Jan 2019 - Sep 2020
Oct 2017 - Dec 2019
Jan 2018 - Dec 2019
Jan 2019 - Dec 2019
Jan 2020 - Dec 2020
Oct 2017 - Dec 2019
Jan 2018 - Dec 2019
Jul 2018 - Dec 2019
Jan 2019 - Dec 2019
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
17,197
7,370
19,654
3,685
—
—
—
—
—
—
4.97
4.96
5.10
6.40
—
—
—
—
—
—
17,197
7,370
19,654
2,457
12,327
—
—
—
—
—
5.65
5.76
5.92
7.62
6.28
—
—
—
—
—
7,500
2.07
7,500
4.00
7,370
3,685
12,284
7,370
—
—
—
—
4.59
4.74
5.05
5.37
—
—
—
—
7,370
3,685
12,284
7,370
—
—
—
—
5.42
5.52
5.72
6.25
—
—
—
—
17,197
7,370
19,654
—
—
—
—
—
—
—
—
7,370
3,685
12,284
7,370
—
—
—
—
3.79
3.74
4.01
—
—
—
—
—
—
—
—
2.93
3.13
3.69
3.81
—
—
—
—
—
—
—
—
—
4,913
9,827
7,370
7,370
7,370
—
—
—
—
—
7,370
1,228
4,913
2,457
—
—
—
—
—
7.92
5.64
5.86
5.86
5.86
—
—
—
—
—
4.87
5.00
4.98
4.92
Cross Currency Interest Rate
Receive Notional Amount (USD)
Rate (LIBOR +)
Pay Notional Amount (CAD)
Rate (CDOR +)
Swap
Jan 2019
1,018,563,000
1.70%
1,354,900,000
1.02%
(1)
The sold swaption instrument allows the counterparty, at the specified date, to enter into a swap with Vermilion at the above detailed terms.
Vermilion Energy Inc. ■ Page 93 ■ 2018 Annual Report
DIRECTORS
Lorenzo Donadeo 1
Calgary, Alberta
Larry J. Macdonald 2, 4, 6, 8
Chairman & CEO, Point Energy Ltd.
Calgary, Alberta
Carin Knickel 6, 8, 12
Golden, Colorado
Stephen P. Larke 4, 6, 12
Calgary, Alberta
Loren M. Leiker 10
McKinney, Texas
Timothy R. Marchant 7, 10, 11
Calgary, Alberta
Anthony Marino
Calgary, Alberta
Robert Michaleski 4, 5
Calgary, Alberta
William Roby 8, 9, 12
Katy, Texas
Catherine L. Williams 3, 6
Calgary, Alberta
1 Chairman of the Board
2 Lead Director
3 Audit Committee Chair (Independent)
4 Audit Committee Member
5 Governance and Human Resources Committee Chair
__(Independent)
6 Governance and Human Resources Committee Member
7 Health, Safety and Environment Committee Chair __
(Independent)
8 Health, Safety and Environment Committee Member
9 Independent Reserves Committee Chair (Independent)
10 Independent Reserves Committee Member
11 Sustainability Committee Chair (Independent)
12 Sustainability Committee Member
OFFICERS AND KEY PERSONNEL
CANADA
Anthony Marino
President & Chief Executive Officer
Lars Glemser
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
Daniel Goulet
Director Corporate HSE
Jeremy Kalanuk
Director Operations Accounting
Bryce Kremnica
Director Field Operations - Canada Business Unit
Kyle Preston
Director Investor Relations
Robert (Bob) J. Engbloom
Corporate Secretary
UNITED STATES
Scott Seatter
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
Sven Tummers
Managing Director - Netherlands Business Unit
Bill Liutkus
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
AUDITORS
Deloitte LLP
Calgary, Alberta
BANKERS
The Toronto-Dominion Bank
Bank of Montreal
Canadian Imperial Bank of Commerce
Export Development Canada
National Bank of Canada
Royal Bank of Canada
The Bank of Nova Scotia
Wells Fargo Bank N.A., Canadian Branch
HSBC Bank Canada
Bank of America N.A., Canada Branch
Citibank N.A., Canadian Branch - Citibank Canada
JPMorgan Chase Bank, N.A., Toronto Branch
La Caisse Centrale Desjardins du Québec
Alberta Treasury Branches
Canadian Western Bank
Goldman Sachs Lending Partners LLC
Barclays Bank PLC
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
Vermilion Energy Inc. ■ Page 94 ■ 2018 Annual Report