Vermilion Energy
Annual Report 2020

Plain-text annual report

Front Cover Theme As illustrated by the front cover photo, we give together through our Days of Caring. Throughout the company, our staff volunteer to support social and environmental agencies we’ve partnered with in the communities where we operate. Here, Vermilion has partnered with the Nature Conservancy of Canada (NCC), one of Canada's leading national conservation organizations. In 2016 and 2019, a group of Vermilion volunteers from our Canada Business Unit tackled projects like trail clearing and sign installation at the Coyote Lake Nature Sanctuary, which is a popular hiking destination near our operations in Drayton Valley, Alberta. This work helped to ensure a safe and enjoyable experience for visitors, and contributed to the safety of local wildlife. NCC focuses on protecting the natural areas that sustain Canada's plants and wildlife by securing properties, and managing them for the long term. To date, NCC and its partners have helped to conserve more than 35 million acres of ecologically significant land from coast to coast. Through programs like this, Vermilion is proud to have invested over $7.4 million and 10,800 hours of volunteer time in strategic community partnerships over the past five years. 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 6 10 56 64 87 April 28, 2021 3:00 PM MT With continued limits on large gatherings due to the ongoing COVID-19 pandemic, our Meeting will be held as a virtual shareholder meeting with electronic participation as explained in the 2021 Proxy Statement and Information Circular, which will be available in March 2021. Details of the meeting will be included in the Information Circular and posted on our website at https://www.vermilionenergy.com/invest-with-us/annual-general- meeting.cfm when available. Vermilion Energy Inc. ■ Page 1 ■ 2020 Annual Report Disclaimer 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 2021 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 2021; 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 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 ■ 2020 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 ■ 2020 Annual Report Highlights • • • • • • • • • • . (1) (2) (3) In 2020, we generated $502 million of fund flows from operations ("FFO")(1) and $135 million of free cash flow (“FCF”)(1) after investing $367 million on exploration and development (“E&D”) capital expenditures. This resulted in a payout ratio of 92% including reclamation and abandonment expenditures and dividends paid earlier in the year. In Q4 2020, we generated $135 million of FFO and invested $60 million of E&D capital, resulting in FCF of $75 million which went toward debt reduction. After funding reclamation and abandonment expenditures and minor acquisitions, we reduced the amount outstanding under our revolving credit facility by approximately $175 million over the second half of 2020, leaving us with over $500 million of liquidity available at year-end. Achieved 2020 average production of 95,190 boe/d(2), slightly above the midpoint of our guidance range of 94,000 to 96,000 boe/d. Q4 2020 production averaged 87,848 boe/d(2), reflecting the impact from a capital program executed predominately during the first part of 2020 with limited drilling activity over the second half of the year. Production from our North American assets averaged 58,774 boe/d(2) in Q4 2020, a decrease of 10% from the prior quarter primarily due to natural decline. The majority of our 2020 North American drilling program was executed during the first half of the year with limited new production added during the second half of the year. Production from our International assets averaged 29,073 boe/d(2) in Q4 2020, a decrease of 5% from the prior quarter primarily due to a planned turnaround in Australia and natural decline. Total proved plus probable reserves decreased 7% from the prior year to 467 mmboe, as evaluated by GLJ as at December 31, 2020(3). The decrease is primarily due lower capital activity levels and economic impacts. Proved plus probable reserve life index remains in excess of 13 years. During Q4 2020, we announced several management changes including the appointments of Mr. Dion Hatcher and Mr. Darcy Kerwin to the newly created roles of Vice President, North America and Vice President, International and HSE, respectively. In lieu of filling the role of COO, Mr. Hatcher and Mr. Kerwin will jointly fulfill the duties and continue to emphasize our focus on cost-control and safe, efficient, profitable operations. Vermilion was ranked at the top of our peer group in 2020 in the SAM Corporate Sustainability Assessment (“CSA”). We were also selected for The Sustainability Yearbook 2021, which reflects that our CSA sustainability performance is within the top 15% of our industry (SAM's Upstream Oil & Gas and Integrated category). Vermilion's 2020 Sustainability Report can be found on our website using the following link: http://sustainability.vermilionenergy.com/. Subsequent to the end of the year we announced a disciplined and balanced E&D capital budget of $300 million for 2021, along with production guidance of 83,000 to 85,000 boe/d. The budget is focused on maximizing returns and FCF in order to facilitate debt reduction and preserve liquidity. Based on the mid-point of our 2021 production and capital expenditure guidance and assuming US$60/bbl WTI oil prices for the balance of the year, we expect to generate over $350 million of FCF in 2021, which will be used to reduce our debt Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of the accompanying Management’s Discussion and Analysis. Please refer to Supplemental Table 4 "Production" of the accompanying Management's Discussion and Analysis for disclosure by product type. Estimated gross proved, developed and producing, total proved, and total proved plus probable reserves as evaluated by GLJ Petroleum Consultants Ltd. (“GLJ”) in a report dated February 12, 2021 with an effective date of December 31, 2020 (the “2020 GLJ Reserves Report”). Vermilion Energy Inc. ■ Page 4 ■ 2020 Annual Report ($M except as indicated) Financial Petroleum and natural gas sales Fund flows from operations Fund flows from operations ($/basic share) (1) Fund flows from operations ($/diluted share) (1) Net (loss) earnings Net (loss) earnings ($/basic share) Capital expenditures Acquisitions Asset retirement obligations settled Cash dividends ($/share) Dividends declared % of fund flows from operations Net dividends (1) % of fund flows from operations Payout (1) % of fund flows from operations Net debt Net debt to four quarter trailing fund flows from operations Operational Production (2) 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 General and administration expenses Average reference prices and foreign exchange rates WTI (US $/bbl) Edmonton Sweet index (US $/bbl) Saskatchewan LSB index (US $/bbl) Dated Brent (US $/bbl) AECO ($/mcf) NBP ($/mcf) TTF ($/mcf) CDN $/US $ CDN $/Euro Share information ('000s) Shares outstanding - basic Shares outstanding - diluted (1) Weighted average shares outstanding - basic Weighted average shares outstanding - diluted (1) (1) Q4 2020 Q3 2020 Q4 2019 2020 2019 316,198 135,212 0.85 0.85 (57,707) (0.36) 59,894 4,821 7,271 — — — % — — % 67,165 50 % 282,020 114,776 0.73 0.73 (69,926) (0.44) 31,330 6,720 2,305 — — — % — — % 33,635 29 % 388,802 215,592 1.38 1.38 1,477 0.01 100,625 9,165 7,352 0.690 107,702 50 % 97,502 45 % 205,479 95 % 1,119,545 502,065 3.18 3.18 (1,517,427) (9.61) 367,202 25,810 14,278 0.575 90,067 18 % 81,790 16 % 463,270 92 % 1,689,863 908,055 5.87 5.82 32,799 0.21 523,164 38,472 19,442 2.760 427,311 47 % 392,374 43 % 934,980 103 % 2,105,983 4.19 2,136,219 3.67 1,993,194 2.20 2,105,983 4.19 1,993,194 2.20 40,555 8,627 232.00 87,848 55.31 19.20 4.13 40 % 17 % 27 % 16 % 19.67 16.50 13.00 2.27 42.66 38.59 38.96 44.23 2.64 6.99 6.63 1.30 1.55 158,724 165,396 158,561 158,561 43,240 9,509 256.34 95,471 52.77 15.04 2.34 40 % 17 % 28 % 15 % 16.29 12.95 10.21 1.35 40.93 37.42 37.57 43.00 2.24 3.67 3.51 1.33 1.56 158,308 163,800 158,307 158,307 46,261 8,160 260.72 97,875 71.25 14.63 3.61 40 % 17 % 26 % 17 % 27.53 24.40 12.52 1.88 56.96 51.59 51.58 63.25 2.48 5.38 5.36 1.32 1.46 156,290 159,912 155,950 156,180 43,421 8,937 256.99 95,190 50.53 13.06 2.77 40 % 16 % 28 % 16 % 17.58 14.32 11.89 1.73 39.40 34.08 34.14 41.67 2.23 4.30 4.18 1.34 1.53 158,724 165,396 157,908 157,908 47,902 7,984 266.82 100,357 74.42 13.61 3.58 39 % 18 % 25 % 18 % 29.25 24.77 12.01 1.61 57.03 52.15 52.50 64.30 1.76 5.90 5.90 1.33 1.49 156,290 159,912 154,736 156,094 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. Please refer to Supplemental Table 4 "Production" of the accompanying Management's Discussion and Analysis for disclosure by product type. (2) Vermilion Energy Inc. ■ Page 5 ■ 2020 Annual Report Message to Shareholders Vermilion started 2020 on a strong footing in what appeared to be a constructive outlook for commodity prices. That all changed in mid-February as the effects from the COVID-19 pandemic started to take hold. As we are all too aware now, the pandemic had devastating effects on the global economy and commodity prices. As commodity prices collapsed, we took swift and decisive action, making drastic changes to our business in order to protect the balance sheet and preserve financial liquidity. We reduced our 2020 capital program in March, suspended our dividend in April and, with other cost saving initiatives, reduced over $550 million combined of annualized cash outflows. In the months following, we made several changes to our executive leadership team and undertook a global organizational review to improve profitability and long-term sustainability. While these collective decisions were difficult to make, we can look back now with confidence and know that they were in the best interests of the Company. Not only did Vermilion successfully navigate this downturn, we have made several structural changes to our business that will improve our long-term sustainability and add value for our shareholders over the coming years. One of the themes emerging from the COVID-19 pandemic is an increased awareness and focus on environmental, social and governance (“ESG”) matters and the energy transition. Vermilion has been focused on ESG for well over a decade and we take great pride in our ESG leadership within the mid-cap energy space. Sustainability is fundamental to our business which is reflected in our consistently strong results and rankings from external ESG agencies, including Vermilion's recent inclusion in The Sustainability Yearbook 2021 based on the SAM (now S&P Global) Corporate Sustainability Assessment. We maintained our disciplined focus on ESG through 2020 despite the challenges caused by COVID-19, and we are committed to progressing our ESG initiatives in the future as we see Vermilion being a key contributor to the energy transition. As such, we are currently developing a comprehensive, long-term ESG strategy that will be fully integrated into our business with clear objectives, including further targets for emissions reductions. This new ESG strategy and associated targets are expected to be in place by mid-2021. Despite all the challenges in 2020, we still managed to execute a $367 million exploration and development ("E&D") capital program and deliver annual average production of 95,190 boe/d(2) which is slightly above the midpoint of our guidance range of 94,000 to 96,000 boe/d. In 2020, we executed a front-end weighted capital program whereby approximately 65% of our E&D capital was invested in Q1 2020, resulting in peak production of over 100,000 boe/d in Q2 2020 and declining to 87,848 boe/d in Q4 2020. Through our profitability review, we have determined that this allocation of capital is not the most efficient and increases the challenges of managing our production base over time. We have incorporated these learnings into our 2021 budget and are targeting a much more level-loaded capital program in 2021, as was outlined in our budget announcement in January. The volatile commodity environment in 2020 saw WTI oil prices peak above US$60/bbl at the beginning of the year and collapse to an unprecedented negative price in April as global storage levels surged following the stay-at-home measures put in place around the world. The WTI benchmark averaged US$39.40/bbl for 2020, compared to US$57.03/bbl in 2019. European natural gas prices experienced similar volatility as a result of the pandemic-induced demand destruction. The TTF benchmark traded below C$2/mcf in May but recovered to over C$8/mcf by December, averaging $4.30/mcf for the full year, compared to $5.90/mcf in 2019. Fortunately, we had the majority of our European conventional natural gas production hedged through the summer months at much higher prices, which offset some of this price weakness. We generated $502 million of fund flows from operations ("FFO")(1) in 2020 and $135 million of free cash flow ("FCF")(1), which more than covered the dividends paid earlier in the year, along with reclamation and abandonment expenditures and minor acquisitions. In Q4 2020, we generated $135 million of FFO and invested $60 million of E&D capital, resulting in FCF of $75 million which went toward debt reduction. After accounting for reclamation and abandonment expenditures and minor acquisitions, we reduced the amount outstanding under our revolving credit facility by approximately $175 million during the second half of 2020, leaving us with over $500 million of liquidity available at year-end. Based on the mid-point of our 2021 production and capital expenditure guidance and assuming US$60/bbl WTI oil prices for the balance of the year, we expect to generate over $350 million of FCF in 2021, which will be used to further reduce our debt. It has been a challenging year for the oil and gas industry and Vermilion; however, we are pleased with what our Company has accomplished under the circumstances. While we still have lots of work to do, we believe our Company is on a much stronger footing today and is better positioned for long-term value creation. Vermilion has a world class asset base comprised of highly efficient, low decline conventional oil and natural gas producing assets that generate strong free cash flow. These assets provide risk reducing attributes owing to their global diversification and global commodity exposure, and also provide significant leverage to recovering global commodity prices. In the near-term, all of our free cash flow will be allocated to debt reduction, but as we begin to make more meaningful progress towards our debt targets, we will review our long-term shareholder return policy to determine the appropriate time to reinstate a dividend and/or share buyback program. We would like to thank our shareholders for their ongoing support and look forward to providing further updates on our 2021 program as the year progresses. We would like to share with you the news that Larry MacDonald, our Lead Director, has recently been awarded the Order of Canada. This award is made to individuals who have demonstrated “outstanding achievement and merit of the highest degree, especially in service to Canada or to humanity at large”. This is absolutely a remarkable achievement for Larry and is a reflection of the significant personal contributions he has made for the disadvantaged, not only in Canada but also globally, over his lifetime. Larry has been a member of our Board of Directors since 2002 and we are proud to be associated with such an outstanding individual. Vermilion Energy Inc. ■ Page 6 ■ 2020 Annual Report Q4 2020 Operations Review North America Production from our North American assets averaged 58,774 boe/d in Q4 2020, a decrease of 10% from the prior quarter primarily due to natural decline. The majority of our 2020 North American drilling program was executed during the first half of the year with limited new production added during the second half of the year. We resumed drilling activity in Alberta in the fourth quarter, drilling seven (6.6 net) Mannville wells and completing two (1.6 net) wells which were brought on production prior to year-end. The remaining five (5.0 net) wells were completed and brought on production in early 2021. No drilling or completion activity occurred in southeast Saskatchewan or Wyoming during the fourth quarter, however we expect to resume drilling in these areas in Q2 2021. International Production from our International assets averaged 29,073 in Q4 2020, a decrease of 5% from the prior quarter primarily due to a planned turnaround in Australia and natural decline. In Australia, we successfully completed an 11-day planned maintenance turnaround, which included the tie in of a new sediments management system which is expected to improve facility operating efficiency. Activity in our European operating areas was primarily focused on maintenance, well work-over activities and planning for the 2021 drilling campaign in the Netherlands, Hungary and Croatia. All drilling permits have been received for our 2021 European drilling campaign, along with the production license for the Burgmoor Z5 well (46% working interest) in Germany which is scheduled to start-up in the second half of 2021. In France, we obtained the necessary authorization for trucking our Paris Basin light crude oil in advance of the Grandpuits refinery closure in Q1 2021. The refinery recently ceased all oil refining operations and we have begun trucking our light crude oil to other refineries in France without any disruption to our field operations. We will continue to evaluate transportation options and remain optimistic we can find a cost effective long-term solution. 2020 Reserve Report Our 2020 total proved plus probable reserves decreased 7% from the prior year to 467 mmboe(3). The decrease is primarily due to lower commodity price assumptions and lower capital activity levels in 2020. Despite these revisions our total proved plus probable reserve life index remains greater than 13 years while our total proved plus probable 3-year F&D operating recycle ratio remains over 2 times, owing to our high netback production base. In an effort to reduce costs, the Company did not complete a resource evaluation this year. The following table provides a summary of company interest reserves by reserve category and region on an oil equivalent basis. Please refer to Vermilion's 2020 Annual Information Form for the year ending December 31, 2020 ("2020 Annual Information Form") for detailed information by country and product type. BOE (mboe) North America International Vermilion Proved Developed Producing 124,376 60,977 185,353 Proved Developed Non-Producing 5,652 7,112 12,764 Proved Undeveloped 79,155 7,992 87,147 Proved 209,183 76,081 285,264 Probable 136,969 44,370 181,339 Proved Plus Probable 346,152 120,451 466,603 The following table summarizes the finding and development costs and associated operating recycle ratios by reserve category for the three-year period ending December 31, 2020: Finding and Development Costs, including FDC (F&D) ($/boe) (4) Finding, Development and Acquisition Costs, including FDC (FD&A) ($/boe) (4) F&D Operating Recycle Ratio (x) (5) FD&A Operating Recycle Ratio (x) (5) PDP $14.83 $20.35 1.7 1.2 3-Year Average 1P $13.74 $19.82 1.8 1.3 2P $11.79 $15.37 2.1 1.6 Vermilion Energy Inc. ■ Page 7 ■ 2020 Annual Report The following table provides a reconciliation of changes in company interest reserves by reserve category and region. Please refer to Vermilion's 2020 Annual Information Form for detailed information by country and product type. 1P (mboe) December 31, 2019 Discoveries Extensions & improved recovery Technical revisions Acquisitions Dispositions Economic factors Production December 31, 2020 2P (mboe) December 31, 2019 Discoveries Extensions & improved recovery Technical revisions Acquisitions Dispositions Economic factors Production December 31, 2020 North America International 221,979 — 18,612 1,701 2,159 (3,679) (7,998) (23,591) 209,183 87,961 — 2,265 4,381 — — (7,277) (11,249) 76,081 North America International 359,828 — 17,741 3,080 4,302 (4,955) (10,254) (23,591) 346,151 141,049 — 5,131 (1,558) — — (12,923) (11,249) 120,450 Vermilion 309,940 — 20,877 6,082 2,159 (3,679) (15,275) (34,840) 285,264 Vermilion 500,877 — 22,872 1,522 4,302 (4,955) (23,177) (34,840) 466,601 Additional information about our 2020 GLJ Reserves Report can be found in our 2020 Annual Information Form on our website at www.vermilionenergy.com and on SEDAR at www.sedar.com. Commodity Hedging Vermilion hedges to manage commodity price exposures and increase the stability of our cash flows. In aggregate, as of March 1, 2021, we have 45% of our expected net-of-royalty production hedged for the first half of 2021. With respect to individual commodity products, we have hedged 64% of our European natural gas production, 38% of our oil production, and 46% of our North American natural gas volumes for the first half of 2021, respectively. Please refer to the Hedging section of our website under Invest With Us for further details using the following link: https://www.vermilionenergy.com/invest-with-us/hedging.cfm. Sustainability Vermilion continued to build on our track record of industry-leading ESG performance based on rankings by third party ratings agencies in 2020. Vermilion was ranked at the top of our peer group in 2020 in the SAM Corporate Sustainability Assessment (“CSA”). We were also selected for The Sustainability Yearbook 2021, which recognizes that our CSA sustainability performance is within the top 15% of our industry (SAM's Upstream Oil & Gas and Integrated category). During Q4 2020, we also released our 2020 Corporate Sustainability Report, marking our 7th year of ESG reporting. The 2020 report highlights our ongoing focus on reducing emissions within our operations, along with a content index that includes recommendations from the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board. The report can be found on our Sustainability micro-site using the following link: https://sustainability.vermilionenergy.com/. (Signed “Lorenzo Donadeo”) Lorenzo Donadeo Executive Chairman March 5, 2021 (Signed “Curtis Hicks”) Curtis Hicks President March 5, 2021 (1) Non-GAAP Financial Measure. Please see the “Non-GAAP Financial Measures” section of the accompanying Management’s Discussion and Analysis. Vermilion Energy Inc. ■ Page 8 ■ 2020 Annual Report (2) (3) (4) (5) Please refer to Supplemental Table 4 "Production" of the accompanying Management's Discussion and Analysis for disclosure by product type. Estimated gross proved, developed and producing, total proved, and total proved plus probable reserves as evaluated by GLJ Petroleum Consultants Ltd. (“GLJ”) in a report dated February 12, 2021 with an effective date of December 31, 2020 (the “2020 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 Energy Inc. ■ Page 9 ■ 2020 Annual Report Management's Discussion and Analysis The following is Management’s Discussion and Analysis (“MD&A”), dated March 5, 2021, 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, 2020 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, 2020 and 2019, 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, 2020 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, core region, 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”. Product Type Disclosure Under National Instrument 51-101 "Standards of Disclosure for Oil and Gas Activities", disclosure of production volumes should include segmentation by product type as defined in the instrument. In this report, references to "crude oil" mean "light crude oil and medium crude oil" and references to "natural gas" mean "conventional natural gas". In addition, in Supplemental Table 4 "Production", Vermilion provides a reconciliation from total production volumes to product type and also a reconciliation of "crude oil and condensate" and "NGLs" to the product types "light crude oil and medium crude oil" and "natural gas liquids". Production volumes reported are based on quantities as measured at the first point of sale. Vermilion Energy Inc. ■ Page 10 ■ 2020 Annual Report Guidance On October 31, 2019, we released our 2020 capital budget and associated production guidance. On March 16, 2020, we announced a reduction of our 2020 capital budget and associated production guidance in response to a decrease in oil prices as a result of the coronavirus ("COVID-19") pandemic and the ensuing oil price war between OPEC+ members. On November 9, 2020, we reduced the upper end of our annual production guidance range to reflect revised production estimates, which take into account the deferred startup of new natural gas production in the Netherlands to take advantage of higher European natural gas prices during the winter months. Actual 2020 capital spending of $367 million and 2020 average production of 95,190 boe/d were both slightly above the midpoint of our guidance ranges. On January 18, 2021, we released our 2021 capital budget and associated production guidance. The following table summarizes our guidance: Date Capital Expenditures ($MM) Production (boe/d) 2020 Guidance 2020 Guidance 2020 Guidance 2020 Guidance 2020 Actual Results 2021 Guidance 2021 Guidance October 31, 2019 March 16, 2020 November 9, 2020 March 8, 2021 January 18, 2021 450 350 to 370 350 to 370 367 100,000 to 103,000 94,000 to 98,000 94,000 to 96,000 95,190 300 83,000 to 85,000 Vermilion Energy Inc. ■ Page 11 ■ 2020 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. Vermilion Energy Inc. ■ Page 12 ■ 2020 Annual Report 2020 production of 95,190 boe/dNorth America: 68%International: 32%2020 capital expenditures of $367MMNorth America: 72%International: 28%2020 fund flows from operations of $502MMNorth America: 59%International: 41%Consolidated Results Overview Production (1) Crude oil and condensate (bbls/d) NGLs (bbls/d) Natural gas (mmcf/d) Total (boe/d) (Draw) build in inventory (mbbls) Financial metrics Fund flows from operations ($M) Per share ($/basic share) Net (loss) earnings ($M) Per share ($/basic share) Net debt ($M) Cash dividends ($/share) Activity Capital expenditures ($M) Acquisitions ($M) Q4 2020 Q3 2020 Q4 2019 Q4/20 vs. Q3/20 Q4/20 vs. Q4/19 2020 2019 2020 vs. 2019 40,555 8,627 232.00 87,848 43,240 9,509 256.34 95,471 (118) (68) 46,261 8,160 260.72 97,875 169 135,212 114,776 215,592 0.85 0.73 (57,707) (69,926) (0.36) (0.44) 1.38 1,477 0.01 2,105,983 2,136,219 1,993,194 — — 0.690 (6)% (9)% (10)% (8)% 18% 16% (18)% (18)% (1)% —% (12)% 6% (11)% (10)% (37)% (38)% N/A N/A 6% (100)% 43,421 8,937 256.99 95,190 47,902 7,984 266.82 100,357 (260) (12) 502,065 908,055 3.18 5.87 (1,517,427) 32,799 (9.61) 0.21 2,105,983 1,993,194 (9)% 12% (4)% (5)% (45)% (46)% N/A N/A 6% 0.575 2.760 (79)% 59,894 4,821 31,330 6,720 100,625 91% (41)% 9,165 367,202 25,810 523,164 (30)% 38,472 (1) Please refer to Supplemental Table 4 "Production" for disclosure by product type. Financial performance review Q4 2020 vs. Q3 2020 • We recorded a net loss of $57.7 million ($0.36/basic share) in Q4 2020 compared to a net loss of $69.9 million ($0.44/basic share) in Q3 2020. This quarter-over-quarter decrease in net loss was primarily driven by decreased impairment charges in Q4 2020, increased funds flow from operations, and lower depletion and depreciation charges, partially offset by an increase in deferred taxes. Vermilion Energy Inc. ■ Page 13 ■ 2020 Annual Report "Other" contains equity based compensation and accretion expense$MMNet loss of $57.7MM in Q4 2020 compared to a net loss of $69.9MM in Q3 2020$(69.9)$47.8$20.4$19.5$7.4$(81.7)$(1.2)$(57.7)Q3 2020ImpairmentFund flowsfrom operationsDepletion and depreciationUnrealized derivatives,foreign exchangeDeferred taxOtherQ4 2020-100-50050 • Fund flows from operations for Q4 2020 increased versus Q3 2020 from $114.8 million to $135.2 million primarily driven by realized commodity pricing which increased 21% from $31.86/boe to $38.57/boe. This was partially offset by lower sales volumes mainly due to decreased production in Q4 2020 driven by natural decline. Q4 2020 vs. Q4 2019 • We recorded a net loss of $57.7 million ($0.36/basic share) for Q4 2020 compared to net earnings of $1.5 million ($0.01/basic share) in Q4 2019. The decrease was primarily driven by lower fund flows from operations of $80.4 million due to lower commodity prices in 2020, partially offset by lower impairment charges compared to Q4 2019. Vermilion Energy Inc. ■ Page 14 ■ 2020 Annual Report "Other" contains general and administration, interest, and realized foreign exchange$MMFund flows from operations of $135.2MM in Q4 2020 compared $114.8MM in Q3 2020$114.8$48.2$6.1$(17.4)$(13.5)$(3.0)$135.2Q3 2020Pricing netof derivativesTaxesSales volumeRoyalties,transportation,operating expenseOtherQ4 2020100200"Other" contains equity based compensation and accretion expense$MMNet loss of $57.7MM in Q4 2020 compared to net earnings of $1.5MM in Q4 2019$1.5$46.1$13.3$(80.4)$(28.8)$(8.3)$(1.1)$(57.7)Q4 2019ImpairmentDeferred taxFund flowsfrom operationsUnrealized derivatives,foreign exchangeDepletion anddepreciationOtherQ4 2020-200-1000100• We generated fund flows from operations of $135.2 million in Q4 2020, a decrease from $215.6 million in Q4 2019 primarily as a result of lower commodity prices and lower sales volumes primarily due to natural decline on our production. Our consolidated realized price per boe decreased from $44.00/boe in Q4 2019 to $38.57/boe in Q4 2020. 2020 vs. 2019 • For the year ended December 31, 2020, a net loss of $1,517.4 million was recorded compared to net earnings of $32.8 million for the comparable period in 2019. The decrease in net earnings was primarily due to impairment charges we recorded of $1.2 billion in 2020 (net of $0.4 billion income tax recovery) and lower fund flows from operations driven by decreases in realized prices due to the impacts of COVID-19 and the OPEC+ price war. Vermilion Energy Inc. ■ Page 15 ■ 2020 Annual Report "Other" contains general and administration, interest, and realized foreign exchange$MMFund flows from operations of $135.2MM in Q4 2020 compared to $215.6MM in Q4 2019$215.6$15.1$1.0$(77.0)$(17.6)$(1.9)$135.2Q4 2019Royalties, transportation,operating expenseOtherPricing netof derivativesSales volumeTaxesQ4 2020100200300"Other" contains equity based compensation, accretion, unrealized derivative instruments andunrealized foreign exchange$MMNet loss of $1,517.4MM in 2020 compared to net earnings of $32.8MM in 2019$32.8$430.4$94.7$(1,636.3)$(406.0)$(33.0)$(1,517.4)YTD 2019Deferred taxDepletion and depreciationImpairmentFund flows from operationsOtherYTD 2020-2,000-1,00001,000• Fund flows from operations decreased by 45% for the year ended December 31, 2020 versus the same period in 2019 primarily driven by a 31% decrease in our consolidated realized price from $46.12/boe to $31.90/boe due to lower commodity prices. Sales volumes decreased year- over-year primarily due to decreases in France stemming from the confinement measures in 2020 and resulting refinery shut-down, in Ireland as a result of natural decline, and in Australia due to timing of liftings. Production review Q4 2020 vs. Q3 2020 • Consolidated average production of 87,848 boe/d during Q4 2020 represented a decrease of 8% from Q3 2020 production of 95,471 boe/d. Production decreases in Canada of 5,416 boe/d and in the United States of 796 boe/d were primarily driven by natural declines, and in Australia of 768 boe/d due to 11-day planned turnaround activities. Q4 2020 vs. Q4 2019 • Consolidated average production of 87,848 boe/d in Q4 2020 represented a decrease of 10% from Q4 2019 production of 97,875 boe/d. Production decreases in Canada of 4,753 boe/d, in Ireland of 1,256 boe/d and in France of 1,009 boe/d were mainly due to natural declines. 2020 vs. 2019 • Consolidated average production of 95,190 boe/d for the year ended December 31, 2020 represented a decrease of 5% from the comparable period in 2019 of 100,357 boe/d. Production decreases were primarily in France due to the Grandpuits refinery temporary shutdown in Q2 2020, in Ireland due to natural declines and planned turnarounds, in Australia due to downtime throughout 2020 and cyclone activity in Q1 2020 and in Canada due to natural declines. These decreases were partially offset by production increases in the United States due to new wells brought online in 2019 and 2020. Vermilion Energy Inc. ■ Page 16 ■ 2020 Annual Report "Other" contains general and administration, interest, and realized foreign exchange$MMFund flows from operations of $502.1MM in 2020 compared to $908.1MM in 2019$908.1$84.7$37.9$16.9$(440.0)$(105.5)$502.12019Royalties, transportation,operating expenseTaxesOtherPricing netof derivativesSales volume20205001,0001,500Activity review • • • For the three months ended December 31, 2020, capital expenditures of $59.9 million were incurred. In our North America core region, capital expenditures of $33.8 million were incurred during the fourth quarter. In Canada, $32.9 million was incurred primarily related to increased drilling activity where we drilled seven (6.6 net) wells. In our International core region, capital expenditures of $26.1 million were incurred during the quarter. $12.8 million of capital expenditures were incurred in France primarily related to increased activity on well workovers and facilities, $4.4 million were incurred in Australia primarily related to asset optimization projects, $3.4 million were in the Netherlands primarily related to workovers and facility projects, and $3.1 million in Germany primarily related to various field optimization projects. Sustainability review Dividends • • • On March 6, 2020, in response to weakness in commodity prices and reduced global economic prospects following the outbreak of COVID-19, Vermilion's board of directors approved a 50% reduction to the March dividend, payable April 15, 2020, to $0.115 per share. On April 15, due to further deterioration of economic prospects and commodity prices resulting from the impact of COVID-19, the board of directors suspended the monthly dividend as a further measure to strengthen the financial position of the Company. Total dividends of $0.575 per common share were declared for the year ended December 31, 2020. Long-term debt and net debt • • Long-term debt remained consistent at $1.9 billion as at December 31, 2020 from December 31, 2019. Net debt increased to $2.1 billion as at December 31, 2020 from $2.0 billion as at December 31, 2019, primarily due to a decrease in net working capital driven by the change in the mark-to-market position of our European gas derivative instruments and our equity swap position moving into current liabilities. The ratio of net debt to four quarter trailing fund flows from operations increased to 4.19 as at December 31, 2020 (December 31, 2019 - 2.20) mainly due to lower four quarter trailing fund flows from operations as a result of lower commodity prices, combined with an increase in net debt. Vermilion Energy Inc. ■ Page 17 ■ 2020 Annual Report Benchmark Commodity Prices Crude oil WTI ($/bbl) WTI (US $/bbl) Edmonton Sweet index ($/bbl) Edmonton Sweet index (US $/bbl) Saskatchewan LSB index ($/bbl) Saskatchewan LSB index (US $/bbl) Canadian C5+ Condensate index ($/bbl) Canadian C5+ Condensate index (US $/bbl) Dated Brent ($/bbl) Dated Brent (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 2020 Q3 2020 Q4 2019 Q4/20 vs. Q3/20 Q4/20 vs. Q4/19 2020 2019 2020 vs. 2019 55.58 42.66 50.28 38.59 50.76 38.96 55.43 42.54 57.63 44.23 2.64 6.99 4.50 6.63 4.27 3.47 2.66 1.30 1.55 54.54 40.93 49.86 37.42 50.06 37.57 50.02 37.54 57.29 43.00 2.24 3.67 2.36 3.51 2.25 2.63 1.97 1.33 1.56 75.19 56.96 68.10 51.59 68.09 51.58 69.97 53.01 83.49 63.25 2.48 5.38 3.68 5.36 3.67 3.30 2.50 1.32 1.46 55.31 19.20 4.13 38.57 52.77 15.04 2.34 31.86 71.25 14.63 3.61 44.00 2% 4% 1% 3% 1% 4% 11% 13% 1% 3% 18% 91% 91% 89% 90% 32% 35% (2)% (1)% 5% 28% 77% 21% (26)% (25)% (26)% (25)% (26)% (25)% (21)% (20)% (31)% (30)% 7% 30% 22% 24% 16% 5% 6% (2)% 6% 52.86 39.40 45.72 34.08 45.80 34.14 49.85 37.16 55.90 41.67 2.23 4.30 2.81 4.18 2.74 2.78 2.07 1.34 1.53 75.67 57.03 69.19 52.15 69.66 52.50 70.13 52.86 85.31 64.30 1.76 5.90 3.97 5.90 3.97 3.49 2.63 1.33 1.49 (22)% 31% 14% (12)% 50.53 13.06 2.77 31.90 74.42 13.61 3.58 46.12 (30)% (31)% (34)% (35)% (34)% (35)% (29)% (30)% (35)% (35)% 27% (27)% (29)% (29)% (31)% (20)% (21)% 1% 3% (32)% (4)% (23)% (31)% As an internationally diversified producer, we are exposed to a range of commodity prices. In our North America core region, our crude oil is sold at benchmarks linked to WTI (including the Edmonton Sweet index, the Saskatchewan LSB index, and the Canadian C5+ index) and our natural gas is sold at the AECO index (in Canada) or the Henry Hub index (in the United States). In our International core region, our crude oil is sold with reference to Dated Brent and our natural gas is sold with reference to NBP, TTF, or indices highly correlated to TTF. Vermilion Energy Inc. ■ Page 18 ■ 2020 Annual Report $/bblQ4 2020 realized crude oil and condensate price was a 10% premium to Edmonton SweetIndexDated Brent (37% of Q4 2020sales volumes)WTI (6% of Q4 2020sales volumes)Canadian C5+ (10% of Q4 2020sales volumes)Crude oil and condensaterealized priceSaskatchewan LSB (40% of Q4 2020sales volumes)Edmonton Sweet index (7% of Q4 2020sales volumes)Q4 2019Q1 2020Q2 2020Q3 2020Q4 202020.0030.0040.0050.0060.0070.0080.0090.00 • • • • • • • • Crude oil prices increased in Q4 2020 relative to Q3 2020 due to continued global demand recovery, a coordinated supply cut from the OPEC+ group, and lower US shale production, with WTI and Brent prices rising quarter-over-quarter by 4% and 3% respectively. For the three months ended December 31, 2020, WTI and Brent prices decreased by 25% and 30%, respectively, versus the comparable period in the prior year. In Canadian dollar terms, quarter-over-quarter, the Edmonton Sweet differential increased by $0.62/bbl to a discount of $5.30/bbl against WTI, and the Saskatchewan LSB differential increased by $0.34/bbl to a discount of $4.82/bbl against WTI. Approximately 37% of Vermilion’s Q4 2020 crude oil and condensate production was priced at the Dated Brent index (which averaged a premium to WTI of US$1.57/bbl), while the remainder of our crude oil and condensate production was priced at the Saskatchewan LSB, Canadian C5+, Edmonton Sweet, and WTI indices. In Canadian dollar terms, prices for European natural gas (TTF and NBP) rose by 89% and 91%, respectively, in Q4 2020 compared to Q3 2020. Seasonal demand and competition for LNG cargoes improved prices. Natural gas prices at AECO in Q4 2020 increased by 18% compared to Q3 2020, with seasonal demand and export increases improving prices. For Q4 2020, average European natural gas prices represented a $4.17/mcf premium to AECO. Approximately 39% of our natural gas production in Q4 2020 benefited from this premium European pricing. For the three months ended December 31, 2020, the Canadian dollar strengthened 2% against the US dollar quarter-over-quarter. The annual average in 2020 was 1% weaker versus 2019. For the three months ended December 31, 2020, the Canadian dollar remained flat against the Euro quarter-over-quarter. The annual average in 2020 was 3% weaker versus 2019. Vermilion Energy Inc. ■ Page 19 ■ 2020 Annual Report $/mcfQ4 2020 realized natural gas priceNBP (15% of Q4 2020sales volumes)TTF (24% of Q4 2020sales volumes)Natural gas realizedpriceHenry Hub (3% of Q4 2020sales volumes)AECO (58% of Q4 2020sales volumes)Q4 2019Q1 2020Q2 2020Q3 2020Q4 20201.002.003.004.005.006.007.008.00CDN $/FXQuarter-over-quarter, the Canadian dollar strengthened versus the USD and weakenedversus the EuroCDN $/EuroCDN $/US $Q4 2019Q1 2020Q2 2020Q3 2020Q4 20201.301.401.501.60North America Q4 2020 Q4 2019 2020 2019 Production (1) Crude oil and condensate (bbls/d) NGLs (bbls/d) Natural gas (mmcf/d) Total production volume (boe/d) (1) 26,459 8,628 142.13 58,774 30,560 8,161 153.34 64,276 29,043 8,937 158.85 64,456 Please refer to Supplemental Table 4 "Production" for disclosure by product type. Sales Royalties Transportation Operating General and administration (1) Corporate income tax recovery (expense) (1) Fund flows from operations Capital expenditures Free cash flow (1) Includes amounts from Corporate segment. Q4 2020 $M 175,808 (19,670) (10,358) (59,162) (10,484) 241 76,375 (33,781) 42,594 $/boe 32.51 (3.64) (1.92) (10.94) (1.94) 0.04 14.12 Q4 2019 $M 229,782 (29,443) (10,384) (65,927) (5,745) (660) 117,623 (69,775) 47,848 $/boe 38.86 (4.98) (1.76) (11.15) (0.97) (0.11) 19.89 2020 $M 635,637 (72,407) (42,843) (236,704) (29,784) (202) 253,697 (265,261) (11,564) $/boe 26.94 (3.07) (1.82) (10.03) (1.26) (0.01) 10.75 30,798 7,984 155.24 64,654 2019 $M 903,434 (112,785) (41,261) (259,160) (20,368) (406) 469,454 (350,940) 118,514 $/boe 38.28 (4.78) (1.75) (10.98) (0.86) (0.02) 19.89 In North America, production averaged 58,774 boe/d in Q4 2020, a decrease of 9% year-over-year primarily due to natural decline and reduced capital activity. For the year-ended 2020, annual average production remained relatively consistent compared to the prior year as decreases in Canada due to natural declines were partially offset by production increases in the United States due to new wells brought online in 2019 and 2020. We resumed drilling activity in Alberta in the fourth quarter, drilling seven (6.6 net) Mannville wells and completing two (1.6 net) wells that were brought on production prior to year-end. The remaining five (5.0 net) wells were completed and brought on production in early 2021. No drilling or completion activity occurred in southeast Saskatchewan or Wyoming during the fourth quarter. Sales Canada United States North America Q4 2020 $M 160,719 15,089 175,808 $/boe 32.45 33.24 32.51 Q4 2019 $M 206,897 22,885 229,782 $/boe 38.38 43.77 38.86 2020 $M 569,191 66,446 635,637 $/boe 26.38 32.93 26.94 2019 $M 828,070 75,364 903,434 $/boe 37.82 44.17 38.28 Sales in North America decreased for the three months and year ended December 31, 2020 versus the comparable prior periods due to lower benchmark prices across all products as a result of the ongoing COVID-19 pandemic and OPEC+ price war in the first quarter of 2020. Royalties Canada United States North America Q4 2020 $M (15,240) (4,430) (19,670) $/boe (3.08) (9.76) (3.64) Q4 2019 $M (24,127) (5,316) (29,443) $/boe (4.48) (10.17) (4.98) 2020 $M (54,961) (17,446) (72,407) $/boe (2.55) (8.65) (3.07) 2019 $M (94,079) (18,706) (112,785) $/boe (4.30) (10.96) (4.78) Royalties in North America decreased for the three months and year ended December 31, 2020 versus the same periods in the prior year and were primarily due to lower crude oil and condensate pricing within Canada. Vermilion Energy Inc. ■ Page 20 ■ 2020 Annual Report Transportation Canada United States North America Q4 2020 $M (9,987) (371) (10,358) $/boe (2.02) (0.82) (1.92) Q4 2019 $M (10,384) — (10,384) $/boe (1.93) — (1.76) 2020 $M (41,494) (1,349) (42,843) $/boe (1.92) (0.67) (1.82) 2019 $M (41,261) — (41,261) $/boe (1.88) — (1.75) Transportation expense in North America remained relatively consistent on a dollar and per boe basis for the three months and year ended December 31, 2020 versus the comparable prior periods. During spring 2020, our United States business unit began transporting production on select wells via pipeline resulting in transportation costs. Operating expense Canada United States North America Q4 2020 $M (54,725) (4,437) (59,162) $/boe (11.05) (9.77) (10.94) Q4 2019 $M (60,931) (4,996) (65,927) $/boe (11.30) (9.56) (11.15) 2020 $M (218,596) (18,108) (236,704) $/boe (10.13) (8.97) (10.03) 2019 $M (242,790) (16,370) (259,160) $/boe (11.09) (9.59) (10.98) Operating expenses in North America for the three months and year ended December 31, 2020 decreased by 10.3% and 8.7%, respectively, versus the comparable prior periods. This decrease in Q4 2020 versus Q4 2019 is primarily due to lower activity levels and a reduction in headcount costs in Q4 2020 as we focus on cost reduction initiatives. Year-over-year, the decrease is primarily in Canada due to a deferral of facility costs, lower headcount costs, lower utility costs, and other cost reductions initiatives. The focus on cost reduction initiatives in 2020 in response to global commodity price pressures helped contribute to the 8.7% decrease on a per unit basis for the year ended December 31, 2020 compared to prior year. Vermilion Energy Inc. ■ Page 21 ■ 2020 Annual Report International Q4 2020 Q4 2019 2020 2019 Production (1) Crude oil and condensate (bbls/d) Natural gas (mmcf/d) Total production volume (boe/d) Total sales volume (boe/d) (1) 14,096 89.86 29,073 30,336 15,702 107.38 33,598 31,760 14,376 98.15 30,734 31,444 Please refer to Supplemental Table 4 "Production" for disclosure by product type. Sales Royalties Transportation Operating General and administration Corporate income tax recovery (expense) PRRT Fund flows from operations Capital expenditures Free cash flow Q4 2020 $M 140,390 (8,438) (6,699) (47,414) (8,158) 6,291 (4,038) 71,934 (26,113) 45,821 $/boe 50.30 (3.02) (2.40) (16.99) (2.92) 2.25 (1.45) 25.77 Q4 2019 $M 159,020 (11,236) (5,186) (44,656) (10,824) 6,495 (1,453) 92,160 (30,850) 61,310 $/boe 54.42 (3.85) (1.77) (15.28) (3.70) 2.22 (0.50) 31.54 2020 $M 483,908 (34,147) (24,868) (180,547) (31,056) 6,012 (20,151) 199,151 (101,941) 97,210 $/boe 42.05 (2.97) (2.16) (15.69) (2.70) 0.52 (1.75) 17.30 17,105 111.58 35,703 35,737 2019 $M 786,429 (50,881) (31,185) (180,918) (38,608) (25,877) (25,947) 433,013 (172,224) 260,789 $/boe 60.29 (3.90) (2.39) (13.87) (2.96) (1.98) (1.99) 33.20 Production from our International assets averaged 29,073 boe/d in Q4 2020, a decrease of 13% year-over-year primarily due to natural decline. For the year-ended December 31, 2020, our production in Europe was impacted by lower crude oil production in France resulting from COVID-19 confinement measures impacting workover activities and the temporary shutdown of the Grandpuits refinery during Q2, in addition to production declines in Netherlands, Germany, and Ireland. In Australia, we completed an 11-day planned maintenance turnaround during Q4 2020, which also contributed to the production decrease. The year-over-year production decrease from our International assets, along with significant decline in reference prices, resulted in decreases in sales and correspondingly fund flows from operations. However, given our continued focus on cost reductions across the business, such as operating costs, general and administration expenses, and capital expenditures, we continued to generate free cash flow from our international assets. Sales Australia France Netherlands Germany Ireland Central and Eastern Europe International Q4 2020 $M 30,148 53,198 22,967 10,681 23,118 278 140,390 $/boe 75.99 58.11 34.40 39.87 43.38 27.22 50.30 Q4 2019 $M 21,872 77,781 25,215 11,531 21,824 797 159,020 $/boe 68.63 53.55 33.88 39.14 33.65 31.39 54.42 2020 $M 141,452 182,292 65,575 34,210 58,446 1,933 483,908 $/boe 76.70 55.39 23.02 30.40 25.59 16.66 42.05 2019 $M 184,490 326,699 112,857 57,312 104,274 797 786,429 $/boe 93.33 83.01 37.37 45.75 36.81 31.19 60.29 As a result of changes in inventory levels, our sales volumes for crude oil in Australia, France, and Germany may differ from our production volumes in those business units. The following table provides the crude oil sales volumes (consisting entirely of "light crude oil and medium crude oil") for those jurisdictions. Crude oil sales volumes (bbls/d) Australia France Germany Q4 2020 4,312 9,951 996 Q4 2019 2,691 10,454 629 2020 5,039 8,991 967 2019 5,416 10,752 881 Vermilion Energy Inc. ■ Page 22 ■ 2020 Annual Report Sales decreased by $18.6 million for the three months ended December 31, 2020 versus the same period in the prior year primarily due to lower sales volumes across our European business units driven by natural decline of our production and a decline in realized pricing on our crude oil. These sales decreases were partially offset by an increase in realized pricing on our European gas sales and an increase in sales volumes in Australia due to the timing of our liftings. Sales decreased by $302.5 million for the year ended December 31, 2020 versus the same period in the prior year due to significant decreases in realized prices driven by lower year-over-year commodity prices, including severely depressed commodity prices during second quarter of 2020. In addition to pricing decreases, sales volumes were down primarily due to natural decline across all areas and production decreases in France following downtime at the Grandpuits refinery and restricted field activity resulting from COVID-19 confinement measures put in place by the French government. Royalties France Netherlands Germany Central and Eastern Europe International Q4 2020 $M (9,416) (150) 1,190 (62) (8,438) $/boe (10.28) (0.22) 4.44 (6.07) (3.02) Q4 2019 $M (10,265) (130) (587) (254) (11,236) $/boe (9.73) (0.17) (1.99) (10.00) (3.85) 2020 $M (32,069) (444) (990) (644) (34,147) $/boe (9.75) (0.16) (0.88) (5.55) (2.97) 2019 $M (43,895) (1,469) (5,264) (253) (50,881) $/boe (11.15) (0.49) (4.20) (9.90) (3.90) Royalties in our International core region are primarily incurred in France, where royalties include charges based on a percentage of sales and fixed per boe charges. Royalties decreased in our International core region in the three months and year ended December 31, 2020 versus the same periods in the prior year due to lower sales prices in France and Netherlands combined with the full year impact of a ruling reducing 2020 Germany gas royalties recorded in the fourth quarter. Our production in Australia and Ireland is not subject to royalties. Transportation France Germany Ireland International Q4 2020 $M (4,264) (1,537) (898) (6,699) $/boe (4.66) (5.74) (1.68) (2.40) Q4 2019 $M (3,215) (963) (1,008) (5,186) $/boe (4.23) (3.27) (1.55) (1.77) 2020 $M (14,604) (5,839) (4,425) (24,868) $/boe (4.44) (5.19) (1.94) (2.16) 2019 $M (21,609) (5,117) (4,459) (31,185) $/boe (5.49) (4.09) (1.57) (2.39) Transportation expense for the three months ended December 31, 2020 increased versus the same period in 2019 due to increased costs related to transportation system maintenance in France. For the year ended December 31, 2020, transportation expense decreased versus the same period in 2019 due mainly to lower costs in France. In France, the year-over-year decrease was due to additional costs incurred in 2019 relating to the Grandpuits refinery outage which resulted in the need to arrange alternative delivery points and transportation methods at a higher incremental cost. In Germany, the changes related to the timing of prior period adjustments. Our production in Australia, Netherlands and Central and Eastern Europe is not subject to transportation expense. Vermilion Energy Inc. ■ Page 23 ■ 2020 Annual Report Operating expense Australia France Netherlands Germany Ireland Central and Eastern Europe International Q4 2020 $M (14,438) (16,230) (7,772) (5,643) (3,232) (99) (47,414) $/boe (36.39) (17.73) (11.64) (21.07) (6.06) (9.69) (16.99) Q4 2019 $M (8,438) (16,142) (9,758) (7,405) (2,854) (59) (44,656) $/boe (34.09) (16.38) (13.11) (25.14) (4.40) (2.32) (15.28) 2020 $M (54,581) (57,128) (32,410) (20,732) (15,232) (464) (180,547) $/boe (29.59) (17.36) (11.38) (18.42) (6.67) (4.00) (15.69) 2019 $M (49,810) (61,281) (32,125) (24,970) (12,431) (301) (180,918) $/boe (25.20) (15.57) (10.64) (19.93) (4.39) (11.78) (13.87) Operating expenses for Q4 2020 increased by $2.8 million compared to Q4 2019. This is mainly due to increased costs in Australia where operating expenses are deferred on the balance sheet until oil is sold at which point the related expenses are recognized into income. Q4 2019 had a larger build of inventory compared to the draws made in Q4 2020, therefore higher costs related to inventory were incurred in Q4 2020. This increase was partially offset by lower activity levels in Germany and lower facility maintenance and repair costs in the Netherlands. For the year ended December 31, 2020, operating expenses remained relatively consistent on a dollar basis and increased by 13.1% on a per boe basis. Cost reductions were due to reduced activity in France during the COVID-19 confinement period earlier in 2020 and lower activity levels in Germany. This was offset by increased costs in Australia resulting from a higher deferral of costs relating to inventory builds on the balance sheet in 2019 offset by lower major project expense work. Cost increases in Ireland were due to increased maintenance activity. Vermilion Energy Inc. ■ Page 24 ■ 2020 Annual Report Consolidated Financial Performance Review ($M except per share) Total assets Long-term debt Petroleum and natural gas sales Net (loss) earnings Net (loss) earnings per share Basic Diluted Cash dividends ($/share) Fund flows from operations Dec 31, 2020 Dec 31, 2019 4,109,139 1,933,848 1,119,545 (1,517,427) 5,866,120 1,924,665 1,689,863 32,799 Dec 31, 2018 6,270,671 1,796,207 1,678,117 271,650 (9.61) (9.61) 0.58 0.21 0.21 2.76 1.93 1.91 2.72 Sales Royalties Transportation Operating General and administration Corporate income tax recovery (expense) PRRT Interest expense Realized gain on derivatives Realized foreign exchange gain (loss) Realized other income Fund flows from operations Q4 2020 $M 316,198 (28,108) (17,057) (106,576) (18,642) 6,532 (4,038) (19,808) 790 1,329 4,592 135,212 $/boe 38.57 (3.43) (2.08) (13.00) (2.27) 0.80 (0.49) (2.42) 0.10 0.16 0.56 16.50 Q4 2019 $M 388,802 (40,679) (15,570) (110,583) (16,569) 5,835 (1,453) (19,169) 22,712 2,013 253 215,592 2020 $M $/boe 44.00 1,119,545 (106,554) (4.60) (67,711) (1.76) (417,251) (12.52) (60,840) (1.88) 5,810 0.66 (20,151) (0.16) (75,077) (2.17) 109,093 2.57 11,110 0.23 4,091 0.03 502,065 24.40 2019 $M $/boe 31.90 1,689,863 (163,666) (3.04) (1.93) (72,446) (440,078) (11.89) (58,976) (1.73) (26,283) 0.17 (25,947) (0.57) (81,377) (2.14) 84,219 3.11 (4,954) 0.32 7,700 0.12 908,055 14.32 $/boe 46.12 (4.47) (1.98) (12.01) (1.61) (0.72) (0.71) (2.22) 2.30 (0.14) 0.21 24.77 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. General and administration • • General and administration expense increased by 11.1% in Q4 2020 versus Q4 2019 due lower recoveries as a result of lower salary allocations from reduced capital activity in Q4 2020 and costs associated with work-force reductions. General and administration expense for the year ended December 31, 2020 were relatively consistent with 2019 as cost savings and government subsidies recorded during the year were offset by higher employee costs incurred in 2020 and lower capitalized costs. PRRT and corporate income taxes • • PRRT increased in Q4 2020 versus Q4 2019 due to higher sales. For the year ended December 31, 2020, PRRT decreased versus the prior year comparable period due to lower Australia sales. Corporate income taxes in Q4 2020 and for the year ended December 31, 2020 versus the comparable periods decreased due to tax recoveries resulting from the significant decreases in commodity prices during the year. Interest expense • Interest expense remained relatively consistent between Q4 2020 and Q4 2019. For the year ended December 31, 2020, interest expense decreased by 7.7% versus the prior year comparable period due to declining market interest rates as a function of the impact of COVID-19. Vermilion Energy Inc. ■ Page 25 ■ 2020 Annual Report Realized gain or loss on derivatives • • Realized gains on derivatives relate to receipts for European natural gas and crude oil hedges. For the year ended December 31, 2020, realized gains also included the receipt of $16.8 million (US $12.7 million) due to the reset the Euro principal amount of the CAD-to-EUR cross currency interest rate swap in Q1 2020, and the receipt of $25.5 million (US $18.2 million) as a result of a number of transactions that resulted in the termination of the USD-to-CAD and CAD-to-EUR cross currency interest swaps in Q2 2020. A listing of derivative positions as at December 31, 2020 is included in “Supplemental Table 2” of this MD&A. Realized other income • Realized other income for the year ended December 31, 2020 primarily relates to amounts in Q4 2020 for funding under the Saskatchewan Accelerated Site Closure program to complete abandonment and reclamation on inactive oil and gas wells and facilities. Net earnings The following table shows a reconciliation from fund flows from operations to net (loss) earnings: ($M) Fund flows from operations Equity based compensation Unrealized loss on derivative instruments Unrealized foreign exchange gain (loss) Unrealized other expense Accretion Depletion and depreciation Deferred tax Impairment Net (loss) earnings Q4 2020 135,212 (11,012) (66,863) 50,519 (202) (9,134) (148,219) (8,008) — (57,707) Q4 2019 215,592 (11,233) (30,362) 42,848 (204) (7,833) (139,940) (21,335) (46,056) 1,477 2020 502,065 (42,906) (100,955) 49,012 (833) (35,318) (580,461) 374,313 (1,682,344) (1,517,427) 2019 908,055 (64,233) (57,427) 57,225 (825) (32,667) (675,177) (56,096) (46,056) 32,799 Fluctuations in net earnings 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. Equity based compensation expense remained consistent between the three months ended December 31, 2020 and three months ended December 31, 2019. Equity based compensation expense for the year ended December 31, 2020 decreased versus the prior year comparable period due to the lower value of VIP awards outstanding in the current period. Unrealized gain or loss on derivative instruments Unrealized gain or loss on derivative instruments arise as a result of changes in forecasts for future prices and rates. 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. USD-to-CAD cross currency interest rate swaps may be entered into to hedge the foreign exchange movements on USD borrowings on our revolving credit facility. As such, unrealized gains and losses on our cross currency interest swaps are offset by unrealized losses and gains on foreign exchange relating to the underlying USD borrowings from our revolving credit facility. In Q3 2019, we entered into two equity swaps to hedge the exposure of our long-term incentive plans. The swaps are expected to settle in September 2021 and October 2021. Included in current liabilities and net debt as at December 31, 2020, is a mark-to-market liability of $59.6 million relating to the positions settling in September 2021 and October 2021. For the three months ended December 31, 2020, we recognized a net unrealized loss on derivative instruments of $66.9 million. This consists of a $47.0 million unrealized loss on our European natural gas commodity derivative instruments and a $40.2 million unrealized loss on our USD-to-CAD foreign exchange swaps. This was partially offset by an unrealized gain of $9.6 million from our equity swaps and an unrealized gain of $8.6 million on our North American natural gas commodity derivative instruments. Vermilion Energy Inc. ■ Page 26 ■ 2020 Annual Report For the year ended December 31, 2020, we recognized a net unrealized loss on derivative instruments of $101.0 million. This consists of unrealized losses of $59.1 million on our equity swaps and $51.6 million from our European natural gas commodity derivative instruments. These are partially offset by unrealized gains of $9.4 million on our crude oil commodity derivative instruments. 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. Unrealized foreign exchange gains and losses result from translating these monetary assets and liabilities from their underlying currency to the Canadian dollar. In 2020, unrealized foreign exchange gains and losses primarily resulted from: • The translation of Euro denominated intercompany loans from Vermilion Energy Inc. to our international subsidiaries. An appreciation in the Euro against the Canadian dollar will result in an unrealized foreign exchange gain (and vice-versa). Under IFRS, the offsetting foreign exchange loss or gain is recorded as a currency translation adjustment within other comprehensive income. As a result, consolidated comprehensive income reflects the offsetting of these translation adjustments while net earnings reflects only the parent company's side of the translation. The translation of USD borrowings on our revolving credit facility. The unrealized foreign exchange gains or losses on these borrowings are offset by unrealized derivative gains or losses on associated USD-to-CAD cross currency interest rate swaps (discussed further below). The translation of our USD denominated senior unsecured notes prior to June 12, 2019 and from May 5, 2020 onward. During the period between June 12, 2019 and May 5, 2020 the USD senior notes were hedged by a USD-to-CAD cross currency interest rate swap. Subsequent to the termination of these instrument, amounts recognized in the hedge accounting reserve will be recognized into earnings through unrealized foreign exchange loss over the period of the hedged cash flows. • • For the three months ended December 31, 2020, we recognized a net unrealized foreign exchange gain of $50.5 million. The impact of the US dollar weakening 5.0% against the Canadian dollar resulted in an unrealized gain of $42.0 million and $19.7 million on our USD borrowings from our revolving credit facility and our senior unsecured notes, respectively. These were partially offset primarily due to the strengthening of the Euro against the Canadian dollar resulting in net unrealized losses of $7.6 million on intercompany loans. For the year ended December 31, 2020, we recognized a net unrealized foreign exchange gain of $49.0 million primarily due to unrealized gains on our USD-to-CAD and CAD-to-EUR cross currency interest swaps of $36.4 million, and impacts of the US dollar weakening 2.0% against the Canadian dollar resulting in unrealized gains on our USD borrowings from our revolving credit facility and our senior unsecured notes of $8.5 million and 4.0 million, respectively. As at December 31, 2020, a $0.01 appreciation of the Euro against the Canadian dollar would result in a $0.9 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 $2.7 million decrease to net earnings as a result of an unrealized loss on foreign exchange. Accretion Accretion expense is recognized to update the present value of the asset retirement obligation balance. For the year ended December 31, 2020 accretion expense increased versus all comparable period primarily due to a weakening Canadian dollar versus the Euro. 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, depletable base (net book value of capital assets and future development costs), and relative production mix. Depletion and depreciation on a per boe basis for Q4 2020 of $18.08 increased from $15.84 due to the impact of reflecting an increase in proved and probable reserves in Q4 2019. For the year ended December 31, 2020, depletion and depreciation decreased on a per boe basis to $16.54 (December 31, 2019 -$18.43) primarily due to impairment charges taken in 2020. Vermilion Energy Inc. ■ Page 27 ■ 2020 Annual Report 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 derecognition or recognition of deferred tax assets, and changes in enacted or substantively enacted tax rates. For the three months and year ended December 31, 2020, a deferred tax recovery was recognized of $8.0 million and $374.3 million, respectively, as a result of the impairment charges recorded in those periods. Impairment Impairment losses are recognized when indicators of impairment arise and the carrying amount of a cash generating unit ("CGU") exceeds its recoverable amount, determined as the higher of fair value less costs of disposal or value-in-use. In the fourth quarter of 2020, indicators of impairment were present in our France CGUs due to a decrease in estimated reserves as a result of economic revisions. As a result of the indicators of impairment, the Company performed impairment tests on its four France CGUs and the recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 9.5%. Based on the results of the impairment tests completed, recoverable amounts were determined to be greater than the carrying values of the CGUs tested and no impairment charges were recorded. In the third quarter of 2020, indicators of impairment were present due to a decline in the Company’s market capitalization. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $35.4 million (net of $12.4 million income tax recovery) in the Neocomian CGU due to increased estimated transportation expenses as a result of an announcement during the quarter that the third-party Grandpuits refinery plans on converting into a zero-crude platform in 2021. As a result of this change, the Company's estimates that incremental transportation expenses will be incurred to transport the crude oil production in the Neocomian, Chaunoy, and Champotran CGUs to alternative refineries in France. In the second quarter of 2020, indicators of impairment were present due to a decline in the Company’s market capitalization. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $53.1 million (net of $16.6 million income tax recovery). In the first quarter of 2020, indicators of impairment were present due to global commodity price forecasts deteriorating from decreases in demand and an increase of supply around the world. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $1.2 billion (net of $0.4 billion income tax recovery). Vermilion Energy Inc. ■ Page 28 ■ 2020 Annual Report Taxes Current income tax rates Vermilion typically pays corporate income taxes in France, Netherlands, and Australia. In addition, Vermilion pays PRRT in Australia which is a profit based tax applied at a rate of 40% on sales less operating expenses, capital expenditures, and other eligible expenditures. PRRT is deductible in the calculation of taxable income in Australia. For 2020 and 2019, taxable income was subject to corporate income tax at the following statutory rates: 2020 25.3 % 21.0 % 28.9 % 50.0 % 31.6 % 25.0 % 30.0 % 2019 26.7 % 21.0 % 32.0 % 50.0 % 31.8 % 25.0 % 30.0 % Jurisdiction Canada United States France Netherlands (1) Germany Ireland Australia (1) ($M) Canada United States France Netherlands Germany Ireland Australia Total (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. Tax legislation changes On July 1, 2020, the Alberta government reduced the provincial corporate tax rate from 10% to 8%, accelerating the previously enacted schedule of rate reductions. On December 28, 2019, the French Parliament approved the Finance Bill for 2020. The Finance Bill for 2020 provides for a progressive decrease of the French corporate income tax rate for companies with sales below €250 million from 32.0% to 25.8% by 2022, with a reduction in 2021 to 27.4%. Tax pools As at December 31, 2020, we had the following tax pools: Oil & Gas Assets Tax Losses Other Total (1) (2) (2) (3) (3) (1) 1,962,908 207,751 383,841 46,484 160,033 — 253,918 3,014,935 (4) (7) (6) (4) (5) (4) 1,305,737 167,157 62,028 20,351 148,563 1,173,198 — 2,877,034 21,333 25,522 11,422 1,387 11,419 7,377 — 78,460 3,289,978 400,430 457,291 68,222 320,015 1,180,575 253,918 5,970,429 (2) (3) (4) (5) (6) (7) Deduction calculated using various declining balance rates. Deduction calculated using a combination of straight-line over the assets life and unit of production method. Deduction calculated using a unit of production method. Tax losses can be carried forward and applied at 100% against taxable income. 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. 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. Tax losses of $47 million created prior to January 1, 2018 are carried forward and applied at 100% against taxable income, tax losses of $120 million created after January 1, 2018 are carried forward and applied to 80% of taxable income in each taxation year. Vermilion Energy Inc. ■ Page 29 ■ 2020 Annual Report Financial Position Review Balance sheet strategy We regularly review whether our forecast of fund flows from operations is sufficient to finance planned capital expenditures, abandonment and reclamation expenditures, and dividends. To the extent that fund flows from operations forecasts are not expected to be sufficient to fulfill such expenditures, we will evaluate our ability to finance any shortfall by reducing some or all categories of expenditures, reducing or eliminating dividends, with issuances of equity, or with debt (including borrowing using the unutilized capacity of our existing revolving credit facility). We have a long-term goal of maintaining a ratio of net debt to fund flows from operations of less than 1.5. Due to the significant decline in commodity prices following the outbreak of COVID-19 and the ensuing OPEC+ price war, our ratio of net debt to fund flows from operations continues to remain beyond our target of less than 1.5 and was 4.19 at December 31, 2020. We responded to this rapid change in market conditions by significantly reducing our cost structure, which included suspending our monthly dividend payment, reducing our capital expenditures, and identified expense savings that were executed in 2020. Going forward, we will continue to monitor for changes in forecasted fund flows from operations and, as appropriate, will adjust our exploration and development capital plans (and associated growth targets) to minimize any further increase to debt. As commodity prices improve, we intend to strengthen our balance sheet through the reduction of debt and will continue to target a ratio of net debt to fund flows from operations of less than 1.5. Net debt Net debt is reconciled to long-term debt, as follows: ($M) Long-term debt Current liabilities Current assets Net debt As at Dec 31, 2020 1,933,848 433,128 (260,993) 2,105,983 Dec 31, 2019 1,924,665 416,210 (347,681) 1,993,194 Ratio of net debt to four quarter trailing fund flows from operations 4.19 2.20 As at December 31, 2020, net debt increased to $2.1 billion (December 31, 2019 - $2.0 billion) primarily due to the impact of lower current assets and also due to increased borrowings on long-term debt. The Company will draw on unutilized capacity of the revolving credit facility to working capital deficiencies. The ratio of net debt to four quarter trailing fund flows from operations increased to 4.19 (December 31, 2019 - 2.20) due to lower four quarter trailing fund flows from operations as a result of lower commodity prices, combined with an increase in net debt. Long-term debt The balances recognized on our balance sheet are as follows: ($M) Revolving credit facility Senior unsecured notes Long-term debt As at Dec 31, 2020 1,555,215 378,633 1,933,848 Dec 31, 2019 1,539,225 385,440 1,924,665 Vermilion Energy Inc. ■ Page 30 ■ 2020 Annual Report Revolving Credit Facility In Q1 2020, we negotiated an extension to our $2.1 billion revolving credit facility to extend the maturity to May 31, 2024. As at December 31, 2020, Vermilion had in place a bank revolving credit facility maturing May 31, 2024 with terms and outstanding positions as follows: ($M) Total facility amount Amount drawn Letters of credit outstanding Unutilized capacity As at Dec 31, 2020 2,100,000 (1,555,215) (23,210) 521,575 Dec 31, 2019 2,100,000 (1,539,225) (10,230) 550,545 As at December 31, 2020, 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 EBITDA to consolidated interest expense Limit Dec 31, 2020 As at Less than 4.0 Less than 3.5 Greater than 2.5 3.48 2.82 8.12 Dec 31, 2019 1.94 1.56 13.46 total debt: Includes all amounts classified as “Long-term debt”, “Current portion of Our financial 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: • long-term debt”, and “Lease Consolidated 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 interest expense: Includes all amounts classified as "Interest expense", but excludes interest on operating leases as defined under IAS 17. • • • In addition, our revolving credit facility has provisions relating to our liability management ratings in Alberta and Saskatchewan whereby if our security adjusted liability management ratings fall below specified limits in a province, a portion of the asset retirement obligations are included in the definitions of consolidated total debt and consolidated total senior debt. An event of default occurs if our security adjusted liability management ratings breach additional lower limits for a period greater than 90 days. As of December 31, 2020, Vermilion's liability management ratings were higher than the specified levels, and as such, no amounts relating to asset retirement obligations were included in the calculation of consolidated total debt and consolidated total senior debt. Due to the OPEC+ price war in the first quarter of 2020 and the ongoing COVID-19 pandemic, worldwide crude oil and natural gas prices have significantly declined. The impacts of these decreases has had an adverse effect on the Company's financial position for the year ended December 31, 2020 and is expected to result in continued pressure on our forecasted cash flows and earnings. The Company is currently in compliance with all financial covenants related to its revolving credit facility, but is at risk of breaching one or more of the financial covenants if worldwide oil and natural gas prices decline in the future. If we believe we are at risk of being in non-compliance with our financial covenants, we will approach our lending syndicate and request temporary covenant relief or other measures to ensure the credit facility remains available. There is no certainty that discussions surrounding covenant relief or other measures would be successful. 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, 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 Energy Inc. ■ Page 31 ■ 2020 Annual Report 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, if redeemed during the twelve-month period beginning on March 15 of each of the years indicated below: Year 2021 2022 2023 and thereafter Redemption price 102.813 % 101.406 % 100.000 % Cross currency interest rate swaps On June 12, 2019, Vermilion entered into a series of cross currency interest rate swaps with a syndicate of banks. Vermilion applied hedge accounting to these derivative instruments. The cross currency interest rate swaps had an original maturity of March 15, 2025. The USD-to-CAD cross currency interest swaps were designated as the hedging instrument in a cash flow hedge while the CAD-to-EUR cross currency interest rate swaps were designated as the hedging instrument in a net investment hedge. During the quarter ended June 30, 2020, Vermilion executed a number of transactions that resulted in a termination of the cross currency interest rate swaps in exchange for $42.3 million ($16.8 million received in the three months ended March 30, 2020 and $25.5 million received in the three months ended June 30, 2020). As a result of the termination, Vermilion has discontinued hedge accounting and amounts previously recognized for the hedge reserve within accumulated other comprehensive income will be reclassified into net income over the remaining life of the senior unsecured notes. Shareholders' capital Dividends declared for the year ended December 31, 2020 were $90.1 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 to February 2020 March 2020 Monthly dividend per unit or share $0.170 $0.190 $0.200 $0.215 $0.230 $0.115 In the current economic and commodity outlook following the outbreak of COVID-19, there was uncertainty regarding our ability to achieve a 100% payout ratio at a reasonable level of capital expenditures. Therefore, in the first half of 2020, we reduced our 2020 capital budget and suspended our monthly dividend to strengthen the financial position of the Company during this period of weak commodity prices. We will evaluate our ability to finance any shortfall by reducing some or all categories of expenditures, with issuances of equity, or with debt (including borrowing using the unutilized capacity of our existing revolving credit facility). Our ability to restore a dividend will be dependent upon stronger commodity prices combined with a balance sheet that reflects the Company's ability to sustain such dividend over the long-term. The following table reconciles the change in shareholders’ capital: Shareholders’ Capital Balance at December 31, 2019 Shares issued for the Dividend Reinvestment Plan Vesting of equity based awards Equity based compensation Share-settled dividends on vested equity based awards Balance at December 31, 2020 Number of Shares ('000s) 156,290 619 1,103 415 297 158,724 Amount ($M) 4,119,031 8,277 49,188 3,203 1,461 4,181,160 As at December 31, 2020, there were approximately 6.2 million equity based compensation awards outstanding. As at March 5, 2021, there were approximately 158.9 million common shares issued and outstanding. Vermilion had a normal course issuer bid approved by the Toronto Stock Exchange that allowed us to purchase up to 7,750,000 common shares (representing approximately 5% of shares outstanding common shares) that commenced on August 9, 2019 and which expired on August 8, 2020. Vermilion did not purchase any shares during the period. Vermilion Energy Inc. ■ Page 32 ■ 2020 Annual Report At Vermilion's Annual General and Special Meeting held on April 28, 2020 shareholders of the Company approved a $3.7 billion reduction in the stated capital of Vermilion's common shares, with the $3.7 billion reduction deducted from the stated capital account maintained for the common shares of Vermilion and an offsetting increase to the contributed surplus account of Vermilion. The transaction did not result in an adjustment to the financial statements under IFRS. Contractual Obligations and Commitments As at December 31, 2020, we had the following contractual obligations and commitments: 1 - 3 years Less than 1 year ($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 2.63%. (2) Commitments denominated in foreign currencies have been translated using the related spot rates on December 31, 2020. 3 - 5 years 1,986,421 36,437 19,839 885 38,061 2,081,643 62,328 43,131 32,122 25,390 15,881 178,852 124,656 41,002 38,643 12,265 57,827 274,393 — 32,408 22,519 — — 54,927 After 5 years Total 2,173,405 152,978 113,123 38,540 111,769 2,589,815 Asset Retirement Obligations As at December 31, 2020, asset retirement obligations were $467.7 million compared to $618.2 million as at December 31, 2019. The decrease in asset retirement obligations is primarily attributable to an increase in the credit-adjusted risk-free rate from December 31, 2019 to December 31, 2020. This decrease was partially offset by changes in the estimated costs, accretion expense and the Euro strengthening against the Canadian dollar. The present value of the obligation is calculated using a credit-adjusted risk-free rate, calculated using a credit spread added to risk-free rates based on long-term, risk-free government bonds. Vermilion's credit spread is determined as the yield to maturity on its senior unsecured notes as at the reporting period. The risk-free rates and credit spread used as inputs to discount the obligations were as follows: Country specific risk-free rate Canada United States France Netherlands Germany Ireland Australia Credit spread added to above noted risk-free rates Dec 31, 2020 Dec 31, 2019 Change 1.2 % 1.6 % 0.3 % (0.6) % (0.2) % (0.1) % 1.3 % 10.0 % 1.7 % 2.4 % 0.9 % (0.1) % 0.3 % 0.6 % 1.6 % 5.3 % (0.5) % (0.8) % (0.6) % (0.5) % (0.5) % (0.7) % (0.3) % 4.7 % Vermilion Energy Inc. ■ Page 33 ■ 2020 Annual Report 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. COVID-19 The emergence of COVID-19 has resulted in emergency actions by governments worldwide, which has had an effect in all of our operating jurisdictions. The actions taken by these governments have typically included, but is not limited to travel bans, mandatory and self-imposed quarantines and isolations, social distancing, and the closing of non-essential businesses which has had significant negative effects on economies, including a substantial decline in crude oil and natural gas demand. The full extent of the risks surrounding the severity and timing of the COVID-19 pandemic is continually evolving; therefore, there is significant risk and uncertainty which may have a material and adverse effect on our operations. The following risks disclosed in our Annual Information Form for the year ended December 31, 2020 may be exacerbated as a result of the COVID-19 pandemic: market risks related to the volatility of oil and gas prices, volatility of foreign exchange rates, volatility of the market price of common shares, and hedging arrangements; operational risks related to increasing operating costs or declines in production levels, operator performance and payment delays, and government regulations; financing risks related to the ability to obtain additional financing, ability to service debt, and variations in interest rates and foreign exchanges rates; and other risks related to cyber-security as our workforce moves to remote connections, accounting adjustments, effectiveness of internal controls, and reliance on key personnel, management, and labour. Due to the COVID-19 pandemic, Vermilion has implemented social distancing measures which require deemed non-critical employees to work remotely and has encouraged critical staff to do the same. These measures may, but are not expected to have an effect on the design and performance of internal controls throughout the Company and will be continually monitored to mitigate any risks associated with changes in its control environment. Vermilion Energy Inc. ■ Page 34 ■ 2020 Annual Report   As part of our cyber security program, policies governing access, networks, and systems are reviewed at minimum on an annual basis. With increased work from home requirements due to COVID-19, a further risk assessment was performed against these policies that considered the changing cyber threat landscape. The result of this assessment was a series of recommendations that were implemented in the first half of 2020 to further strengthen the organization’s cyber resiliency while balancing the need to enable our workforce to continue to be efficient when working from home. Other than Vermilion's response to COVID-19, there has been no change in Vermilion’s internal control over financial reporting during the period covered by this MD&A that materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. Financial Risk Management To mitigate the risks affecting our business whenever possible, we seek to hire personnel with experience in specific areas. In addition, we provide continued training and development to staff to further develop their skills. When appropriate, we use third party consultants with relevant experience to augment our internal capabilities with respect to certain risks. We consider our commodity price risk management program as a form of insurance that protects our cash flow and rate of return. The primary objective of the risk management program is to support our dividends and our internal capital development program. The level of commodity price risk management that occurs is dependent on the amount of debt that is carried. When debt levels are higher, we will be more active in protecting our cash flow stream through our commodity price risk management strategy. When executing our commodity price risk management programs, we use derivative financial instruments encompassing over-the-counter financial structures as well as fixed and collar structures to economically hedge a part of our physical crude oil and natural gas production. We have strict controls and guidelines in relation to these activities and contract principally with counterparties that have investment grade credit ratings. Critical Accounting Estimates The preparation of financial statements in accordance with IFRS requires 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 ($467.7 million as at December 31, 2020) 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 the 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 $37.7 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. A 0.5% increase or decrease in the credit-adjusted risk-free rate would decrease or increase asset retirement obligations by approximately $26.8 million. Vermilion Energy Inc. ■ Page 35 ■ 2020 Annual Report The recognition of deferred tax assets 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. As at December 31, 2020, the deferred tax asset balance of $484.5 million primarily related to Canada as a deferred tax asset has not been recognized on our non-expiring tax loss pools in Ireland. In Canada, we have $36.0 million of non-expiring oil and gas tax pools where $9.0 million of deferred tax assets has not been recognized as there is uncertainty on our ability to fully use these pools based on estimated future taxable profits. Estimated future taxable profits are calculated using proved and probable reserves and forecast pricing. A 5% increase or decrease in sales would increase or decrease the amount of deferred tax assets recognized by approximately $5.0 million. In Ireland, we have $1.2 billion of non-expiring tax loss pools where $248.2 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. A 5% increase or decrease in sales would not increase or decrease the amount of deferred tax assets recognized. 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. Key judgments that are made to reserve estimates such as revisions in reserves, changes in forecast commodity prices, foreign exchange rates, capital or operating costs would impact the amount of depletion and depreciation recorded in a period. The estimated recoverable amount of cash generating units Each reporting period, we assess our CGUs for indicators of impairment or impairment reversal. If an indicator of impairment or impairment reversal is identified, we estimate the recoverable amount of the CGU. Judgment is required when determining whether indicators of impairment or impairment reversal exist, as well as judgments made when determining the recoverable amount of a CGU. Changes in any of the key judgments, such as a revision in reserves, changes in forecast commodity prices, foreign exchange rates, capital or operating costs would impact the estimated recoverable amount. In the fourth quarter of 2020, indicators of impairment were present in our France CGUs due to a decrease in estimated reserves as a result of economic revisions. As a result of the indicators of impairment, the Company performed impairment tests on its four France CGUs and the recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 9.5%. Based on the results of the impairment tests completed, recoverable amounts were determined to be greater than the carrying values of the CGUs tested and no impairment charges were recorded. A 1% increase in the assumed after-tax discount rate would reduce the estimated recoverable amount of assets tested and result in an impairment of $5.6 million while a 5% decrease in revenues (due to a decrease in commodity price forecasts or reserve estimates) would reduce the estimated recoverable amount of assets tested and result in an impairment of $24.8 million. In the third quarter of 2020, indicators of impairment were present due to a decline in the Company’s market capitalization. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $35.4 million (net of $12.4 million income tax recovery) in the Neocomian CGU due to increased estimated transportation expenses as a result of an announcement during the quarter that the third-party Grandpuits refinery plans on converting into a zero-crude platform in 2021. As a result of this change, the Company's estimates that incremental transportation expenses will be incurred to transport the crude oil production in the Neocomian, Chaunoy, and Champotran CGUs to alternative refineries in France. A 1% increase in the assumed after-tax discount rate would reduce the estimated recoverable amount of impaired assets by $5.2 million (resulting in a $53.0 million impairment) while a 5% decrease in revenues (due to a decrease in commodity price forecasts or reserve estimates) would reduce the estimated recoverable amount of impaired assets by $13.2 million (resulting in a $61.0 million impairment). Vermilion Energy Inc. ■ Page 36 ■ 2020 Annual Report In the second quarter of 2020, indicators of impairment were present due to a decline in the Company’s market capitalization. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $53.1 million (net of $16.6 million income tax recovery). A 1% increase in the assumed after-tax discount rate would reduce the estimated recoverable amount of impaired assets by $14.0 million (resulting in a $83.7 million impairment) while a 5% decrease in revenues (due to a decrease in commodity price forecasts or reserve estimates) would reduce the estimated recoverable amount of impaired assets by $37.5 million (resulting in a $107.2 million impairment). In the first quarter of 2020, indicators of impairment were present due to global commodity price forecasts deteriorating from decreases in demand and an increase of supply around the world. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $1.2 billion (net of $0.4 billion income tax recovery). A 1% increase in the assumed after-tax discount rate would reduce the estimated recoverable amount of impaired assets by $137.7 million (resulting in a $1.7 billion impairment) while a 5% decrease in revenues (due to a decrease in commodity price forecasts or reserve estimates) would reduce the estimated recoverable amount of impaired assets by $272.3 million (resulting in a $1.8 billion impairment). 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 Vermilion did not adopt any new accounting pronouncements as at December 31, 2020. 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 “Best in Class HSE”, our mission 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 2020 we: • • • • • • • • • • • • • • Maintained clear priorities around 5 key focus areas of HSE Culture, Communication and Knowledge Management, Management Systems, Health, and Environment & Operational Stewardship; Activated our Emergency Response and Business Continuity Plans to address COVID-19 with a primary focus on healthy and safe operations; Completed ongoing HSE Performance Monitoring through key performance indicator development, analysis and reporting; Continued comprehensive investigations of our incidents and near misses to ensure root causes were identified and corrective actions effectively implemented; Implemented action plans to address the findings of our latest HSE Perception Survey, which we conduct every three years. Our results all factored in the favorable range; Implemented a new Event and Environmental Management Information System; Implemented recently updated corporate standards updates related to operational risk management, contractor management, marine transportation, and environmental management; Continued reinforcement of the “Vermilion High 5”, an individual safety awareness initiative aimed at keeping front-line workers safe; Further developed and validated critical procedures and initiated competency assessments as part of fit-for-purpose training and competency programs; Submitted our First CDP Water report. Continued submitting our CDP Climate report; 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; Continued the development of a robust hazard identification and risk mitigation program specific to environmentally sensitive areas; Vermilion Energy Inc. ■ Page 37 ■ 2020 Annual Report • • • 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) In 2020 we continued to support recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) in our ESG strategy and reporting, focusing not only on climate but also on sustainability in a wider context. In 2020, our Board of Directors and senior management analyzed the results of their robust scenario analysis that was based on reporting from the World Economic Forum, including a “Gradual, Business as Usual” scenario and a “Rapid, 2ºC or lower, Sustainable Development” scenario. This included factors such as the influence of new technologies, technology growth, government policy, and emerging markets that will impact the speed of the energy transition, and the resulting risks and opportunities for Vermilion. Our 2020 performance in sustainability rankings such as CDP Climate, SAM, and Sustainalytics continued to be at the 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 through our sustainability reporting. In 2020, this included providing alignment with TCFD and SASB. 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 • • • • The Company received the top ranking for our peer group in SAM's 2020 Corporate Sustainability Assessment ("CSA”) and was selected for The Sustainability Yearbook 2021, indicating that our sustainability performance is within the top 15% of our industry (SAM's Upstream Oil & Gas and Integrated category). Vermilion was ranked top of our peer group in the Sustainalytics ESG Risk Rating. Vermilion maintained its MSCI ESG rating of AA in 2020. As of February 2021, our ISS decile ratings were 1 for both Environmental and Social QualityScores, which assess corporate disclosure and transparency practices in these areas, where 1 indicates the lowest risk. Vermilion Energy Inc. ■ Page 38 ■ 2020 Annual Report Climate-related Disclosures: TCFD 2(a) and 2(b) Vermilion has publicly communicated our identified climate-related risks and opportunities since our first annual CDP Climate Change response in 2014. We progressed this transparency by submitting our first CDP Water Security questionnaire in 2020. The following table summarizes climate- related issues as per TCFD Strategy recommendations 2(a) and 2(b). For more information on our sustainability- and climate-related governance, strategy, risk management, and metrics and targets, please see our 2021 Proxy Statement and Information Circular, our online sustainability reporting, particularly the Index and Performance Metrics sections, and our 2020 CDP Responses, which include additional details for the following summaries of risks and opportunities. Category / Issue Policy and Legal: Increased Pricing of GHG Emissions e.g. Carbon Tax Policy and Legal: Enhanced Emissions Reporting Obligations Policy and Legal and Technology: Mandates on and Regulation of Existing Products and Services Policy and Legal: Changes in Emissions Regulations Description of Impacts1 Potential Financial Impact Management Approach Short-term Transition Risks (0-3 Years) In April 2019, our Saskatchewan operations became subject to the federal Greenhouse Gas Pollution Pricing Act, with carbon tax rates set at $20 per tonne of CO2e in 2019, rising to $50 by 2022. In Alberta, the TIER system will apply a tax rate of $30 per tonne of CO2e commencing January 2020. Since carbon pricing mechanisms are vulnerable to changes in government policy, regions with upcoming elections, coalition governments or minority governments may be subject to changes that cannot yet be identified. We note the political focus in the EU and Canada on a COVID-19 economic recovery that is both climate-focused and responsive to social justice issues such as labour practices. Emissions reporting obligations are an ongoing risk and 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. Based on the current output of Vermilion's facilities in Canada and Europe and on the current regulated thresholds, the cost associated with meeting emission reporting obligations will likely increase in the 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. Based on the probable cost scenarios identified in our Carbon Liability Assessment Tool, our Canadian carbon tax liability is not expected to exceed $0.5MM/year in the medium term. The Ireland EU ETS liability is forecasted to be approximately $1.1MM/year between 2021 and 2025. The Ireland Carbon Tax liability is forecasted to be an additional approximately $0.3MM/year over this period. Commencing in 2021, our Netherlands operations will likely be subject to an indirect carbon tax applied to the price of fossil fuels. The cost implication of the tax is expected to be limited. Vermilion continues to monitor and comply with taxation requirements, engaging external subject matter experts and in-house experts in engineering, asset integrity, optimization, health safety & environment, and sustainability that assess our operations to determine where we are able to apply the principles of Operational Excellence supporting Integrated Sustainability. As a result, the potential financial impact is significantly decreased and anticipated to decrease further in the short term. Vermilion's ongoing efforts to reduce the energy intensity of our operations also contribute to managing this risk. The financial impact is anticipated to be realized as a small increase in operational cost associated with the management and quantification of emissions to meet new reporting requirements. This is built into Vermilion's operating expenses and is currently estimated at $0.4MM annually. 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. Operational changes to comply with methane reduction regulations is expected at approx. $1.5MM in the short term, with those associated with eliminating routine flaring in France not expected to exceed $0.5MM. Costs associated with the Netherlands MJA3 program are built into operating costs and no significant expenditures are anticipated in the short term. Vermilion is allocating resources to complete these works on a planned program basis, as opposed to a reactive single replacement program, resulting in an overall reduction in costs associated with the work. Tying in vented equipment to flaring infrastructure in Canada is an example of projects planned in the near term to address this risk. Medium-term Transition Risks (3-6 Years) 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 being 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. 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 $2.0MM. This does not include the cost associated with emission reduction projects completed on an annual basis, or previous projects that have annual emissions reductions. Medium-term Physical Risks (3-6 Years) Acute: Increased Severity of Extreme Weather Events such as Cyclones and Floods Vermilion owns and operates an offshore platform in the Wandoo field off northwestern Australia, co-owns and operates the Corrib project off the Irish coast, and owns and operates oil fields in the coastal area of SW France. Extreme weather events 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. Based on the value of the Wandoo Platform and a 1- in-10,000 year cyclonic event, the financial implications associated with damage due to a severe weather event is estimated at $234.5MM (total impact before insurance). The third-party costs associated with potential damages from extreme weather events are not tracked by Vermilion. Vermilion Energy Inc. ■ Page 39 ■ 2020 Annual Report 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 regulatory framework, both at a regional and corporate level. This includes the Sustainability Committee at the Board of Directors level, monthly Executive Committee meetings on Sustainability strategy and performance, and risk identification at the corporate and business unit level. 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 a robust asset integrity program that maintains our offshore facilities to their original design specifications of CAT 5 hurricane force. 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 severe weather event. Description of Impacts1 Potential Financial Impact Management Approach Category / Issue Market and Reputational: Changing Customer Behaviour Long-term Transition Risks (6-50 Years) 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 $156.0MM. The direct cost of Vermilion's operating excellence and risk management cannot be quantified on a single risk basis. 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. 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. For example, we have reduced the potential impact related to access in remote assets by using multi-well pads wherever possible. This reduces the aerial impact of these activities on the environment, habitat fragmentation and carbon emissions associated with lease construction and equipment mobilization/ demobilization. This would significantly decrease capital considerations in the event that limited frost days occurred. As these incidents are out of Vermilion's control, we take all measures possible to ensure effective emergency response to extreme weather events, to ensure the protection of the health and safety of our workers, contractors and the public, the protection of the environment and limiting the financial impact of the event. In the case of a longer term extreme precipitation event or drought, in the past Vermilion has implemented water management programs to reduce our reliance on fresh water sources to limit the potential impact on operations. Other than conventional berm protection, there is no measure available to protect Vermilion's assets in the Netherlands in the event that water levels rise to a level resulting in one of our main facilities being temporarily invaded by sea water. Based on Vermilion's assessment of the probability of these events occurring over the next 5 years being less than 0.05%, Vermilion has accepted this level of risk exposure. Vermilion currently includes a review of this risk in our annual risk management process. We have technical experts who provide input into renewable energy 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. Chronic: Changes in Temperature Extremes, Including Rising Mean Temperatures Long-term Physical Risks (6-50 Years) A decrease or increase in the temperature extremes experienced in winter/summer months (i.e. lower seasonal lows, higher seasonal highs) could result in an increase in fuel gas for a variety of equipment essential for safe production, along with additional equipment (e.g. building heaters, line heaters). This would require additional resources (infrastructure) as well as increase our carbon footprint. Temperature extremes also have the potential to increase capital costs associated with drilling, completion and workover operations due to increased timelines, decreased productivity, equipment breakdown, etc. For example, an overall increase in seasonal lows (warmer winters) would have a direct impact on Vermilion's more northern onshore operations and could result in a decrease in ability to access lands and increase construction capital requirements. 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. Chronic: Changes In Precipitation Patterns and Extreme Variability in Weather Patterns Chronic: Rising Sea Levels 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. 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. The financial implications of a single time event (i.e. wild fire) has been assessed on a case-specific basis, and the financial implications of this event is believed to be substantive (impact > $10.0MM). Vermilion maintains insurance to mitigate the potential impact of precipitation-related extreme events (i.e. Wildfire, Flooding). It has been estimated that a rise in sea level could have a maximum foreseeable financial impact of $91.3MM at our main gas processing facility Garijp (GTC) in the Netherlands, caused by an extreme tide/extreme wind event 1 in 10000 years. The cost of insurance coverage associated with this risk is estimated at $0.4MM per annum. Short-term Opportunities (0-3 Years) Products and Services: Development of New Products and Services through R&D and Innovation 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. 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 $2.0MM per year. Potential also exists for significant cost adjustments, as assets slated for abandonment would be repurposed to enable them to continue to generate energy. Vermilion Energy Inc. ■ Page 40 ■ 2020 Annual Report Category / Issue Products and Services: Access to New Markets Energy Source: Participation in Carbon Market Description of Impacts1 Potential Financial Impact Management Approach Short-term Opportunities (0-3 Years) More stringent global measures to reduce emissions from individual ships by 30 per cent by 2030, established through amendments to MARPOL Annex VI, came into force on Jan1 2020, limiting the sulphur content of bunker fuel to a maximum of 0.5%. Vermilion’s Australian Wando facility produces 4500 bbl/d of low sulphur crude oil that will be sought by refineries in the short term to meet IMO regulations. Vermilion conservatively foresees achieving a premium of $10/bbl for its Wandoo production over the next three years for cumulative incremental revenue of $49.3MM. Medium-term Opportunities (3-6 Years) Under the revised EU ETS Directive in effect 2021-2030, it is anticipated that there will be an active market and consumers for the offset credits generated at some of Vermilion's sustainability initiatives around the world. This upcoming shift in the cap and trade scheme will likely provide opportunities for Vermilion to generate certified energy reduction/offset credits through our geothermal cogeneration projects in France. 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 $0.5MM. Vermilion continues to access local markets for our low sulphur production, while exploring regions to expand our operations. Our Marketing group ensures that Vermilion meets its contractual obligation with our buyers in terms of volumes, delivery dates and crude quality, and maintain our reputation of being a reliable source of low sulphur feedstock to refineries. We are currently evaluating the benefit that certified offset credits from various emission reduction projects across our operations could provide. Examples of projects that have the potential to generate credits is our Tomato Greenhouse and eco-neighbourhood geothermal coproduction projects in France. Vermilion's project assessment framework is applied to each identified opportunity, including considerations associated with emissions offset. Products and Services: Shift in Consumer Preferences Long-term Opportunities (6-50 Years) 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. The short term impact of this regulatory change on gas pricing is anticipated to be low and increase to medium in the mid to long term. Once the regulations have come into effect and the implementation period has occurred, there is a potential to see an impact on the marketable price and demand for natural gas. As a natural gas and oil producer, Vermilion would benefit from an increase in marketable prices for natural gas in our Canadian operations. Based on 2019 production, an increase in gas price of $1 per MMBTU, the impact to sales would be approximately $54.0MM. 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. Products and Services: Ability to Diversify Business Activities 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. Energy Source: Shift Toward Decentralized Energy Generation 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. The financial impact of changing consumer preferences in difficult to quantify. We foresee opportunities in two distinct areas. We see opportunity in consumers selecting premium energy products, 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 or $36.6MM/yr (100,357 boe/d*365days*$1/ boe)based on $1 at 2019 production levels). The second opportunity we have identified, and are already receiving benefit from, is access to more stringent markets, supported by our environmental and sustainability performance. Vermilion has entered into the German, Hungarian, Croatian, and Slovak oil and gas operations in the last several years. Our sustainability performance has supported our entry into these markets. On an operating netback (sales) basis, based on current estimates, the financial premium of our non- Canadian assets was $450.0MM. 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). Notes: (1) Risk summary is based on our fiscal year 2019 environmental reporting through CDP Climate. Fiscal year 2020 environmental reporting will be available in mid-2021. Vermilion Energy Inc. ■ Page 41 ■ 2020 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 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 do 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, 2020, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the President, for this specific purpose of acting in the capacity of 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 President, for this specific purpose of acting in the capacity of 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, 2020. The effectiveness of Vermilion’s internal control over financial reporting as of December 31, 2020 has been audited by Deloitte LLP, as reflected in their report included in the 2020 audited annual financial statements filed with Vermilion Energy Inc. ■ Page 42 ■ 2020 Annual Report the US Securities and Exchange Commission. No changes were made to Vermilion’s internal control over financial reporting during the year ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting. Vermilion Energy Inc. ■ Page 43 ■ 2020 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 United States 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 43.65 (5.03) (2.60) (12.92) 23.10 39.70 (11.64) (1.06) (10.05) 16.95 58.11 (10.28) (4.66) (17.73) 25.44 49.63 — — 49.63 51.53 (1.17) (13.10) (20.53) 16.73 — — — — Q4 2020 Natural Gas $/mcf 2.82 (0.06) (0.20) (1.41) 1.15 1.97 (0.59) — (1.48) (0.10) — — — — — 5.70 (0.04) (1.97) 3.69 5.64 1.23 (0.32) (3.56) 2.99 7.23 (0.28) (1.01) 5.94 Total $/boe 32.45 (3.08) (2.02) (11.05) 16.30 (1.60) 14.70 33.24 (9.76) (0.82) (9.77) 12.89 (5.22) 7.67 58.11 (10.28) (4.66) (17.73) 25.44 (3.68) (0.15) 21.61 34.40 (0.22) (11.64) 22.54 — 4.74 27.28 39.87 4.44 (5.74) (21.07) 17.50 (7.44) 10.06 43.38 (1.68) (6.06) 35.64 (0.07) 35.57 Liquids $/bbl 36.86 (4.25) (2.51) (12.05) 18.05 39.43 (10.30) (0.86) (9.16) 19.11 55.39 (9.74) (4.44) (17.36) 23.85 45.99 — — 45.99 48.43 (2.18) (11.73) (21.08) 13.44 — — — — 2020 Natural Gas $/mcf 2.06 (0.05) (0.19) (1.26) 0.56 1.77 (0.50) — (1.39) (0.12) — — — — — 3.79 (0.03) (1.92) 1.84 3.69 (0.05) (0.36) (2.87) 0.41 4.26 (0.32) (1.11) 2.83 Total $/boe 26.38 (2.55) (1.92) (10.13) 11.78 (1.18) 10.60 32.93 (8.65) (0.67) (8.97) 14.64 (3.68) 10.96 55.39 (9.75) (4.44) (17.36) 23.84 (3.98) (0.04) 19.82 23.02 (0.16) (11.38) 11.48 (0.43) 1.32 12.37 30.40 (0.88) (5.19) (18.42) 5.91 (5.80) 0.11 25.59 (1.94) (6.67) 16.98 (0.26) 16.72 Q4 2019 Total $/boe 2019 Total $/boe 38.38 (4.48) (1.93) (11.30) 20.67 (1.38) 19.29 43.77 (10.17) — (9.56) 24.04 (4.01) 20.03 80.87 (10.67) (3.34) (16.78) 50.08 (5.01) (5.16) 39.91 33.88 (0.17) (13.11) 20.60 (1.03) 15.05 34.62 39.14 (1.99) (3.27) (25.14) 8.74 (6.64) 2.10 33.65 (1.55) (4.40) 27.70 (0.75) 26.95 37.82 (4.30) (1.88) (11.09) 20.55 (1.07) 19.48 44.17 (10.96) — (9.59) 23.62 (4.43) 19.19 83.01 (11.15) (5.49) (15.57) 50.80 (3.91) (5.45) 41.44 37.37 (0.49) (10.64) 26.24 (0.88) 1.31 26.67 45.75 (4.20) (4.09) (19.93) 17.53 (6.75) 10.78 36.81 (1.57) (4.39) 30.85 (0.88) 29.97 Vermilion Energy Inc. ■ Page 44 ■ 2020 Annual Report     Australia Sales Operating PRRT (1) Operating netback General and administration Current income taxes Fund flows from operations netback Total Company Sales Realized hedging gain (loss) 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 Liquids $/bbl 75.99 (36.39) (10.18) 29.42 49.14 (1.15) (6.05) (2.87) (15.79) (0.87) 22.41 Q4 2020 Natural Gas $/mcf — — — — 4.13 0.29 — (0.18) (1.56) — 2.68 Total $/boe 75.99 (36.39) (10.18) 29.42 (2.56) 7.55 34.41 38.57 0.10 (3.43) (2.08) (13.00) (0.49) 19.67 (2.27) (2.42) 0.16 0.56 0.80 16.50 Liquids $/bbl 76.70 (29.59) (10.93) 36.18 44.22 3.46 (5.22) (2.63) (14.53) (1.04) 24.26 2020 Natural Gas $/mcf — — — — 2.77 0.45 (0.06) (0.18) (1.44) — 1.54 Total $/boe 76.70 (29.59) (10.93) 36.18 (2.08) 1.14 35.24 31.90 3.11 (3.04) (1.93) (11.89) (0.57) 17.58 (1.73) (2.14) 0.32 0.12 0.17 14.32 Q4 2019 Total $/boe 2019 Total $/boe 88.35 (34.09) (5.87) 48.39 (5.97) (2.00) 40.42 44.00 2.57 (4.60) (1.76) (12.52) (0.16) 27.53 (1.88) (2.17) 0.23 0.03 0.66 24.40 93.33 (25.20) (13.13) 55.00 (2.50) (4.25) 48.25 46.12 2.30 (4.47) (1.98) (12.01) (0.71) 29.25 (1.61) (2.22) (0.14) 0.21 (0.72) 24.77 (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 45 ■ 2020 Annual Report   Supplemental Table 2: Hedges The prices in these tables may represent the weighted averages for several contracts with foreign currency amounts translated to the disclosure currency using forward rates as at the month-end date. 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, 2020: Unit Currency Bought Put Volume Weighted Average Bought Put Price Weighted Average Sold Call Price Weighted Average Sold Put Price Sold Swap Volume Weighted Average Sold Swap Price Bought Swap Volume Weighted Average Bought Swap Price Sold Put Volume Sold Call Volume Dated Brent Q1 2021 Q2 2021 WTI Q1 2021 Q2 2021 AECO Q2 2021 Q3 2021 Q4 2021 bbl bbl bbl bbl mcf mcf mcf USD USD USD USD CAD CAD CAD AECO Basis (AECO less NYMEX Henry Hub) Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 NYMEX Henry Hub Q1 2021 Q2 2021 Q3 2021 Q4 2021 mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf USD USD USD USD USD USD USD USD USD USD USD USD Ventura Basis (Ventura less NYMEX Henry Hub) Q1 2021 Q2 2021 Q3 2021 Q4 2021 SoCal Border Q1 2021 Conway Propane Q1 2021 mcf mcf mcf mcf USD USD USD USD mcf USD bbl USD 1,000 — 4,500 4,000 47.50 — 45.00 45.00 1,000 — 4,500 4,000 53.75 — 51.26 53.50 1,000 — 4,500 4,000 40.00 — 37.50 37.50 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 15,000 10,000 10,000 10,000 2.73 2.65 2.65 2.65 15,000 10,000 10,000 10,000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2.90 2.77 2.77 2.77 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2,000 500 4,300 2,150 9,478 9,478 3,194 30,000 45,000 45,000 35,054 30,000 35,000 35,000 11,793 33,500 28,500 28,500 21,870 — — — — 49.18 47.50 45.51 45.54 2.12 2.12 2.12 (1.11) (1.08) (1.08) (1.09) (1.10) (1.09) (1.09) (1.09) 2.86 2.83 2.83 2.78 — — — — 5,000 3.40 500 56% WTI — — — — — — — — — — — — — — — — — — — 10,000 10,000 10,000 3,370 — — — — — — — — — — — — — — — — — — — — — — — 0.04 0.04 0.04 0.04 — — — — Vermilion Energy Inc. ■ Page 46 ■ 2020 Annual Report Unit Currency Bought Put Volume Weighted Average Bought Put Price Weighted Average Sold Call Price Weighted Average Sold Put Price Weighted Average Sold Swap Price Bought Swap Volume Weighted Average Bought Swap Price Sold Swap Volume Sold Put Volume Sold Call Volume mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR 58,962 49,135 49,135 58,962 34,394 27,024 14,740 14,740 7,370 2,457 2,457 2,457 2,457 2,457 2,457 2,457 5.37 5.37 5.37 5.37 5.18 5.07 4.86 4.86 4.74 4.25 4.25 4.84 4.84 4.84 4.84 4.84 61,419 49,135 49,135 58,962 34,394 27,024 14,740 14,740 7,370 2,457 2,457 2,457 2,457 2,457 2,457 2,457 5.45 5.43 5.42 5.36 5.88 5.64 5.42 5.41 4.96 3.93 3.92 5.64 5.64 5.64 5.64 5.64 58,962 49,135 49,135 58,962 34,394 27,024 14,740 14,740 7,370 2,457 2,457 2,457 2,457 2,457 2,457 2,457 3.88 3.87 3.87 3.88 3.63 3.50 3.42 3.42 3.32 2.93 2.93 3.52 3.52 3.52 3.52 3.52 2,457 2,457 2,457 2,457 2,457 2,457 2,457 2,457 — — — — — — — — 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — NBP Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 TTF Q2 2021 Q3 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 VET Equity Swaps Swap Swap Jan 2020 - Sep 2021 Jan 2020 - Oct 2021 Foreign Currency Swaps Swap Jan 2021 Notional Amount 1,200,342,790 USD Initial Share Price 20.9788 CAD 22.4587 CAD Notional Amount 1,570,298,550 CAD Share Volume 2,250,000 1,500,000 Average Rate 1.3082 The following sold option instruments allow the counterparties, at the specified date, to enter into a derivative instrument contract with Vermilion at the detailed terms: Period if Option Exercised Unit Currency NYMEX Option Expiration Date Bought Put Volume Weighted Average Bought Put Price Sold Call Volume Weighted Average Sold Call Price Sold Put Volume Weighted Average Sold Put Price Weighted Average Sold Swap Price Sold Swap Volume Apr 2021 - Oct 2021 mcf USD 24-Mar-21 NBP Jan 2022 - Dec 2022 mcf EUR 30-Jun-21 Dated Brent Apr 2021 - Mar 2022 bbl USD 31-Mar-21 — — — — — — — — — — — — — — — — — — 10,000 2.90 2,457 5.13 500 52.00 Vermilion Energy Inc. ■ Page 47 ■ 2020 Annual Report Supplemental Table 3: Capital Expenditures and Acquisitions By classification ($M) Drilling and development Exploration and evaluation Capital expenditures Acquisitions Acquisitions By category ($M) Drilling, completion, new well equip and tie-in, workovers and recompletions Production equipment and facilities Seismic, studies, land and other Capital expenditures Acquisitions Total capital expenditures and acquisitions Capital expenditures by country ($M) Canada United States France Netherlands Germany Ireland Australia Corporate Total capital expenditures Acquisitions by country ($M) Canada United States Netherlands Germany Corporate Total acquisitions Q4 2020 Q3 2020 52,903 6,991 59,894 4,821 4,821 29,762 1,568 31,330 6,720 6,720 Q4 2019 97,114 3,511 100,625 2020 352,481 14,721 367,202 9,165 9,165 25,810 25,810 Q4 2020 Q3 2020 Q4 2019 2020 72,515 285,401 42,063 21,866 (4,035) 59,894 4,821 64,715 13,220 15,800 2,310 31,330 6,720 38,050 Q4 2020 Q3 2020 32,942 839 12,830 3,417 3,127 211 4,392 2,136 59,894 3,837 5,738 12,638 1,553 1,558 928 3,926 1,152 31,330 29,221 (1,111) 100,625 9,165 109,790 Q4 2019 66,643 3,132 8,745 9,651 5,177 923 6,452 (98) 100,625 Q4 2020 Q3 2020 Q4 2019 791 946 — 828 2,256 4,821 6,621 90 — 9 — 6,720 5,003 575 — 1,456 2,131 9,165 70,483 11,318 367,202 25,810 393,012 2020 199,141 66,120 42,328 10,105 15,819 1,823 24,520 7,346 367,202 2020 13,111 7,643 — 1,420 3,636 25,810 2019 486,677 36,487 523,164 38,472 38,472 2019 411,390 87,711 24,063 523,164 38,472 561,636 2019 293,744 57,196 74,641 23,605 21,684 1,372 30,550 20,372 523,164 2019 24,064 3,799 908 7,570 2,131 38,472 In 2020, included in cash expenditures on acquisitions of $25.8 million is: $14.4 million relating to the carry component of farm-in arrangements; $11.7 million paid to acquire land; $0.5 million in asset improvements incurred subsequent to acquisitions for compliance with safety, environmental, and Vermilion's operating standards; and $0.8 million net received from vendors in relation to the purchase of assets from other oil and gas producers. Vermilion Energy Inc. ■ Page 48 ■ 2020 Annual Report Supplemental Table 4: Production Q4/20 Q3/20 Q2/20 Q1/20 Q4/19 Q3/19 Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Canada Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) Other NGLs (1) (bbls/d) NGLs (bbls/d) 19,301 19,847 22,545 22,767 23,259 23,610 23,973 25,067 25,640 24,602 13,103 5,960 4,662 5,200 5,047 4,634 4,140 4,072 4,872 4,096 3,918 3,875 3,905 3,312 7,334 8,350 8,248 6,943 7,005 6,632 7,352 6,968 6,816 6,126 5,589 5,106 11,996 13,550 13,295 11,577 11,145 10,704 12,224 11,064 10,734 10,001 9,494 8,418 Conventional natural gas (mmcf/d) 135.27 155.15 164.08 151.16 145.14 145.14 151.87 151.37 146.65 136.77 127.32 106.21 Total (boe/d) United States Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) Other NGLs (1) (bbls/d) NGLs (bbls/d) 53,840 59,256 63,187 59,537 58,593 58,504 61,507 61,360 60,814 57,397 43,817 32,078 2,495 3,243 3,971 2,481 3,149 2,717 2,421 1,750 1,582 1,455 652 573 1 6 6 6 12 4 1,294 1,158 1,340 1,079 1,156 1,140 1,295 1,164 1,346 1,085 1,168 1,144 63 754 817 7.06 (8) 929 921 5.89 23 998 1,021 5.65 6 714 720 4.82 3 62 65 0.40 784 1 20 21 0.15 618 Conventional natural gas (mmcf/d) 6.87 7.94 8.35 6.72 8.20 6.38 Total (boe/d) France 4,934 5,730 6,708 4,685 5,683 4,925 4,414 3,653 3,545 2,979 Light and medium crude oil (bbls/d) 9,255 9,347 7,046 9,957 10,264 10,347 9,800 11,342 11,317 11,407 11,683 11,037 Conventional natural gas (mmcf/d) — — — — — — — 0.77 0.82 — — — Total (boe/d) Netherlands 9,255 9,347 7,046 9,957 10,264 10,347 9,800 11,470 11,454 11,407 11,683 11,037 Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) NGLs (bbls/d) 1 99 99 — 83 83 1 86 86 3 84 84 4 86 86 1 81 81 9 91 91 — 93 93 — 112 112 — 84 84 — 87 87 — 77 77 Conventional natural gas (mmcf/d) 42.95 46.09 47.31 48.33 47.99 44.08 52.90 51.51 51.82 44.37 43.49 44.79 Total (boe/d) Germany 7,257 7,764 7,972 8,143 8,088 7,429 8,917 8,677 8,749 7,479 7,335 7,541 Light and medium crude oil (bbls/d) 960 964 1,039 909 800 845 1,047 978 913 1,019 1,008 1,078 Conventional natural gas (mmcf/d) 11.50 11.25 13.23 14.64 15.44 14.54 14.56 16.71 16.94 14.88 14.63 16.19 Total (boe/d) Ireland 2,876 2,839 3,244 3,349 3,373 3,269 3,474 3,763 3,736 3,498 3,447 3,777 Conventional natural gas (mmcf/d) 34.76 35.12 38.57 41.38 42.30 43.21 49.21 51.71 52.03 51.38 56.56 60.87 Total (boe/d) Australia 5,793 5,853 6,428 6,896 7,049 7,202 8,201 8,619 8,672 8,563 9,426 10,144 Light and medium crude oil (bbls/d) 3,781 4,549 5,299 4,041 4,548 5,564 6,689 5,862 4,174 4,704 4,132 4,971 Total (boe/d) 3,781 4,549 5,299 4,041 4,548 5,564 6,689 5,862 4,174 4,704 4,132 4,971 Central and Eastern Europe Conventional natural gas (mmcf/d) Total (boe/d) Consolidated Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) Other NGLs (1) (bbls/d) NGLs (bbls/d) 0.67 111 0.80 132 2.89 483 3.27 546 1.66 276 — — — — — — 2.86 477 1.17 195 — — — — 35,793 37,951 39,899 40,157 42,024 43,084 43,938 45,001 43,625 43,186 30,579 23,619 4,762 5,289 5,142 4,724 4,237 4,158 5,026 4,181 4,053 3,965 3,995 3,389 8,627 9,509 9,588 8,022 8,160 7,772 8,107 7,897 7,815 6,839 5,651 5,126 13,389 14,798 14,730 12,746 12,397 11,930 13,133 12,078 11,868 10,804 9,646 8,515 Conventional natural gas (mmcf/d) 232.00 256.34 274.42 265.51 260.72 253.36 275.60 277.96 276.77 253.38 242.40 228.20 Total (boe/d) 87,848 95,471 100,366 97,154 97,875 97,239 103,003 103,404 101,621 96,222 80,625 70,167 Vermilion Energy Inc. ■ Page 49 ■ 2020 Annual Report Canada Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) Other NGLs (1) (bbls/d) NGLs (bbls/d) Conventional natural gas (mmcf/d) Total (boe/d) United States Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) Other NGLs (1) (bbls/d) NGLs (bbls/d) Conventional natural gas (mmcf/d) Total (boe/d) France Light and medium crude oil (bbls/d) Conventional natural gas (mmcf/d) Total (boe/d) Netherlands Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) NGLs (bbls/d) Conventional natural gas (mmcf/d) Total (boe/d) Germany Light and medium crude oil (bbls/d) Conventional natural gas (mmcf/d) Total (boe/d) Ireland Conventional natural gas (mmcf/d) Total (boe/d) Australia Light and medium crude oil (bbls/d) Total (boe/d) Central and Eastern Europe Conventional natural gas (mmcf/d) Total (boe/d) Consolidated Light and medium crude oil (bbls/d) Condensate (1) (bbls/d) Other NGLs (1) (bbls/d) NGLs (bbls/d) Conventional natural gas (mmcf/d) Total (boe/d) 2020 2019 2018 2017 2016 2015 21,106 23,971 17,400 6,015 6,657 9,549 4,886 4,295 3,754 3,036 2,514 1,807 7,719 6,988 5,914 4,144 2,552 2,301 12,605 11,283 9,668 7,180 5,066 4,108 151.38 148.35 129.37 97.89 84.29 71.64 58,942 59,979 48,630 29,510 25,771 25,598 3,046 2,514 1,069 662 393 5 1,218 18 996 1,223 1,014 7.47 6.89 8 452 460 2.78 5,514 4,675 1,992 4 50 54 0.39 781 — 29 29 0.21 457 231 — 7 7 0.05 247 8,903 10,435 11,362 11,084 11,896 12,267 — 0.19 0.21 — 0.44 0.97 8,903 10,467 11,396 11,085 11,970 12,429 1 88 88 3 88 88 — 90 90 — 90 90 — 88 88 — 99 99 46.16 49.10 46.13 40.54 47.82 44.76 7,782 8,274 7,779 6,847 8,058 7,559 968 917 1,004 1,060 — — 12.65 15.31 15.66 19.39 14.90 15.78 3,076 3,468 3,614 4,291 2,483 2,630 37.44 46.57 55.17 58.43 50.89 6,240 7,762 9,195 9,737 8,482 0.03 5 4,416 5,662 4,494 5,770 6,304 6,454 4,416 5,662 4,494 5,770 6,304 6,454 1.90 317 0.42 70 1.02 169 — — — — — — 38,441 43,502 35,329 24,591 25,250 28,502 4,980 4,400 3,853 3,130 2,602 1,906 8,937 7,984 6,366 4,194 2,582 2,308 13,917 12,384 10,219 7,324 5,184 4,214 256.99 266.82 250.33 216.64 198.55 133.24 95,190 100,357 87,270 68,021 63,526 54,922 (1) Under National Instrument 51-101 "Standards of Disclosure for Oil and Gas Activities", disclosure of production volumes should include segmentation by product type as defined in the instrument. This table provides a reconciliation from "crude oil and condensate", "NGLs" and "natural gas" to the product types. Elsewhere in this report, references to "crude oil" mean "light crude oil and medium crude oil" and references to "natural gas" mean "conventional natural gas". Production volumes reported are based on quantities as measured at the first point of sale. Vermilion Energy Inc. ■ Page 50 ■ 2020 Annual Report Supplemental Table 5: Segmented Financial Results Three Months Ended December 31, 2020 France Netherlands Germany Ireland Australia Corporate 3,412 5 455 — 22,512 — (150) — — ($M) Drilling and development Exploration and evaluation Canada 32,942 — USA 839 — 12,749 81 Crude oil and condensate sales 112,489 11,796 53,198 NGL sales Natural gas sales Sales of purchased commodities Royalties 13,195 35,035 — 2,046 1,247 — — — — (15,240) (4,430) (9,416) Revenue from external customers 145,479 10,659 43,782 22,817 Purchased commodities — — — Transportation Operating General and administration PRRT Corporate income taxes Interest expense Realized gain on derivative instruments Realized foreign exchange gain Realized other income (9,987) (54,725) (7,929) — — — — — — (371) (4,264) (4,437) (2,369) — — — — — — (16,230) (7,772) (3,369) — 1 — (141) 3,164 — — — — — — — — 3,221 (94) 4,720 — 5,961 — 1,190 11,871 — (1,537) (5,643) (1,992) — — — — — — 211 — 1 — 23,117 — — 4,392 — 30,148 — — — — (4,863) 6,999 — — 278 31,902 Total 52,903 6,991 212,807 15,241 88,150 31,902 (62) (28,108) 23,118 30,148 32,118 319,992 — (898) — — (31,902) (31,902) — (17,057) (3,232) (14,438) (99) (106,576) (38) — — — — — — (1,015) (4,038) 2,995 — — — — (1,931) (18,642) — 514 (4,038) 6,532 (19,808) (19,808) 790 1,329 4,592 790 1,329 4,592 Fund flows from operations 72,838 3,482 19,778 18,210 2,699 18,950 13,652 (14,397) 135,212 ($M) Total assets Drilling and development Exploration and evaluation Crude oil and condensate sales NGL sales Natural gas sales Sales of purchased commodities Royalties USA France Netherlands Germany Ireland Australia Corporate Total Year Ended December 31, 2020 Canada 1,805,464 199,141 — 418,610 36,204 114,377 — 328,902 66,120 — 703,567 42,145 183 130,063 10,331 (226) 55,099 182,292 6,513 4,834 — — — — 1,502 — 64,073 — (444) (54,961) (17,446) (32,069) 198,357 257,990 13,005 2,814 17,143 — 1,823 — 13 — 17,067 58,433 — (990) — — 105,898 24,520 578,898 4,109,139 (4,604) 352,481 — 11,950 14,721 141,452 — — — — 8 — 1,925 127,853 816,119 42,717 260,709 127,853 (644) (106,554) Revenue from external customers 514,230 49,000 150,223 65,131 33,220 58,446 141,452 129,142 1,140,844 Purchased commodities Transportation Operating — — — (41,494) (1,349) (14,604) — — — — (5,839) (4,425) — — (127,853) (127,853) — (67,711) (218,596) (18,108) (57,128) (32,410) (20,732) (15,232) (54,581) (464) (417,251) General and administration (25,462) (7,420) (13,108) (1,220) (6,532) (594) (3,841) (2,663) (60,840) PRRT Corporate income taxes Interest expense Realized gain on derivative instruments Realized foreign exchange gain Realized other income — — — — — — — — — — — — — (141) — 3,774 — — — — — — — — — — — — — — — — — — — — Fund flows from operations 228,678 22,123 65,242 35,275 117 38,195 64,985 Vermilion Energy Inc. ■ Page 51 ■ 2020 Annual Report (20,151) 2,106 — 71 (20,151) 5,810 — — — — (75,077) (75,077) 109,093 109,093 11,110 4,091 47,450 11,110 4,091 502,065 Supplemental Table 6: Operational and Financial Data by Core Region Production volumes (1) Q4/20 Q3/20 Q2/20 Q1/20 Q4/19 Q3/19 Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 North America Crude oil and condensate (bbls/d) 26,459 28,296 31,569 29,888 30,560 30,403 31,329 30,905 31,163 29,938 17,663 8,628 9,508 9,588 8,022 8,161 7,772 8,106 7,897 7,814 6,840 5,651 142.13 163.09 172.43 157.88 153.34 151.52 158.93 157.26 152.30 141.59 127.72 106.35 58,774 64,986 69,895 64,222 64,276 63,429 65,921 65,013 64,359 60,376 44,601 32,696 9,846 5,126 NGLs (bbls/d) Natural gas (mmcf/d) Total (boe/d) International Crude oil and condensate (bbls/d) 14,096 14,943 13,471 14,994 15,702 16,838 17,636 18,275 16,516 17,214 16,910 17,163 NGLs (bbls/d) Natural gas (mmcf/d) Total (boe/d) Consolidated — — — — — — — — — — — — 89.86 93.25 101.99 107.63 107.38 101.83 116.67 120.70 124.48 111.79 114.68 121.85 29,073 30,484 30,472 32,932 33,598 33,811 37,081 38,391 37,262 35,846 36,023 37,470 Crude oil and condensate (bbls/d) 40,555 43,240 45,041 44,881 46,261 47,242 48,964 49,182 47,678 47,151 34,574 27,008 NGLs (bbls/d) Natural gas (mmcf/d) Total (boe/d) 8,627 9,509 9,588 8,022 8,160 7,772 8,107 7,897 7,815 6,839 5,651 5,126 232.00 256.34 274.42 265.51 260.72 253.36 275.60 277.96 276.77 253.38 242.40 228.20 87,848 95,471 100,366 97,154 97,875 97,239 103,003 103,404 101,621 96,222 80,625 70,167 (1) Please refer to Supplemental Table 4 "Production" for disclosure by product type. Sales volumes North America Q4/20 Q3/20 Q2/20 Q1/20 Q4/19 Q3/19 Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Crude oil and condensate (bbls/d) 26,459 28,297 31,569 29,888 30,560 30,404 31,327 30,906 31,162 29,938 17,664 NGLs (bbls/d) 8,628 9,508 9,588 8,022 8,161 7,772 8,106 7,897 7,814 6,840 5,651 9,846 5,126 Natural gas (mmcf/d) 142.13 163.09 172.43 157.88 153.34 151.52 158.93 157.26 152.30 141.59 127.72 106.35 Total (boe/d) 58,774 64,986 69,895 64,222 64,276 63,429 65,921 65,013 64,359 60,376 44,601 32,696 International Crude oil and condensate (bbls/d) 15,359 15,689 12,202 17,090 13,864 18,575 16,009 20,163 16,458 16,559 16,991 16,078 NGLs (bbls/d) Natural gas (mmcf/d) Total (boe/d) Consolidated — — — — — — — — — — — 77 89.86 93.25 101.99 107.63 107.38 101.83 116.67 120.70 124.48 111.02 114.68 121.85 30,336 31,229 29,201 35,028 31,760 35,547 35,454 40,279 37,204 35,062 36,104 36,462 Crude oil and condensate (bbls/d) 41,818 43,985 43,771 46,977 44,423 48,979 47,337 51,068 47,620 46,368 34,655 26,001 NGLs (bbls/d) 8,627 9,509 9,588 8,022 8,160 7,772 8,107 7,897 7,815 6,839 5,651 5,126 Natural gas (mmcf/d) 232.00 256.34 274.42 265.51 260.72 253.36 275.60 277.96 276.77 253.38 242.40 228.20 Total (boe/d) 89,111 96,217 99,096 99,250 96,037 98,976 101,377 105,291 101,563 95,437 80,706 69,159 Vermilion Energy Inc. ■ Page 52 ■ 2020 Annual Report Financial results North America Crude oil and condensate sales ($/bbl) NGL sales ($/bbl) Natural gas sales ($/mcf) Sales ($/boe) Royalties ($/boe) Transportation ($/boe) Operating ($/boe) General and administration ($/boe) Corporate income taxes ($/boe) PRRT ($/boe) Q4/20 Q3/20 Q2/20 Q1/20 Q4/19 Q3/19 Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 51.06 19.20 2.77 32.51 (3.64) (1.92) (10.94) (1.94) 0.04 — 49.79 15.04 2.02 28.94 (3.58) (1.74) (7.82) (0.78) (0.02) — 28.94 50.25 8.94 1.60 8.92 1.92 18.24 29.22 66.31 14.63 2.29 38.86 66.67 6.14 1.18 35.52 72.40 11.25 1.15 38.56 65.95 22.49 2.52 40.17 54.90 25.70 1.79 33.94 80.22 27.97 1.46 46.37 (1.67) (1.72) (3.54) (1.91) (4.98) (1.76) (4.93) (1.78) (4.22) (1.63) (5.00) (1.83) (5.01) (1.88) (6.71) (1.63) (9.60) (11.93) (11.15) (10.67) (10.66) (11.46) (10.96) (10.48) (0.84) (0.04) — (0.97) (0.11) — (0.60) 0.09 — (1.04) (0.02) — (0.83) (0.03) — (0.28) 0.10 — (0.36) (0.16) — 79.66 26.06 1.09 37.98 (4.17) (1.28) (8.90) (1.43) (0.23) — 75.13 25.37 1.95 32.96 (3.73) (1.54) (8.38) (0.85) 0.22 — (1.52) (0.02) — 3.72 Fund flows netback ($/boe) 14.12 14.99 10.96 19.89 17.63 20.99 21.03 15.91 27.04 21.97 18.68 Fund flows from operations 76,375 89,635 23,639 64,048 117,623 102,867 125,893 123,071 94,200 150,202 89,177 54,961 Capital expenditures Free cash flow International (33,781) (9,575) (23,979) (197,926) (69,775) (91,027) (42,047) (148,091) (93,092) (101,223) (39,396) (84,983) 42,594 80,060 (340) (133,878) 47,848 11,840 83,846 (25,020) 1,108 48,979 49,781 (30,022) Crude oil and condensate sales ($/bbl) 62.65 58.19 50.27 73.35 82.14 84.55 93.28 84.95 87.56 95.32 95.65 83.41 NGL sales ($/bbl) Natural gas sales ($/mcf) Sales ($/boe) Royalties ($/boe) Transportation ($/boe) Operating ($/boe) — 6.27 50.30 — 2.91 37.94 — 2.28 28.98 — 4.44 49.42 — 5.49 54.42 — 4.29 56.46 — 5.73 60.98 — 8.46 67.87 — 10.78 74.80 — 10.34 77.76 — 8.86 73.16 (3.02) (2.40) (3.32) (2.28) (2.16) (2.04) (3.27) (1.94) (3.85) (1.77) (3.89) (2.76) (3.97) (3.40) (3.89) (1.66) (4.16) (1.70) (5.13) (1.45) (4.44) (1.78) — 9.17 67.43 (3.66) (1.72) (16.99) (15.18) (14.35) (16.13) (15.28) (13.13) (11.76) (15.28) (13.89) (12.26) (13.03) (13.16) General and administration ($/boe) Corporate income taxes ($/boe) PRRT ($/boe) (2.92) (2.53) 2.25 0.04 (1.45) (1.27) (2.72) (0.02) (1.21) (2.63) (0.11) (2.90) (3.70) 2.22 (0.50) (3.10) (1.55) (1.78) (2.93) (3.63) (2.56) (2.27) (4.30) (2.87) Fund flows netback ($/boe) 25.77 13.40 6.47 22.44 31.54 30.26 32.73 37.60 (3.27) (2.49) 0.71 49.99 (3.49) (2.65) 0.08 52.88 (2.55) (3.57) (0.81) (2.81) (2.85) (1.48) 46.97 41.75 Fund flows from operations 71,934 38,498 17,193 71,526 92,160 98,955 105,600 136,298 171,119 170,563 154,319 137,002 Capital expenditures Free cash flow (26,113) (21,755) (18,295) (35,778) (30,850) (36,852) (50,560) (53,962) (70,488) (44,962) (40,588) (43,482) 45,821 16,743 (1,102) 35,748 61,310 62,103 55,040 82,336 100,631 125,601 113,731 93,520 Consolidated Crude oil and condensate sales ($/bbl) NGL sales ($/bbl) Natural gas sales ($/mcf) Sales ($/boe) Royalties ($/boe) Transportation ($/boe) Operating ($/boe) Q4/20 Q3/20 Q2/20 Q1/20 Q4/19 Q3/19 Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 55.31 19.20 4.13 38.57 52.79 15.04 2.34 31.86 34.89 58.66 8.94 1.85 8.92 2.94 21.40 36.35 71.25 14.63 3.61 44.01 73.45 6.14 2.43 43.04 79.46 11.25 3.09 46.40 73.45 22.49 5.10 50.77 66.19 25.69 5.83 48.90 85.84 27.97 5.35 57.90 87.50 26.06 4.77 53.72 (3.43) (2.08) (3.50) (1.92) (1.81) (1.81) (3.45) (1.92) (4.60) (1.76) (4.56) (2.13) (4.13) (2.25) (4.58) (1.76) (4.70) (1.81) (6.13) (1.56) (4.29) (1.50) 80.02 25.37 5.81 51.13 (3.69) (1.64) (13.00) (10.21) (11.00) (13.41) (12.52) (11.55) (11.04) (12.92) (12.04) (11.13) (10.75) (10.90) General and administration ($/boe) (2.27) (1.35) Corporate income taxes ($/boe) PRRT ($/boe) Interest ($/boe) Realized derivatives ($/boe) Realized foreign exchange ($/boe) Realized other ($/boe) Fund flows netback ($/boe) 0.80 (0.49) (2.42) 0.10 0.16 0.56 16.49 — (0.41) (1.97) 0.47 (0.31) 0.29 12.97 (1.88) (0.02) (0.36) (1.98) 6.07 0.44 0.03 9.08 (1.47) (0.06) (1.02) (2.21) 5.47 0.94 (0.37) (1.88) 0.66 (0.16) (2.17) 2.57 0.23 0.03 18.85 24.40 (1.50) (0.50) (0.64) (2.16) 4.06 (1.70) (1.28) (0.90) (2.34) 1.54 (1.38) (1.66) (1.10) (2.21) 1.09 (0.37) (0.17) (0.22) 0.04 23.74 0.02 24.14 0.73 26.76 (1.37) (0.85) 0.26 (2.23) (3.03) 0.63 0.03 23.80 (1.51) (1.07) 0.03 (2.25) (4.26) (0.35) 0.02 29.69 (1.93) (1.73) (0.36) (2.26) (3.79) (0.56) 0.03 26.58 (1.88) (1.40) (0.78) (2.50) (2.85) 0.25 0.03 25.77 Fund flows from operations 135,212 114,776 81,852 170,225 215,592 216,153 222,738 253,572 222,342 260,705 195,190 160,415 Capital expenditures Free cash flow (59,894) (31,330) (42,274) (233,704) (100,625) (127,879) (92,607) (202,053) (163,580) (146,185) (79,984) (128,465) 75,318 83,446 39,578 (63,479) 114,967 88,274 130,131 51,519 58,762 114,520 115,206 31,950 Vermilion Energy Inc. ■ Page 53 ■ 2020 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 Statements 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 Statements 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 payout or 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 balance sheets at the beginning and end of the twelve-month period. Vermilion Energy Inc. ■ Page 54 ■ 2020 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: ($M) Dividends declared Shares issued for the Dividend Reinvestment Plan Net dividends Drilling and development Exploration and evaluation Asset retirement obligations settled Payout % of fund flows from operations ('000s of shares) Shares outstanding Potential shares issuable pursuant to the VIP Diluted shares outstanding Q4 2020 — — — 52,903 6,991 7,271 67,165 50 % Q3 2020 — — — 29,762 1,568 2,305 33,635 29 % The following tables reconciles the calculation of return on capital employed: ($M) Net (loss) earnings Taxes Interest expense EBIT Average capital employed Return on capital employed 2020 2019 Q4 2019 107,702 (10,200) 97,502 97,114 3,511 7,352 205,479 90,067 (8,277) 81,790 352,481 14,721 14,278 463,270 95 % 92 % Q4 2020 158,724 6,672 165,396 Q3 2020 158,308 5,492 163,800 427,311 (34,937) 392,374 486,677 36,487 19,442 934,980 103 % Q4 2019 156,290 3,622 159,912 Twelve Months Ended Dec 31, 2020 (1,517,427) (359,972) 75,077 (1,802,322) 4,562,960 Dec 31, 2019 32,799 108,326 81,377 222,502 5,578,691 (40) % 4 % Vermilion Energy Inc. ■ Page 55 ■ 2020 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, 2020. 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, 2020 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, 2020. (“Curtis Hicks”) Curtis Hicks President March 5, 2021 (“Lars Glemser”) Lars Glemser Vice President & Chief Financial Officer Vermilion Energy Inc. ■ Page 56 ■ 2020 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, 2020, 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, 2020, 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, 2020, of the Company and our report dated March 5, 2021, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report to Shareholders. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with 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 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 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. 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 March 5, 2021 Vermilion Energy Inc. ■ Page 57 ■ 2020 Annual Report Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Vermilion Energy Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Vermilion Energy Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of net (loss) earnings and comprehensive loss, consolidated statements of cash flows and consolidated statements of changes in shareholders' equity, for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2020, 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, 2020, 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 March 5, 2021, 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 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 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relates. Impairment of Capital Assets - Refer to Notes 2 and 4 to the Financial Statements Critical Audit Matter Description The Company reviews all Cash Generating Units (“CGUs”) for indicators of potential impairment at each reporting date. As a result of declining commodity price forecasts and a market capitalization deficiency during the year, indicators of impairment were identified for all CGUs. An impairment loss is recognized if the carrying amount of the CGU exceeds its recoverable amount. The recoverable amount of a CGU is estimated based on the higher of its fair value less cost of disposal and its value-in-use, using future after-tax cash flows of the underlying proved and probable oil and natural gas reserves. The Company engages an independent reservoir engineer to estimate oil and natural gas reserves using estimates, assumptions and engineering data. The development of the Company’s reserves and the related future after-tax cash flows used to evaluate the impairment requires management to make significant estimates and assumptions related to future oil and natural gas prices, discount rates, reserves, and future operating and development costs. Impairment charges totaling $1.68 billion were recorded for the year ended December 31, 2020. Given the significant judgments made by management related to future oil and natural gas prices, discount rates, reserves, and future operating and development costs, these estimates and assumptions are subject to a high degree of estimation uncertainty. Auditing these estimates and assumptions are subject to a high degree of auditor judgment in applying audit procedures and in evaluation of the results of those procedures. This resulted in an increased extent of audit effort, including the involvement of fair value specialists. Vermilion Energy Inc. ■ Page 58 ■ 2020 Annual Report How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to future oil and natural gas prices, discount rates, reserves, and future operating and development costs used to determine the recoverable amount of all CGUs included the following, among others: • • • • • Evaluated the effectiveness of the relevant controls, including those over the determination of the future oil and natural gas prices, discount rates, reserves, and future operating and development costs. Evaluated the Company’s independent reservoir engineer by: ◦ ◦ Examining reports and assessing their scope of work and findings. Assessing the competence, capability and objectivity by evaluating their relevant professional qualifications and experience. Evaluated the reasonableness of reserves by testing the source financial information underlying the reserves and comparing the reserve volumes to historical production volumes. Evaluated the reasonableness of future operating and development costs by testing the source financial information underlying the estimate, comparing future operating and development costs to historical results, and evaluating whether they are consistent with evidence obtained in other areas of the audit. Evaluated the reasonableness of forecast oil and natural gas prices used by comparing the assumptions to historical data and available market trends. • With the assistance of fair value specialists, ◦ ◦ Evaluated the future oil and natural gas prices by independently developing a reasonable range of forecasts based on reputable third-party forecasts and market data and comparing those to the future prices selected by management. Evaluated the reasonableness of the discount rates by testing the source information underlying the determination of the discount rates and developing a range of independent estimates and comparing those to the discount rates selected by management. Deferred Taxes - Refer to Notes 2 and 9 to the Financial Statements Critical Audit Matter Description The Company recognizes deferred income taxes for differences between the financial statement and tax basis of assets and liabilities at substantively enacted statutory tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax assets are reduced to the amounts expected to be realized based on forecasts of future tax profits, specifically forecasts of future revenue (commodity price forecasts and forecasted reserves). The Company recorded a deferred income tax asset for Canada primarily arising from past taxable losses in this jurisdiction. To determine whether it is probable that the deferred income tax assets in Canada will be realized, management makes assumptions related to the forecasts of future taxable income, specifically forecasts of future revenue (commodity price forecasts and forecasted reserves). As such, auditing the probability of the deferred income tax assets being realized and management’s commodity price forecasts and forecasted reserves involved a high degree of auditor judgement as the estimations made by management contain significant measurement uncertainty. This resulted in an increased extent of audit effort, which included the need to involve an income tax specialist. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to assessing the probability of the deferred income tax assets being realized and management’s forecasts of taxable income, specifically forecasts of future revenue (commodity price forecasts and forecasted reserves) to evaluate the deferred income tax assets in Canada included the following, among others: • Evaluated the effectiveness of relevant controls, including those over the determination of the forecasts of future revenue, specifically commodity price forecasts and forecasted reserves in Canada. Evaluated management’s ability to accurately forecast future revenue by comparing management’s assumptions to historical data and available market trends. Evaluated the reasonableness of management’s forecasts of future revenue by: • • ◦ ◦ Comparing the forecasts prepared by management’s expert to third party forecasts and, Evaluating whether management’s estimates of commodity price forecasts and estimated reserves were consistent with the requirements of IAS 12 relating to the probability of forecasted future revenue and the length of the forecast period. /s/ Deloitte LLP Chartered Professional Accountants Calgary, Canada March 5, 2021 We have served as the Company's auditor since 2000. Vermilion Energy Inc. ■ Page 59 ■ 2020 Annual Report Consolidated Financial Statements Consolidated Balance Sheet thousands of Canadian dollars Note December 31, 2020 December 31, 2019 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 "Robert Michaleski”) Robert Michaleski, Director 17 17 17 7 17 7 4, 9 5 4 17 11 7 17 7 10 8 6 9 11 6,904 196,077 13,402 16,924 27,686 260,993 2,451 484,497 254,094 3,107,104 4,109,139 297,670 — 130,919 4,539 433,128 8,228 1,933,848 76,524 467,737 264,272 3,183,737 4,181,160 66,250 77,986 (3,399,994) 925,402 4,109,139 29,028 211,409 29,389 55,645 22,210 347,681 20,127 196,543 286,149 5,015,620 5,866,120 312,442 35,947 62,405 5,416 416,210 24,358 1,924,665 93,072 618,201 336,309 3,412,815 4,119,031 75,735 49,578 (1,791,039) 2,453,305 5,866,120 (Signed “Lorenzo Donadeo”) Lorenzo Donadeo, Director Vermilion Energy Inc. ■ Page 60 ■ 2020 Annual Report Consolidated Statements of Net (Loss) Earnings and Comprehensive Loss thousands of Canadian dollars, except share and per share amounts Note Dec 31, 2020 Dec 31, 2019 Year Ended Revenue Petroleum and natural gas sales Royalties Sales of purchased commodities Petroleum and natural gas revenue Expenses Purchased commodities Operating Transportation Equity based compensation Gain on derivative instruments Interest expense General and administration Foreign exchange gain Other income Accretion Depletion and depreciation Impairment (Loss) earnings before income taxes Income tax (recovery) expense Deferred Current Net (loss) earnings Other comprehensive loss Currency translation adjustments Unrealized (loss) gain on hedges Other comprehensive loss Net (loss) earnings per share Basic Diluted Weighted average shares outstanding ('000s) Basic Diluted 1,119,545 (106,554) 127,853 1,140,844 127,853 417,251 67,711 42,906 (8,138) 75,077 60,840 (60,122) (3,258) 35,318 580,461 1,682,344 3,018,243 (1,877,399) (374,313) 14,341 (359,972) (1,517,427) 65,160 (36,752) (1,489,019) (9.61) (9.61) 1,689,863 (163,666) 221,274 1,747,471 221,274 440,078 72,446 64,233 (26,792) 81,377 58,976 (52,271) (6,875) 32,667 675,177 46,056 1,606,346 141,125 56,096 52,230 108,326 32,799 (81,042) 12,438 (35,805) 0.21 0.21 157,908 157,908 154,736 156,095 17 13 7 17 6 4, 5 4 4, 9 7, 10 14 14 Vermilion Energy Inc. ■ Page 61 ■ 2020 Annual Report Consolidated Statements of Cash Flows thousands of Canadian dollars Operating Net (loss) earnings Adjustments: Accretion Depletion and depreciation Impairment Unrealized loss on derivative instruments Equity based compensation Unrealized foreign exchange 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 on the revolving credit facility Payments on lease obligations Cash dividends Cash flows used in financing activities Foreign exchange (loss) 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, 2020 Dec 31, 2019 Year Ended (1,517,427) 32,799 6 4, 5 4 7 13 9 6 17 4 5 4, 5 17 10 8 11 17 35,318 580,461 1,682,344 100,955 42,906 (49,012) 833 (374,313) (14,278) 12,365 500,152 (352,481) (14,721) (25,810) (8,422) (401,434) 22,183 (25,048) (117,737) (120,602) (240) (22,124) 29,028 6,904 74,125 15,218 32,667 675,177 46,056 57,427 64,233 (57,225) 825 56,096 (19,442) (65,148) 823,465 (486,677) (36,487) (38,472) (57,072) (618,708) 214,895 (26,354) (391,549) (203,008) 470 2,219 26,809 29,028 73,783 84,224 Vermilion Energy Inc. ■ Page 62 ■ 2020 Annual Report Consolidated Statements of Changes in Shareholders' Equity thousands of Canadian dollars Shareholders' capital Balance, beginning of year 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 Hedge accounting reserve Balance, end of year Deficit Balance, beginning of year Net (loss) earnings Dividends declared Share-settled dividends on vested equity based awards Balance, end of year Note 11 11 11 Year Ended Dec 31, 2020 Dec 31, 2019 4,119,031 8,277 49,188 3,203 1,461 4,181,160 75,735 39,703 (49,188) 66,250 49,578 65,160 (36,752) 77,986 (1,791,039) (1,517,427) (90,067) (1,461) (3,399,994) 4,008,828 34,937 51,108 15,868 8,290 4,119,031 78,478 48,365 (51,108) 75,735 118,182 (81,042) 12,438 49,578 (1,388,237) 32,799 (427,311) (8,290) (1,791,039) Total shareholders' equity 925,402 2,453,305 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 and hedge accounting reserve. Currency translation adjustments result from translating the balance sheets 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. The hedge accounting reserve represents the effective portion of the change in fair value related to cash flow and net investment hedges recognized in other comprehensive income, net of tax and reclassified to the consolidated statement of net earnings in the same period in which the transaction associated with the hedged item occurs. For the year ended December 31, 2020, accumulated losses of $29.8 million and $6.9 million were recognized on the cash flow hedges and net investment hedges, respectively, and will be recognized in net earnings through 2025 when the senior unsecured notes mature. Deficit Represents the cumulative net earnings less distributed earnings of Vermilion Energy Inc. Vermilion Energy Inc. ■ Page 63 ■ 2020 Annual Report Notes to the Consolidated Financial Statements for the year ended December 31, 2020 and 2019 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 March 5, 2021. 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 3 (Segmented information) including: Canada, France, Netherlands, Germany, Ireland, Australia, the United States, and Central and Eastern Europe (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 64 ■ 2020 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. Vermilion Energy Inc. ■ Page 65 ■ 2020 Annual Report 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. 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 ("FVTPL"): Financial instruments under this classification include cash and cash equivalents and derivative assets and liabilities. Transaction costs under this classification are expensed as incurred. Fair value through other comprehensive income ("FVTOCI"): Financial instruments under this classification include derivative assets and liabilities where hedge accounting is applied. Transaction costs under this classification are expensed as incurred. Amortized cost: Financial instruments under this classification include accounts receivable, accounts payable and accrued liabilities, dividends payable, lease obligations, and long-term debt. Transaction costs under this classification are included in the measurement of the financial instrument. Accounts receivable are measured net of a loss allowance equal to the lifetime expected credit loss. Hedge accounting Hedge accounting is applied to financial instruments designated as hedging instruments in qualifying hedging relationships. Qualifying hedge relationships may include cash flow hedges, fair value hedges, and hedges of net investments in foreign operations. The purpose of hedge accounting is to represent the effect of Vermilion's risk management activities to manage exposures arising from specific risks that affect net earnings such as foreign currency risk. In order to apply hedge accounting, the eligible hedging instrument must be highly effective in offsetting the exposure to changes in the eligible hedged item. This effectiveness is assessed at inception and at the end of each reporting period thereafter. At inception, formal designation and documentation of the hedging relationship, risk management objective and strategy is required for undertaking the hedge. For cash flow and net investment hedges, gains and losses on the hedging instrument are recognized in the consolidated statement of earnings in the same period in which the transaction associated with the hedged item occurs. Where the hedging instrument is a derivative instrument, a derivative asset or liability is recognized on the balance sheet at fair value (included in "Derivative instruments") with the effective portion of the gain or loss recorded to other comprehensive income. Any gain or loss associated with the ineffective portion of the hedging relationship is recognized in the consolidated statement of net earnings as other income or expense. If a hedging relationship no longer qualifies for hedge accounting, any gain or loss resulting from the discontinuation of hedge accounting is deferred in other comprehensive income until the forecasted transaction date. If the forecasted transaction is no longer expected to occur, any gain or loss resulting from the discontinuation of hedge accounting is immediately recognized in the consolidated statement of net earnings. Vermilion Energy Inc. ■ Page 66 ■ 2020 Annual Report 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 the Deferred Share Unit Plan ("DSU"). Equity-settled awards issued under the VIP vest over a period of one to three years and awards issued under the DSU vest immediately upon granting. Equity based compensation expense for equity-settled 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 (if applicable), and an estimate of forfeiture rates based on historical vesting data. Dividends notionally accrue to the VIP and are excluded in the determination of grant date fair values. When the awards are converted to Vermilion common shares, the amount recognized in contributed surplus is reclassified to shareholders’ capital. The grant date fair value of awards or Vermilion common shares issued is 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. 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 occurs 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 in the statement of net earnings. 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 in the statement of comprehensive earnings. Foreign operation translation occurs 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. Vermilion Energy Inc. ■ Page 67 ■ 2020 Annual Report 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 values. 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 the fair value 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. As part of the assessment to determine if the acquisition constitutes a business, Vermilion may elect to apply the concentration test on a transaction by transaction basis. The test is met if substantially all of the fair value related to the gross assets acquired is concentrated in a single identifiable asset (or group of similar assets) resulting in the acquisition not being deemed a business and recorded as an asset acquisition. Segmented information Vermilion has a decentralized business unit structure designed to manage assets in each country the Company operates. 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. 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 determination of whether indicators of impairment or impairment reversals: • Determining whether there are indicators of impairment or impairment reversals are based on management's assessments of the changes in estimates for future commodity prices, costs, discount rates, or reserves. Changes in these estimates and assumptions can directly impact the calculated fair value of capital assets and therefore could be indicators of impairment or impairment reversals. In addition, change in the Vermilion's market capitalization relative to its book value could be an indicator of impairment. 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 ("CGU"): • • Calculating the fair value of capital assets acquired in a business combination and the recoverable amount of CGUs (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, discount rates and estimated reserves. Reserve 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). Vermilion Energy Inc. ■ Page 68 ■ 2020 Annual Report 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. Vermilion Energy Inc. ■ Page 69 ■ 2020 Annual Report 3. Segmented information Substantially all sales in the France, Netherlands, and Ireland operating segments for the years ended December 31, 2020 and 2019 were to one customer in each respective segment. In 2020 and 2019, France contributed more than 10% of Vermilion's consolidated revenues. ($M) Total assets Drilling and development Exploration and evaluation Crude oil and condensate sales NGL sales Natural gas sales Sales of purchased commodities Canada 1,805,464 199,141 — 418,610 36,204 114,377 — USA France Netherlands Germany Ireland Australia Corporate Total Year Ended December 31, 2020 328,902 66,120 — 703,567 42,145 183 130,063 10,331 (226) 55,099 182,292 6,513 4,834 — — — — 1,502 — 64,073 — (444) 198,357 257,990 13,005 2,814 17,143 — 1,823 — 13 — 17,067 58,433 — (990) — — 105,898 24,520 578,898 4,109,139 (4,604) 352,481 — 11,950 14,721 141,452 — — — — 8 — 1,925 127,853 816,119 42,717 260,709 127,853 (644) (106,554) Royalties (54,961) (17,446) (32,069) Revenue from external customers 514,230 49,000 150,223 65,131 33,220 58,446 141,452 129,142 1,140,844 Purchased commodities — — — (41,494) (1,349) (14,604) — — — — (5,839) (4,425) — — (127,853) (127,853) — (67,711) (218,596) (18,108) (57,128) (32,410) (20,732) (15,232) (54,581) (464) (417,251) Transportation Operating General and administration (25,462) (7,420) (13,108) (1,220) (6,532) (594) (3,841) (2,663) PRRT Corporate income taxes Interest expense Realized gain on derivative instruments Realized foreign exchange gain Realized other income — — — — — — — — — — — — — (141) — 3,774 — — — — — — — — — — — — — — — — — — — — Fund flows from operations 228,678 22,123 65,242 35,275 117 38,195 64,985 (20,151) 2,106 — 71 (60,840) (20,151) 5,810 — — — — (75,077) (75,077) 109,093 109,093 11,110 4,091 47,450 11,110 4,091 502,065 USA France Netherlands Germany Ireland Australia Corporate Total Year Ended December 31, 2019 ($M) Total assets Drilling and development Exploration and evaluation Canada 3,088,947 293,744 — 421,609 57,196 — 841,875 74,579 62 Crude oil and condensate sales 699,290 63,449 326,578 NGL sales Natural gas sales Sales of purchased commodities 33,159 95,621 — 6,499 5,416 — — 121 — 226,834 261,712 470,316 19,866 3,739 2,411 — 10,806 10,878 25,783 — 1,372 — 27 — 110,446 31,529 104,247 — — — — 233,581 30,550 321,246 5,866,120 (1,436) 486,677 — 21,808 36,487 184,490 — — — — — — 797 221,274 1,302,028 39,658 348,177 221,274 (253) (163,666) Royalties (94,079) (18,706) (43,895) (1,469) (5,264) Revenue from external customers 733,991 56,658 282,804 111,388 52,048 104,274 184,490 221,818 1,747,471 Purchased commodities Transportation Operating — (41,261) — — — (21,609) — — — — (5,117) (4,459) — — (221,274) (221,274) — (72,446) (242,790) (16,370) (61,281) (32,125) (24,970) (12,431) (49,810) (301) (440,078) General and administration (23,341) (7,566) (15,406) (2,659) (8,452) (2,491) (4,940) PRRT Corporate income taxes Interest expense Realized gain on derivative instruments Realized foreign exchange loss Realized other income — — — — — — — — — — — — — (21,431) — 3,961 — — — — — — — — — — — — — — — — — — — — (25,947) (8,407) — — — — Fund flows from operations 426,599 32,722 163,077 80,565 13,509 84,893 95,386 5,879 — (406) (81,377) 84,219 (4,954) 7,700 11,304 (58,976) (25,947) (26,283) (81,377) 84,219 (4,954) 7,700 908,055 Vermilion Energy Inc. ■ Page 70 ■ 2020 Annual Report Reconciliation of fund flows from operations to net (loss) earnings: Fund flows from operations Accretion Depletion and depreciation Impairment Unrealized loss on derivative instruments Equity based compensation Unrealized foreign exchange gain Unrealized other expense Deferred tax Net (loss) earnings 4. Capital assets The following table reconciles the change in Vermilion's capital assets: Balance at January 1 Acquisitions Additions Increase in right-of-use assets Transfers from exploration and evaluation assets Impairment Depletion and depreciation Changes in asset retirement obligations Foreign exchange Balance at December 31 Cost Accumulated depletion, depreciation, and impairment Carrying amount at December 31 Year Ended Dec 31, 2020 502,065 (35,318) (580,461) (1,682,344) (100,955) (42,906) 49,012 (833) 374,313 (1,517,427) 2020 5,015,620 24,430 352,481 5,245 — (1,682,344) (517,734) (200,454) 109,860 3,107,104 9,863,537 (6,756,433) 3,107,104 Dec 31, 2019 908,055 (32,667) (675,177) (46,056) (57,427) (64,233) 57,225 (825) (56,096) 32,799 2019 5,316,873 38,472 486,677 12,348 27,918 (46,056) (657,863) (10,354) (152,395) 5,015,620 9,604,933 (4,589,313) 5,015,620 Right-of-use assets 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, 2020: ($M) Office space Gas processing facilities Oil storage facilities Vehicles and equipment Total As at Dec 31, 2020 As at Dec 31, 2019 Depreciation Balance Depreciation 9,835 7,109 2,738 3,608 23,290 49,134 27,593 15,231 8,035 99,993 9,745 7,089 2,633 3,209 22,676 Balance 53,777 34,701 16,803 10,327 115,608 Q4 2020 impairment In the fourth quarter of 2020, indicators of impairment were present in our France CGUs due to a decrease in estimated reserves as a result of economic revisions. As a result of the indicators of impairment, the Company performed impairment tests on its four France CGUs and the recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 9.5%. Based on the results of the impairment tests completed, recoverable amounts were determined to be greater than the carrying values of the CGUs tested and no impairment charges were recorded. Vermilion Energy Inc. ■ Page 71 ■ 2020 Annual Report The following benchmark price forecasts were used to calculate the recoverable amounts: Brent Crude ($ US/bbl) (1) 0.78 Exchange rate (CAD/USD) (1) The forecast benchmark commodity prices listed are adjusted for quality differentials, heat content, transportation and marketing costs and other factors specific to the Company’s operations. 2029 2030 (2) 50.75 55.00 58.50 61.79 62.95 64.13 65.33 66.56 67.81 69.17 0.76 0.76 0.76 0.76 0.76 0.76 0.77 0.76 0.76 2026 2027 2025 2024 2022 2023 2028 2021 (2) In 2031 and beyond, commodity price forecasts are inflated at a rate of 2.0% per annum. In 2030 and beyond there is no escalation of exchange rates. The following are the results of impairment tests completed and sensitivity impacts which would increase impairment charges taken: Operating Segment France France Total CGU Aquitaine Basin Neocomian Impairment — — — 1% increase in discount rate — 5,582 5,582 5% decrease in pricing 12,556 12,241 24,797 In the fourth quarter of 2020, no indicators of impairment reversal were identified. Q3 2020 impairment In the third quarter of 2020, indicators of impairment were present due to a decline in the Company’s market capitalization. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $35.4 million (net of $12.4 million income tax recovery) in the Neocomian CGU due to increased estimated transportation expenses as a result of an announcement during the quarter that the third-party Grandpuits refinery plans on converting into a zero-crude platform in 2021. As a result of this change, the Company estimates that incremental transportation expenses will be incurred to transport the crude oil production in the Neocomian, Chaunoy, and Champotran CGUs to alternative refineries in France. The following benchmark price forecasts were used to calculate the recoverable amounts: 2020 Brent Crude ($ US/bbl) (1) WTI Crude ($ US/bbl) (1) NBP (€/mmbtu) (1) 3.87 AECO Spot Gas ($/mmbtu) (1) 3.00 0.75 Exchange rate (CAD/USD) (1) The forecast benchmark commodity prices listed are adjusted for quality differentials, heat content, transportation and marketing costs and other factors specific to the Company’s operations. 2028 2029 (2) 44.00 46.75 51.00 56.50 60.00 62.95 64.13 65.33 66.56 67.81 42.00 44.00 47.50 52.50 56.00 58.95 60.13 61.33 62.56 63.81 5.83 2.87 0.75 4.58 2.60 0.75 5.42 2.76 0.75 5.21 2.70 0.75 4.41 2.70 0.75 4.79 2.60 0.75 5.00 2.65 0.75 4.03 2.90 0.75 5.63 2.81 0.75 2022 2023 2026 2024 2025 2027 2021 (2) In 2030 and beyond, commodity price forecasts are inflated at a rate of 2.0% per annum. In 2030 and beyond there is no escalation of exchange rates. The following are the results of impairment tests completed and sensitivity impacts which would increase impairment charges taken: Operating Segment France CGU Neocomian Impairment 47,777 1% increase in discount rate 5,184 5% decrease in pricing 13,235 Q2 2020 impairment In the second quarter of 2020, indicators of impairment were present due to a decline in the Company’s market capitalization. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $53.1 million (net of $16.6 million income tax recovery). Vermilion Energy Inc. ■ Page 72 ■ 2020 Annual Report The following benchmark price forecasts were used to calculate the recoverable amounts: 2020 Brent Crude ($ US/bbl) (1) WTI Crude ($ US/bbl) (1) NBP (€/mmbtu) (1) 2.75 AECO Spot Gas ($/mmbtu) (1) 2.10 0.74 Exchange rate (CAD/USD) (1) The forecast benchmark commodity prices listed are adjusted for quality differentials, heat content, transportation and marketing costs and other factors specific to the Company’s operations. 2028 2029 (2) 43.50 48.00 51.50 56.50 60.00 62.95 64.13 65.33 66.56 67.81 41.00 44.00 47.50 52.50 56.00 58.95 60.13 61.33 62.56 63.81 7.00 2.87 0.75 5.25 2.45 0.75 6.00 2.65 0.75 4.25 2.35 0.74 4.75 2.40 0.75 5.75 2.55 0.75 6.50 2.76 0.75 6.25 2.70 0.75 6.75 2.81 0.75 2026 2022 2023 2024 2027 2025 2021 (2) In 2030 and beyond, commodity price forecasts are inflated at a rate of 2.0% per annum. In 2030 and beyond there is no escalation of exchange rates. The following are the results of impairment tests completed and sensitivity impacts which would increase impairment charges taken: Operating Segment Australia Germany Ireland Total CGU Australia Germany Gas Ireland Impairment 33,475 10,177 26,061 69,713 1% increase in discount rate 3,435 1,370 9,198 14,003 5% decrease in pricing 15,470 2,818 19,208 37,496 Q1 2020 impairment In the first quarter of 2020, indicators of impairment were present due to global commodity price forecasts deteriorating from decreases in demand and an increase of supply around the world. As a result of the indicators of impairment, the Company performed impairment tests across all CGUs. The recoverable amounts were determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 11.5%. Based on the results of the impairment tests completed, the Company recognized non-cash impairment charges of $1.2 billion (net of $0.4 billion income tax recovery). The following benchmark price forecasts were used to calculate the recoverable amounts: 2020 Brent Crude ($ US/bbl) (1) WTI Crude ($ US/bbl) (1) NBP (€/mmbtu) (1) 3.33 AECO Spot Gas ($/mmbtu) (1) 1.95 0.72 Exchange rate (CAD/USD) (1) The forecast benchmark commodity prices listed are adjusted for quality differentials, heat content, transportation and marketing costs and other factors specific to the Company’s operations. 2028 2029 (2) 34.00 45.50 52.50 57.50 62.50 62.95 64.13 65.33 66.56 67.81 30.00 41.00 47.50 52.50 57.50 58.95 60.13 61.33 62.56 63.81 7.25 2.87 0.75 5.00 2.35 0.74 4.25 2.25 0.73 6.00 2.55 0.75 6.75 2.76 0.75 6.50 2.70 0.75 6.25 2.65 0.75 5.50 2.45 0.74 7.00 2.81 0.75 2025 2024 2023 2026 2022 2027 2021 (2) In 2030 and beyond, commodity price forecasts are inflated at a rate of 2.0% per annum. In 2030 and beyond there is no escalation of exchange rates. The following are the results of impairment tests completed and sensitivity impacts which would increase impairment charges taken: Operating Segment Australia Canada Canada France Germany Ireland United States Total CGU Australia Saskatchewan Drayton Valley Oil Neocomian Germany Gas Ireland United States Impairment 55,583 815,909 364,879 22,758 39,738 119,634 146,353 1,564,854 1% increase in discount rate 3,227 70,737 13,204 8,576 3,545 10,333 28,051 137,673 5% decrease in pricing 13,582 141,015 23,582 13,609 7,084 20,793 52,613 272,278 Q4 2019 impairment In the fourth quarter of 2019, an indicator of impairment was present in the Ireland CGU due to declining natural gas price forecasts. As a result of the indicator of impairment, the Company performed an impairment test on its Ireland CGU whereby the recoverable amount was compared against its carrying amount. The recoverable amount was determined using fair value less costs to sell, which considered future after-tax cash flows from proved plus probable reserves and an after-tax discount rate of 9.0%. Based on the results of the impairment test completed, the Company recognized a non-cash impairment charge of $34.6 million (net of $11.5 million income tax recovery). Vermilion Energy Inc. ■ Page 73 ■ 2020 Annual Report The following benchmark price forecast was used to calculate the recoverable amount: 2020 NBP (€/mmbtu) (1) 5.58 (1) The forecast benchmark commodity prices listed are adjusted for quality differentials, heat content, transportation and marketing costs and other factors specific to the Company’s operations. 2025 5.88 2023 5.65 2021 5.51 2024 5.77 2022 5.54 2026 6.00 2027 6.12 2028 2029 (2) 6.37 6.24 (2) In 2030 and beyond, commodity price forecasts are inflated at a rate of 2.0% per annum. The following is the result of the impairment test completed and sensitivity impacts of a 1% increase in after-tax discount rate and a 5% decrease in pricing on the impairment test completed: CGU Ireland Operating Segment Ireland Impairment 46,055 1% increase in discount rate 14,749 5% decrease in pricing 28,598 Changes in any of the key judgments, such as a revision in reserves, changes in forecast commodity prices, foreign exchange rates, capital or operating costs would impact the estimated recoverable amount. Q4 2020 CGU Realignment Previously, Vermilion's assets in Alberta were managed and organized based primarily on geological characteristics and were grouped into the Drayton Valley Gas and Drayton Valley Oil CGUs. In the fourth quarter of 2020, the Company finalized an evaluation of the management and organization of Vermilion's assets in Alberta resulting in a re-organization based primarily on geographical characteristics. This process resulted in the combination of its Drayton Valley Gas and Drayton Valley Oil CGU's into a combined Alberta CGU. 5. Exploration and evaluation assets The following table reconciles the change in Vermilion's exploration and evaluation assets: 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 6. Asset retirement obligations The following table reconciles the change in Vermilion’s asset retirement obligations: 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 Vermilion Energy Inc. ■ Page 74 ■ 2020 Annual Report 2020 286,149 1,380 14,721 (500) — (54,838) 7,182 254,094 395,615 (141,521) 254,094 2020 618,201 1,484 74,235 (14,278) 35,318 (276,673) 29,450 467,737 2019 303,295 — 36,487 36 (27,918) (18,689) (7,062) 286,149 371,632 (85,483) 286,149 2019 650,164 7,595 39,722 (19,442) 32,667 (57,635) (34,870) 618,201 Vermilion calculated the present value of the obligations using a credit-adjusted risk-free rate, calculated using a credit spread of 9.5% (as at December 31, 2019 - 5.3%) added to risk-free rates based on long-term, risk-free government bonds. Vermilion's credit spread is determined as the yield to maturity on its senior unsecured notes as at the reporting period. The country specific risk-free rates used as inputs to discount the obligations were as follows: Canada United States France Netherlands Germany Ireland Australia Dec 31, 2020 1.2 % 1.6 % 0.3 % (0.6) % (0.2) % (0.1) % 1.3 % Dec 31, 2019 1.7 % 2.4 % 0.9 % (0.1) % 0.3 % 0.6 % 1.6 % Vermilion has estimated the asset retirement obligations based on current cost estimates of $2.0 billion (2019 - $1.8 billion). Current cost estimates are inflated to the estimated time of abandonment using inflation rates of between 0.2% and 2.9% (2019 - between 0.4% and 2.7%), resulting in inflated cost estimates of $2.5 billion (2019 - $2.6 billion). These payments are expected to be made between 2021 and 2080, with the majority of costs occurring between 2030 and 2040 ($0.8 billion) and 2049 to 2056 ($0.8 billion). A 0.5% increase/decrease in the discount rate applied to asset retirement obligations would decrease/increase asset retirement obligations by approximately $26.8 million. A one-year increase/decrease in the expected timing of abandonment spend would decrease/increase asset retirement obligations by approximately $37.7 million. 7. Derivative instruments The following table reconciles the change in the fair value of Vermilion’s derivative instruments: Fair value of contracts, beginning of year Reversal of opening contracts settled during the year Realized gain on contracts settled during the year Unrealized (loss) gain during the year on contracts outstanding at the end of the year Net receipt from counterparties on contract settlements during the year Unrealized loss on derivatives designated as cash flow hedges Unrealized gain on derivatives designated as net investment hedges Fair value of contracts, end of year Comprised of: Current derivative asset Current derivative liability Non-current derivative asset Non-current derivative liability Fair value of contracts, end of year The gain on derivative instruments for 2020 and 2019 were comprised of the following: Realized gain on contracts settled during the year Reversal of opening contracts settled during the year Unrealized loss (gain) on contracts outstanding at the end of the year Gain on derivative instruments Year Ended Dec 31, 2020 (10,991) 12,811 109,093 (113,766) (109,093) (7,826) — (119,772) 16,924 (130,919) 2,451 (8,228) (119,772) Dec 31, 2019 38,339 (62,735) 84,219 5,308 (84,219) (1,071) 9,168 (10,991) 55,645 (62,405) 20,127 (24,358) (10,991) Year Ended Dec 31, 2020 (109,093) (12,811) 113,766 (8,138) Dec 31, 2019 (84,219) 62,735 (5,308) (26,792) Please refer to Note 17 (Supplemental information) for a listing of Vermilion's outstanding derivative instruments as at December 31, 2020. Vermilion Energy Inc. ■ Page 75 ■ 2020 Annual Report 8. Leases Vermilion had the following future commitments associated with its lease obligations: ($M) Less than 1 year 1 - 3 years 3 - 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 Total cash outflow Interest on lease liabilities 9. Taxes  The following table reconciles Vermilion’s deferred tax asset and liability: Deferred tax assets: Non-capital losses Derivative contracts Other Stock based compensation Asset retirement obligations Capital assets Unrealized foreign exchange Deferred tax assets Deferred tax liabilities: Asset retirement obligations Capital assets Other Non-capital losses Deferred tax liabilities As at Dec 31, 2020 27,927 41,270 31,412 14,178 114,787 (15,381) 99,406 (22,882) 76,524 31,240 6,192 Dec 31, 2019 29,217 46,501 38,177 26,168 140,063 (23,309) 116,754 (23,682) 93,072 33,276 6,984 As at Dec 31, 2020 Dec 31, 2019 420,060 33,064 14,766 12,218 7,581 443 (3,635) 484,497 184,144 112,818 1,682 (34,372) 264,272 454,339 2,712 3,149 — 36,170 (296,793) (3,034) 196,543 123,257 262,669 (1,610) (48,007) 336,309 Vermilion Energy Inc. ■ Page 76 ■ 2020 Annual Report 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: Earnings before income taxes Canadian corporate tax rate (1) Expected tax expense Increase (decrease) in taxes resulting from: Petroleum resource rent tax rate (PRRT) differential (2) Foreign tax rate differentials (2) (3) Equity based compensation expense Amended returns and changes to estimated tax pools and tax positions Statutory rate changes and the estimated reversal rates on temporary differences (4) Derecognition (recognition) of deferred tax assets Adjustment for uncertain tax positions Other non-deductible items Provision for income taxes (1) Year Ended Dec 31, 2020 (1,877,399) 25.31 % (475,170) Dec 31, 2019 141,125 26.72 % 37,709 (15,157) (14,907) 2,445 (2,598) 33,770 141,315 — (29,670) (359,972) 17,455 5,543 3,733 (24,387) 9,543 65,522 3,659 (10,451) 108,326 (2) (3) In Canada, the lower tax rate is a result of reductions to the Alberta corporate tax rate from 10% to 8%. 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 2020 were: 28.9% in France, 50.0% in the Netherlands, 31.6% in Germany, 25.0% in Ireland, and 21.0% in the United States (2019: 32.0% in France, 50.0% in the Netherlands, 31.8% in Germany, 25.0% in Ireland, and 21.0% in the United States). (4) On December 28, 2019, the French Parliament approved the Finance Bill for 2020. The Finance Bill for 2020 provides for a progressive decrease of the French corporate income tax rate for companies with sales below €250 million from 32.0% to 25.8% by 2022. On July 1, 2020, the Alberta government reduced the provincial corporate tax rate from 10% to 8%, accelerating the previously enacted schedule of rate reductions. At December 31, 2020, Vermilion had $2.9 billion (2019 - $2.5 billion) of unused tax losses of which $1.3 billion (2019 - $1.2 billion) relates to Vermilion's Canada segment and expire between 2028 and 2040. The majority of the remaining unused tax losses relates to Vermilion's Ireland segment and do not expire. At December 31, 2020, Vermilion derecognized $141.3 million (2019 - derecognized $65.5 million) of deferred income tax assets primarily relating to the aforementioned non-expiring tax loss in Ireland as there is uncertainty as to the Company's ability to fully utilize such losses based on the forecasted commodity prices in effect as at December 31, 2020. The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognized as at December 31, 2020 is approximately $0.5 billion (2019 – approximately $0.5 billion). 10. Long-term debt The following table summarizes Vermilion’s outstanding long-term debt: Revolving credit facility Senior unsecured notes Long-term debt As at Dec 31, 2020 1,555,215 378,633 1,933,848 Dec 31, 2019 1,539,225 385,440 1,924,665 The fair value of the revolving credit facility is equal to its carrying value due to the use of short-term borrowing instruments at market rates of interest. The fair value of the senior unsecured notes as at December 31, 2020 was $329.1 million. Vermilion Energy Inc. ■ Page 77 ■ 2020 Annual Report The following table reconciles the change in Vermilion’s long-term debt: Balance at January 1 Borrowings on the revolving credit facility Amortization of transaction costs Foreign exchange Balance at December 31 2020 1,924,665 22,183 833 (13,833) 1,933,848 2019 1,796,207 207,787 4,379 (83,708) 1,924,665 Revolving credit facility In Q1 2020, we negotiated an extension to our $2.1 billion revolving credit facility to extend the maturity to May 31, 2024. As at December 31, 2020, Vermilion had in place a bank revolving credit facility maturing May 31, 2024 with the following terms: As at Total facility amount Amount drawn Letters of credit outstanding Unutilized capacity Dec 31, 2020 2,100,000 (1,555,215) (23,210) 521,575 Dec 31, 2019 2,100,000 (1,539,225) (10,230) 550,545 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, 2020, 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 EBITDA to consolidated interest expense Limit Dec 31, 2020 As at Less than 4.0 Less than 3.5 Greater than 2.5 3.48 2.82 8.12 Dec 31, 2019 1.94 1.56 13.46 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. Consolidated total interest expense: Includes all amounts classified as "Interest expense", but excludes interest on operating leases as defined under IAS 17. In addition, our revolving credit facility has provisions relating to our liability management ratings in Alberta and Saskatchewan whereby if our security adjusted liability management ratings fall below specified limits in a province, a portion of the asset retirement obligations are included in the definitions of consolidated total debt and consolidated total senior debt. An event of default occurs if our security adjusted liability management ratings breach additional lower limits for a period greater than 90 days. As of December 31, 2020, Vermilion's liability management ratings were higher than the specified levels, and as such, no amounts relating to asset retirement obligations were included in the calculation of consolidated total debt and consolidated total senior debt. As at December 31, 2020 and 2019, Vermilion was in compliance with the above covenants. Vermilion Energy Inc. ■ Page 78 ■ 2020 Annual Report 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 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, if redeemed during the twelve-month period beginning on March 15 of each of the years indicated below: Year 2021 2022 2023 and thereafter Redemption price 102.813 % 101.406 % 100.000 % Cross currency interest rate swaps On June 12, 2019, Vermilion entered into a series of cross currency interest rate swaps with a syndicate of banks. Vermilion applied hedge accounting to these derivative instruments. The cross currency interest rate swaps had an original maturity of March 15, 2025. The USD-to-CAD cross currency interest swaps were designated as the hedging instrument in a cash flow hedge while the CAD-to-EUR cross currency interest rate swaps were designated as the hedging instrument in a net investment hedge. In 2020, Vermilion executed a number of transactions that resulted in a termination of the cross currency interest rate swaps in exchange for $42.3 million ($16.8 million received in the three months ended March 30, 2020 and $25.5 million received in the three months ended June 30, 2020). As a result of the termination, Vermilion has discontinued hedge accounting and amounts previously recognized for the hedge reserve within accumulated other comprehensive income will be reclassified into net income over the remaining life of the senior unsecured notes. 11. Shareholders' capital The following table reconciles the change in Vermilion’s shareholders’ capital: Shareholders' capital Balance at January 1 Shares issued for the Dividend Reinvestment Plan Vesting of equity based awards Shares issued for equity based compensation Share-settled dividends on vested equity based awards Balance at December 31 2020 2019 Shares ('000s) Amount ($M) Shares ('000s) 156,290 619 1,103 415 297 158,724 4,119,031 8,277 49,188 3,203 1,461 4,181,160 152,704 1,417 1,359 552 258 156,290 Amount ($M) 4,008,828 34,937 51,108 15,868 8,290 4,119,031 Vermilion is authorized to issue an unlimited number of common shares with no par value. Dividends declared to shareholders for the year ended December 31, 2020 were $90.1 million or $0.58 per common share (2019 - $427.3 million or $2.76 per common share). At Vermilion's Annual General and Special Meeting held on April 28, 2020 shareholders of the Company approved a $3.7 billion reduction in the stated capital of Vermilion's common shares, with the $3.7 billion reduction deducted from the stated capital account maintained for the common shares of Vermilion and an offsetting increase to the contributed surplus account of Vermilion. The transaction did not result in an adjustment to the financial statements under IFRS. 12. 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, 2020, our ratio of net debt to trailing fund flows from operations is 4.19 (2019 - 2.20). Vermilion manages the ratio of net debt to fund flows from operations (refer to Note 3 - Segmented information) by Vermilion Energy Inc. ■ Page 79 ■ 2020 Annual Report   monitoring 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: Long-term debt Current liabilities Current assets Net debt Year Ended Dec 31, 2020 1,933,848 433,128 (260,993) 2,105,983 Dec 31, 2019 1,924,665 416,210 (347,681) 1,993,194 Ratio of net debt to four quarter trailing fund flows from operations 4.19 2.20 13. Equity based compensation The following table summarizes the number of awards outstanding under the VIP: Number of VIP and Five Year Compensation Awards ('000s) Opening balance Granted Vested Forfeited Closing balance 2020 2,268 5,120 (650) (494) 6,244 2019 1,931 1,193 (688) (168) 2,268 For the year ended December 31, 2020, the awards had a weighted average grant date fair value of $5.92 (2019 - $30.92). Equity based compensation expense for the awards is calculated based on the number of awards outstanding multiplied by the estimated performance factor that will be realized upon vesting (2020 - 1.2; 2019 - 1.7) adjusted by an estimated annual forfeiture rate (2020 - 5.8%; 2019 - 5.2%). Equity based compensation expense of $38.9 million was recorded during the year ended December 31, 2020 (2019 - $46.6 million) relating to the awards. For the year ended December 31, 2020, there were 252,910 DSUs granted and outstanding with a weighted average grant date fair value of $4.48. Equity based compensation expense of $0.8 million was recorded during the year ended December 31, 2020 relating to the DSUs. 14. Per share amounts Basic and diluted net (loss) earnings per share have been determined based on the following: Net (loss) earnings Basic weighted average shares outstanding ('000s) Dilutive impact of equity based compensation ('000s) Diluted weighted average shares outstanding ('000s) Basic loss per share Diluted loss per share Year Ended Dec 31, 2020 (1,517,427) Dec 31, 2019 32,799 157,908 — 157,908 (9.61) (9.61) 154,736 1,359 156,095 0.21 0.21 Vermilion Energy Inc. ■ Page 80 ■ 2020 Annual Report 15. Financial instruments Classification of financial instruments The following table summarizes the carrying value relating to Vermilion’s financial instruments: ($M) As at Dec 31, 2020 FVTPL FVTOCI Amortized Cost As at Dec 31, 2019 Total FVTPL FVTOCI Amortized Cost Total Cash and cash equivalents Derivative assets Derivative liabilities Accounts receivable Accounts payable and accrued liabilities Dividends payable Lease obligations Long-term debt (1) 6,904 19,375 (139,147) — — — — — — — — 196,077 (297,670) — (76,524) 6,904 — 19,375 — (139,147) — 196,077 — (297,670) — — — — (76,524) — (1,933,848) (1,933,848) 29,028 64,135 (83,223) — — — — — 29,028 — 75,772 11,637 (86,763) (3,540) 211,409 — (312,442) — (35,947) — — (93,072) — (1,924,665) (1,924,665) — — — 211,409 (312,442) (35,947) (93,072) (1) The carrying value of the above equals fair value except for long-term debt. The fair value of long-term debt was $1,884,296 (2019 - $1,905,588). The carrying value of accounts receivable, accounts payable and accrued liabilities, dividends payable and lease obligations 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. 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, the revolving credit facility, 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, 2020 and 2019. 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. Interest rate risk Vermilion is exposed to interest rate risk on its revolving credit facility, which consists of short-term borrowing instruments that bear interest at market rates. Thus, changes in interest rates could result in an increase or decrease in the amount paid by Vermilion to service this debt. Vermilion Energy Inc. ■ Page 81 ■ 2020 Annual Report 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 Share price risk - Equity swaps $1.00 increase from initial share price of the equity swap $1.00 decrease from initial share price of the equity swap Dec 31, 2020 Dec 31, 2019 (873) 873 2,711 (2,711) (11,783) 7,207 (23,904) 24,088 3,750 (3,750) (1,599) 1,599 (5,594) 5,594 (44,106) 47,777 (28,192) 22,670 3,750 (3,750) 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, 2020, Vermilion’s maximum exposure to receivable credit risk was $215.5 million (December 31, 2019 - $287.2 million) which is the value of accounts receivable and derivative assets on the balance sheet. Vermilion’s accounts receivable primarily relates to customers and joint operations partners in the petroleum and natural gas industry. These amounts are subject to normal industry payment terms and credit risks. Vermilion manages these risks by monitoring the creditworthiness of customers and joint operations partners and, where appropriate, obtaining assurances such as parental guarantees and letters of credit. 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, 2020 and 2019 is not material. As at the balance sheet date, approximately 1.4% (2019 - 3.6%) 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 82 ■ 2020 Annual Report The following table summarizes Vermilion’s undiscounted non-derivative financial liabilities and their contractual maturities: 3 months to 1 year 23,204 5,136 ($M) December 31, 2020 December 31, 2019 1 month to 3 months 181,475 208,752 92,991 134,502 1 month 1 year to 5 years 2,006,530 1,608,435 16. Related party disclosures 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, 2020 and 2019: Short-term benefits Equity based compensation Number of individuals included in the above amounts Year Ended Dec 31, 2020 4,800 13,169 17,969 18 Dec 31, 2019 8,084 16,296 24,380 19 During the year ended December 31, 2020, Vermilion recorded $0.2 million of office rent recoveries (2019 - $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. 17. Supplemental information Changes in non-cash working capital was comprised of the following: Changes in: Accounts receivable Crude oil inventory Prepaid expenses Accounts payable and accrued liabilities Income taxes payable Foreign exchange Changes in non-cash working capital Changes in non-cash operating working capital Changes in non-cash investing working capital Changes in non-cash working capital Year Ended Dec 31, 2020 Dec 31, 2019 15,332 15,987 (5,476) (14,772) (877) (6,251) 3,943 12,365 (8,422) 3,943 48,913 (1,638) (2,882) (137,209) (31,994) 2,590 (122,220) (65,148) (57,072) (122,220) Vermilion Energy Inc. ■ Page 83 ■ 2020 Annual Report Cash and cash equivalents was comprised of the following: Cash on deposit with financial institutions Guaranteed investment certificates Cash and cash equivalents Wages and benefits included in operating expenses and general and administration expenses were: Operating expense General and administration expense Wages and benefits As at Dec 31, 2020 6,777 127 6,904 Dec 31, 2019 28,898 130 29,028 Year Ended Dec 31, 2020 70,414 60,551 130,965 Dec 31, 2019 77,868 47,310 125,178 Vermilion Energy Inc. ■ Page 84 ■ 2020 Annual Report The following tables summarize Vermilion's outstanding risk management positions as at December 31, 2020: Unit Currency Bought Put Volume Weighted Average Bought Put Price Weighted Average Sold Call Price Weighted Average Sold Put Price Sold Swap Volume Weighted Average Sold Swap Price Bought Swap Volume Weighted Average Bought Swap Price Sold Put Volume Sold Call Volume Dated Brent Q1 2021 Q2 2021 WTI Q1 2021 Q2 2021 AECO Q2 2021 Q3 2021 Q4 2021 bbl bbl bbl bbl mcf mcf mcf USD USD USD USD CAD CAD CAD AECO Basis (AECO less NYMEX Henry Hub) Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 NYMEX Henry Hub Q1 2021 Q2 2021 Q3 2021 Q4 2021 mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf USD USD USD USD USD USD USD USD USD USD USD USD Ventura Basis (Ventura less NYMEX Henry Hub) Q1 2021 Q2 2021 Q3 2021 Q4 2021 SoCal Border Q1 2021 Conway Propane Q1 2021 mcf mcf mcf mcf USD USD USD USD mcf USD bbl USD 1,000 — 4,500 4,000 47.50 — 45.00 45.00 1,000 — 4,500 4,000 53.75 — 51.26 53.50 1,000 — 4,500 4,000 40.00 — 37.50 37.50 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 15,000 10,000 10,000 10,000 2.73 2.65 2.65 2.65 15,000 10,000 10,000 10,000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2.90 2.77 2.77 2.77 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2,000 500 4,300 2,150 9,478 9,478 3,194 30,000 45,000 45,000 35,054 30,000 35,000 35,000 11,793 33,500 28,500 28,500 21,870 — — — — 49.18 47.50 45.51 45.54 2.12 2.12 2.12 (1.11) (1.08) (1.08) (1.09) (1.10) (1.09) (1.09) (1.09) 2.86 2.83 2.83 2.78 — — — — 5,000 3.40 500 56% WTI — — — — — — — — — — — — — — — — — — — 10,000 10,000 10,000 3,370 — — — — — — — — — — — — — — — — — — — — — — — 0.04 0.04 0.04 0.04 — — — — Vermilion Energy Inc. ■ Page 85 ■ 2020 Annual Report Unit Currency Bought Put Volume Weighted Average Bought Put Price Weighted Average Sold Call Price Weighted Average Sold Put Price Sold Swap Volume Weighted Average Sold Swap Price Bought Swap Volume Weighted Average Bought Swap Price Sold Put Volume Sold Call Volume mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf mcf EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR 58,962 49,135 49,135 58,962 34,394 27,024 14,740 14,740 7,370 2,457 2,457 2,457 2,457 2,457 2,457 2,457 5.37 5.37 5.37 5.37 5.18 5.07 4.86 4.86 4.74 4.25 4.25 4.84 4.84 4.84 4.84 4.84 61,419 49,135 49,135 58,962 34,394 27,024 14,740 14,740 7,370 2,457 2,457 2,457 2,457 2,457 2,457 2,457 5.45 5.43 5.42 5.36 5.88 5.64 5.42 5.41 4.96 3.93 3.92 5.64 5.64 5.64 5.64 5.64 58,962 49,135 49,135 58,962 34,394 27,024 14,740 14,740 7,370 2,457 2,457 2,457 2,457 2,457 2,457 2,457 3.88 3.87 3.87 3.88 3.63 3.50 3.42 3.42 3.32 2.93 2.93 3.52 3.52 3.52 3.52 3.52 2,457 2,457 2,457 2,457 2,457 2,457 2,457 2,457 — — — — — — — — 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — NBP Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 TTF Q2 2021 Q3 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 VET Equity Swaps Swap Swap Jan 2020 - Sep 2021 Jan 2020 - Oct 2021 Initial Share Price Share Volume 20.9788 22.4587 CAD CAD 2,250,000 1,500,000 Foreign Currency Swaps Swap Jan 2021 Notional Amount 1,200,342,790 USD Notional Amount 1,570,298,550 CAD Average Rate 1.3082 The following sold option instruments allow the counterparties, at the specified date, to enter into a derivative instrument contract with Vermilion at the detailed terms: Period if Option Exercised Unit Currency NYMEX Option Expiration Date Bought Put Volume Weighted Average Bought Put Price Sold Call Volume Weighted Average Sold Call Price Sold Put Volume Weighted Average Sold Put Price Weighted Average Sold Swap Price Sold Swap Volume Apr 2021 - Oct 2021 mcf USD 24-Mar-21 NBP Jan 2022 - Dec 2022 mcf EUR 30-Jun-21 Dated Brent Apr 2021 - Mar 2022 bbl USD 31-Mar-21 — — — — — — — — — — — — — — — — — — 10,000 2.90 2,457 5.13 500 52.00 Vermilion Energy Inc. ■ Page 86 ■ 2020 Annual Report DIRECTORS Lorenzo Donadeo 1 Calgary, Alberta Larry J. Macdonald 2, 4, 6, 8 Calgary, Alberta Carin Knickel 5, 8, 12 Golden, Colorado Stephen P. Larke 4, 6, 12 Calgary, Alberta Loren M. Leiker 10, 13 McKinney, Texas Timothy R. Marchant 7, 10, 11 Calgary, Alberta Robert Michaleski 3, 6 Calgary, Alberta William Roby 8, 9, 12 Katy, Texas Catherine L. Williams 4, 6 Calgary, Alberta 1 Executive Chairman 2 Lead Director (Independent) 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 13 New Venture Working Team Chair (Independent) 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 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 EVALUATION ENGINEERS GLJ Petroleum Consultants Ltd. Calgary, Alberta LEGAL COUNSEL Norton Rose Fulbright Canada LLP Calgary, Alberta TRANSFER AGENT Odyssey Trust Company STOCK EXCHANGE LISTINGS The Toronto Stock Exchange (“VET”) The New York Stock Exchange (“VET”) INVESTOR RELATIONS Kyle Preston Vice President Investor Relations 403-476-8431 TEL 403-476-8100 FAX 1-866-895-8101 IR TOLL FREE investor_relations@vermilionenergy.com OFFICERS AND KEY PERSONNEL CANADA Lorenzo Donadeo * Executive Chairman Curtis Hicks * President Lars Glemser * Vice President & Chief Financial Officer Dion Hatcher * Vice President North America Terry Hergott Vice President Marketing Darcy Kerwin * Vice President International & HSE Kyle Preston Vice President Investor Relations Jenson Tan * Vice President Business Development Adam Iwanicki Director Marketing Yvonne Jeffery Director Sustainability Jeremy Kalanuk Director Operations Accounting Bryce Kremnica Director Field Operations - Canada Business Unit Tom Rafter Director Land - Canada Business Unit Steve Reece Director Information Technology & Information Systems Averyl Schraven Director, People & Culture Robert (Bob) J. Engbloom Corporate Secretary UNITED STATES Scott Seatter Managing Director - 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 Ryan Carty Managing Director - Ireland Business Unit AUSTRALIA Bruce D. Lake Managing Director - Australia Business Unit * Executive Committee Vermilion Energy Inc. ■ Page 87 ■ 2020 Annual Report 

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