2022
A N N UA L R E P O R T
EXCELLENCE. TRUST. RESPECT. RESPONSIBILITY.INTERNATIONALLY DIVERSIFIED | FREE CASH FLOW FOCUSED 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
8
15
68
78
100
May 3, 2023
3:00 PM MT
Our annual general meeting will be held as a virtual shareholder meeting with electronic participation as explained in our 2023 Proxy Statement and
Information Circular, which will be available in March 2023. 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 when available.
Vermilion Energy Inc. ■ Page 1 ■ 2022 Annual Report
Disclaimer
Certain statements included or incorporated by reference in this document may constitute forward-looking statements or information 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; statements regarding the return of 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 2023 guidance, and rates of
average annual production growth; the effect of changes in crude oil and natural gas prices, changes in exchange and inflation rates; 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 wells expected to be drilled in 2023; exploration and development plans and the
timing thereof; Vermilion’s ability to reduce its debt; 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, interest rates, and inflation
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 or involving 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.
This document contains references to sustainability/ESG data and performance that reflect metrics and concepts that are commonly used in such
frameworks as the Global Reporting Initiative, the Task Force on Climate-related Financial Disclosures, and the Sustainability Accounting Standards
Board. Vermilion has used best efforts to align with the most commonly accepted methodologies for ESG reporting, including with respect to climate
data and information on potential future risks and opportunities, in order to provide a fuller context for our current and future operations. However,
these methodologies are not yet standardized, are frequently based on calculation factors that change over time, and continue to evolve rapidly.
Readers are particularly cautioned to evaluate the underlying definitions and measures used by other companies, as these may not be comparable
to Vermilion’s. While Vermilion will continue to monitor and adapt its reporting accordingly, the Company is not under any duty to update or revise the
related sustainability/ESG data or statements except as required by applicable securities laws.
Vermilion Energy Inc. ■ Page 2 ■ 2022 Annual Report
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 3 ■ 2022 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 4 ■ 2022 Annual Report
Highlights
Year-end 2022 Results
•
•
•
•
•
•
•
•
•
2022 fund flows from operations (“FFO”)(1) was a record $1.6 billion ($10.00/basic share)(2), representing a year-over year increase of 78%,
including the impact of $406 million of realized hedging losses and $223 million of temporary European windfall taxes.
2022 exploration and development (“E&D”) capital expenditures(3) were $552 million, resulting in record free cash flow (“FCF”)(4) of $1.1 billion
($6.62/basic share)(5), representing a year-over-year increase of 99%, including the impact of hedging losses and temporary windfall taxes.
Record FCF in 2022 allowed us to fund over $500 million of strategic acquisitions, reduce net debt by over $300 million and return over $100
million to our shareholders through dividends and share buybacks. We exited the year with net debt(6) of $1.3 billion, resulting in a net debt to
trailing FFO ratio(7) of 0.8 times at December 31, 2022.
Following the reinstatement of our quarterly dividend in Q1 2022 and the approval of a normal course issuer bid (“NCIB”) in Q3 2022, we
declared $46 million in dividends and repurchased $72 million of Vermilion shares in 2022, representing 11% of FCF.
Net earnings were $1.3 billion ($8.03/basic share) for 2022, representing a 14% increase over the prior year.
Production in 2022 averaged 85,187 boe/d(8) which is consistent with 2021 production levels.
Total proved plus probable (“2P”) reserves increased 9% from the prior year to 523 mmboe(9). Including acquisitions, we replaced 234% of
production on a proved plus probable basis and increased our total proved plus probable reserve life index to 16.8 years.
The after-tax net present value of 2P reserves(9), discounted at 10%, increased 36% from the prior year to $8.9 billion ($54.72/basic share), with
proved developed producing ("PDP") reserves making up more than 50% of this value.
2P finding, development and acquisition (“FD&A”) costs, including changes in future development costs (“FDC”) were $19.22/boe, resulting in a
2022 2P FD&A Operating Recycle Ratio of 4.4 times.
Fourth Quarter 2022 Results
•
•
•
•
•
Q4 2022 FFO was $284 million ($1.74/basic share)(2), including the full year impact of the temporary European windfall tax of $223 million.
Without the temporary windfall tax, FFO would have been $507 million ($3.11/basic share), in line with the prior quarter.
Q4 2022 E&D capital expenditures(3) were $169 million, resulting in FCF of $115 million ($0.70/basic share)(5), including the full year impact of
the temporary European windfall tax noted above. Without the impact of the temporary windfall tax, FCF would have been $338 million ($2.07/
basic share), an increase of 4% over the prior quarter.
Q4 2022 production averaged 85,450 boe/d(8) an increase of 1% from the previous quarter. During the fourth quarter, production was impacted
by unplanned downtime in Australia, cold weather and third-party downtime in North America and the delayed startup of our six-well Montney
pad in Alberta.
Production from our North American operations averaged 58,499 boe/d(8) in Q4 2022, an increase of 2% from the prior quarter primarily due to
new production from our Montney assets in Canada and a full quarter contribution from our 2022 drilling program in the United States.
Production from our International operations averaged 26,953 boe/d(8) in Q4 2022, a decrease of 1% from the prior quarter, primarily due to
natural decline in Netherlands and Germany, as well as lower than anticipated production in Australia due to unplanned downtime.
Outlook
•
•
•
•
The Corrib acquisition has a planned close on March 31, 2023. This acquisition is expected to add approximately 7,000 boe/d of European gas
production which was incorporated from March 31, 2023 onwards in our original production guidance of 87,000 to 91,000 boe/d.
Subsequent to year-end, we signed an agreement to sell approximately 5,500 boe/d of non-core light oil production in southeast Saskatchewan
for total cash consideration of $225 million, before closing adjustments. The transaction has an effective date of September 1, 2022 and is
expected to close in March 2023. The net proceeds will be used to pay down debt.
Taking into account the southeast Saskatchewan asset sale and Australia downtime, we are revising our 2023 production guidance to 82,000 to
86,000 boe/d. Our 2023 capital budget remains unchanged at $570 million.
In conjunction with our Q4 2022 release, we declared a quarterly cash dividend of $0.10 CDN per share for Q1 2023, representing a 25%
increase over the prior quarterly dividend. In addition, we resumed share buybacks in early January 2023, and have repurchased 1.1 million
shares in 2023 to date.
Vermilion Energy Inc. ■ Page 5 ■ 2022 Annual Report
($M except as indicated)
Financial
Petroleum and natural gas sales
Cash flows from operating activities
Fund flows from operations (1)
Fund flows from operations ($/basic share) (2)
Fund flows from operations ($/diluted share) (2)
Net earnings
Net earnings ($/basic share)
Cash flows used in investing activities
Capital expenditures (3)
Acquisitions
Asset retirement obligations settled
Repurchase of shares
Cash dividends ($/share)
Dividends declared
% of fund flows from operations (10)
Payout (11)
% of fund flows from operations (11)
Free cash flow (4)
Long-term debt
Net debt (6)
Net debt to four quarter trailing fund flows from operations (7)
Operational
Production (8)
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 (12)
Fund flows from operations ($/boe) (13)
Operating expenses
General and administration expenses
Average reference prices
WTI (US $/bbl)
Dated Brent (US $/bbl)
AECO ($/mcf)
TTF ($/mcf)
Share information ('000s)
Shares outstanding - basic
Shares outstanding - diluted (14)
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted (14)
(1)
Q4 2022
Q3 2022
Q4 2021
2022
2021
842,693
495,195
284,220
1.74
1.70
395,408
2.42
168,053
169,305
4,558
16,508
—
0.08
13,058
964,678
447,608
507,876
3.10
3.01
271,079
1.65
168,275
184,015
6,220
10,386
71,659
0.08
13,031
5 %
3 %
198,871
207,432
70 %
41 %
114,915
1,081,351
1,344,586
0.8
323,861
1,409,507
1,412,052
0.8
38,915
7,497
234.23
85,450
115.02
39.93
17.43
38 %
18 %
30 %
14 %
70.00
35.08
16.81
1.65
82.65
88.71
4.64
38.36
163,227
168,616
163,105
167,397
37,315
7,901
234.12
84,237
123.02
44.64
24.68
38 %
17 %
30 %
15 %
78.42
67.07
16.64
1.90
91.56
100.85
4.16
75.56
162,883
168,574
163,947
168,494
765,915
250,352
322,173
1.99
1.93
344,588
2.12
134,873
145,807
23,633
13,039
—
—
—
— %
158,846
49 %
176,366
1,651,569
1,644,786
1.8
36,264
8,461
238.16
84,417
96.88
47.27
17.89
38 %
16 %
28 %
18 %
48.07
40.73
14.24
2.20
77.19
79.73
4.66
38.86
162,261
168,746
162,247
166,519
3,476,394
1,814,220
1,634,865
10.00
9.71
1,313,062
8.03
1,059,292
551,817
539,713
37,514
71,659
0.28
45,769
3 %
635,100
39 %
1,083,048
1,081,351
1,344,586
0.8
37,530
7,961
238.18
85,187
123.89
45.95
18.99
38 %
16 %
30 %
16 %
70.15
52.65
15.75
1.86
94.23
101.19
5.25
48.35
163,227
168,616
163,489
168,426
2,079,761
834,453
919,862
5.71
5.58
1,148,696
7.13
469,700
374,796
130,965
28,525
—
—
—
— %
403,321
44 %
545,066
1,651,569
1,644,786
1.8
38,143
8,325
233.64
85,408
83.78
34.44
9.53
38 %
17 %
29 %
16 %
34.06
29.54
13.27
1.70
67.92
70.73
3.62
19.86
162,261
168,746
161,172
164,765
Fund flows from operations (FFO) is a total of segments measure comparable to net earnings that is comprised of sales less royalties, transportation, operating,
G&A, corporate income tax, PRRT, windfall taxes, interest expense, realized loss on derivatives, realized foreign exchange gain (loss), and realized other
income. The measure is used to assess the contribution of each business unit to Vermilion's ability to generate income necessary to pay dividends, repay debt,
fund asset retirement obligations, and make capital investments. FFO does not have a standardized meaning under IFRS and therefore may not be comparable
to similar measures provided by other issuers. More information and a reconciliation to primary financial statement measures can be found in the “Non-GAAP
and Other Specified Financial Measures” section of this document.
Vermilion Energy Inc. ■ Page 6 ■ 2022 Annual Report
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Fund flows from operations per share (basic and diluted) are supplementary financial measures and are not a standardized financial measures under IFRS, and
therefore may not be comparable to similar measures disclosed by other issuers. They are calculated using FFO (a total of segments measure) and basic/
diluted shares outstanding. The measure is used to assess the contribution per share of each business unit. More information and a reconciliation to primary
financial statement measures can be found in the “Non-GAAP and Other Specified Financial Measures” section of this document.
Capital expenditures is a non-GAAP financial measure that is the sum of drilling and development costs and exploration and evaluation costs from the
Consolidated Statements of Cash Flows. More information and a reconciliation to primary financial statement measures can be found in the “Non-GAAP and
Other Specified Financial Measures” section of this document.
Free cash flow (FCF) is a non-GAAP financial measure comparable to cash flows from operating activities and is comprised of FFO less drilling and
development and exploration and evaluation expenditures. More information and a reconciliation to primary financial statement measures can be found in the
“Non-GAAP and Other Specified Financial Measures” section of this document.
Free cash flow per basic share is a non-GAAP supplementary financial measure and is not a standardized financial measure under IFRS and may not be
comparable to similar measures disclosed by other issuers. It is calculated using FCF and basic shares outstanding.
Net debt is a capital management measure comparable to long-term debt and is comprised of long-term debt (excluding unrealized foreign exchange on
swapped USD borrowings) plus adjusted working capital (defined as current assets less current liabilities, excluding current derivatives and current lease
liabilities). More information and a reconciliation to primary financial statement measures can be found in the “Non-GAAP and Other Specified Financial
Measures” section of this document.
Net debt to trailing FFO is a supplementary financial measure and is not a standardized financial measure under IFRS. It may not be comparable to similar
measures disclosed by other issuers and is calculated using net debt (capital management measure) and FFO (total of segment measure). The measure is
used to assess the ability to repay debt. Information in this document is included by reference; refer to the "Non-GAAP and Other Specified Financial Measures"
section of this document.
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 14, 2023 with an effective date of December 31, 2022 (the “2022 GLJ Reserves Report”). Net present value of discounted
cash flows as provided in the 2022 GLJ Reserves Report.
(10) Dividends % of FFO is a supplementary financial measure that is not standardized under IFRS and may not be comparable to similar measures disclosed by
other issuers, calculated as dividends divided by FFO. The ratio is used by management as a metric to assess the cash distributed to shareholders.
Reconciliation to primary financial statement measures can be found in the “Non-GAAP and Other Specified Financial Measures” section of this document.
(11) Payout and payout % of FFO are a non-GAAP financial measure and a non-GAAP ratio, respectively, that are not standardized under IFRS and may not be
comparable to similar measures disclosed by other issuers. Payout is comparable to dividends declared and is comprised of dividends declared plus drilling and
development costs, exploration and evaluation costs, and asset retirement obligations settled, while the ratio is calculated as payout divided by FFO. More
information and a reconciliation to primary financial statement measures can be found in the “Non-GAAP and Other Specified Financial Measures” section of
this document.
(12) Operating netback is a non-GAAP financial measure comparable to net earnings and is comprised of sales less royalties, operating expense, transportation
costs, PRRT, and realized hedging gains and losses. More information and a reconciliation to primary financial statement measures can be found in the “Non-
GAAP and Other Specified Financial Measures” section of this document.
(13)
Fund flows from operations per boe is a supplementary financial measure that is not standardized under IFRS and may not be comparable to similar measures
disclosed by other issuers, calculated as FFO by boe production. Fund flows from operations per boe is used by management to assess the profitability of our
business units and Vermilion as a whole. More information and a reconciliation to primary financial statement measures can be found in the “Non-GAAP and
Other Specified Financial Measures” section of this document.
(14) Diluted shares outstanding represent the sum of shares outstanding at the period end plus outstanding awards under the Long-term Incentive Plan (“LTIP”),
based on current estimates of future performance factors and forfeiture rates.
Vermilion Energy Inc. ■ Page 7 ■ 2022 Annual Report
Message to Shareholders
In 2022, we delivered on our strategic priorities and continued to re-position Vermilion for long term success. Due to the robust free cash flow
generation of our international and diversified assets, we reduced net debt by $300 million and completed $500 million of strategic acquisitions,
despite incurring $406 million of realized hedging losses and $223 million of temporary windfall taxes. To increase our exposure to premium priced
European gas, we progressed the high rate of return Irish Corrib consolidation deal, which we plan to close on March 31, 2023. In Canada, our
Montney acquisition increased the depth and quality of our North American inventory. With lower debt and an even stronger asset base, we
announced our return of capital framework and returned over $100 million to our shareholders with the reinstatement of a quarterly dividend in Q1
2022 and commencement of a share buyback program in Q3 2022. We exited the year with net debt of $1.3 billion, or 0.8 times trailing FFO, which
is less than half the leverage ratio from the prior year. These results translated into a total shareholder return in excess of 50% including share price
appreciation and dividends. We remain committed to reducing debt even further, which will allow for increasing return of capital to our shareholders
in the future. Our next debt target remains $1.0 billion of net debt, which we anticipate achieving by the end of 2023 or early 2024, depending on
commodity prices.
Production in Q4 2022 averaged 85,450 boe/d, representing a 1% increase over Q3 2022. Annual average production was 85,187 boe/d, which is
consistent with 2021 production levels. During the fourth quarter, production was impacted by unplanned downtime in Australia, cold weather and
third-party downtime in North America, and the delayed startup of our six-well Montney pad in Alberta. We generated $284 million of FFO and $115
million of FCF in Q4 2022, which includes the $223 million full year impact of temporary windfall taxes. The temporary windfall tax was approved by
the European Union on September 30, 2022, and was applied retroactively for 2022 in the countries where we operate, therefore we have reflected
the full amount in our Q4 2022 financial results.
Our exposure to global commodity prices is a key driver of our strong financial results and remains a strategic advantage for Vermilion. European
gas prices were particularly strong in 2022, averaging nearly $50/mmbtu (TTF) for the year and reaching over $120/mmbtu (TTF) during the summer.
While European gas prices have moderated in recent months due to a much warmer than average winter in Europe, the forward price for the balance
of 2023 and 2024 is approximately $20/mmbtu, which is six to seven times higher than forward Canadian AECO prices and four to five times higher
than forward NYMEX prices.
We completed the strategic acquisition of Leucrotta Exploration in 2022, marking Vermilion’s entry into the prolific Montney resource play. This
acquisition has significantly enhanced the depth and quality of Vermilion’s drilling inventory as reflected by the 9% increase in our 2022 proved plus
probable reserve life index of 16.8 years. We are in the early stages of developing this long-life asset as we focus on optimizing the existing
infrastructure in both Alberta and British Columbia in 2023 and further plans for the build out of the necessary infrastructure to support our future
expansion plans. Subsequent to the end of the year, the British Columbia government announced agreements with Blueberry River First Nations and
other Treaty 8 First Nations, outlining guidelines pertaining to future resource development in the region. We view this as a positive development.
Our British Columbia assets are located outside of Blueberry River First Nations' High Value Areas and are on predominantly private freehold land
where we continue to receive permits. We believe this will help facilitate the timely approval of future permits required to expand our Montney
development in British Columbia.
Asset Disposition
Subsequent to year-end, we signed an agreement to sell certain assets in southeast Saskatchewan. The assets are comprised of approximately
5,500 boe/d of non-core light oil production spread across the greater Arcola and Queensdale areas of southeast Saskatchewan. Total cash
consideration is $225 million, before closing adjustments. Following our entry into the Montney, these mature assets were unlikely to attract capital.
The divestment was part of our strategy to re-position Vermilion for long term success by high-grading our North American inventory, reducing unit
cost and accelerating the timeline of achieving our debt reduction targets. The transaction has an effective date of September 1, 2022 and is
expected to close in March 2023. The net proceeds will be used to pay down our revolving credit facility.
Outlook and Guidance Update
The Corrib acquisition has a planned close on March 31, 2023. We estimate a net cash payment of approximately $200 million at close and expect
the acquisition to payout in approximately one year, based on forward commodity prices. This acquisition is expected to add approximately 7,000
boe/d of European gas production, which was reflected from March 31, 2023 onwards in our original production guidance of 87,000 to 91,000 boe/d.
Taking into account the southeast Saskatchewan asset sale and Australia downtime, we are revising our 2023 production guidance to 82,000 to
86,000 boe/d. Our 2023 capital budget remains unchanged at $570 million as there was minimal capital allocated to the assets being sold.
Our Q1 2023 drilling program is off to a strong start and is expected to deliver higher production in Canada during the first quarter, however extended
maintenance downtime in Australia will result in lower corporate production in Q1 2023. Production from the Wandoo field in Australia was
temporarily shut-in during December 2022 for maintenance. We have identified additional maintenance requirements and, as a precautionary
Vermilion Energy Inc. ■ Page 8 ■ 2022 Annual Report
measure, have elected to complete a detailed inspection of the entire facility and conduct all necessary repairs at this time. These actions are
expected to minimize future downtime. We expect Australia production to be offline for all of Q1 2023 and to restart in Q2 2023. As a result of the
Australia downtime and the southeast Saskatchewan asset sale, Q1 2023 corporate production is expected to be in the range of 80,000 to 82,000
boe/d.
We continue to deleverage our balance sheet and prioritize profitability, debt reduction and return of capital over production growth. As announced
with our 2023 budget, we expect to allocate up to 25% of FCF to shareholder returns through the base dividend and share repurchases, which
recommenced in early January 2023. To date, we have repurchased 1.1 million shares in 2023 and 3.5 million shares in total under our existing
NCIB. In addition, we announced a 25% increase to the Q1 2023 base dividend to $0.10 per share which will be payable on April 17, 2023. We look
forward to providing further updates on our return of capital strategy as we make progress towards our next debt target.
Q4 2022 Operations Review
North America
Production from our North American operations averaged 58,499 boe/d in Q4 2022, an increase of 2% from the prior quarter primarily due to new
well production from our Montney assets in Canada and a full quarter contribution from our 2022 drilling program in the United States. In Alberta, we
drilled twelve (10.6 net), completed ten (8.2 net), and brought on production seven (6.9 net) Mannville liquids rich gas wells, while at Mica we drilled
one (1.0 net) well and brought on production the six (6.0 net) wells from our first Montney pad. The six well Montney pad was brought on production
in late November and saw rates increase through the balance of the year as the wells cleaned up. Total production from our Montney assets
averaged 7,500 boe/d during the month of December. In December, drilling commenced on a follow up three-well pad in Alberta which is expected to
be completed and tied in during the first half of 2023. During the fourth quarter of 2022 we received three permits in British Columbia, including one
of the permits to construct a 16,000 boe/d battery and to drill a multi-well pad in British Columbia. We also signed agreements to acquire 11 sections
of adjacent land at Mica, further consolidating our contiguous land base and increasing our Tier 1 inventory.
In Saskatchewan, we drilled seven (5.5 net) wells, completed ten (6.9 net) wells, and brought on production twelve (6.7 net) wells in southeast
Saskatchewan. No drilling or completion activity occurred in the United States in the fourth quarter as the team focused on preparation for the 2023
drilling program which will commence in Q2 2023.
International
Production from our International operations averaged 26,953 boe/d in Q4 2022, a decrease of 1% from the prior quarter, primarily due to natural
decline in Netherlands and Germany, as well as lower than anticipated production in Australia due to unplanned downtime. This was largely offset by
higher production in France and Ireland. Production from the fire-related downtime in France was gradually restored through the fourth quarter of
2022 and has been fully restored subsequent to year end. Ireland production increased 1% in Q4 2022 compared to the previous quarter as the
Corrib facility experienced strong operational run time during the quarter.
During the fourth quarter we drilled one (1.0 net) oil well in Germany, which was brought on production in Q1 2023. We also continued to advance
our deep well gas exploration and development plans in Germany as we prepare for our first well to be drilled in the fourth quarter of 2023. In the
Netherlands, we drilled one (0.5 net) gas well which encountered a 19 metre gas column and is expected to be brought on production in the first half
of 2023. We drilled two (2.0 net) exploratory wells in Croatia, however, neither of the wells encountered commercial hydrocarbons.
2022 Reserve Report
Our 2022 total proved plus probable reserves increased 9% from the prior year to 523 mmboe(2). The after-tax net present value of proved plus
probable reserves(2), discounted at 10%, increased 36% from the prior year to $8.9 billion ($54.72/basic share) at December 31, 2022, with proved
developed producing reserves making up more than 50% of this value. The increase is primarily due to the acquisition of Leucrotta and positive
economic revisions resulting from stronger commodity prices. Including acquisitions, we replaced 234% of production on a proved plus probable
basis at an FD&A cost (including future development costs) of $19.22/boe, resulting in a 2022 total proved plus probable FD&A Operating Recycle
Ratio of 4.4 times. On an organic basis, we added proved plus probable reserves at an F&D cost (including future development costs) of $22.66/boe,
resulting in a 2022 total proved plus probable F&D Operating Recycle Ratio of 3.7 times. Our total proved plus probable reserve life index increased
by 9% in 2022 to 16.8 years, reflecting our continuous focus on enhancing the asset base. Over the past decade we have successfully increased our
reserve life index by approximately 40% through the combination of organic development and strategic acquisitions. Given the early stage of our
Montney development, we expect further recognition of Montney reserves in the coming years as we progress development of this play.
Vermilion Energy Inc. ■ Page 9 ■ 2022 Annual Report
The following table provides a summary of company interest reserves by reserve category and region on an oil equivalent basis. Please refer to
Vermilion's 2022 Annual Information Form for the year ending December 31, 2022 ("2022 Annual Information Form") for detailed information by
country and product type.
BOE (mboe)
North America
International
Vermilion
Proved Developed
Producing
Proved Developed
Non-Producing
Proved
Undeveloped
Proved
Probable
133,879
54,738
188,617
6,882
7,220
14,101
103,909
6,501
110,411
244,670
68,459
313,129
167,375
42,286
209,661
Proved Plus
Probable
412,045
110,745
522,790
The following table summarizes the finding and development costs and associated operating recycle ratios by reserve category for the three-year
period ending December 31, 2022:
Finding and Development Costs, including FDC (F&D) ($/boe) (3)
Finding, Development and Acquisition Costs, including FDC (FD&A) ($/boe) (3)
F&D Operating Recycle Ratio (x) (4)
FD&A Operating Recycle Ratio (x) (4)
PDP
$22.93
$35.10
2022
1P
$24.47
$29.09
3-Year Average
2P
$22.66
$19.22
PDP
$16.64
$21.76
1P
$18.51
$21.08
2P
$23.65
$18.78
3.65
2.39
3.42
2.88
3.70
4.36
2.80
2.14
2.52
2.21
1.97
2.48
The following table provides a reconciliation of changes in company interest reserves by reserve category and region. Please refer to Vermilion's
2022 Annual Information Form for detailed information by country and product type.
1P (mboe)
December 31, 2021
Discoveries
Extensions & Improved Recovery
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
December 31, 2022
2P (mboe)
December 31, 2021
Discoveries
Extensions & Improved Recovery
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
December 31, 2022
North America
International
223,478
—
26,614
(6,536)
18,895
(61)
3,292
(21,013)
244,669
78,574
—
717
(3,101)
—
(17)
2,367
(10,080)
68,459
North America
International
357,780
—
47,369
(24,889)
48,113
(143)
4,827
(21,013)
412,045
123,227
—
3,223
(8,054)
—
(26)
2,456
(10,080)
110,745
Vermilion
302,052
—
27,330
(9,637)
18,895
(78)
5,659
(31,093)
313,128
Vermilion
481,007
—
50,592
(32,943)
48,113
(169)
7,283
(31,093)
522,790
Additional information about our 2022 GLJ Reserves Report can be found in our 2022 Annual Information Form on our website at
www.vermilionenergy.com and on SEDAR at www.sedar.com.
Vermilion Energy Inc. ■ Page 10 ■ 2022 Annual Report
Commodity Hedging
Vermilion hedges to manage commodity price exposures and increase the stability of our cash flows. In aggregate, as of March 8, 2023, we have
15% of our expected net-of-royalty production hedged for the remainder of 2023. With respect to individual commodity products, we have hedged
50% of our European natural gas production, 0% of our crude oil production, and 13% of our North American natural gas volumes for the remainder
of 2023, 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.
Organizational Update
Mr. Dion Hatcher has been promoted to the role of President and Chief Executive Officer, and appointed as a member of the Board of Directors of
the Company, effective March 7, 2023. Mr. Hatcher was promoted to President on January 1, 2022 and previously held the positions of Vice
President, North America, Vice President of Canadian Business Unit, and various other roles of increasing responsibility during his 17 year tenure
with the company. The Executive Committee structure will remain in place and will continue to be used by the organization to review and approve
key organizational, financial, operational and strategic decisions for the Company. This leadership structure has proven to be a highly collaborative
decision-making model that draws upon the collective knowledge, experience, business acumen and skills of the senior management team.
"On behalf of the Board, I would like to congratulate Dion on his promotion to President and Chief Executive Officer. Since taking on the role of
President in January 2022, Dion has demonstrated strong leadership skills with the vision to lead Vermilion into the future. He is fully aligned with
Vermilion's conservative business principles, its focus on long term value creation, and its values and corporate culture. We look forward to his
contribution to the Board" said Robert Michaleski, Vermilion's Chairman.
(Signed “Dion Hatcher”)
Dion Hatcher
President & Chief Executive Officer
March 8, 2023
(1)
(2)
(3)
(4)
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 14, 2023 with an effective date of December 31, 2022 (the “2022 GLJ Reserves Report”). Net present value of discounted
cash flows as provided in the 2022 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 non-GAAP ratio that is calculated by dividing the Operating Netback (non-GAAP measure), excluding realized hedging gain (loss)
and PRRT, by the cost of adding reserves (F&D and FD&A cost). For the purposes of calculating 2022 Operating Recycle Ratios, this netback number was
$83.81. More information can be found in the “Non-GAAP Financial Measures and Other Specified Financial Measures” section of this document.
Vermilion Energy Inc. ■ Page 11 ■ 2022 Annual Report
Non-GAAP and Other Specified Financial Measures
This report and other materials released by Vermilion includes financial measures that are not standardized, specified, defined, or determined under
IFRS and are therefore considered non-GAAP or other specified financial measures and may not be comparable to similar measures presented by
other issuers. These financial measures include:
Total of Segments Measures
Fund flows from operations (FFO): Most directly comparable to net earnings, FFO is comprised of sales excluding royalties, transportation,
operating, G&A, corporate income tax, PRRT, windfall taxes, interest expense, realized loss on derivatives, realized foreign exchange gain (loss),
and realized other income. The measure is used to assess the contribution of each business unit to Vermilion's ability to generate income necessary
to pay dividends, repay debt, fund asset retirement obligations and make capital investments.
Sales
Royalties
Transportation
Operating
General and administration
Corporate income tax expense
Windfall taxes
PRRT
Interest expense
Realized loss on derivatives
Realized foreign exchange gain (loss)
Realized other (expense) income
Fund flows from operations
Equity based compensation
Unrealized gain (loss) on derivative instruments (1)
Unrealized foreign exchange (loss) gain (1)
Accretion
Depletion and depreciation
Deferred tax expense
Gain on business combinations
Impairment reversal
Unrealized other expense
Net earnings
(1)
$/boe
66.81
(5.98)
(2.48)
(13.27)
(1.70)
(0.97)
—
(0.50)
(2.35)
(10.52)
(0.21)
0.71
29.54
$/boe
103.99
(8.43)
(2.71)
(16.81)
(1.65)
(5.18)
(27.50)
(0.62)
(2.78)
(5.42)
2.33
(0.14)
35.08
Q4 2022
$M
842,693
(68,303)
(21,976)
(136,247)
(13,344)
(41,958)
(222,859)
(5,045)
(22,506)
(43,940)
18,845
(1,140)
284,220
(5,377)
549,693
(47,405)
(16,501)
(171,926)
(196,733)
—
—
(563)
395,408
Q4 2021
$M
765,915
(58,785)
(19,033)
(112,680)
(17,374)
(32,234)
—
(5,544)
(16,279)
(189,598)
(2,395)
10,180
322,173
(6,666)
172,265
7,122
(10,983)
(148,216)
(14,834)
—
23,922
(195)
344,588
2022
$M
$/boe
96.82 3,476,394
(7.43) (306,017)
(2.41)
(78,896)
(14.24) (489,034)
(2.20)
(57,677)
(4.07) (208,153)
— (222,859)
(18,318)
(0.70)
(2.06)
(82,858)
(23.97) (405,894)
15,195
(0.30)
1.29
12,982
40.73 1,634,865
(44,390)
540,801
(84,464)
(58,170)
(577,134)
(288,707)
—
192,094
(1,833)
1,313,062
2021
$M
$/boe
111.95 2,079,761
(9.85) (186,122)
(2.54)
(77,161)
(15.75) (413,013)
(52,877)
(1.86)
(30,166)
(6.70)
—
(7.18)
(15,688)
(0.59)
(2.67)
(73,075)
(13.07) (327,384)
(6,613)
0.49
0.42
22,200
52.65 919,862
(41,565)
(181,094)
(64,963)
(43,552)
(571,688)
(187,343)
17,198
1,302,619
(778)
1,148,696
Unrealized gain (loss) on derivative instruments, Unrealized foreign exchange (loss) gain, and Unrealized other expense are line items from the respective
Consolidated Statements of Cash Flows.
Non-GAAP Financial Measures and Non-GAAP Ratios
Free cash flow (FCF): Most directly comparable to cash flows from operating activities, FCF is comprised of fund flows from operations less drilling
and development costs and exploration and evaluation costs. The measure is used to determine the funding available for investing and financing
activities including payment of dividends, repayment of long-term debt, reallocation into existing business units and deployment into new ventures.
Vermilion Energy Inc. ■ Page 12 ■ 2022 Annual Report
($M)
Cash flows from operating activities
Changes in non-cash operating working capital
Asset retirement obligations settled
Fund flows from operations
Drilling and development
Exploration and evaluation
Free cash flow
Q4 2022
495,195
(227,483)
16,508
284,220
(157,849)
(11,456)
114,915
Q4 2021
250,352
58,782
13,039
322,173
(119,002)
(26,805)
176,366
2022
1,814,220
(216,869)
37,514
1,634,865
(528,056)
(23,761)
1,083,048
2021
834,453
56,884
28,525
919,862
(339,390)
(35,406)
545,066
Adjusted working capital: Defined as current assets less current liabilities, excluding current derivatives and current lease liabilities. The measure
is used to calculate net debt, a capital measure disclosed above.
($M)
Current assets
Current derivative asset
Current liabilities
Current lease liability
Current derivative liability
Adjusted working capital
As at
Dec 31, 2022
714,446
(162,843)
(892,045)
19,486
55,845
(265,111)
Dec 31, 2021
472,845
(19,321)
(746,813)
15,032
268,973
(9,284)
Capital expenditures: Calculated as the sum of drilling and development costs and exploration and evaluation costs from the Consolidated
Statements of Cash Flows and most directly comparable to cash flows used in investing activities. We consider capital expenditures to be a useful
measure of our investment in our existing asset base. Capital expenditures are also referred to as E&D capital.
($M)
Drilling and development
Exploration and evaluation
Capital expenditures
Q4 2022
157,849
11,456
169,305
Q4 2021
119,002
26,805
145,807
2022
528,056
23,761
551,817
2021
339,390
35,406
374,796
Operating netback: Most directly comparable to net earnings and is calculated as 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.
Payout and payout % of FFO: A non-GAAP financial measure and non-GAAP ratio respectively most directly comparable to dividends declared.
Payout is comprised of dividends declared plus drilling and development costs, exploration and evaluation costs, and asset retirement obligations
settled. The measure is used to assess the amount of cash distributed back to shareholders and reinvested in the business for maintaining
production and organic growth. The reconciliation of the measure to primary financial statement measure can be found below. Management uses
payout and payout as a percentage of FFO (also referred to as the payout or sustainability ratio).
($M)
Dividends Declared
% of fund flows from operations
Drilling and development
Exploration and evaluation
Asset retirement obligations settled
Payout
% of fund flows from operations
Capital Management Measure
Q4 2022
13,058
5 %
157,849
11,456
16,508
198,871
70 %
Q4 2021
—
— %
119,002
26,805
13,039
158,846
2022
45,769
3 %
528,056
23,761
37,514
635,100
2021
—
— %
339,390
35,406
28,525
403,321
49 %
39 %
44 %
Net debt: Is in accordance with IAS 1 "Presentation of Financial Statements" and is most directly comparable to long-term debt. Net debt is
comprised of long-term debt (excluding unrealized foreign exchange on swapped USD borrowings) plus adjusted working capital and represents
Vermilion's net financing obligations after adjusting for the timing of working capital fluctuations.
Vermilion Energy Inc. ■ Page 13 ■ 2022 Annual Report
($M)
Long-term debt
Adjusted working capital
Unrealized FX on swapped USD borrowings
Net debt
As at
Dec 31, 2022
1,081,351
265,111
(1,876)
1,344,586
Dec 31, 2021
1,651,569
9,284
(16,067)
1,644,786
Ratio of net debt to four quarter trailing fund flows from operations
0.8
1.8
Supplementary Financial Measures
Net debt to four quarter trailing fund flows from operations: Calculated as net debt (capital management measure) over the FFO (total of
segments measure) from the preceding four quarters. The measure is used to assess the ability to repay debt.
Dividends % of FFO: Calculated as dividends declared divided by FFO (total of segments measure). The measure is used by management as a
metric to assess the cash distributed to shareholders.
($M)
Dividends Declared
% of fund flows from operations
Drilling and development
Exploration and evaluation
Asset retirement obligations settled
Payout
% of fund flows from operations
Q4 2022
13,058
5 %
157,849
11,456
16,508
198,871
70 %
Q4 2021
—
— %
119,002
26,805
13,039
158,846
2022
45,769
3 %
528,056
23,761
37,514
635,100
2021
—
— %
339,390
35,406
28,525
403,321
49 %
39 %
44 %
Fund flows from operations per boe: Calculated as FFO (total of segments measure) by boe production. Fund flows from operations per boe is
used by management to assess the profitability of our business units and Vermilion as a whole.
Vermilion Energy Inc. ■ Page 14 ■ 2022 Annual Report
Management's Discussion and Analysis
The following is Management’s Discussion and Analysis (“MD&A”), dated March 8, 2023, 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, 2022 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, 2022 and 2021,
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, 2022 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 (FFO) is a total of segments measure most directly comparable to net earnings and is
comprised of sales excluding royalties, transportation, operating, G&A, corporate income tax, PRRT, windfall taxes, interest expense, realized
loss on derivatives, realized foreign exchange gain (loss), and realized other income. The measure is used to assess the contribution of each
business unit to Vermilion's ability to generate income necessary to pay dividends, repay debt, fund asset retirement obligations and make
capital investments. A reconciliation to Net Earnings can be found within the "Non-GAAP and Other Specified Financial Measures" section of
this MD&A.
Free cash flow: Free cash flow (FCF) is a non-GAAP financial measure most directly comparable to Cash flows used in investing activities and
is comprised of FFO less drilling and development costs and exploration and evaluation costs. The measure is used to determine the funding
available for investing and financing activities including payment of dividends, repayment of long-term debt, reallocation into existing business
units and deployment into new ventures. A reconciliation to Cash flows used in investing activities can be found within the "Non-GAAP and
Other Specified Financial Measures" section of this MD&A.
Net debt: Net debt is a capital management measure in accordance with IAS 1 "Presentation of Financial Statements" and is most directly
comparable to long-term debt. Net debt is comprised of long-term debt (excluding unrealized foreign exchange on swapped USD borrowings)
plus adjusted working capital (defined as current assets less current liabilities, excluding current derivatives and current lease liabilities), 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. A reconciliation to long term-debt can be found within the "Financial Position Review"
section of this MD&A.
Operating Netbacks: Operating Netbacks is a non-GAAP financial measure most directly comparable to net earnings and is calculated as 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. A reconciliation to the primary
financial statement measures can be found within "Supplemental Table 1: Netbacks" of this MD&A.
Fund flows from operations per boe: Fund flows from operations per boe includes general and administration expense. Fund flows from
operations netback is used by management to assess the profitability of our business units and Vermilion as a whole. A reconciliation to the
primary financial statement measures can be found within "Supplemental Table 1: Netbacks" of this MD&A.
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 and other specified financial measures. These financial measures are unlikely to be comparable to similar financial
measures presented by other issuers. For a full description of these non-GAAP and other specified financial measures and a reconciliation of these
measures to their most directly comparable GAAP measures, please refer to “Non-GAAP and Other Specified 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" and "light and medium 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 15 ■ 2022 Annual Report
Guidance
On November 29, 2021, we released our 2022 capital budget and associated production guidance. On March 28, 2022, we increased our 2022
capital expenditure guidance to $500 million and our 2022 annual production guidance to 86,000 to 88,000 boe/d to reflect the post-closing impact of
the acquisition of Leucrotta Exploration Inc. On August 11, 2022, as a result of forest fire related downtime in France and offshore drilling delays in
Australia, combined with inflationary pressure, we increased our 2022 budget by $50 million to $550 million.
The following table summarizes our 2022 guidance:
Date
Capital Expenditures ($MM)
Production (boe/d)
2022 Guidance
2022 Guidance
2022 Guidance
2022 Guidance
2022 Actual Results
November 29, 2021
March 28, 2022
August 11, 2022
March 8, 2023
425
500
550
552
83,000 - 85,000
86,000 - 88,000
86,000 - 88,000
85,187
On January 6, 2023, we released our 2023 capital budget and associated production guidance. Our 2023 guidance assumes the Corrib acquisition
will close on March 31, 2023. On March 8, 2023, we decreased annual production guidance to 82,000 to 86,000 boe/d to reflect the southeast
Saskatchewan asset sale and unplanned downtime in Australia, and decreased operating expense guidance to reflect the southeast Saskatchewan
asset sale and lower European gas prices. Revisions to other guidance items reflect the assumptions used in management's most recent forecast.
The Company's guidance for 2023 is as follows:
Category
Production (boe/d)
E&D Capital Expenditures ($MM)
Royalty rate (%) (2)
Operating ($/boe)
Transportation ($/boe)
General and administration ($/boe)
Cash taxes (% of pre-tax FFO)
Windfall tax (% of pre-tax FFO) (3)
Prior (1)
87,000 - 91,000
570
8 - 10%
$17.50 - 18.50
$2.75 - 3.25
$2.00 - 2.50
11 - 13%
14 - 16%
Revised (1)
82,000 - 86,000
570
9 - 11%
$16.50 - 17.50
$3.00 - 3.50
$2.00 - 2.50
7 - 9%
12 - 14%
(1)
Revised 2023 guidance reflects foreign exchange assumptions of CAD/USD 1.35, CAD/EUR 1.45, and CAD/AUD 0.92. Prior 2023 guidance reflected foreign
exchange assumptions of CAD/USD 1.36, CAD/EUR 1.46, and CAD/AUD 0.92.
Royalty rate guidance excludes windfall royalties paid as part of the European Solidarity Contribution.
(2)
(3) Windfall tax guidance is based on forward prices as at February 27, 2023 (prior as at December 30, 2022), and incorporates all forms of solidarity payments
including windfall taxes and windfall royalties net of tax.
Vermilion Energy Inc. ■ Page 16 ■ 2022 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 17 ■ 2022 Annual Report
2022 production of 85,187 boe/dNorth America: 68%International: 32%2022 capital expenditures of $551.8MMNorth America: 61%International: 39%2022 fund flows from operations of $1,634.9MMNorth America: 40%International: 60% Consolidated Results Overview
Production (1)
Crude oil and condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
(Draw) build in inventory (mbbls)
Financial metrics
Fund flows from operations ($M) (2)
Per share ($/basic share)
Net earnings ($M)
Per share ($/basic share)
Cash flows from operating activities ($M)
Free cash flow ($M) (3)
Long-term debt ($M)
Net debt ($M) (4)
Activity
Capital expenditures ($M) (5)
Acquisitions ($M) (6)
Q4 2022
Q4 2021
Q4/22 vs.
Q4/21
2022
2021
2022 vs.
2021
38,915
7,497
234.23
85,450
(242)
36,264
8,461
238.16
84,417
(144)
7%
(11)%
(2)%
1%
37,530
7,961
238.18
85,187
39
38,143
8,325
233.64
85,408
44
284,220
1.74
395,408
2.42
495,195
114,915
322,173
1.99
344,588
2.12
250,352
176,366
1,081,351 1,651,569
1,344,586 1,644,786
919,862
(12)% 1,634,865
5.71
(13)%
10.00
1,313,062 1,148,696
15%
7.13
8.03
14%
834,453
98%
1,814,220
(35)% 1,083,048
545,066
(35)% 1,081,351 1,651,569
(18)% 1,344,586 1,644,786
169,305
4,558
145,807
23,633
16%
551,817
539,713
374,796
130,965
(2)%
(4)%
2%
—%
78%
75%
14%
13%
117%
99%
(35)%
(18)%
47%
(1)
(2)
(3)
(4)
(5)
(6)
Please refer to Supplemental Table 4 "Production" for disclosure by product type.
Fund flows from operations (FFO) and FFO per share are a total of segments measure and supplementary financial measure respectively most directly
comparable to net earnings and net earnings per share, respectively. The measures do not have a standardized meaning under IFRS and therefore may not be
comparable to similar measures presented by other issuers. FFO is comprised of sales excluding royalties, transportation, operating, G&A, corporate income
tax, PRRT, windfall taxes, interest expense, and realized loss (gain) on derivatives, plus realized gain (loss) on foreign exchange and realized other income.
The measure is used to assess the contribution of each business unit to Vermilion's ability to generate income necessary to pay dividends, repay debt, fund
asset retirement obligations and make capital investments. A reconciliation to the primary financial statement measures can be found within the "Non-GAAP and
Other Specified Financial Measures" section of this MD&A.
Free cash flow (FCF) is a non-GAAP financial measure most directly comparable to cash flows from operating activities; it does not have a standardized
meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. FCF is comprised of fund flows from operations less
drilling and development costs and exploration and evaluation costs. The measure is used to determine the funding available for investing and financing
activities including payment of dividends, repayment of long-term debt, reallocation into existing business units and deployment into new ventures. A
reconciliation to primary financial statement measures can be found within the "Non-GAAP and Other Specified Financial Measures" section of this MD&A.
Net debt is a capital management measure in accordance with IAS 1 "Presentation of Financial Statements" and is most directly comparable to long-term debt.
Net debt is comprised of long-term debt (excluding unrealized foreign exchange on swapped USD borrowings) plus adjusted working capital (defined as current
assets less current liabilities, excluding current derivatives and current lease liabilities), 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. A reconciliation to the
primary financial statement measures can be found within the "Financial Position Review" section of this MD&A.
Capital expenditures is a non-GAAP financial measure that does not have a standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other issuers. The measure is calculated as the sum of drilling and development costs and exploration and evaluation costs 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. A reconciliation to the primary financial statement measures can be found within the "Non-GAAP and Other
Specified Financial Measures" section of this MD&A.
Acquisitions is a non-GAAP financial measure that does not have a standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other issuers. The measure is calculated as 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. A reconciliation to the acquisitions line item in the Consolidated Statements of Cash Flows can be found in "Supplemental Table 3:
Capital Expenditures and Acquisitions" section of this MD&A.
Vermilion Energy Inc. ■ Page 18 ■ 2022 Annual Report
Financial performance review
Q4 2022 vs. Q4 2021
• We recorded net earnings of $395.4 million ($2.42/basic share) for Q4 2022 compared to $344.6 million ($2.12/basic share) in Q4 2021. The
increase in net earnings was primarily due to a change in the position of unrealized derivative loss in Q4 2022 by $377.4 million driven by
changes in our mark-to-market position and settlements. This was partially offset by deferred taxes resulting from increased taxable income and
lower fund flows from operations as the full year impact of 2022 windfall taxes ($222.9 million) was accrued in Q4, 2022.
Vermilion Energy Inc. ■ Page 19 ■ 2022 Annual Report
"Other" contains equity based compensation, accretion, depletion & depreciation, and unrealized other$MMNet earnings of $395.4MM in Q4 2022 compared to $344.6MM in Q4 2021$344.6$322.9$(181.9)$(38.0)$(23.9)$(23.7)$(4.6)$395.4Q4 2021Unrealized derivatives, foreign exchangeDeferred taxFund flows from operationsImpairment reversalDepletion and depreciationOtherQ4 2022300400500600700 • We generated cash flows from operating activities of $495.2 million in Q4 2022 compared to $250.4 million in Q4 2021 and fund flows from
operations of $284.2 million in Q4 2022 compared to $322.2 million in Q4 2021. The decrease in fund flows from operations was primarily due
to the recognition of the full year impact of 2022 windfall taxes ($222.9 million) in Q4 2022. These decreases were partially offset by higher
commodity prices. The variance between cash flows from operating activities and fund flows from operations is primarily due to non-cash
working capital impacts of the windfall taxes payable.
2022 vs. 2021
Vermilion Energy Inc. ■ Page 20 ■ 2022 Annual Report
"Pricing net of derivatives" contains pricing variance on sales volumes (WTI, AECO, Dated Brent & TTF and NBP) and realized derivatives. "Sales volume" is the sum of sales volume variance in all regions. "Other" contains general and administration, interest, realized foreign exchange, and other realized income.$MMIncreased cash flows from operating activities on working capital timing and decreased FFO driven by windfall taxes$322.2$252.2$7.6$(222.9)$(36.0)$(29.7)$(9.2)$284.2$250.4$495.2Cash flows from operating activitiesQ4 2021 - FFOPricing net of derivativesOtherWindfall taxesRoyalties, transportation and operating expenseSales volumeTaxesQ4 2022 - FFO100200300400500600700"Other" contains equity based compensation, depletion and depreciation, and unrealized other$MMNet earnings of $1,313.1MM in 2022 compared to $1,148.7MM in 2021$1,148.7$715.0$702.4$(1,110.5)$(101.4)$(17.2)$(14.6)$(9.3)$1,313.12021Fund flows from operationsUnrealized derivatives, foreign exchangeImpairment reversalDeferred taxGain on business combinationsAccretionOther20221,0001,2001,4001,6001,8002,0002,2002,4002,600 •
For the year ended December 31, 2022, we recorded net earnings of $1,313.1 million compared $1,148.7 million for the comparable period in
2021. The increase in net earnings was primarily due to higher fund flows from operations driven by increased consolidated realized pricing and
changes in our unrealized derivative position of $721.9 million driven by changes in the mark-to-market position. The increases were partially
offset by lower impairment reversals recorded in 2022 of $144.4 million (net of $47.7 million deferred income tax expense), compared to
impairment reversals recorded in 2021 of $987.1 million (net of $315.5 million deferred income tax expense).
•
For the year ended December 31, 2022 as compared to 2021, cash flows from operating activities increased by $979.8 million to $1,814.2
million and fund flows from operations increased by $715.0 million to $1,634.9 million. The increase in fund flows from operations were primarily
driven by a 68% increase in our consolidated realized price from $66.81/boe to $111.95/boe and were partially offset by increased contributions
to the jurisdictions we operate in the form of windfall taxes, increased current taxes, and increased royalties. The variance between cash flows
from operating activities and fund flows from operations is primarily driven by non-cash working capital impact of the windfall taxes payable.
Production review
Q4 2022 vs. Q4 2021
•
Consolidated average production of 85,450 boe/d in Q4 2022 increased slightly compared to Q4 2021 production of 84,417 boe/d. Production
increased in Germany and Canada due to acquisitions in 2021 and 2022, respectively, as well as in Australia primarily due to new wells coming
online in 2022. The increases were partially offset by natural decline in the Netherlands, France, and Ireland.
2022 vs. 2021
•
Consolidated average production of 85,187 boe/d in the year ended December 31, 2022 decreased slightly from 85,408 boe/d in the prior year
comparative period. Production decreased in the Netherlands, France, and Ireland primarily due to natural decline. This was partially offset by
an increase in Canada, Germany and the United States primarily due to acquisition activity in 2021 and 2022.
Activity review
•
•
For the three months ended December 31, 2022, capital expenditures of $169.3 million were incurred.
In our North America core region, we incurred capital expenditures of $113.9 million. In Canada, capital expenditures totaled $111.5 million as
we drilled seven (5.5 net) wells, completed ten (6.9 net) wells, and brought on production twelve (6.7 net) wells in southeast Saskatchewan, and
Vermilion Energy Inc. ■ Page 21 ■ 2022 Annual Report
"Pricing net of derivatives" contains pricing variance on sales volumes (WTI, AECO, Dated Brent & TTF and NBP) and realized derivatives. "Sales volume" is the sum of sales volume variance in all regions. "Other" contains general and administration, interest, realized foreign exchange, and other realized income.$MMCash flows from operating activities and funds flow from operations increased on stronger commodity prices$919.9$1,346.4$(222.9)$(197.7)$(180.6)$(28.2)$(2.0)$1,634.9$834.5$1,814.2Cash flows from operating activities2021 - FFOPricing net of derivativesWindfall taxesRoyalties, transportation, operating expenseTaxesSales volumeOther2022 - FFO8001,0001,2001,4001,6001,8002,0002,200 •
drilled twelve (10.6 net), completed ten (8.2 net), and brought on production seven (6.9 net) Mannville liquids-rich gas wells, we drilled one (1.0
net) Mica well, and brought on production the wells on our first 6.0 (6.0 net) well Montney pad in Alberta. In the United States, $2.4 million was
incurred primarily related to preparation for the 2023 drilling program which will commence in Q2 2023.
In our International core region, capital expenditures of $55.4 million were incurred during Q4 2022. Our activities included $15.7 million
incurred in France primarily on facilities and subsurface maintenance activities, $14.2 million incurred in the Netherlands primarily on drilling
activities, and $10.1 million incurred in Germany primarily on drilling and facilities activity along with various other costs associated with support
work for our Q4 2022 drilling campaign in Europe.
Financial sustainability review
Free cash flow
•
Free cash flow of $1,083.0 million increased by $538.0 million for the year ended December 31, 2022 compared to the prior year period which
was primarily driven by increased fund flows from operations on higher realized prices, partially offset by higher expenditure on drilling and
development activities.
Long-term debt and net debt
•
Long-term debt decreased to $1.1 billion as at December 31, 2022 from $1.7 billion as at December 31, 2021 as a result of net repayments of
$622.8 million, partially offset by unrealized foreign exchange losses of $50.8 million due to the US dollar strengthening.
Net debt as at December 31, 2022 decreased to $1.3 billion from $1.6 billion at December 31, 2021 primarily due to decreases in long-term
debt, partially offset by increases in income taxes payable as a result of $222.9 million of windfall taxes in Q4 2022.
The ratio of net debt to four quarter trailing fund flows from operations(1) decreased to 0.8 as at December 31, 2022 (December 31, 2021 - 1.8)
primarily due to higher four quarter trailing fund flows from operations.
•
•
(1)
Net debt to four quarter trailing fund flows from operations is a supplementary financial measure that does not have a standardized meaning under IFRS and
therefore may not be comparable to similar measures presented by other issuers. It is calculated as net debt (capital measure) over the FFO from the preceding
4 quarters (total of segments measure). The measure is used to assess our ability to repay debt.
Vermilion Energy Inc. ■ Page 22 ■ 2022 Annual Report
Benchmark Commodity Prices
Crude oil
WTI ($/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 $/bbl)
Natural gas
North America
AECO 5A ($/mcf)
Henry Hub ($/mcf)
Henry Hub (US $/mcf)
Europe(1)
NBP Day Ahead ($/mmbtu)
NBP Month Ahead ($/mmbtu)
NBP Day Ahead (€/mmbtu)
NBP Month Ahead (€/mmbtu)
TTF Day Ahead ($/mmbtu)
TTF Month Ahead ($/mmbtu)
TTF Day Ahead (€/mmbtu)
TTF Month Ahead (€/mmbtu)
Average exchange rates
CDN $/US $
CDN $/Euro
Realized prices
Crude oil and condensate ($/bbl)
NGLs ($/bbl)
Natural gas ($/mcf)
Total ($/boe)
(1)
Q4 2022
Q4 2021
Q4/22 vs.
Q4/21
2022
2021
2022 vs.
2021
112.24
82.65
109.85
80.89
106.05
78.09
113.19
83.35
120.47
88.71
4.64
8.50
6.26
26.09
43.51
18.82
31.38
38.36
49.98
27.67
36.05
97.21
77.19
93.30
74.09
92.90
73.77
99.65
79.13
100.40
79.73
4.66
7.34
5.83
37.76
41.00
26.21
28.46
38.86
40.25
26.97
27.94
16%
7%
18%
9%
14%
6%
14%
5%
20%
11%
—%
16%
7%
(31)%
6%
(28)%
10%
(1)%
24%
3%
29%
1.36
1.39
1.26
1.44
8%
(4)%
122.62
94.23
120.25
92.41
118.22
90.85
121.96
93.72
131.68
101.19
5.25
8.67
6.66
31.78
41.44
23.21
30.26
48.35
52.59
35.30
38.40
1.30
1.37
115.02
39.93
17.43
103.99
96.88
47.27
17.89
96.82
19%
(16)%
(3)%
7%
123.89
45.95
18.99
111.95
85.14
67.92
80.27
64.03
80.12
63.91
85.50
68.20
88.67
70.73
3.62
4.82
3.85
19.62
20.61
13.22
13.89
19.86
20.35
13.39
13.72
1.25
1.48
83.78
34.44
9.53
66.81
44%
39%
50%
44%
48%
42%
43%
37%
49%
43%
45%
80%
73%
62%
101%
76%
118%
144%
158%
164%
180%
4%
(7)%
48%
33%
99%
68%
NBP and TTF pricing can occur on a day-ahead ("DA") or month-ahead ("MA") basis. DA prices in a period reflect the average current day settled price on the
next days' delivery and MA prices in a period represent daily one month futures contract prices which are determined at the end of each month. In a rising price
environment, the DA price will tend to be greater than the MA price and vice versa. Natural gas in the Netherlands and Germany is benchmarked to the TTF
and production is generally equally split between DA and MA contracts. Natural gas in Ireland is benchmarked to the NBP and is sold on DA contracts.
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 benchmarks linked to the AECO index (in Canada) or the Henry Hub ("HH") 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 23 ■ 2022 Annual Report
•
•
•
•
•
•
Crude oil prices increased in Q4 2022 relative to Q4 2021 as reduced spare capacity and increased geopolitical supply risks outweighed
the incremental demand concerns regarding tighter monetary policies and global recession risks. Canadian dollar WTI and Brent prices
rose 16% and 20%, respectively in Q4 2022 relative to Q4 2021.
In Canadian dollar terms, year-over-year, the Edmonton Sweet differential narrowed by $1.42/bbl to a discount of $2.49/bbl against WTI,
and the Saskatchewan LSB differential widened by $1.88/bbl to a discount of $6.19/bbl against WTI.
Approximately 39% of Vermilion’s Q4 2022 crude oil and condensate production was priced at the Dated Brent index, which averaged a
premium to WTI of US$6.06/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, year-over-year, prices for European natural gas linked to NBP and TTF decreased by 31% and 1% respectively
on a day-ahead basis. On a month ahead basis, NBP and TTF rose by 6% and 24% respectively. While prices were off their Q3 2022
highs, they remained slightly elevated compared to historical trends due to Russian pipeline supply decreases, elevated winter risk
premium, and requirement to attract increased LNG imports.
Natural gas prices in Canadian dollar terms at NYMEX HH increased by 16% while AECO remained flat. NYMEX HH prices benefited from
temporary weather related demand increases and limited production growth in the second half of 2022. AECO year-over-year price
changes were limited compared to NYMEX as basis widened on high WCSB production growth and storage levels returning to within their
5 year range levels.
For Q4 2022, average European natural gas prices represented a $34.85/mcf premium to AECO. Approximately 34% of our natural gas
production in Q4 2022 benefited from this premium European pricing.
Vermilion Energy Inc. ■ Page 24 ■ 2022 Annual Report
$/bblQ4 2022 realized crude oil and condensate price was a $5.17/bbl premium to Edmonton Sweet IndexDated Brent (39% of Q4 2022 sales volumes)WTI (8% of Q4 2022 sales volumes)Canadian C5+ (11% of Q4 2022 sales volumes)Crude oil and condensate realized priceSaskatchewan LSB (34% of Q4 2022 sales volumes)Edmonton Sweet index (8% of Q4 2022 sales volumes)Q4 2021Q1 2022Q2 2022Q3 2022Q4 202270.0080.0090.00100.00110.00120.00130.00140.00150.00$/mcfQ4 2022 realized natural gas price was a $12.79/mcf premium to AECONBP DA (11% of Q4 2022 sales volumes)TTF DA (23% of Q4 2022 sales volumes)Natural gas realized priceHenry Hub (3% of Q4 2022 sales volumes)AECO (5A) (63% of Q4 2022 sales volumes)Q4 2021Q1 2022Q2 2022Q3 2022Q4 20220.0010.0020.0030.0040.0050.0060.0070.0080.00 •
•
For the three months ended December 31, 2022, the Canadian dollar strengthened 4% against the Euro compared to Q4 2021.
For the three months ended December 31, 2022, the Canadian dollar weakened 8% against the US Dollar compared to Q4 2021.
Vermilion Energy Inc. ■ Page 25 ■ 2022 Annual Report
CDN $/FXThe Canadian dollar strengthened slightly versus the Euro and weakened slightly versus the US Dollar in Q4 2022 compared to Q4 2021CDN $/EuroCDN $/US $Q4 2021Q1 2022Q2 2022Q3 2022Q4 20221.201.301.401.501.60 North America
Production (1)
Crude oil and condensate (bbls/d)
NGLs (bbls/d)
Natural gas (mmcf/d)
Total production volume (boe/d)
(1)
Q4 2022
Q4 2021
2022
2021
25,291
7,497
154.26
58,499
23,846
8,461
137.93
55,295
24,393
7,961
151.30
57,571
24,390
8,325
144.87
56,858
Please refer to Supplemental Table 4 "Production" for disclosure by product type.
Sales
Royalties
Transportation
Operating
General and administration (1)
Corporate income tax expense (1)
Fund flows from operations
Drilling and development
Free cash flow
(1)
Includes amounts from Corporate segment.
Q4 2022
$M
360,295
(50,945)
(13,014)
(72,694)
513
(712)
223,443
(113,892)
109,551
$/boe
66.95
(9.47)
(2.42)
(13.51)
0.10
(0.13)
41.52
Q4 2021
$M
305,054
(47,119)
(9,447)
(59,425)
(10,224)
2,140
180,979
(89,643)
91,336
2022
$M
$/boe
59.97 1,510,517
(240,432)
(9.26)
(45,467)
(1.86)
(268,271)
(11.68)
(20,651)
(2.01)
(1,011)
0.42
934,685
35.58
(338,556)
596,129
2021
$M
$/boe
71.88 1,014,190
(144,398)
(11.44)
(2.16)
(40,100)
(232,370)
(12.77)
(27,887)
(0.98)
1,451
(0.05)
570,886
44.48
(222,782)
348,104
$/boe
48.87
(6.96)
(1.93)
(11.20)
(1.34)
0.07
27.51
Production from our North American operations averaged 58,499 boe/d in Q4 2022, an increase of 2% from the prior quarter primarily due to new
well production from our Montney assets in Canada and a full quarter contribution from our 2022 drilling program in the United States. In Alberta, we
drilled twelve (10.6 net), completed ten (8.2 net), and brought on production seven (6.9 net) Mannville liquids rich gas wells, while at Mica we drilled
one (1.0 net) well and brought on production the six (6.0 net) wells from our first Montney pad. The six well Montney pad was brought on production
in late November and saw rates increase through the balance of the year as the wells cleaned up. Total production from our Montney assets
averaged 7,500 boe/d during the month of December. In December, drilling commenced on a follow up three-well pad in Alberta which is expected to
be completed and tied in during the first half of 2023. During the fourth quarter we received three permits in British Columbia, including one of the
permits to construct a 16,000 boe/d battery and drill a multi-well pad in British Columbia. We also signed agreements to acquire 11 sections of
adjacent land at Mica, further consolidating our contiguous land base and increasing our Tier 1 inventory.
In Saskatchewan, we drilled seven (5.5 net) wells, completed ten (6.9 net) wells, and brought on production twelve (6.7 net) wells in southeast
Saskatchewan. No drilling or completion activity occurred in the United States in the fourth quarter as the team focused on preparation for the 2023
drilling program which will commence in Q2 2023.
Sales
Canada
United States
North America
Q4 2022
$M
315,897
44,398
360,295
$/boe
65.13
83.51
66.95
Q4 2021
$M
270,600
34,454
305,054
2022
$M
$/boe
59.16 1,344,284
67.18
166,233
59.97 1,510,517
2021
$M
$/boe
901,775
70.33
87.46
112,415
71.88 1,014,190
$/boe
47.54
62.98
48.87
Sales in North America increased on a dollar and per unit basis for the three months and year ended December 31, 2022 versus the comparable
prior periods due to significantly higher realized prices across all products coupled with slightly higher production primarily related to acquisition
activity.
Vermilion Energy Inc. ■ Page 26 ■ 2022 Annual Report
Royalties
Canada
United States
North America
Q4 2022
$M
(38,747)
(12,198)
(50,945)
$/boe
(7.99)
(22.94)
(9.47)
Q4 2021
$M
(37,064)
(10,055)
(47,119)
$/boe
(8.10)
(19.60)
(9.26)
2022
$M
(196,005)
(44,427)
(240,432)
$/boe
(10.26)
(23.38)
(11.44)
2021
$M
(113,651)
(30,747)
(144,398)
$/boe
(5.99)
(17.23)
(6.96)
Royalties in North America increased on a dollar and per unit basis for the three months and year ended December 31, 2022 versus the comparable
prior periods primarily due to increased sliding scale royalties driven by higher commodity prices. Royalties as a percentage of sales for the three
months and year ended December 31, 2022 were 14.1% and 15.9%, respectively, compared to the prior year comparative periods of 15.4% and
14.2% respectively.
Transportation
Canada
United States
North America
Q4 2022
$M
(12,919)
(95)
(13,014)
$/boe
(2.66)
(0.18)
(2.42)
Q4 2021
$M
(9,134)
(313)
(9,447)
$/boe
(2.00)
(0.61)
(1.86)
2022
$M
(44,849)
(618)
(45,467)
$/boe
(2.35)
(0.33)
(2.16)
2021
$M
(38,764)
(1,336)
(40,100)
$/boe
(2.04)
(0.75)
(1.93)
Transportation expense in North America increased on a dollar and per boe basis for the three months and year ended December 31, 2022 versus
the comparable prior period primarily due to increased tariffs in Saskatchewan beginning in mid-2022.
Operating expense
Canada
United States
North America
Q4 2022
$M
(63,305)
(9,389)
(72,694)
$/boe
(13.05)
(17.66)
(13.51)
Q4 2021
$M
(54,695)
(4,730)
(59,425)
$/boe
(11.96)
(9.22)
(11.68)
2022
$M
(240,899)
(27,372)
(268,271)
$/boe
(12.60)
(14.40)
(12.77)
2021
$M
(215,378)
(16,992)
(232,370)
$/boe
(11.35)
(9.52)
(11.20)
Operating expenses in North America increased on a dollar basis and per boe basis for the three months and year ended December 31, 2022 versus
the comparable prior periods. In Canada, increases during the three months ended December 31, 2022 were primarily the result of an increase in
downhole, trucking and project expenses related to our Mica assets, as well as processing fees due to higher plant rates in Saskatchewan.
Increases during the year ended December 31, 2022 were primarily the result of acquisition activity, planned maintenance, and downhole costs. In
the United States, increases during the three months and year ended December 31, 2022 were primarily downhole costs and inflationary pressures.
Vermilion Energy Inc. ■ Page 27 ■ 2022 Annual Report
International
Production (1)
Crude oil and condensate (bbls/d)
Natural gas (mmcf/d)
Total production volume (boe/d)
Total sales volume (boe/d)
(1)
Q4 2022
Q4 2021
2022
2021
13,624
79.97
26,953
29,585
12,419
100.22
29,123
30,689
13,135
86.88
27,616
27,506
13,753
88.77
28,548
28,430
Please refer to Supplemental Table 4 "Production" for disclosure by product type.
Sales
Royalties
Transportation
Operating
General and administration
Corporate income tax expense
PRRT
Fund flows from operations
Drilling and development
Exploration and evaluation
Free cash flow
$/boe
177.23
(6.38)
(3.29)
(23.35)
(5.09)
(15.15)
(1.85)
122.12
Q4 2022
$M
482,398
(17,358)
(8,962)
(63,553)
(13,857)
(41,246)
(5,045)
332,377
(43,957)
(11,456)
276,964
Q4 2021
$M
$/boe
2022
$M
460,861
(11,666)
(9,586)
(53,255)
(7,150)
(34,374)
(5,544)
339,286
(29,359)
(26,805)
283,122
(4.13)
(3.40)
(18.86)
(2.53)
(12.17)
(1.96)
163.23 1,965,877
(65,585)
(33,429)
(220,763)
(37,026)
(207,142)
(18,318)
120.18 1,383,614
(189,500)
(23,761)
1,170,353
2021
$M
(6.53)
(3.33)
(21.99)
(3.69)
(20.63)
(1.82)
137.82
$/boe
195.81 1,065,571
(41,724)
(37,061)
(180,643)
(24,990)
(31,617)
(15,688)
733,848
(116,608)
(35,406)
581,834
$/boe
102.69
(4.02)
(3.57)
(17.41)
(2.41)
(3.05)
(1.51)
70.72
Production from our International operations averaged 26,953 boe/d in Q4 2022, a decrease of 1% from the prior quarter, primarily due to natural
decline in Netherlands and Germany, as well as lower than anticipated production in Australia due to unplanned downtime. This was largely offset by
higher production in France and Ireland. Production from the fire-related downtime in France was gradually restored through the fourth quarter of
2022 and has been fully restored subsequent to year end. Ireland production increased 1% in Q4 2022 compared to the previous quarter as the
Corrib facility experienced strong operational run time during the quarter.
During the fourth quarter we drilled one (1.0 net) oil well in Germany, which was brought on production in Q1 2023. We also continued to advance
our deep well gas exploration and development plans in Germany as we prepare for our first well to be drilled in the fourth quarter of 2023. In the
Netherlands, we drilled one (0.5 net) gas well which encountered a 19 metre gas column and is expected to be brought on production in the first half
of 2023. We drilled two (2.0 net) exploratory wells in Croatia, however, neither of the wells encountered commercial hydrocarbons.
Sales
Australia
France
Netherlands
Germany
Ireland
Central and Eastern Europe
International
Q4 2022
$M
95,420
77,910
119,668
121,011
64,753
3,636
482,398
$/boe
139.95
119.68
281.75
218.13
162.16
356.05
177.23
Q4 2021
$M
40,332
79,809
165,370
65,623
109,352
375
460,861
$/boe
112.26
100.18
205.17
164.96
236.78
203.80
163.23
2022
$M
221,187
365,431
562,857
481,260
324,345
10,797
1,965,877
$/boe
148.15
132.90
279.87
231.34
194.05
313.02
195.81
2021
$M
143,014
279,263
295,723
131,935
214,425
1,211
1,065,571
$/boe
103.01
88.15
110.47
98.06
120.51
65.06
102.69
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.
Vermilion Energy Inc. ■ Page 28 ■ 2022 Annual Report
Crude oil sales volumes (bbls/d)
Australia
France
Germany
International
Q4 2022
7,411
7,076
1,721
16,208
Q4 2021
3,905
8,659
1,324
13,888
2022
4,090
7,533
1,337
12,960
2021
3,804
8,680
1,051
13,535
Sales increased on a dollar and per boe basis for the three months and year ended December 31, 2022 versus the comparable prior periods due to
higher realized prices across Australia, France, Netherlands, Germany and Central and Eastern Europe business units and higher sales volume in
Australia and Germany due to new wells coming online and acquisition activity. These increases were partially offset by lower realized price for the
three month period in Ireland and lower sales volumes in France, Netherlands, and Ireland, due to natural decline combined with the timing of liftings
in France.
Royalties
France
Netherlands
Germany
Central and Eastern Europe
International
Q4 2022
$M
(9,294)
(512)
(6,403)
(1,149)
(17,358)
$/boe
(14.28)
(1.21)
(11.54)
(112.51)
(6.38)
Q4 2021
$M
(10,174)
(419)
(909)
(164)
(11,666)
$/boe
(12.77)
(0.52)
(2.29)
(89.13)
(4.13)
2022
$M
(40,353)
(512)
(21,232)
(3,488)
(65,585)
$/boe
(14.68)
(0.25)
(10.21)
(101.12)
(6.53)
2021
$M
(37,666)
(873)
(2,847)
(338)
(41,724)
$/boe
(11.89)
(0.33)
(2.12)
(18.16)
(4.02)
Royalties in our International core region are primarily incurred in France and Germany, where royalties include charges based on a percentage of
sales and fixed per boe charges. Our production in Australia and Ireland is not subject to royalties.
Royalties increased on a dollar and per unit basis for the three months and year ended December 31, 2022 versus the comparable prior periods
primarily due to higher sales prices.
Royalties as a percentage of sales for the three months ended December 31, 2022 of 3.6% increased versus the comparable prior period of 2.5%
primarily due to an increase in royalty rate in Germany. Royalties as a percentage of sales for the year ended December 31, 2022 of 3.3%
decreased versus the prior year comparable period of 3.9% primarily due to higher sales in business units that are not subject to royalties.
Transportation
France
Germany
Ireland
International
Q4 2022
$M
(4,589)
(3,621)
(752)
(8,962)
$/boe
(7.05)
(6.53)
(1.88)
(3.29)
Q4 2021
$M
(6,574)
(2,076)
(936)
(9,586)
$/boe
(8.25)
(5.22)
(2.03)
(3.40)
2022
$M
(20,100)
(9,751)
(3,578)
(33,429)
$/boe
(7.31)
(4.69)
(2.14)
(3.33)
2021
$M
(26,497)
(6,359)
(4,205)
(37,061)
$/boe
(8.36)
(4.73)
(2.36)
(3.57)
Transportation expense decreased for the three months and year ended December 31, 2022 versus the comparable prior periods. This was primarily
due to the lower volume of liftings in France, partially offset by increased volumes in Germany. On a per unit basis, transportation expense remained
relatively flat versus prior year comparable periods.
Our production in Australia, Netherlands and Central and Eastern Europe is not subject to transportation expense.
Vermilion Energy Inc. ■ Page 29 ■ 2022 Annual Report
Operating expense
Australia
France
Netherlands
Germany
Ireland
Central and Eastern Europe
International
Q4 2022
$M
(21,291)
(12,638)
(11,229)
(13,292)
(4,687)
(416)
(63,553)
$/boe
(31.23)
(19.41)
(26.44)
(23.96)
(11.74)
(40.74)
(23.35)
Q4 2021
$M
(15,918)
(14,242)
(11,449)
(7,323)
(4,107)
(216)
(53,255)
$/boe
(44.31)
(17.88)
(14.20)
(18.41)
(8.89)
(117.39)
(18.86)
2022
$M
(57,478)
(57,588)
(45,903)
(41,523)
(16,580)
(1,691)
(220,763)
$/boe
(38.50)
(20.94)
(22.82)
(19.96)
(9.92)
(49.03)
(21.99)
2021
$M
(50,748)
(52,147)
(35,269)
(27,149)
(14,889)
(441)
(180,643)
$/boe
(36.55)
(16.46)
(13.17)
(20.18)
(8.37)
(23.69)
(17.41)
For the three months ended December 31, 2022 versus the prior comparable period, operating expense increased on a dollar and per boe basis
primarily due to asset integrity costs in Australia, increased maintenance activity and electricity charges in Germany, partially offset by a decrease in
France due to a rate recovery on previous period electricity charges. Operating expense increased on a dollar and per boe basis for the year ended
December 31, 2022 versus the prior year comparable period primarily due to the impact of higher fuel and electricity prices in Europe and increased
costs in Germany due to 2021 acquisition activity.
Vermilion Energy Inc. ■ Page 30 ■ 2022 Annual Report
Consolidated Financial Performance Review
($M except per share)
Total assets
Long-term debt
Petroleum and natural gas sales
Net earnings (loss)
Net earnings (loss) per share
Basic
Diluted
Cash dividends ($/share)
Financial performance
Dec 31, 2022
Dec 31, 2021
6,991,058
1,081,351
3,476,394
1,313,062
5,905,323
1,651,569
2,079,761
1,148,696
Dec 31, 2020
4,109,139
1,933,848
1,119,545
(1,517,427)
8.03
7.80
0.28
7.13
6.97
—
(9.61)
(9.61)
0.58
Sales
Royalties
Transportation
Operating
General and administration
Corporate income tax expense
Windfall taxes
PRRT
Interest expense
Realized loss on derivatives
Realized foreign exchange gain (loss)
Realized other (expense) income
Fund flows from operations
Equity based compensation
Unrealized gain (loss) on derivative
instruments (1)
Unrealized foreign exchange (loss) gain (1)
Accretion
Depletion and depreciation
Deferred tax expense
Gain on business combinations
Impairment reversal
Unrealized other expense (1)
Net earnings
(1)
$/boe
103.99
(8.43)
(2.71)
(16.81)
(1.65)
(5.18)
(27.50)
(0.62)
(2.78)
(5.42)
2.33
(0.14)
35.08
Q4 2022
$M
842,693
(68,303)
(21,976)
(136,247)
(13,344)
(41,958)
(222,859)
(5,045)
(22,506)
(43,940)
18,845
(1,140)
284,220
(5,377)
549,693
(47,405)
(16,501)
(171,926)
(196,733)
—
—
(563)
395,408
Q4 2021
$M
765,915
(58,785)
(19,033)
(112,680)
(17,374)
(32,234)
—
(5,544)
(16,279)
(189,598)
(2,395)
10,180
322,173
(6,666)
172,265
7,122
(10,983)
(148,216)
(14,834)
—
23,922
(195)
344,588
2022
$M
$/boe
96.82 3,476,394
(306,017)
(7.43)
(78,896)
(2.41)
(489,034)
(14.24)
(57,677)
(2.20)
(208,153)
(4.07)
(222,859)
—
(18,318)
(0.70)
(82,858)
(2.06)
(405,894)
(23.97)
15,195
(0.30)
1.29
12,982
40.73 1,634,865
(44,390)
540,801
(84,464)
(58,170)
(577,134)
(288,707)
—
192,094
(1,833)
1,313,062
2021
$M
$/boe
111.95 2,079,761
(186,122)
(77,161)
(413,013)
(52,877)
(30,166)
—
(15,688)
(73,075)
(327,384)
(6,613)
22,200
919,862
(41,565)
(9.85)
(2.54)
(15.75)
(1.86)
(6.70)
(7.18)
(0.59)
(2.67)
(13.07)
0.49
0.42
52.65
$/boe
66.81
(5.98)
(2.48)
(13.27)
(1.70)
(0.97)
—
(0.50)
(2.35)
(10.52)
(0.21)
0.71
29.54
(181,094)
(64,963)
(43,552)
(571,688)
(187,343)
17,198
1,302,619
(778)
1,148,696
Unrealized gain (loss) on derivative instruments, Unrealized foreign exchange (loss) gain, and Unrealized other expense are line items from the respective
Consolidated Statements of Cash Flows.
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 within profit or loss.
General and administration
•
•
General and administration expense decreased in Q4 2022 versus Q4 2021 primarily due to lower discretionary headcount costs.
General and administration expense increased for the year ended December 31, 2022 versus the prior year comparable period primarily
due to higher legal, tax, and financial advisory costs.
Vermilion Energy Inc. ■ Page 31 ■ 2022 Annual Report
PRRT and corporate income taxes
•
•
PRRT remained relatively consistent for the three months ended December 31, 2022 versus the comparable prior period. PRRT increased
for the year ended December 31, 2022 versus the prior year comparable period due to higher sales partially offset by higher capital
expenditures in the current period.
Corporate income taxes for the three months and year ended December 31, 2022 increased versus the comparable prior periods primarily
due to higher taxable income as a result of increased commodity prices in 2022.
Windfall taxes
•
On September 30, 2022 the Council of the European Union and member states agreed to a set mandatory temporary solidarity
contribution on the profits of oil and gas producers. The contribution set out minimum amounts to be calculated on taxable profits starting in
2022 and/or 2023, which are above a 20% increase of the average yearly taxable profits for 2018 to 2021. Legislation became
substantively enacted during the fourth quarter of 2022 resulting in a full year of windfall taxes being booked during the fourth quarter.
• Windfall taxes recorded in 2022 are based on the rates legislated or, in the case of Ireland, announced as of December 31, 2022. In
Netherlands, Germany, and France, a rate of 33% has been legislated on excess profits and a rate of 75% has been announced by the
Irish Government. For the three months ended and year ended December 31, 2022, windfall tax expense was $222.9 million.
Interest expense
•
Interest expense increased for the three months and year ended December 31, 2022 compared to the comparable prior periods despite
lower debt levels. This was due to higher variable interest rates and an increase in the percentage of our debt with fixed interest rates
following the issuance of the 2030 senior unsecured notes.
Realized gain or loss on derivatives
•
•
For the three months and year ended December 31, 2022, we recorded realized losses on our crude oil and natural gas hedges due to
higher commodity pricing compared to the strike prices on our hedges.
A listing of derivative positions as at December 31, 2022 is included in “Supplemental Table 2” of this MD&A.
Realized other income
•
Realized other income for the three months and year ended December 31, 2022 decreased versus the comparable prior periods primarily
due to amounts for funding under the Saskatchewan Accelerated Site Closure program to complete abandonment and reclamation on
inactive oil and gas wells and facilities.
Net earnings
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 decreased for the three months ended
December 31, 2022 versus the comparable prior period primarily due to the lower value of LTIP awards outstanding in the current period. For the
year ended December 31, 2022 versus the prior year comparable period, equity based compensation expense increased primarily due to higher
bonuses under the employee bonus plan during the current year.
Unrealized gain or loss on derivative instruments
Unrealized gain or loss on derivative instruments arises 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 and foreign exchange 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.
Vermilion Energy Inc. ■ Page 32 ■ 2022 Annual Report
For the three months ended December 31, 2022, we recognized a net unrealized gain on derivative instruments of $549.7 million. This consists of
unrealized gains of $573.4 million on our European natural gas commodity derivative instruments, $10.9 million on our North American natural gas
commodity derivative instruments, and $4.2 million on our crude oil commodity derivative instruments, partially offset by unrealized losses of $21.0
million on our equity swaps and $17.8 million on our USD-to-CAD foreign exchange swaps.
For the year ended December 31, 2022, we recognized a net unrealized gain on derivative instruments of $540.8 million. This consists of unrealized
gains of $509.1 million on our European natural gas commodity derivative instruments, $30.4 million on our equity swaps, $9.9 million on our crude
oil commodity derivative instruments, and $5.6 million on our North American natural gas commodity derivative instruments, partially offset by
unrealized losses of $14.2 million on our USD-to-CAD foreign exchange swaps.
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 2022, unrealized foreign exchange gains and losses primarily resulted from:
•
The translation of Euro denominated intercompany loans from our international subsidiaries to Vermilion Energy Inc. An appreciation in the Euro
against the Canadian dollar will result in an unrealized foreign exchange loss (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 2025 senior unsecured notes and USD denominated 2030 senior unsecured notes. During the period
between June 12, 2019 and May 5, 2020 the USD 2025 senior unsecured notes were hedged by a USD-to-CAD cross currency interest rate
swap. Subsequent to the termination of these instruments, amounts previously 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, 2022, we recognized a net unrealized foreign exchange loss of $47.4 million, driven by an unrealized loss
of $73.1 million on intercompany loans due to the Euro strengthening 8.0% against the Canadian dollar in Q4 2022. This was partially offset by an
unrealized gain of $15.6 million on our USD borrowings from our revolving credit facility as well as an unrealized gain of $11.2 million on our senior
unsecured notes resulting from the US dollar weakening 1.2% against the Canadian dollar in Q4 2022.
For the year ended December 31, 2022, we recognized a net unrealized foreign exchange loss of $84.5 million, driven by an unrealized loss of $55.0
million on our senior unsecured notes resulting from the US dollar strengthening 6.8% against the Canadian dollar in 2022, as well as unrealized
losses of $27.0 million on intercompany loans due to the Euro strengthening 0.5% against the Canadian dollar in 2022, with the majority of the
unrealized loss driven by the significant Q4 strengthening of the Euro. This was partially offset by unrealized gains of $4.3 million on our USD
borrowings from our revolving credit facility.
As at December 31, 2022, a $0.01 appreciation of the Euro against the Canadian dollar would result in a $5.6 million decrease to net earnings as a
result of an unrealized loss on foreign exchange, while a $0.01 appreciation of the US dollar against the Canadian dollar would result in a $5.4
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 three months and year ended
December 31, 2022, accretion expense increased versus the comparable prior periods primarily due to the impact of a higher asset retirement
obligation balance at the end of 2022 compared to 2021 and slight strengthening of the Euro against the Canadian dollar.
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.
Vermilion Energy Inc. ■ Page 33 ■ 2022 Annual Report
Depletion and depreciation on a per boe basis for the three months and year ended December 31, 2022 of $21.22 and $18.59, respectively
increased from $18.74 and $18.36 in the comparable prior periods primarily due to a higher depletable base due to impairment reversals in 2021 and
2022, acquisitions, and the strengthening of the Euro against the Canadian dollar in Q4 2022.
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, 2022, the Company recorded deferred tax expense of $196.7 million and $288.7 million,
respectively, compared to deferred tax expense of $14.8 million and $187.3 million, respectively, for the comparable prior periods. The deferred tax
expense for the three months ended and year ended December 31, 2022 was primarily due to loss utilization on increased taxable income, as well
as the tax impact on unrealized derivative movement.
Impairment
Impairment losses or reversals of losses are recognized when indicators of impairment or impairment reversal arise and the carrying amount of a
cash generating unit ("CGU") is greater than (impairment) or less than (impairment reversal) its recoverable amount, determined as the higher of fair
value less costs of disposal or value-in-use. Subsequent to the first quarter of 2022 there were no indicators of impairment and no amounts relating
to previous impairments remaining to be reversed.
In the first quarter of 2022, indicators of impairment reversal were present in our Canada - Saskatchewan and France - Neocomian CGUs due to an
increase in forecast oil prices. As a result of the indicators of impairment reversal, the Company performed impairment reversal calculations on the
identified 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 12.0%. Based on the results of the impairment reversal calculations completed,
recoverable amounts were determined to be greater than the carrying values of the CGUs tested and $144.4 million (net of $47.7 million deferred
income tax expense) of impairment reversal was recorded.
Inputs used in the measurement of capital assets are not based on observable market data and fall within level 3 of the fair value hierarchy.
Vermilion Energy Inc. ■ Page 34 ■ 2022 Annual Report
Taxes
Current income tax rates
Vermilion typically pays corporate income taxes in France, Netherlands, Australia and Germany. 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 2022 and 2021, taxable income was subject to corporate income tax at the following statutory rates:
Jurisdiction
Canada
United States
France
Netherlands (1)
Germany
Ireland
Australia
(1)
2022
24.6 %
21.0 %
25.8 %
50.0 %
31.3 %
25.0 %
30.0 %
2021
24.6 %
21.0 %
27.4 %
50.0 %
31.4 %
25.0 %
30.0 %
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.
Windfall Taxes
On September 30, 2022 the Council of the European Union and member states agreed to a set mandatory temporary solidarity contribution on the
profits of oil and gas producers. The contribution set out minimum amounts to be calculated on taxable profits starting in 2022 and/or 2023, which
are above a 20% increase of the average yearly taxable profits for 2018 to 2021 period. Legislation became substantively enacted during the fourth
quarter of 2022 resulting in a full year of windfall taxes being booked during the fourth quarter.
Windfall tax rates apply to taxable profits which are above a 20% increase of the average yearly profits for the 2018 to 2021 period. The following
rates have been legislated as of December 31, 2022:
Jurisdiction
France
Netherlands (1)
Germany
Ireland (2)
2023
N/A
N/A
33.0 %
N/A
2022
33.0 %
33.0 %
33.0 %
N/A
(1)
(2)
For 2023 and 2024, Netherlands has implemented a windfall royalty. This royalty applies if annual realized pricing (net of hedges) exceeds €0.50/Nm3. This
royalty is assessed annually at a rate of 65% on realized pricing (net of hedges) less €0.50/Nm3 and payments on this royalty are deductible in calculating
current income taxes.
As at December 31, 2022, Ireland has not legislated a windfall tax rate. A rate of 75% was announced in November 2022.
Tax legislation changes
On December 21, 2021, the Dutch Senate approved the 2022 Tax Plan that included an increase to the Dutch corporate tax rate from 25.0% in 2021
to 25.8% in 2022. Due to the tax regime applicable to natural gas producers in the Netherlands, the increase to the corporate tax rate is not expected
to have a material impact to Vermilion taxes in the Netherlands.
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.
In 2021, 136 countries and jurisdictions, including Canada, agreed to implement the Organisation for Economic Co-operation and Development’s
(OECD) Pillar Two rules, effective in 2023. The proposed Pillar Two rules are designed to ensure that large multinational enterprises pay a minimum
level of tax (currently agreed upon at 15%) on the income arising in each jurisdiction where they operate. The proposed rules remain subject to
approval and ratification in multiple countries and jurisdictions. We are monitoring developments relating to the Pillar Two rules and implementation
to assess potential impacts on Vermilion.
Vermilion Energy Inc. ■ Page 35 ■ 2022 Annual Report
Tax pools
As at December 31, 2022, we had the following tax pools:
(1)
($M)
Canada
United States
France
Netherlands
Germany
Ireland
Australia
Total
(1) Deduction calculated using various declining balance rates.
(2) Deduction calculated using a combination of straight-line over the assets life and unit of production method.
(3) Deduction calculated using a unit of production method.
(4)
Tax Losses
1,374,896
208,272
—
—
—
803,763
15,431
2,402,362
Oil & Gas
Assets
1,778,803
265,091
293,484
48,138
198,444
—
175,126
2,759,086
(2)
(4)
(5)
(4)
(1)
(3)
(2)
(3)
(4)
Other
27,359
57,941
—
—
16,513
—
—
101,813
Total
3,181,058
531,304
293,484
48,138
214,957
803,763
190,557
5,263,261
(5)
Tax losses can be carried forward and applied at 100% against taxable income.
Tax losses of $47 million created prior to January 1, 2018 are carried forward and applied at 100% against taxable income, tax losses of $161
million created after January 1, 2018 are carried forward and applied to 80% of taxable income in each taxation year.
Vermilion Energy Inc. ■ Page 36 ■ 2022 Annual Report
Financial Position Review
Balance sheet strategy
We regularly review whether our forecast of fund flows from operations is sufficient to finance planned capital expenditures, dividends, share buy-
backs, and abandonment and reclamation expenditures. To the extent that fund flows from operations forecasts are not expected to be sufficient to
fulfill such expenditures, we will evaluate our ability to finance any shortfall by reducing some or all categories of expenditures, with issuances of
equity, and/or with debt (including borrowing using the unutilized capacity of our existing revolving credit facility). We have a long-term goal of
achieving and maintaining a ratio of net debt to four quarter trailing fund flows from operations of approximately 1.0.
As at December 31, 2022, we have a ratio of net debt to four quarter trailing fund flows from operations of 0.8. We will continue to monitor for
changes in forecasted fund flows from operations and, as appropriate, will adjust our exploration, development capital plans (and associated
production targets), and return of capital plans to target optimal debt levels.
Maintaining a strong balance sheet is a core principle of Vermilion and will remain a focus going forward. As debt reduction continues, we will plan to
increase the amount of free cash flow that is available for the return of capital, while taking into account other capital requirements.
Net debt
Net debt is reconciled to long-term debt, as follows:
($M)
Long-term debt
Adjusted working capital deficit (1)
Unrealized FX on swapped USD borrowings
Net debt
As at
Dec 31, 2022
1,081,351
265,111
(1,876)
1,344,586
Dec 31, 2021
1,651,569
9,284
(16,067)
1,644,786
0.8
1.8
Ratio of net debt to four quarter trailing fund flows from operations
(1)
Adjusted working capital is a non-GAAP financial measure that is not standardized under IFRS and may not be comparable to similar measures disclosed by
other issuers. It is defined as current assets less current liabilities, excluding current derivatives and current lease liabilities. The measure is used to calculate
net debt, a capital measure disclosed above. Reconciliation to the primary financial statement measures can be found in the “Non-GAAP and Other Specified
Financial Measures” section of this document.
As at December 31, 2022, net debt decreased to $1.3 billion (December 31, 2021 - $1.6 billion), primarily as a result of debt repayments of $1,121.9
million, funded by the $1,083.0 million of free cash flow generated during 2022. This was partially offset by borrowings made to fund the Leucrotta
acquisition, unrealized foreign exchange losses of $50.8 million on our senior unsecured notes due to the US dollar strengthening, and working
capital movements. The ratio of net debt to four quarter trailing fund flows from operations decreased to 0.8 (December 31, 2021 - 1.8) due to higher
four quarter trailing fund flows from operations, driven by strong commodity prices.
Long-term debt
The balances recognized on our balance sheet are as follows:
Revolving credit facility
2025 senior unsecured notes
2030 senior unsecured notes
Long-term debt
As at
Dec 31, 2022
147,666
404,463
529,222
1,081,351
Dec 31, 2021
1,273,755
377,814
—
1,651,569
Vermilion Energy Inc. ■ Page 37 ■ 2022 Annual Report
Revolving Credit Facility
As at December 31, 2022, Vermilion had in place a bank revolving credit facility maturing May 29, 2026 with terms and outstanding positions as
follows:
($M)
Total facility amount
Amount drawn
Letters of credit outstanding
Unutilized capacity
As at
Dec 31, 2022
1,600,000
(147,666)
(13,527)
1,438,807
Dec 31, 2021
2,100,000
(1,273,755)
(11,035)
815,210
On April 26, 2022, contemporaneous with the issuance of the 2030 senior unsecured notes and at Vermilion's election, the maturity date of the
facility was extended to May 29, 2026 (previously May 31, 2024) and the total facility amount was reduced to $1.6 billion (previously $2.1 billion).
As at December 31, 2022, 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, 2022
As at
Less than 4.0
Less than 3.5
Greater than 2.5
0.51
0.07
27.10
Dec 31, 2021
1.61
1.24
14.78
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:
•
Consolidated
long-term debt”, and “Lease
obligations” (including the current portion included within "Accounts payable and accrued liabilities" but excluding operating leases as defined
under IAS 17) on our consolidated balance sheet.
Consolidated total senior debt: Consolidated total debt excluding unsecured and subordinated debt.
Consolidated EBITDA: 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, 2022, 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, 2022 and December 31, 2021, Vermilion was in compliance with the above covenants.
2025 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 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
2022
2023 and thereafter
Redemption price
101.406 %
100.000 %
Vermilion Energy Inc. ■ Page 38 ■ 2022 Annual Report
2030 senior unsecured notes
On April 26, 2022, Vermilion closed a private offering of US $400.0 million 8-year senior unsecured notes. The notes were priced at 99.241% of par,
mature on May 1, 2030, and bear interest at a rate of 6.875% per annum. Interest is paid semi-annually on May 1 and November 1, commencing on
November 1, 2022. The notes are senior unsecured obligations of Vermilion and rank equally with existing and future senior unsecured
indebtedness.
The senior unsecured notes were recognized at amortized cost and include the transaction costs directly related to the issuance.
Vermilion may, at its option, redeem the notes prior to maturity as follows:
•
•
•
On or after May 1, 2025, Vermilion may redeem some or all of the senior unsecured notes at the redemption prices set forth below,
together with accrued and unpaid interest.
Prior to May 1, 2025, Vermilion may redeem up to 35% of the original principal amount of the notes with an amount of cash not greater
than the net cash proceeds of certain equity offerings at a redemption price of 106.875% of the principal amount of the notes, together with
accrued and unpaid interest.
Prior to May 1, 2025, Vermilion may also redeem some or all of the notes at a price equal to 100% of the principal amount of the notes,
plus a “make-whole premium,” together with applicable premium, accrued and unpaid interest.
Year
2025
2026
2027
2028 and thereafter
Shareholders' capital
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
April 2022 to July 2022
August 2022 onwards
Redemption price
103.438 %
102.292 %
101.146 %
100.000 %
Frequency
Monthly
Monthly
Monthly
Monthly
Monthly
Monthly
Quarterly
Quarterly
Dividend per unit or share
$0.170
$0.190
$0.200
$0.215
$0.230
$0.115
$0.060
$0.080
In the first quarter of 2022, we announced our plan to distribute a fixed quarterly dividend due to stronger commodity prices and a strengthened
balance sheet. In August 2022, we announced a 33% increase to our quarterly cash dividend effective for the Q3 2022 distribution. In January 2023,
we announced our plan to increase the quarterly dividend by 25% to $0.10 per share effective for the planned Q1 2023 distribution.
The following table reconciles the change in shareholders’ capital:
Shareholders’ Capital
Balance at January 1
Vesting of equity based awards
Shares issued for equity based compensation
Share-settled dividends on vested equity based awards
Repurchase of shares
Balance at December 31
Shares ('000s)
162,261
2,578
549
178
(2,339)
163,227
Amount
4,241,773
44,811
13,699
4,377
(60,866)
4,243,794
As at December 31, 2022, there were approximately 5.5 million equity based compensation awards outstanding. As at March 8, 2023, there were
approximately 162.1 million common shares issued and outstanding.
On July 4, 2022, the Toronto Stock Exchange approved our notice of intention to commence a normal course issuer bid ("the NCIB"). The NCIB
allows Vermilion to purchase up to 16,076,666 common shares representing approximately 10% of its public float as at June 22, 2022 beginning
July 6, 2022 and ending July 5, 2023.
Vermilion Energy Inc. ■ Page 39 ■ 2022 Annual Report
In 2022, Vermilion purchased and cancelled 2.34 million common shares under the NCIB for total consideration of $71.7 million. Subsequent to year
end 2022 and as at March 8, 2023, Vermilion purchased and cancelled 1.14 million common shares under the NCIB for total consideration of $22.4
million.
Contractual Obligations and Commitments
As at December 31, 2022, we had the following contractual obligations and commitments:
($M)
Long-term debt (1)
Lease obligations
Processing and transportation agreements
Purchase obligations
Drilling and service agreements
Total contractual obligations and commitments
(1)
Less than 1 year
1 - 3 years
3 - 5 years
After 5 years
69,235
46,245
40,267
27,481
5,051
188,279
533,362
49,730
52,786
4,907
58,122
698,907
225,861
29,062
23,133
444
—
278,500
634,875
8,597
101,629
285
—
745,386
Total
1,463,333
133,634
217,815
33,117
63,173
1,911,072
(2)
Interest on revolving credit facility calculated assuming an annual interest rate of 6.19%.
Commitments denominated in foreign currencies have been translated using the related spot rates on December 31, 2022.
Asset Retirement Obligations
As at December 31, 2022, asset retirement obligations were $1,087.8 million compared to $1,000.6 million as at December 31, 2021. The increase
in asset retirement obligations is primarily attributable to increases in inflationary market pressures and increases in estimated abandonment costs in
Netherlands, France and Canada. This increase was partially offset by higher country specific risk-free rates.
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 using the Company's expected cost of borrowing at the end of the
reporting period.
The risk-free rates and credit spread used as inputs to discount the obligations were as follows:
Credit spread added to below noted risk-free rates
Country specific risk-free rate
Canada
United States
France
Netherlands
Germany
Ireland
Australia
Dec 31, 2022
4.5 %
Dec 31, 2021
4.9 %
Change
(0.4) %
3.3 %
4.1 %
3.4 %
2.7 %
2.5 %
3.2 %
4.2 %
1.8 %
1.9 %
0.8 %
(0.3) %
0.1 %
0.5 %
1.9 %
1.5 %
2.2 %
2.6 %
3.0 %
2.4 %
2.7 %
2.3 %
Current cost estimates are inflated to the estimated time of abandonment using inflation rates of between 1.6% and 4.2% (as at December 31, 2021
- between 1.1% and 3.1%).
Vermilion Energy Inc. ■ Page 40 ■ 2022 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.
Windfall taxes and royalties
Vermilion is exposed to increased taxation and royalties due to windfall taxes on profits. Windfall taxes have been substantively enacted within the
European Union for oil and gas companies for 2022 and/or 2023 at a minimum rate of 33% calculated on taxable profits above a 20% increase in the
average yearly taxable profits as compared to 2018 to 2021. Windfall tax rates have been legislated or, in the case of Ireland, announced as
described in the preceding section “Taxes”. There remains uncertainty on whether the announced windfall tax rate in Ireland of 75% will change upon
legislation. In addition, there is uncertainty on whether windfall taxes will continue beyond 2023 or whether similar legislation could be enacted in
other jurisdictions that Vermilion operates in.
Ukraine War
During 2022, Russian military forces invaded Ukraine resulting in a war between the two countries. The ongoing conflict between countries has
impacted the supply of oil and gas from the region and has resulted in countries throughout the world imposing financial and trade sanctions against
Russia which have had macroeconomic effects. The risks disclosed in our Annual Information Form for the year ended December 31, 2022 may be
exacerbated as a result of the Ukraine war, including: market risks including volatility of oil and gas prices, volatility of foreign exchange rates,
volatility of market price of common shares, hedging arrangements; regulatory and political risks including tax, royalty, and other government
legislation; financing risks including additional financing, debt service, variations in interest rates and foreign exchange rates; acquisition and
expansion risks including international operations and future geographical/industry expansion, acquisition assumptions, failure to realize anticipated
benefits of prior acquisitions.
Vermilion Energy Inc. ■ Page 41 ■ 2022 Annual Report
COVID-19
The 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, 2022 may be exacerbated as a result of the continued 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 parts of our workforce continue to work through remote connections, accounting adjustments, effectiveness of
internal controls, and reliance on key personnel, management, and labour.
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.
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 return of capital and internal capital development programs. 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 ($1,087.8 million as at December 31, 2022) 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).
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 $54.0 million.
The estimated credit-adjusted risk-free rate may change from period to period in response to market conditions in Canada and the international
jurisdictions that we operate in. A 0.5% increase or decrease in the credit-adjusted risk-free rate would decrease or increase asset retirement
obligations by approximately $64.8 million.
The fair value of capital assets acquired in business combinations
In preparing the purchase price allocation for the business combinations completed in 2022, we estimate the fair value of assets acquired. Assets
acquired in an acquisition primarily relates to the crude oil and natural gas reserves. The estimated fair value of the crude oil and natural gas
Vermilion Energy Inc. ■ Page 42 ■ 2022 Annual Report
reserves acquired is based on the present value of proved plus probable reserves and forecast commodity prices. Changes in these assumptions,
including the discount rate used, would change the amount of capital assets recognized and as a result may cause rise to goodwill or gains
recognized on the acquisition and future depletion and depreciation expense.
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, 2022, the deferred tax asset balance of $125.5 million relates to Ireland.
In Ireland, we are projected to use all tax pools based on forecasted reserves and pricing and have not recognized any contra valuation allowances
against deferred tax assets. A 10% decrease in pricing or volumes would continue to result in no contra valuation allowance being 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 first quarter of 2022, indicators of impairment reversal were present in our Canada - Saskatchewan and France - Neocomian CGUs due to an
increase in forecast oil prices. As a result of the indicators of impairment reversal, the Company performed impairment reversal calculations on the
identified 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 12.0%. Based on the results of the impairment reversal calculations completed,
recoverable amounts were determined to be greater than the carrying values of the CGUs tested and $144.4 million (net of $47.7 million deferred
income tax expense) of impairment reversal was recorded. A 1% increase in the assumed after-tax discount rate would reduce the estimated
recoverable amount of assets tested and result in a lower impairment reversal of $123.0 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 lower impairment
reversal of $220.4 million.
In the fourth quarter of 2021, indicators of impairment reversal were present in our France - Neocomian CGU due to increases and stabilization of
commodity prices resulting in increased cash flow estimates. As a result of the indicators of impairment reversal, the Company performed impairment
reversal calculations on the identified CGU 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 12.0%. Based on the results of the impairment reversal
calculations completed, recoverable amounts were determined to be greater than the carrying values of the CGU tested and $17.7 million (net of
$6.2 million deferred income tax expense) of impairment reversal was recorded. A 1% increase in the assumed after-tax discount rate would reduce
the estimated recoverable amount of assets tested and result in a lower impairment reversal of $6.4 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 lower
impairment reversal of $12.9 million.
In the third quarter of 2021, indicators of impairment reversal were present in our Ireland CGU due to an increase and stabilization in forecast gas
prices. As a result of the indicators of impairment reversal, the Company performed impairment reversal calculations on the Ireland CGU and 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 12.0%. Based on the results of the impairment reversal calculations completed, the recoverable amount
was determined to be greater than the carrying value and $16.7 million (net of $5.5 million deferred income tax expense) of impairment reversal was
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. A 1% increase in the assumed after-tax discount rate or
a 5% decrease in revenues (due to a decrease in commodity price forecasts or reserve estimates) would not affect the amount of impairment
reversal recorded.
Vermilion Energy Inc. ■ Page 43 ■ 2022 Annual Report
In the second quarter of 2021, indicators of impairment reversal were present in our Alberta, Saskatchewan, Germany, Ireland and United States
CGUs due to an increase and stabilization in forecast oil and gas prices. As a result of the indicators of impairment reversal, the Company performed
impairment reversal calculations on the identified 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 12.0%. Based on the results of the
impairment reversal calculations completed, recoverable amounts were determined to be greater than the carrying values of the CGUs tested and
$460.4 million (net of $133.2 million deferred income tax expense) of impairment reversal was recorded. A 1% increase in the assumed after-tax
discount rate would reduce the estimated recoverable amount of assets tested and result in a lower impairment reversal of $116.8 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 lower impairment reversal of $254.9 million.
In the first quarter of 2021, indicators of impairment reversal were present in our Australia, Alberta, Saskatchewan, and United States CGUs due to
an increase and stabilization in forecast crude oil prices versus 2020 when impairment charges were taken. As a result of the indicators of
impairment reversal, the Company performed impairment reversal tests on the identified 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 12.0%.
Based on the results of the impairment reversal calculations completed, recoverable amounts were determined to be greater than the carrying values
of the CGUs tested and $492.2 million (net of $170.7 million deferred income tax expense) of impairment reversal was recorded. A 1% increase in
the assumed after-tax discount rate would reduce the estimated recoverable amount of assets tested and result in a lower impairment reversal of
$146.4 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 lower impairment reversal of $285.6 million.
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.
Cybersecurity
Vermilion has an information security training and compliance program that is completed at least annually. We have not experienced a cybersecurity
breach in the last three years.
Recently Adopted Accounting Pronouncements
Vermilion did not adopt any new accounting pronouncements as at December 31, 2022.
Health, Safety and Environment
We are committed to ensuring we conduct our activities in a manner that protects the health and safety of our employees, our contractors and the
public. Our HSE Vision is to consistently apply our core values of Excellence, Trust, Respect and Responsibility. Our goal is to create a workplace
free of incidents by ensuring our proactive culture and behaviours create a high-reliability organization where HSE is fully integrated into our
business – it is our way of life. Our mantra is HSE: Everyone. Everywhere. Everyday.
Vermilion seeks to maintain health, safety and environmental practices and procedures that comply with or exceed 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 2022 we:
•
•
•
Maintained clear priorities around 5 key focus areas of HSE Culture, Communication and Knowledge Management, Management Systems,
Environmental & Operational Stewardship, and Health;
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;
• Worked towards fulfilling our updated HSE Strategy and further enhanced our Visible Active Leadership program;
•
•
•
•
Completed a comprehensive HSE Management System Assessment across the organization;
Completed a gap assessment and action plan as part of our Process Safety Management System implementation;
Completed our 4th HSE Perception Survey, analyzed the results and developed action plans;
Continued reinforcement of the “Vermilion High 5”, an individual safety awareness initiative aimed at keeping front-line workers safe;
Vermilion Energy Inc. ■ Page 44 ■ 2022 Annual Report
•
•
•
•
•
•
•
Advanced our Energy Safety Canada and International Oil and Gas Producers Life-Saving Rules implementation and competency
development;
Submitted our CDP Water and Climate reports;
Managed our waste products by reducing, recycling and recovering;
Reduced long-term environmental liabilities through decommissioning, abandoning and reclaiming well leases and facilities;
Continued the development of a robust hazard identification and risk mitigation program specific to environmentally sensitive areas;
Performed auditing, management inspections and workforce observations to measure compliance and identify potential hazards and apply
risk reduction measures; and
Assessed the effectiveness of our performance management standards across multiple business units.
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.
Task Force on Climate-related Financial Disclosure (TCFD)
Environmental, Social and Governance (ESG)
As an international company, Vermilion responsibly produces essential energy while delivering long-term value to our stakeholders. We believe that
integrating sustainability principles into our business increases shareholder returns, enhances development opportunities, reduces long-term risks,
and supports the well-being of key stakeholders including the communities in which we operate.
Vermilion has established a leadership position in sustainability performance and disclosure, launching our first CDP Climate submission and
Sustainability Report in 2014, with data to 2012, aligned with the Global Reporting Initiative (GRI). We have since adopted recommendations from
the Task Force on Climate-related Financial Disclosure (TCFD), the Sustainability Accounting Standards Board (SASB), and the International
Sustainability Standards Board (ISSB).
In particular, we have applied the TCFD framework in the management of climate- and other sustainability-related risks and opportunities. This
recognizes the importance of climate-specific disclosure while reflecting its intersection with other environment-related risks and opportunities, social
factors such as safety and community engagement, and governance issues. Our Index follows:
•
•
•
•
•
Governance
Strategy
Risk Management
Metrics and Targets
Consolidated Climate (TCFD) Report www.vermilionenergy.com/sustainability/reports/
Information Circular
Annual Report MD&A
Annual Report MD&A
Annual Report MD&A
Vermilion Energy Inc. ■ Page 45 ■ 2022 Annual Report
Sustainability and Climate-Related Strategy
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. Our scenario analysis has consistently
demonstrated that Vermilion can best contribute by focusing on producing energy responsibly: safely, reliably and cost-effectively. Our Sustainability
Report provides further details at: www.vermilionenergy.com/sustainability.
Description of Sustainability- and Climate-related Risks and Opportunities, and Impacts
Given the intersection of environmental and social issues, and their impact over varying timeframes, we have identified climate-related risks and
opportunities within short-term (0-3 years), medium-term (3-6 years) and long-term (6-50 years) horizons. We describe these below, along with their
potential company and financial impact (assessed using processes such as scenario analysis, cost projections and our Emissions Long-Range
Planning tool), and our resulting management approach, including operations such as equipment upgrade, and capital allocation. Our annual CDP
Climate Change and Water Security submissions provide additional information, including where in the value chain these risks and opportunities
occur: see www.vermilionenergy.com/sustainability/reports/.
Category /
Issue
Policy and Legal:
Increased Pricing
of GHG Emissions
e.g. Carbon Tax
Policy and Legal:
Enhanced
Emissions &
Other ESG
Reporting
Obligations
Description of Impacts
Potential Financial Impact
Management Approach
Short-term Transition Risks (0-3 Years)
Short-term impact is primarily in Canada and Ireland.
Canadian Federal Greenhouse Gas Pollution Pricing
Act has set carbon tax rates at $50 per tCO2e in
2022, rising to $170 by 2030. Our exposure is
mitigated by provincial responses to the Act,
including Alberta's Technology Innovation and
Emissions Reduction (TIER) regulation and
Saskatchewan’s Output-Based Pricing System
(OBPS). Our Ireland operations are subject to the
EU ETS and Ireland Carbon Tax systems.
Longer-term impact rests on carbon pricing’s
vulnerability to changes in government policy. We
note the political focus in the EU, Canada and USA
on a COVID-19 economic recovery that is both
climate-focused and responsive to social justice
issues such as labour practices.
Climate and other ESG reporting obligations are
evolving rapidly, with Vermilion potentially subject to
European Sustainability Reporting Standards, U.S.
Securities and Exchange Commission Climate-
Related Disclosure Rules, and Canadian Securities
Administrators Climate-Related Disclosure Rule,
much of which is founded on the work of TCFD,
SASB and the International Sustainability Standards
Board. Although Vermilion's existing sustainability-
related disclosure provides a sound foundation for
compliance with these proposed rules, there are
costs to monitor developments and respond to the
final versions, particularly potential requirements for
increased levels of audit. The impact to Vermilion
would be a decreased netback per BOE, due to
increased expenses for staff time and system
development and implementation.
With our recent Montney acquisition, our Canadian
carbon tax liability increased to approximately
$0.7MM in 2022, and is forecasted to exceed $1MM/
year in the near term. Our Ireland EU ETS liability is
forecast to be approximately $0.8MM in 2022,
increasing to approximately $2.6MM in 2025 and
$3.5MM in 2030. The Ireland Carbon Tax liability is
expected to be an additional approximately $0.1MM/
year over this period. All of the liability estimates are
net Vermilion.
We voluntarily opted into Alberta’s TIER regulation,
which provides tax exemptions contingent on
emissions reduction activities that Vermilion is in the
process of implementing. Our ongoing efforts to
reduce the energy and emissions intensity of our
operations are integral to managing this risk,
including our announcement of two emission
reduction targets in 2021. 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.
The financial impact is an increase in operational
cost associated with the management and
quantification of emissions to meet new reporting
requirements, and the administrative costs
associated with reporting and audit obligations. This
is built into Vermilion's budgeting and is currently
estimated at $0.5MM annually.
Regulations in all of our business units are
monitored on an ongoing basis, and assumptions/
scenario planning is used annually to assess risk. In
Canada, we implemented an external emission data
gathering software in 2021 to support the evolving
regulatory landscape. Vermilion also engages
stakeholders relating to emissions reporting
obligations. Management of this risk is built into
Vermilion's operations and our ERM. In addition, we
expect to automate our emissions data gathering,
aggregation and calculation processes in 2023-2024,
while ensuring audit-ready processes for all ESG
data points to align with proposed regulatory
requirements.
Vermilion Energy Inc. ■ Page 46 ■ 2022 Annual Report
Vermilion is closely monitoring regulatory and market
changes to ensure its approach to resilience under
evolving conditions remains appropriate. We provide
feedback to governments on proposed regulations,
as per our lobbying disclosures, and allocate
resources, including staff and capital, to ensure that
required operational changes can be effectively
actioned. In the short term, tying in vented
equipment to flaring infrastructure in Canada is an
example of projects to address this risk; in
Netherlands we have used NOx scrubbers and
purchased NOx certificates to comply with new
regulations.
Our ongoing efforts to proactively reduce the energy
and emissions intensity of our operations are integral
to managing this risk, including our announcement of
two emission reduction targets in 2021, and our work
in 2022-2023 to establish a clear net zero to 2050
plan and 2030 emissions reduction target. We are
also working with external partners to further
implement and develop emission reduction
technologies that are economic to the Company, in
part due to the potential generation of carbon credits.
Based on stakeholder engagement, Vermilion
believes that independent assessments of our
operations by third parties are an important tool to
demonstrate our responsible approach to production
of essential energy. As a result, we have sought and
achieved Equitable Origin responsible gas producer
certification for 3 of our Canadian sites, the AFNOR
CSR Committed label in France, and the Business
Working Responsibly mark in Ireland.
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 due to severe weather.
Based on our scenario analysis, we identified the
need to explore new and evolving technologies and
processes to identify synergistic fits for our business
in both traditional and renewable energy production.
We are pursuing this via our established track record
in geothermal energy from produced water, for which
our internal expertise in engineering, geoscience and
drilling is particularly well suited. We are also
investing in early R&D in other areas, such as biogas
and the conversion of traditional oil and gas assets
to geothermal and hydrogen production, to better
understand the long-term potential.
Description of Impacts
Potential Financial Impact
Management Approach
Category /
Issue
Policy and Legal
and Technology:
Mandates on and
Regulation of
Existing Products
and Service, and
Changes in
Emissions
Regulations; and
Market and
Reputational:
Changing
Customer
Behaviour
Operational changes to comply with existing
methane reduction regulations is expected at
approx. $1.5MM in the short term, with those
associated with eliminating routine flaring in France
subject to continuing review in 2023.
The cost of compliance with proposed regulations,
such as Canada's proposed regulatory framework
for reducing oil and gas methane emissions to
achieve a 75% reduction by 2030 is not yet
established, and will depend on the final version of
the framework.
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. The
most likely short-term impact is regulations in
Canada to reduce methane emissions, in France to
reduce flaring and in Netherlands to reduce NOx.
From a macro perspective, geopolitical impacts (e.g.
war in Ukraine) have escalated diverging
government and consumer viewpoints on the need
for energy security vs energy transition. We expect
that demand for oil and natural gas to remain strong
in the short term, while safety and environmental
regulations governing its production will increase.
We have identified these risks as interconnected and
existing in the short-term; however, they should be
seen as medium- to long-term risks as well.
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 $274MM (total impact
before insurance). The third-party costs associated
with potential damages from extreme weather events
are not tracked.
Long-term Transition Risks (6-50 Years)
Technology:
Substitution of
existing products
and services with
lower emissions
options
Although we see demand for oil and natural gas
remaining robust in the short- to mid-term, it is likely
that demand for oil and, to a lesser degree, natural
gas will eventually fall as the energy transition
evolves and various alternatives for renewable
energy options become technologically and
economically available. This could impact the need
for our products in the longer term, post 2030 for oil
and even further out for natural gas. As 2021 and
2022 have demonstrated, it will be critical to maintain
adequate supplies of both oil and natural gas during
the energy transition, to provide both accessibility
and affordability.
Given the uncertain timeline and progression of the
energy transition, and supply-demand dynamics, we
are not using a financial forecast for impact. We are,
however, using our scenario analysis to identify
potential opportunities that would mitigate the risk to
our products.
Long-term Physical Risks (6-50 Years)
Chronic:
Changes in
Temperature
Extremes,
Including Rising
Mean
Temperatures
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, via a
decreased ability to access lands and an increase in
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.
As weather extremes cannot be controlled, Vermilion
uses our 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 would significantly decrease capital
considerations in the event that limited frost days
occurred. Each risk associated with weather is
assessed on a case-by-case basis.
Vermilion Energy Inc. ■ Page 47 ■ 2022 Annual Report
Description of Impacts
Potential Financial Impact
Management Approach
Category /
Issue
Chronic:
Changes In
Precipitation
Patterns and
Extreme
Variability in
Weather Patterns
Chronic:
Rising Sea Levels
Vermilion holds assets inland, in coastal regions,
and offshore, where a change in precipitation could
negatively 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, where we have assessed the potential
risk associated with rising sea levels. This could
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.
wildfire) have been assessed on a case-specific
basis, and are believed to be substantive (impact >
$10.0MM). Vermilion maintains insurance to mitigate
the potential impact of precipitation-related extreme
events (i.e. Wildfire, Flooding).
We have estimated that a rise in sea level could
have a financial impact of $571MM before insurance
at our main gas processing facility Garijp (GTC) in
the Netherlands, caused by an extreme 1-in-10000-
years tide/extreme wind event.
Short-term Opportunities (0-3 Years)
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
in revenue and returns on investment. Potential also
exists for significant cost adjustments, as assets
slated for abandonment would be repurposed to
enable them to continue to generate energy.
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.
Products and
Services, and
Resilience:
Development of
New Products and
Services through
R&D and
Innovation;
participation in
renewable energy
programs
Products and
Services:
Access to New
Markets
Products and
Services:
Ability to Diversify
Business
Activities; Shift in
Consumer
Preferences
Directly related to the long-term transitional risk
associated with the substitution of low-carbon
products, we have the opportunity to participate in
the development of those products. This has the
potential to reuse our current infrastructure to
provide alternative products, such as biogas or
hydrogen, or to develop new products such as
geothermal energy, creating new revenue streams.
An example of this opportunity is the geothermal
heat we are providing heat from the produced water
in our oil operations to develop sustainable
agriculture and residential projects near our
operations.
More stringent global measures to reduce emissions
from individual ships by 30% by 2030, established
through amendments to MARPOL Annex VI, came
into force on Jan 1 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 meets the needs of refineries
in the short term to meet IMO regulations.
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.
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, Vermilion would
implement 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 if 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 are leveraging our technical experts and
partnerships to provide input into alternative and
renewable energy projects as they are identified. An
example of the development of low emission goods/
services is our France-based industry partnership
with Avenia to expand the use of geothermal energy
production in oil production, and a geothermal
association in Germany. We have also developed
criteria for approving the move of these ideas into
our Vermilion Opportunity Development Process,
which provides clear gates and criteria for
considering and implementing such projects.
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.
The financial impact of changing consumer
preferences in difficult to quantify. We foresee
revenue opportunities in two distinct areas. (1) 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 $31.1MM/year based on
$1 at 2022 production levels. (2) Access to more
stringent markets, supported by our environmental
and sustainability performance. Vermilion has
entered into German, Hungarian, Croatian and
Slovak oil and gas operations, which our
sustainability performance has supported.
Based on stakeholder engagement, Vermilion
believes that independent assessments of our
operations by third parties are an important tool to
demonstrate our responsible approach to production
of essential energy, and generate premium. As a
result, we have sought and achieved Equitable
Origin responsible gas producer certification for 3 of
our Canadian sites, the AFNOR CSR Committed
label in France, and the Business Working
Responsibly mark in Ireland. We are currently
assessing the potential to expand these
certifications.
Vermilion Energy Inc. ■ Page 48 ■ 2022 Annual Report
Category /
Issue
Energy Source:
Participation in
Carbon Market
Description of Impacts
Potential Financial Impact
Management Approach
Medium-term Opportunities (3-6 Years)
Vermilion is not accounting for any short term
financial impact due to the volatility in current
markets.
We will continue to evaluate the benefit that certified
offset credits from various emission reduction
projects across our operations could provide.
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 shift in the cap and
trade scheme may provide opportunities for
Vermilion to generate certified energy reduction /
offset credits through our geothermal cogeneration
projects in France; however, current carbon markets
are experiencing significant volatility, including
reputational impacts to voluntary markets.
Long-term Opportunities (6-50 Years)
Products and
Services:
Shift in Consumer
Preferences
Under the Canadian Environmental Protection Act
and based on commitments made by the Canadian
and Alberta governments and energy utilities 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.
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.
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 long-term financial impact of decentralized
energy generation will depend on the speed of the
energy transition balanced against the need for
energy security. As such, we believe it is not
possible to predict the financial impact at this time.
Examples of projects that have the potential to
generate credits include four geothermal co-
production projects in France. Vermilion's project
assessment framework is applied to each identified
opportunity, including considerations associated with
emissions offset.
As we move further into the energy transition, we
foresee natural gas playing an impactful role as a
less carbon intense fuel than other options (i.e. coal).
Vermilion continues to focus on the identification of
resources and assets where we have the opportunity
to apply our industry leading expertise to optimize
production while reducing emissions. An example of
our strategy to realize this opportunity is our asset
base in Alberta, which currently includes a large
liquids rich gas play. Vermilion's marketing team is
also actively pursuing options for our natural gas
production that will enable Vermilion to achieve the
best netbacks on production.
Vermilion 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).
Resilience of the Company’s Strategy
Countries in all of our operating regions have implemented policies to support a low-carbon future for the world’s economy, consistent with a 1.5-2C
or lower scenario. As a global energy producer, we contribute to the supply of safe, reliable and affordable energy during this transition; our strategy
is therefore based on our risk and opportunity identification, which in turn contributes to our materiality analysis. This analysis is based on double
materiality, considering issues based on both external and internal impacts. The Board of Directors and senior leadership used these analyses in our
scenario analysis. Vermilion uses two energy transition scenarios from the World Economic Forum. These compare a Gradual versus Rapid low-
carbon transition based on inputs that include the International Energy Agency’s New Policies Scenario (Gradual) and Sustainable Development
Scenario (Rapid), which meets the Paris Agreement’s goal to limit global temperature increases to 1.5 to 2ºC. Vermilion examines key factors
impacting the speed of the transition – including the influence of new energy technologies; potential speed of their adoption; anticipated changes in
policy and regulation; and emerging market pathways such as India – and resulting factors that could impact the Company, including economics
(demand, supply, consumer behaviour, and costs of energy); technological advancement; capital availability; government policy; and Company
reputation. Among these, government policy is seen as most influential in the near to mid-term.
We applied these findings to Vermilion’s strategy to 2050 and beyond, described below. In particular, the scenario analysis led us to develop two
emission-related targets that were announced in 2021: an aspirational commitment to net zero emissions in our own operations, including Scope 1
and Scope 2 emissions, by 2050, and a near-term target to reduce Scope 1 emissions intensity from our operations by 15 to 20% by 2025, using a
baseline year of 2019. See Metrics and Targets, below, for more information.
In 2022, we furthered this commitment by establishing high-level approaches to net zero, including: reducing emissions; converting production by
replacing end-of-life fields with lower intensity production; adapting to new technology such as carbon capture and storage and renewable energy;
and — when no other options exist — a careful approach to offsetting. We are building out this plan in 2023, including establishing our next
emissions reduction target, for 2030.
Vermilion Energy Inc. ■ Page 49 ■ 2022 Annual Report
Overall, our strategy to ensure our resilience under various scenarios rests on three strategic activities:
•
Focusing on efficient and responsible production of oil and natural gas, viewing emissions as potential energy sources:
◦
◦
◦
Lower carbon fuels. Since 2012, we have shifted our production mix towards natural gas as a cleaner burning fuel than other
fossil fuels. We also sell our fuels within the country of production wherever possible, reducing the carbon footprint associated
with transportation of the fuel to consumers while increasing national energy security.
Socially responsible fuels. We are committed to ensuring that our products are produced in an environmentally and socially
responsible manner, respecting worker rights and community engagement. We operate in regions noted for their stable, well-
developed fiscal and regulatory policies related to oil and gas exploration and development, and for their robust health, safety,
environmental and human rights legislation.
Transparency and reporting. We have established a strong record of reporting on greenhouse gas emissions, energy usage and
other key environmental metrics, which has supported our emission reduction targets.
•
•
Implementing technically and economically feasible options for emission reduction, covering combustion, flaring, venting and
fugitive emissions:
◦
◦
Greater energy efficiency. Many energy and operational efficiency initiatives go hand-in-hand, which in turn helps us minimize
our carbon footprint and reduce greenhouse gas emissions.
Lower greenhouse gas emission intensity. We are committed to reducing the greenhouse gas emissions associated with our
production, with particular focus on methane.
Exploring new and evolving technologies and processes to identify synergistic fits for our business in both traditional and renewable
energy production:
◦
Alternative energy. We are continuing to develop our knowledge and use of alternative energy sources, including geothermal
energy, for which our internal expertise in engineering, geoscience and drilling is particularly well suited. This work has begun
with the geothermal potential of our produced water, supporting a circular economy model that conserves, reuses and recycles
resources to better protect our environment. It is also expanding into areas such as biogas and the conversion of traditional oil
and gas assets to geothermal and hydrogen production.
In addition, we identified two further pillars of our sustainability strategy that are integral to managing sustainability- and climate-related issues:
Conservation
We are committed to reducing the impact our operations have, beginning with regulatory compliance across all business units. Our conservation
efforts are further focused in three areas:
• Water: We recognize water as a basic human right, and as a vital resource that is shared among many stakeholders in our communities.
We are therefore committed to protecting both the supply and the quality of water sources in our areas of operation by:
◦
◦
◦
Proactively preventing harm and supporting healthy surface and groundwater bodies
Reducing potable and freshwater usage to the lowest level practical, and
Taking a lifecycle and circular economy approach to water, exploring opportunities to reuse and recycle products such as
produced water
•
•
Asset Retirement Obligations: We are adapting our long-term Asset Retirement Obligation management to include revitalizing or reusing
assets to benefit our environment and our communities.
Biodiversity: We are focusing on protecting the species and habitats around us by proactively identifying biodiversity risks and
opportunities, and implementing associated plans.
Community
Our communities comprise a wide diversity of people and organizations, but they have one key thing in common: they care deeply about the safety,
environmental stewardship and corporate citizenship that we bring to our local operations. In addition, our people care deeply about their
communities - whether we work there or live there, these are the places we call home. We therefore steward our operations and relationships to
demonstrate our commitment to being a responsible producer and a valued and trusted neighbor and business partner, including:
•
•
•
Transparency with respect to safe and environmentally responsible operations, including our potential impacts on local communities
Maintaining strong, genuine relationships with our communities, with engagement based on respect, listening and openness, and
Creating a shared value focused on local economic and social development
Vermilion Energy Inc. ■ Page 50 ■ 2022 Annual Report
Sustainability and Climate-Related Risk Management
Process for Identifying, Assessing and Managing Sustainability- and Climate-related Risks, and
Integration into the Company’s Enterprise Risk Management (ERM) System
Sustainability-related risks and opportunities, including those related to climate, are integrated into multi-disciplinary Company-wide risk identification,
assessment, and management processes as part of our ERM system, based on the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) framework. This provides an integrated approach to managing risk as it impacts strategy and performance, and includes
Operational, Market & Financial, Credit, Organizational, Political, Regulatory Compliance, Strategic and Reputational, and Sustainability categories.
Our sustainability materiality analysis, which assesses issues with impact for both the Company and our key stakeholders, is integrated into our ERM
system using the Corporate Risk Register through a collaboration between our Finance, HSE and Sustainability teams.
Overall, risk management is the responsibility of the Board and the Executive Committee based on a Top-Down, Bottom-Up approach to engage all
staff. Top-Down begins with our Board and its committees with clear terms of reference, including oversight for identification and management of
specific allocations of risk type. This is translated into action by our Executive Committee, which reviews and manages the ERM process through
implementation of associated policies and procedures. Our staff help develop systems, standards and procedures. Bottom-Up is how staff
implement, maintain and improve risk management processes, applying the hazard-risk-mitigation process in every part of our business.
Risks are identified by key staff across our Company, including our Operations, Finance, Health, Safety and Environment, Economics, Government
and Public Relations, and Sustainability teams at corporate, business unit and asset levels. These employees have significant experience, and use a
wide array of inputs, including operational and facility assessments, technical and research reports, external stakeholder organizations, government
policy and regulation changes, industry initiatives, communities and landowners, and non-governmental entities.
The results are incorporated into our Corporate Risk Register, which provides a consistent framework to ensure the effective tracking and
communication of our material risks. Using our Risk Matrix as a prioritization tool, Teams assess severity, likelihood, speed of onset, and vulnerability
using scales from 1 to 5 for each factor, described in terms of human, environment, financial, social license and cybersecurity impacts. Every risk
case has also been assessed to determine where sustainability- or climate-related risk is a contributing factor. The results are provided annually at
minimum to senior management, the Executive Committee and the Board and its Committees as appropriate, who further assess the risks including
interdependencies.
Our risk management approach focuses on reducing the risk to a level as low as reasonably practicable, accepting the risk, and/or controlling it (such
as insuring it). For example, if direct mitigation is not possible (e.g. changes in temperature extremes), we would adapt our business processes to
reduce the potential impact (e.g. changing work hours to avoid extreme mid-day heat). In other situations (e.g. increasing risk of flood), we may take
measures to protect against the risk (e.g. flood controls) while also insuring our operations.
To support climate risk identification and management, we developed a Carbon Liability Assessment Tool, with Scope 1 emissions quantification and
regulatory information for each business unit. We assessed the price of carbon on both a realized cost and shadow pricing basis, and have identified
likely carbon pricing scenarios for all our operating areas. The Tool provides the basis for developing carbon liability risk cases for all business units,
supports ongoing identification of carbon opportunities, and supports activities such as business development, taxation review and marginal
abatement cost curve preparation. In 2022, we built on this approach by developing our Emissions Long-Range Planning Tool. This is based on our
long-range planning tool for production, and allows us to forecast emissions, carbon taxes and the impact of various emission reduction projects.
This supports our decision-making on production, capital allocation, and mergers and acquisitions.
Sustainability and Climate-Related Metrics and Targets
Metrics Used to Assess Sustainability- and Climate-Related Risks and Opportunities
Our sustainability reporting (www.vermilionenergy.com/sustainability) continues to describe significant economic, environmental, social and
governance measures, which are reported with reference to TCFD, SASB and GRI. These include but are not limited to:
•
•
•
•
Climate: energy consumption and intensity; investment in and generation of renewable energy; greenhouse gas emission and intensity,
including flaring and venting, and avoided emissions; and water withdrawal, including from areas of high baseline water stress, and
discharge.
Environment: Waste generation and management; Asset integrity and spills; and Environmental investment
Social: Health and Safety; People; and Community investment
Governance: Ethics
Vermilion Energy Inc. ■ Page 51 ■ 2022 Annual Report
These metrics contribute to our performance for CDP Climate, and S&P Global Corporate Sustainability Assessment and Sustainalytics, which
comprise 10% of the Corporate Performance Scorecard for our Long-term Incentive Plan. In addition, HSE metrics comprise 25% of the scorecard
for our Short-Term Incentive Plan. These plans apply to all employees, including our executive team.
We also track carbon pricing, and have identified actual and likely pricing scenarios for all of our operations based on current government policies
and published research relating to the Paris Agreement. For example, in Canada, the 2022 carbon tax was $50 per tCO2e, and in Ireland, carbon
pricing was 41 € per tCO2e. Further information is available in our CDP Climate submission, available at vermilionenergy.com/sustainability/reports/.
In addition, we benchmark our performance via third-party ESG rating agencies, including:
•
•
•
•
CDP Climate Change and Water Security: Climate Score of A- and Water score of “B” in 2022.
ISS ESG QualityScore: Decile rating of “1” for Environmental and Social practices as of March 2023.
MSCI ESG Rating: AAA in 2022.
S&P Global Corporate Sustainability Assessment: Top of our peer group in 2022.
Scope 1, 2 and 3 GHG Emissions Disclosure
We report Scopes 1, 2 and 3 emissions, which are externally verified under ISO 14064-3. Historical, corporate and business unit data can be found
in the Energy and Emissions Performance Metric document available at www.vermilionenergy.com/sustainability/, summarized in the charts below.
The 2018 increase in emissions was associated with the acquisition of southeast Saskatchewan assets. Our Scope 1 and 2 emissions intensity and
methane emissions intensity decreased in 2019 and 2020, primarily related to our first full year of operatorship for the Corrib gas asset in Ireland,
and our focus on reducing post-acquisition emissions over time through superior operations, as we did in 2014 to 2017 following the acquisition of
previous Saskatchewan assets. This has been achieved through a variety of gas conservation and recovery initiatives including construction of new
infrastructure, operational changes and increased infrastructure runtimes. Additional decreases have been achieved through improved measurement
and methodologies, projects such as replacing diesel or propane with compressed natural gas for boilers and water heating for the drilling program in
Alberta, converting pneumatic devices from high- to low-bleed, installing solar-powered chemical injection pumps, and the purchase of renewable
energy certificates for electricity use in Netherlands and Ireland.
Related Targets and Performance
Vermilion has committed to two emission-related targets:
•
•
•
Net zero emissions in our own operations, including Scope 1 and Scope 2 emissions, by 2050. We are transparent that this is an
aspirational goal, and that we will continue building the plan to achieve this target over time.
As a first step, we set a near-term target to reduce Scope 1 emissions intensity from our operations by 15 to 20% by 2025, using a
baseline year of 2019. We will set new targets every five years at minimum, building on this foundation while exploring broader options,
including the potential to reduce Scope 3 emissions.
In 2022, we furthered this commitment by establishing high-level approaches to net zero, including: reducing emissions; converting
production by replacing end-of-life fields with lower intensity production; adapting to new technology such as carbon capture and storage
and renewable energy; and — when no other options exist — a careful approach to offsetting. We continue to build out this plan in 2023,
including establishing our next emissions reduction target, for 2030.
We are tracking our performance using Scope 1 and 2 absolute and intensity emission metrics, and were on track as of end of year 2021 with a 5%
decrease in Scope 1 emissions intensity. Fiscal year 2022 environmental reporting will be available in mid-2022 at https://www.vermilionenergy.com/
sustainability/, where additional targets to reduce emissions and methane in our southeast Saskatchewan assets, reduce Scope 2 emissions in our
Netherlands and Ireland Business Units, and generate renewable energy in our France Business Unit can also be found.
Vermilion Energy Inc. ■ Page 52 ■ 2022 Annual Report
tCO2e per BOEEmissions Intensity Scope 1&2 tCO2e per BOE201420152016201720182019202020210.0150.0200.0250.0300.035tCO2e per BOEMethane Intensity tCO2e per BOE201420152016201720182019202020210.0000.0020.0040.0060.0080.0100.012
For more information on our sustainability- and climate-related performance, please see our 2023 Proxy Statement and Information Circular, online
sustainability reporting, particularly the Index and Performance Metrics sections, and 2022 CDP Responses.
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, 2022, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded and certified that our disclosure controls and procedures are
effective.
Vermilion Energy Inc. ■ Page 53 ■ 2022 Annual Report
Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
The Chief Executive Officer and the Chief Financial Officer of Vermilion have assessed the effectiveness of Vermilion’s internal control over financial
reporting as defined in Rule 13a-15 under the US Securities Exchange Act of 1934 and as defined in Canada by National Instrument 52-109,
Certification of Disclosure in Issuers’ Annual and Interim Filings. The assessment was based on the framework in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Chief Executive Officer and the Chief
Financial Officer of Vermilion have concluded that Vermilion’s internal control over financial reporting was effective as of December 31, 2022. The
effectiveness of Vermilion’s internal control over financial reporting as of December 31, 2022 has been audited by Deloitte LLP, as reflected in their
report included in the 2022 audited annual financial statements filed with the US Securities and Exchange Commission. No changes were made to
Vermilion’s internal control over financial reporting during the year ended December 31, 2022, that have materially affected, or are reasonably likely
to materially affect, the internal controls over financial reporting.
Vermilion has limited the scope of design controls and procedures ("DC&P") and internal controls over financial reporting to exclude controls, policies
and procedures of Leucrotta Exploration Inc., which was acquired on May 31, 2022. The scope limitation is in accordance with section 3.3(1)(b) of NI
52-109 which allows an issuer to limit the design of DC&P and ICFR to exclude controls, policies, and procedures of a business that the issuer
acquired not more than 365 days before the end of the fiscal period.
The table below presents the summary financial information of Leucrotta Exploration Inc. included in Vermilion's financial statements as at and for
the year ended December 31, 2022:
($M)
Non-current assets
Non-current liabilities
Net assets
($M)
Revenue net of royalties
Net earnings
As at Dec 31, 2022
659,047
100,697
558,350
Year Ended Dec 31, 2022
55,696
17,055
Vermilion Energy Inc. ■ Page 54 ■ 2022 Annual Report
Supplemental Table 1: Netbacks
The following table includes financial statement information on a per unit basis by business unit. Liquids includes crude oil, condensate, and NGLs.
Natural gas sales volumes have been converted on a basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.
Canada
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Fund flows from operations ($/boe)
United States
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Fund flows from operations ($/boe)
France
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Current income taxes
Fund flows from operations ($/boe)
Netherlands
Sales
Royalties
Operating
Operating netback
General and administration
Current income taxes
Fund flows from operations ($/boe)
Germany
Sales
Royalties
Transportation
Operating
Operating netback
General and administration
Current income taxes
Fund flows from operations ($/boe)
Liquids
$/bbl
90.58
(14.09)
(3.10)
(17.05)
56.34
96.51
(26.18)
(0.23)
(17.98)
52.12
119.68
(14.27)
(7.05)
(19.41)
78.95
(6.47)
—
—
(6.47)
114.67
(2.64)
(13.67)
(17.53)
80.83
Q4 2022
Natural Gas
$/mcf
5.96
(0.16)
(0.36)
(1.41)
4.03
6.00
(1.85)
—
(2.75)
1.40
—
—
—
—
—
47.47
(0.20)
(4.45)
42.82
43.24
(2.52)
(0.61)
(4.42)
35.69
Total
$/boe
65.13
(7.99)
(2.66)
(13.05)
41.43
(1.37)
40.06
83.51
(22.94)
(0.18)
(17.66)
42.73
(4.28)
38.45
119.68
(14.28)
(7.05)
(19.41)
78.94
(7.73)
(7.69)
63.52
281.75
(1.21)
(26.44)
254.10
(4.75)
(86.02)
163.33
218.13
(11.54)
(6.53)
(23.96)
176.10
(5.36)
(3.53)
167.21
Liquids
$/bbl
99.07
(16.56)
(2.92)
(16.30)
63.29
102.22
(27.00)
(0.42)
(14.59)
60.21
132.90
(14.67)
(7.31)
(20.94)
89.98
87.13
—
—
87.13
128.00
(2.66)
(10.69)
(19.57)
95.08
2022
Natural Gas
$/mcf
6.07
(0.47)
(0.28)
(1.37)
3.95
6.36
(1.88)
—
(2.29)
2.19
—
—
—
—
—
47.04
(0.04)
(3.85)
43.15
43.84
(2.09)
(0.47)
(3.35)
37.93
Total
$/boe
70.33
(10.26)
(2.35)
(12.60)
45.12
(1.50)
43.62
87.46
(23.38)
(0.33)
(14.40)
49.35
(3.08)
46.27
132.90
(14.68)
(7.31)
(20.94)
89.97
(5.98)
(10.87)
73.12
279.87
(0.25)
(22.82)
256.80
(2.12)
(74.91)
179.77
231.34
(10.21)
(4.69)
(19.96)
196.48
(3.34)
(15.15)
177.99
Q4 2021
Total
$/boe
2021
Total
$/boe
59.16
(8.10)
(2.00)
47.54
(5.99)
(2.04)
(11.96)
(11.35)
37.10
(0.71)
36.39
67.18
(19.60)
(0.61)
(9.22)
37.75
(3.10)
34.65
100.18
(12.77)
(8.25)
(17.88)
61.28
(3.02)
(4.12)
54.14
28.16
(0.97)
27.19
62.98
(17.23)
(0.75)
(9.52)
35.48
(2.56)
32.92
88.15
(11.89)
(8.36)
(16.46)
51.44
(3.46)
2.88
50.86
205.17
110.47
(0.52)
(14.20)
190.45
(0.88)
(41.66)
147.91
164.96
(2.29)
(5.22)
(18.41)
139.04
(3.80)
—
135.24
(0.33)
(13.17)
96.97
(0.46)
(17.40)
79.11
98.06
(2.12)
(4.73)
(20.18)
71.03
(3.91)
—
67.12
Vermilion Energy Inc. ■ Page 55 ■ 2022 Annual Report
Ireland
Sales
Transportation
Operating
Operating netback
General and administration
Fund flows from operations ($/boe)
Australia
Sales
Operating
PRRT (1)
Operating netback
General and administration
Current income taxes
Fund flows from operations ($/boe)
Total Company
Sales
Realized hedging (loss) gain
Royalties
Transportation
Operating
PRRT (1)
Operating netback
General and administration
Interest expense
Realized foreign exchange
Other income
Corporate income taxes
Windfall taxes
Fund flows from operations ($/boe)
Liquids
$/bbl
—
—
—
—
139.95
(31.23)
(7.40)
101.32
103.54
(0.68)
(12.69)
(3.30)
(19.62)
(1.12)
66.13
Q4 2022
Natural Gas
$/mcf
27.02
(0.31)
(1.96)
24.75
—
—
—
—
17.43
(1.90)
(0.51)
(0.33)
(2.21)
—
12.48
Total
$/boe
162.16
(1.88)
(11.74)
148.54
(0.78)
147.76
139.95
(31.23)
(7.40)
101.32
(2.93)
3.47
101.86
103.99
(5.42)
(8.43)
(2.71)
(16.81)
(0.62)
70.00
(1.65)
(2.78)
2.33
(0.14)
(5.18)
(27.50)
35.08
Liquids
$/bbl
—
—
—
—
148.15
(38.50)
(12.27)
97.38
110.22
(5.82)
(15.24)
(3.39)
(18.99)
(1.11)
65.67
2022
Natural Gas
$/mcf
32.34
(0.36)
(1.65)
30.33
—
—
—
—
18.99
(3.56)
(0.62)
(0.26)
(2.01)
—
12.54
Total
$/boe
194.05
(2.14)
(9.92)
181.99
0.07
182.06
148.15
(38.50)
(12.27)
97.38
(3.32)
3.36
97.42
111.95
(13.07)
(9.85)
(2.54)
(15.75)
(0.59)
70.15
(1.86)
(2.67)
0.49
0.42
(6.70)
(7.18)
52.65
Q4 2021
Total
$/boe
2021
Total
$/boe
236.78
120.51
(2.03)
(8.89)
225.86
(0.81)
225.05
112.26
(44.31)
(15.43)
52.52
(3.07)
6.73
56.18
96.82
(23.97)
(7.43)
(2.41)
(14.24)
(0.70)
48.07
(2.20)
(2.06)
(0.30)
1.29
(4.07)
—
40.73
(2.36)
(8.37)
109.78
0.01
109.79
103.01
(36.55)
(11.30)
55.16
(2.49)
4.15
56.82
66.81
(10.52)
(5.98)
(2.48)
(13.27)
(0.50)
34.06
(1.70)
(2.35)
(0.21)
0.71
(0.97)
—
29.54
(1)
Vermilion considers Australian PRRT to be an operating item and, accordingly, has included PRRT in the calculation of operating netbacks. Current income
taxes presented above excludes PRRT.
Vermilion Energy Inc. ■ Page 56 ■ 2022 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, 2022:
AECO
Q1 2023
Q2 2023
Q3 2023
Q4 2023
Unit Currency
mcf
mcf
mcf
mcf
CAD
CAD
CAD
CAD
AECO Basis (AECO less NYMEX Henry Hub)
Daily
Bought Put
Volume
Weighted
Average
Bought Put
Price
Daily Sold
Call
Volume
Weighted
Average
Sold Call
Price
Daily Sold
Put
Volume
Weighted
Average
Sold Put
Price
Daily Sold
Swap
Volume
Weighted
Average
Sold Swap
Price
Daily
Bought
Swap
Volume
Weighted
Average
Bought
Swap Price
4,739
3.69
4,739
7.70
—
—
—
—
—
—
24,000
5,000
5,000
1,685
—
—
—
—
—
—
4.00
4.00
4.00
4.00
—
—
—
—
—
—
24,000
5,000
5,000
1,685
—
—
—
—
—
—
8.44
8.75
8.75
8.75
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28,435
14,217
14,217
4,791
23,000
23,000
7,750
—
—
—
—
4.95
4.19
4.19
4.19
(1.13)
(1.13)
(1.13)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
mcf
mcf
mcf
mcf
mcf
mcf
mcf
USD
USD
USD
USD
USD
USD
USD
Daily
Bought Put
Volume
Weighted
Average
Bought Put
Price
Daily Sold
Call
Volume
Weighted
Average
Sold Call
Price
Daily Sold
Put
Volume
Weighted
Average
Sold Put
Price
Daily Sold
Swap
Volume
Weighted
Average
Sold Swap
Price
Daily
Bought
Swap
Volume
Weighted
Average
Bought
Swap Price
Unit Currency
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
18,426
7,370
2,457
4,913
14,740
19,654
19,654
12,284
31,938
3,593
3,593
11.76
11.48
22.71
41.03
24.01
34.53
34.53
44.84
40.69
37.56
37.56
18,426
7,370
2,457
4,913
14,740
19,654
19,654
12,284
31,938
3,593
3,593
19.54
17.46
35.90
84.26
46.12
53.21
53.21
84.99
78.00
74.66
74.66
14,740
4,913
—
—
4.10
4.40
—
—
2,457
3.52
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,685
3,685
—
—
67.41
67.41
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Q2 2023
Q3 2023
Q4 2023
NYMEX Henry Hub
Q1 2023
Q2 2023
Q3 2023
Q4 2023
NBP
Q1 2023
Q2 2023
Q3 2023
Q1 2024
TTF
Q1 2023
Q2 2023
Q3 2023
Q4 2023
Q1 2024
Q2 2024
Q3 2024
VET Equity Swaps
Swap
Swap
Jan 2020 - Apr 2023
Jan 2020 - Jul 2024
Initial Share Price
Share Volume
20.9788 CAD
22.4587 CAD
2,250,000
1,500,000
Cross Currency Interest Rate
Receive Notional Amount
Receive Rate
Pay Notional Amount
Pay Rate
Swap
January 2023
111,600,000 USD
SOFR + 1.35%
150,000,000 CAD
CDOR + 0.88%
Vermilion Energy Inc. ■ Page 57 ■ 2022 Annual Report
Supplemental Table 3: Capital Expenditures and Acquisitions
By classification ($M)
Drilling and development
Exploration and evaluation
Capital expenditures
Acquisitions
Acquisition of securities
Contingent consideration
Working capital assumed
Acquisitions
By category ($M)
Drilling, completion, new well equip and tie-in, workovers and recompletions
Production equipment and facilities
Seismic, studies, land and other
Capital expenditures
Acquisitions
Total capital expenditures and acquisitions
Capital expenditures by country ($M)
Canada
United States
France
Netherlands
Germany
Ireland
Australia
Central and Eastern Europe
Total capital expenditures
Acquisitions by country ($M)
Canada
United States
Netherlands
Germany
Ireland
Total acquisitions
Q4 2022
157,849
11,456
169,305
Q4 2021
119,002
26,805
145,807
2022
528,056
23,761
551,817
2021
339,390
35,406
374,796
3,594
964
—
—
4,558
26,848
—
—
(3,215)
23,633
510,309
23,282
—
6,122
539,713
131,628
—
330
(993)
130,965
Q4 2021
2022
418,284
97,833
105,722
30,919
27,811
17,055
551,817
145,807
539,713
23,633
169,440 1,091,530
Q4 2022
112,755
49,286
7,264
169,305
4,558
173,863
Q4 2022
111,483
2,409
15,704
14,232
10,089
1,323
5,753
8,312
169,305
Q4 2021
86,051
3,592
15,030
12,432
10,883
105
8,755
8,959
145,807
Q4 2022
Q4 2021
1,985
—
—
(11)
2,584
4,558
1,191
78
—
20,485
1,879
23,633
2022
275,203
63,353
44,252
21,652
26,157
3,030
95,173
22,997
551,817
2022
531,348
1,075
707
3,857
2,726
539,713
2021
252,734
93,901
28,161
374,796
130,965
505,761
2021
190,242
32,540
39,708
27,037
20,307
1,261
34,785
28,916
374,796
2021
1,699
94,248
—
33,139
1,879
130,965
Vermilion Energy Inc. ■ Page 58 ■ 2022 Annual Report
Supplemental Table 4: Production
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)
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)
Q4/22
Q3/22
Q2/22
Q1/22
Q4/21
Q3/21
Q2/21
Q1/21
Q4/20
Q3/20
Q2/20
Q1/20
17,448
16,835
17,042
15,980
16,388
16,809
16,868
17,767
19,301
19,847
22,545
22,767
4,525
6,279
10,804
146.81
52,720
4,204
6,870
11,074
145.04
52,080
4,873
7,155
12,028
143.94
53,060
4,892
7,286
12,178
140.55
51,584
4,785
7,073
11,858
128.85
49,720
4,426
6,862
5,558
7,767
4,556
7,016
4,662
7,334
5,200
8,350
5,047
8,248
4,634
6,943
11,288
13,325
11,572
11,996
13,550
13,295
11,577
138.42
146.55
138.41
135.27
155.15
164.08
151.16
51,168
54,618
52,407
53,840
59,256
63,187
59,537
3,282
2,824
2,846
2,675
2,647
3,520
1,888
2,322
2,495
3,243
3,971
2,481
36
1,218
1,254
7.45
5,779
7,247
7,247
—
49
49
27.41
4,617
1,481
25.86
5,791
26.04
4,340
4,847
4,847
0.67
111
35
1,031
1,066
7.03
5,062
6,818
6,818
—
74
74
29.15
4,933
1,764
26.54
6,187
25.74
4,290
4,763
4,763
0.63
104
40
958
998
6.74
4,967
8,126
8,126
1
60
60
35.22
5,930
1,331
25.36
5,558
27.93
4,655
2,465
2,465
0.64
106
24
1,056
1,080
7.56
5,014
8,389
8,389
1
83
83
39.03
6,589
1,158
26.95
5,650
30.26
5,043
3,888
3,888
0.34
57
26
1,388
1,414
9.09
5,575
8,453
8,453
—
97
97
51.98
8,761
1,127
18.00
4,127
30.12
5,020
2,742
2,742
0.12
20
2
1,206
1,208
6.75
2
928
930
5.51
—
1
6
6
6
1,058
1,294
1,158
1,340
1,079
1,058
1,295
1,164
1,346
1,085
5.95
6.87
7.94
8.35
6.72
5,854
3,736
4,373
4,934
5,730
6,708
4,685
8,677
9,013
9,062
9,255
9,347
7,046
9,957
8,677
9,013
9,062
9,255
9,347
7,046
9,957
6
104
104
1
95
95
6
92
92
1
99
99
—
83
83
1
86
86
3
84
84
42.48
37.59
41.45
42.95
46.09
47.31
48.33
7,190
6,362
7,006
7,257
7,764
7,972
8,143
1,043
1,093
911
960
964
1,039
909
16.19
15.60
13.40
11.50
11.25
13.23
14.64
3,741
3,694
3,144
2,876
2,839
3,244
3,349
22.67
30.19
34.14
34.76
35.12
38.57
41.38
3,778
5,031
5,690
5,793
5,853
6,428
6,896
4,190
3,835
4,489
3,781
4,549
5,299
4,041
4,190
3,835
4,489
3,781
4,549
5,299
4,041
0.22
36
0.28
46
0.63
104
0.67
111
0.80
132
2.89
483
3.27
546
34,305
33,003
31,811
32,091
31,356
34,245
32,698
34,556
35,793
37,951
39,899
40,157
4,610
7,497
12,107
234.23
85,450
4,312
7,901
12,213
234.12
84,237
4,973
8,113
13,086
239.83
84,868
4,999
8,342
13,341
244.69
86,213
4,908
8,461
13,369
238.16
84,417
4,532
5,656
4,648
4,762
5,289
5,142
4,724
8,068
8,695
8,074
8,627
9,509
9,588
8,022
12,600
14,351
12,722
13,389
14,798
14,730
12,746
226.73
235.72
233.98
232.00
256.34
274.42
265.51
84,633
86,335
86,276
87,848
95,471
100,366
97,154
Vermilion Energy Inc. ■ Page 59 ■ 2022 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)
2022
2021
2020
2019
2018
2017
16,830
16,954
21,106
23,971
17,400
4,621
6,895
11,516
144.10
52,364
4,831
7,179
12,010
138.03
51,968
4,886
7,719
12,605
151.38
58,942
4,295
6,988
11,283
148.35
59,979
3,754
5,914
9,668
129.37
48,630
6,015
3,036
4,144
7,180
97.89
29,510
2,908
2,597
3,046
2,514
1,069
662
34
1,066
1,100
7.20
5,207
8
1,146
1,154
6.84
4,890
5
1,218
1,223
7.47
5,514
18
996
1,014
6.89
4,675
8
452
460
2.78
1,992
4
50
54
0.39
781
7,639
8,799
8,903
10,435
11,362
11,084
—
—
—
0.19
0.21
—
7,639
8,799
8,903
10,467
11,396
11,084
—
66
66
32.66
5,510
1,435
26.18
5,798
27.48
4,579
3,995
3,995
0.57
95
3
97
97
43.40
7,334
1,044
15.81
3,679
29.25
4,875
3,810
3,810
0.31
51
1
88
88
46.16
7,782
968
12.65
3,076
37.44
6,240
4,416
4,416
1.90
317
3
88
88
49.10
8,274
917
15.31
3,468
46.57
7,762
5,662
5,662
0.42
70
—
90
90
46.13
7,779
1,004
15.66
3,614
55.17
9,195
4,494
4,494
1.02
169
—
90
90
40.54
6,847
1,060
19.39
4,291
58.43
9,737
5,770
5,770
—
—
32,809
33,208
38,441
43,502
35,329
24,591
4,721
7,961
12,682
238.18
85,187
4,936
8,325
13,261
233.64
85,408
4,980
8,937
13,917
256.99
4,400
7,984
12,384
266.82
95,190
100,357
3,853
6,366
10,219
250.33
87,270
3,130
4,194
7,324
216.64
68,021
(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. In
this report, references to "crude oil" and "light and medium 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 60 ■ 2022 Annual Report
Supplemental Table 5: Segmented Financial Results
($M)
Drilling and development
Exploration and evaluation
Canada
111,483
—
USA
2,409
—
15,704
—
13,897
335
9,844
245
Three Months Ended December 31, 2022
France Netherlands
Germany
Ireland
Australia
Corporate
Total
1,323
—
15
—
—
—
5,753
—
95,420
—
—
—
—
(2,564)
157,849
10,876
11,456
—
—
3,636
50,215
439,637
27,539
375,517
50,215
(1,149)
(68,303)
Crude oil and condensate sales
213,382
34,786
77,910
(29)
18,153
NGL sales
Natural gas sales
Sales of purchased commodities
Royalties
22,043
80,472
—
5,496
4,116
—
—
—
—
119,697
102,858
64,738
—
—
—
—
(38,747)
(12,198)
(9,294)
(512)
(6,403)
Revenue from external customers
277,150
32,200
68,616
119,156
114,608
64,753
95,420
52,702
824,605
Purchased commodities
Transportation
Operating
General and administration
PRRT
Corporate income taxes
Windfall taxes
Interest expense
Realized loss on derivative instruments
Realized foreign exchange gain
Realized other expense
—
(12,919)
(63,305)
(6,661)
—
(10)
—
—
—
—
—
—
(95)
(9,389)
(2,274)
—
—
—
—
—
—
—
—
(4,589)
—
—
—
(3,621)
—
(752)
—
—
(50,215)
(50,215)
—
(21,976)
(12,638)
(11,229)
(13,292)
(4,687)
(21,291)
(416)
(136,247)
(5,033)
(2,016)
(2,972)
(313)
—
—
—
(5,008)
(36,536)
(1,959)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,000)
(5,045)
2,366
—
—
—
—
—
7,925
—
(13,344)
(5,045)
(811)
(41,958)
(222,859)
(222,859)
(22,506)
(43,940)
18,845
(1,140)
(22,506)
(43,940)
18,845
(1,140)
Fund flows from operations
194,255
20,442
41,348
69,375
92,764
59,001
69,450
(262,415)
284,220
USA
France Netherlands
Germany
Ireland
Australia
Corporate
Total
Year Ended December 31, 2022
($M)
Total assets
Drilling and development
Exploration and evaluation
Crude oil and condensate sales
NGL sales
Natural gas sales
Sales of purchased commodities
Canada
3,612,487
275,203
—
910,863
114,128
319,293
—
618,116
63,353
—
823,544
44,250
2
130,150
365,431
19,385
16,698
—
—
—
—
240,276
21,629
23
2,119
—
398,612
465,643
25,087
1,070
62,464
—
3,030
—
15
—
560,738
418,796
324,330
—
—
—
—
249,253
95,173
—
221,187
—
—
—
—
583,127
6,991,058
331
22,666
528,056
23,761
—
—
1,692,229
133,513
10,797
1,650,652
244,834
244,834
(3,488)
(306,017)
Royalties
(196,005)
(44,427)
(40,353)
(512)
(21,232)
Revenue from external customers
1,148,279
121,806
325,078
562,345
460,028
324,345
221,187
252,143
3,415,211
Purchased commodities
Transportation
Operating
—
—
—
(44,849)
(618)
(20,100)
—
—
—
—
(9,751)
(3,578)
—
—
(244,834)
(244,834)
—
(78,896)
(240,899)
(27,372)
(57,588)
(45,903)
(41,523)
(16,580)
(57,478)
(1,691)
(489,034)
General and administration
(28,643)
(5,863)
(16,444)
(4,255)
(6,949)
122
PRRT
Corporate income taxes
Windfall taxes
Interest expense
Realized loss on derivative instruments
Realized foreign exchange gain
Realized other income
—
(10)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(29,889)
(150,647)
(31,513)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,964)
(18,318)
9,319
—
(57,677)
(18,318)
5,016
(1,110)
(208,153)
—
—
—
—
—
(222,859)
(222,859)
(82,858)
(82,858)
(405,894)
(405,894)
15,195
12,982
15,195
12,982
Fund flows from operations
833,878
87,953
201,057
361,540
370,292
304,309
145,443
(669,607)
1,634,865
Vermilion Energy Inc. ■ Page 61 ■ 2022 Annual Report
Supplemental Table 6: Operational and Financial Data by Core Region
Production volumes (1)
North America
Crude oil and condensate (bbls/d)
25,291
23,898
24,801
23,571
23,846
24,757
24,316
24,645
26,459
28,296
31,569
29,888
Q4/22
Q3/22
Q2/22
Q1/22
Q4/21
Q3/21
Q2/21
Q1/21
Q4/20
Q3/20
Q2/20
Q1/20
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
International
7,497
7,901
8,113
8,342
8,461
8,068
8,695
8,074
8,628
9,508
9,588
8,022
154.26
152.07
150.68
148.11
137.93
145.18
152.06
144.36
142.13
163.09
172.43
157.88
58,499
57,142
58,027
56,598
55,295
57,022
58,354
56,780
58,774
64,986
69,895
64,222
Crude oil and condensate (bbls/d)
13,624
13,419
11,983
13,519
12,419
14,020
14,037
14,560
14,096
14,943
13,471
14,994
Natural gas (mmcf/d)
Total (boe/d)
Consolidated
79.97
82.05
89.15
96.58
100.22
81.55
83.66
89.62
89.86
93.25
101.99
107.63
26,953
27,095
26,840
29,616
29,123
27,612
27,981
29,495
29,073
30,484
30,472
32,932
Crude oil and condensate (bbls/d)
38,915
37,315
36,784
37,090
36,264
38,777
38,354
39,204
40,555
43,240
45,041
44,881
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
7,497
7,901
8,113
8,342
8,461
8,068
8,695
8,074
8,627
9,509
9,588
8,022
234.23
234.12
239.83
244.69
238.16
226.73
235.72
233.98
232.00
256.34
274.42
265.51
85,450
84,237
84,868
86,213
84,417
84,633
86,335
86,276
87,848
95,471
100,366
97,154
(1)
Please refer to Supplemental Table 4 "Production" for disclosure by product type.
Sales volumes
North America
Q4/22
Q3/22
Q2/22
Q1/22
Q4/21
Q3/21
Q2/21
Q1/21
Q4/20
Q3/20
Q2/20
Q1/20
Crude oil and condensate (bbls/d)
25,291
23,897
24,801
23,571
23,845
24,757
24,316
24,645
26,459
28,297
31,569
29,888
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
International
7,497
7,901
8,113
8,342
8,461
8,068
8,695
8,074
8,628
9,508
9,588
8,022
154.26
152.07
150.68
148.11
137.93
145.18
152.06
144.36
142.13
163.09
172.43
157.88
58,499
57,142
58,027
56,598
55,295
57,022
58,354
56,780
58,774
64,986
69,895
64,222
Crude oil and condensate (bbls/d)
16,257
11,493
11,720
12,615
13,985
15,227
13,859
11,421
15,359
15,689
12,202
17,090
Natural gas (mmcf/d)
Total (boe/d)
Consolidated
79.97
82.05
89.15
96.58
100.22
81.55
83.66
89.62
89.86
93.25
101.99
107.63
29,585
25,169
26,578
28,712
30,689
28,820
27,802
26,357
30,336
31,229
29,201
35,028
Crude oil and condensate (bbls/d)
41,547
35,391
36,522
36,186
37,830
39,985
38,174
36,066
41,818
43,985
43,771
46,977
NGLs (bbls/d)
Natural gas (mmcf/d)
Total (boe/d)
7,497
7,901
8,113
8,342
8,461
8,068
8,695
8,074
8,627
9,509
9,588
8,022
234.23
234.12
239.83
244.69
238.16
226.73
235.72
233.98
232.00
256.34
274.42
265.51
88,083
82,312
84,607
85,310
85,984
85,841
86,156
83,138
89,111
96,217
99,096
99,250
Vermilion Energy Inc. ■ Page 62 ■ 2022 Annual Report
Financial results
North America
Q4/22
Q3/22
Q2/22
Q1/22
Q4/21
Q3/21
Q2/21
Q1/21
Q4/20
Q3/20
Q2/20
Q1/20
Crude oil and condensate sales ($/bbl)
106.66
114.82
134.72
111.42
NGL sales ($/bbl)
Natural gas sales ($/mcf)
Sales ($/boe)
Royalties ($/boe)
Transportation ($/boe)
Operating ($/boe)
39.93
5.96
66.95
44.64
6.41
71.24
51.86
7.13
83.34
46.94
4.80
65.88
92.99
47.26
5.07
59.97
82.23
35.55
3.80
50.40
75.43
25.43
2.72
42.30
66.31
29.39
3.98
43.08
51.06
19.20
2.77
32.51
(9.47)
(12.58)
(12.51)
(11.24)
(2.42)
(2.16)
(2.15)
(1.91)
(9.26)
(1.86)
(7.14)
(1.92)
(5.98)
(1.90)
(5.49)
(2.05)
(3.64)
(1.92)
(13.51)
(14.00)
(11.58)
(11.95)
(11.68)
(11.02)
(10.89)
(11.21)
(10.94)
General and administration ($/boe)
Corporate income taxes ($/boe)
0.10
(0.13)
(1.27)
(0.03)
(1.52)
—
(1.26)
(0.02)
Fund flows from operations ($/boe)
41.52
41.20
55.58
39.50
(2.01)
0.42
35.58
(1.14)
(0.05)
(0.91)
(0.04)
(1.34)
(0.04)
29.13
22.58
22.95
(1.94)
0.04
14.11
49.79
15.04
2.02
28.94
(3.58)
(1.74)
(7.82)
(0.78)
(0.02)
15.00
28.94
50.25
8.94
1.60
18.24
(1.67)
(1.72)
8.92
1.92
29.22
(3.54)
(1.91)
(9.60)
(11.93)
(1.52)
(0.02)
3.71
(0.84)
(0.04)
10.96
Fund flows from operations
Drilling and development
Free cash flow
International
223,443
216,579
293,470
201,193
180,979
152,764
119,916
117,227
76,375
89,635
23,639
64,048
(113,892) (112,238)
(54,913)
(57,513)
(89,643)
(35,179)
(38,847)
(59,113)
(33,781)
(9,575)
(23,979) (197,926)
109,551
104,341
238,557
143,680
91,336
117,585
81,069
58,114
42,594
80,060
(340) (133,878)
Crude oil and condensate sales ($/bbl)
128.02
140.09
146.67
136.69
103.53
Natural gas sales ($/mcf)
39.54
58.55
32.33
36.75
35.54
94.91
18.82
177.23
254.86
173.14
183.66
163.23
103.39
85.41
9.83
72.16
81.40
7.98
62.39
62.65
6.27
50.30
58.19
2.91
37.94
50.27
2.28
28.98
(6.38)
(3.29)
(7.21)
(3.51)
(7.23)
(3.64)
(5.43)
(2.91)
(4.13)
(3.40)
(4.52)
(3.47)
(3.83)
(4.64)
(3.53)
(2.76)
(3.02)
(2.40)
(3.32)
(2.28)
(2.16)
(2.04)
(23.35)
(22.63)
(22.11)
(19.86)
(18.86)
(17.55)
(16.56)
(16.42)
(16.99)
(15.18)
(14.35)
(16.13)
Sales ($/boe)
Royalties ($/boe)
Transportation ($/boe)
Operating ($/boe)
73.35
4.44
49.42
(3.27)
(1.94)
General and administration ($/boe)
(5.09)
(3.34)
(3.16)
(3.02)
(2.53)
(2.40)
Corporate income taxes ($/boe)
(15.15)
(21.97)
(28.73)
(17.63)
(12.17)
0.64
PRRT ($/boe)
(1.85)
(1.96)
(0.83)
(2.60)
(1.96)
(2.74)
(2.61)
(0.19)
(0.58)
(2.06)
(2.92)
(2.53)
0.66
2.25
0.04
(0.60)
(1.45)
(1.27)
(2.72)
(0.02)
(1.21)
(2.63)
(0.11)
(2.90)
Fund flows from operations ($/boe)
122.12
194.24
107.44
132.21
120.18
73.35
43.75
37.68
25.77
13.40
6.48
22.44
Fund flows from operations
Drilling and development
Exploration and evaluation
Free cash flow
Consolidated
332,377
449,771
259,840
341,626
339,286
194,505
110,654
89,403
71,934
38,498
17,193
71,526
(43,957)
(65,640)
(54,575)
(25,328)
(29,359)
(27,994)
(38,856)
(20,399)
(19,122)
(20,187)
(18,404)
(29,507)
(11,456)
(6,137)
(3,665)
(2,503)
(26,805)
(3,277)
(1,473)
(3,851)
(6,991)
(1,568)
109
(6,271)
276,964
377,994
201,600
313,795
283,122
163,234
70,325
65,153
45,821
16,743
(1,102) 35,748
Q4/22
Q3/22
Q2/22
Q1/22
Q4/21
Q3/21
Q2/21
Q1/21
Q4/20
Q3/20
Q2/20
Q1/20
Crude oil and condensate sales ($/bbl)
115.02
123.02
138.55
120.23
NGL sales ($/bbl)
Natural gas sales ($/mcf)
Sales ($/boe)
Royalties ($/boe)
Transportation ($/boe)
Operating ($/boe)
39.93
17.43
44.64
24.68
51.86
16.50
46.94
17.41
103.99
127.39
111.55
105.52
96.88
47.26
17.89
96.82
87.05
35.55
9.20
68.19
79.06
25.43
5.24
51.93
71.09
29.39
5.51
49.20
55.31
19.20
4.13
38.57
52.79
15.04
2.34
31.86
8.94
1.85
21.40
34.89
58.66
(8.43)
(10.94)
(10.85)
(2.71)
(2.57)
(2.62)
(9.29)
(2.25)
(7.43)
(2.41)
(6.26)
(2.44)
(5.29)
(2.78)
(4.87)
(2.27)
(3.43)
(2.08)
(3.50)
(1.92)
(1.81)
(1.81)
(16.81)
(16.64)
(14.89)
(14.61)
(14.24)
(13.21)
(12.72)
(12.86)
(13.00)
(10.21)
(11.00)
(13.41)
8.92
2.94
36.35
(3.45)
(1.92)
General and administration ($/boe)
Corporate income taxes ($/boe)
Windfall taxes ($/boe)
PRRT ($/boe)
Interest ($/boe)
(1.65)
(5.18)
(1.90)
(6.74)
(27.50)
—
(0.62)
(2.78)
(0.60)
(3.23)
(2.04)
(9.03)
—
(0.26)
(2.74)
(1.85)
(5.95)
—
(0.87)
(1.93)
(2.20)
(4.07)
—
(0.70)
(2.06)
Realized derivatives ($/boe)
(5.42)
(18.22)
(10.36)
(18.78)
(23.97)
(1.56)
0.18
—
(0.92)
(2.37)
(9.19)
Realized foreign exchange ($/boe)
2.33
(0.28)
(0.30)
Realized other ($/boe)
Fund flows from operations ($/boe)
(0.14)
35.08
0.80
67.07
0.36
58.82
0.10
0.70
50.79
(0.30)
1.29
40.73
0.37
0.48
33.27
(1.46)
(0.09)
—
(0.19)
(2.41)
(5.05)
(0.25)
0.35
22.04
(1.57)
(2.27)
(1.35)
0.18
—
(0.19)
(2.57)
(3.43)
(0.69)
0.73
21.66
0.80
—
(0.49)
(2.42)
0.10
0.16
0.56
16.50
—
—
(0.41)
(1.97)
0.47
(0.31)
0.29
12.95
(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)
18.85
Fund flows from operations
Drilling and development
Exploration and evaluation
Free cash flow
284,220
507,876
452,901
389,868
322,173
262,696
172,942
162,051
135,212
114,776
81,852
170,225
(157,849) (177,878) (109,488)
(82,841) (119,002)
(63,173)
(77,703)
(79,512)
(52,903)
(29,762)
(42,383) (227,433)
(11,456)
(6,137)
(3,665)
(2,503)
(26,805)
(3,277)
(1,473)
(3,851)
(6,991)
(1,568)
109
(6,271)
114,915
323,861
339,748
304,524
176,366
196,246
93,766
78,688
75,318
83,446
39,578
(63,479)
Vermilion Energy Inc. ■ Page 63 ■ 2022 Annual Report
Non-GAAP and Other Specified 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 total of segments measure of profit or loss in
accordance with IFRS 8 “Operating Segments” (please see Segmented Information in the Notes to the condensed Consolidated Financial
Statements) and net debt, a capital management measure in accordance with IAS 1 “Presentation of Financial Statements” (please see Capital
Disclosures in the Notes to the condensed 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:
Total of Segments Measure
Fund flows from operations (FFO): Most directly comparable to net earnings, FFO is comprised of sales excluding royalties, transportation,
operating, G&A, corporate income tax, PRRT, windfall taxes, interest expense, realized loss on derivatives, realized foreign exchange gain (loss),
and realized other income. The measure is used to assess the contribution of each business unit to Vermilion's ability to generate income necessary
to pay dividends, repay debt, fund asset retirement obligations and make capital investments. Reconciliation to the primary financial statement
measures can be found below.
Sales
Royalties
Transportation
Operating
General and administration
Corporate income tax expense
Windfall taxes
PRRT
Interest expense
Realized loss on derivatives
Realized foreign exchange gain (loss)
Realized other (expense) income
Fund flows from operations
Equity based compensation
Unrealized gain (loss) on derivative
instruments (1)
Unrealized foreign exchange (loss) gain (1)
Accretion
Depletion and depreciation
Deferred tax expense
Gain on business combinations
Impairment reversal
Unrealized other expense (1)
Net earnings
(1)
$/boe
103.99
(8.43)
(2.71)
(16.81)
(1.65)
(5.18)
(27.50)
(0.62)
(2.78)
(5.42)
2.33
(0.14)
35.08
Q4 2022
$M
842,693
(68,303)
(21,976)
(136,247)
(13,344)
(41,958)
(222,859)
(5,045)
(22,506)
(43,940)
18,845
(1,140)
284,220
(5,377)
549,693
(47,405)
(16,501)
(171,926)
(196,733)
—
—
(563)
395,408
Q4 2021
$M
765,915
(58,785)
(19,033)
(112,680)
(17,374)
(32,234)
—
(5,544)
(16,279)
(189,598)
(2,395)
10,180
322,173
(6,666)
172,265
7,122
(10,983)
(148,216)
(14,834)
—
23,922
(195)
344,588
2022
$M
$/boe
96.82 3,476,394
(306,017)
(7.43)
(78,896)
(2.41)
(489,034)
(14.24)
(57,677)
(2.20)
(208,153)
(4.07)
(222,859)
—
(18,318)
(0.70)
(82,858)
(2.06)
(405,894)
(23.97)
15,195
(0.30)
1.29
12,982
40.73 1,634,865
(44,390)
540,801
(84,464)
(58,170)
(577,134)
(288,707)
—
192,094
(1,833)
1,313,062
2021
$M
$/boe
111.95 2,079,761
(186,122)
(77,161)
(413,013)
(52,877)
(30,166)
—
(15,688)
(73,075)
(327,384)
(6,613)
22,200
919,862
(41,565)
(9.85)
(2.54)
(15.75)
(1.86)
(6.70)
(7.18)
(0.59)
(2.67)
(13.07)
0.49
0.42
52.65
$/boe
66.81
(5.98)
(2.48)
(13.27)
(1.70)
(0.97)
—
(0.50)
(2.35)
(10.52)
(0.21)
0.71
29.54
(181,094)
(64,963)
(43,552)
(571,688)
(187,343)
17,198
1,302,619
(778)
1,148,696
Unrealized gain (loss) on derivative instruments, Unrealized foreign exchange (loss) gain, and Unrealized other expense are line items from the respective
Consolidated Statements of Cash Flows.
Non-GAAP Financial Measures and Non-GAAP Ratios
Free cash flow: Most directly comparable to cash flows from operating activities and is comprised of fund flows from operations less drilling and
development costs and exploration and evaluation costs. The measure is used to determine the funding available for investing and financing
activities including payment of dividends, repayment of long-term debt, reallocation into existing business units and deployment into new ventures.
Reconciliation to the primary financial statement measures can be found in the following table.
Vermilion Energy Inc. ■ Page 64 ■ 2022 Annual Report
($M)
Cash flows from operating activities
Changes in non-cash operating working capital
Asset retirement obligations settled
Fund flows from operations
Drilling and development
Exploration and evaluation
Free cash flow
Q4 2022
495,195
(227,483)
16,508
284,220
(157,849)
(11,456)
114,915
Q4 2021
250,352
58,782
13,039
322,173
(119,002)
(26,805)
176,366
2022
1,814,220
(216,869)
37,514
1,634,865
(528,056)
(23,761)
1,083,048
2021
834,453
56,884
28,525
919,862
(339,390)
(35,406)
545,066
Capital expenditures: Calculated as the sum of drilling and development costs and exploration and evaluation costs from the Consolidated
Statements of Cash Flows that is most directly comparable to cash flows used in investing activities. 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. Reconciliation to the primary financial
statement measures can be found below.
($M)
Drilling and development
Exploration and evaluation
Capital expenditures
Q4 2022
157,849
11,456
169,305
Q4 2021
119,002
26,805
145,807
2022
528,056
23,761
551,817
2021
339,390
35,406
374,796
Payout and payout % of FFO: A non-GAAP financial measure and non-GAAP ratio respectively, most directly comparable to dividends declared.
Payout is comprised of dividends declared plus drilling and development costs, exploration and evaluation costs, and asset retirement obligations
settled, and payout % of FFO is calculated as payout over FFO (total of segments measure). The measure is used to assess the amount of cash
distributed back to shareholders and reinvested in the business for maintaining production and organic growth. The reconciliation of the measure to
the primary financial statement measure can be found below.
($M)
Dividends declared
Drilling and development
Exploration and evaluation
Asset retirement obligations settled
Payout
% of fund flows from operations
Q4 2022
13,058
157,849
11,456
16,508
198,871
Q4 2021
—
119,002
26,805
13,039
158,846
2022
45,769
528,056
23,761
37,514
635,100
2021
—
339,390
35,406
28,525
403,321
70 %
49 %
39 %
44 %
Return on capital employed (ROCE): A non-GAAP ratio, ROCE is a measure that we use to analyze our profitability and the efficiency of our
capital allocation process; the comparable primary financial statement measure is earnings before income taxes. 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.
($M)
Net earnings
Taxes
Interest expense
EBIT
Average capital employed
Return on capital employed
Twelve Months Ended
Dec 31, 2022
1,313,062
738,037
82,858
2,133,957
5,628,762
Dec 31, 2021
1,148,696
233,197
73,075
1,454,968
4,417,260
38 %
33 %
Adjusted working capital: Defined as current assets less current liabilities, excluding current derivatives and current lease liabilities. The measure
is used to calculate net debt, a capital management measure disclosed below.
Vermilion Energy Inc. ■ Page 65 ■ 2022 Annual Report
($M)
Current assets
Current derivative asset
Current liabilities
Current lease liability
Current derivative liability
Adjusted working capital
Capital Management Measure
As at
Dec 31, 2022
714,446
(162,843)
(892,045)
19,486
55,845
(265,111)
Dec 31, 2021
472,845
(19,321)
(746,813)
15,032
268,973
(9,284)
Net debt: Is in accordance with IAS 1 "Presentation of Financial Statements" that is most directly comparable to long-term debt. Net debt is
comprised of long-term debt (excluding unrealized foreign exchange on swapped USD borrowings) plus adjusted working capital (defined as current
assets less current liabilities, excluding current derivatives and current lease liabilities), 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.
($M)
Long-term debt
Adjusted working capital
Unrealized FX on swapped USD borrowings
Net debt
As at
Dec 31, 2022
1,081,351
265,111
(1,876)
1,344,586
Dec 31, 2021
1,651,569
9,284
(16,067)
1,644,786
Ratio of net debt to four quarter trailing fund flows from operations
0.8
1.8
Supplementary Financial Measures
Diluted shares outstanding: The sum of shares outstanding at the period end plus outstanding awards under the LTIP, based on current estimates
of future performance factors and forfeiture rates.
('000s of shares)
Shares outstanding
Potential shares issuable pursuant to the LTIP
Diluted shares outstanding
Q4 2022
163,227
5,389
168,616
Q4 2021
162,261
6,485
168,746
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 (total of segments measure) 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.
Operating netback: Most directly comparable to net earnings that is calculated as 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.
Fund flows from operations per boe: Calculated as FFO (total of segments measure) by boe production. Fund flows from operations netback is
used by management to assess the profitability of our business units and Vermilion as a whole.
Net debt to four quarter trailing fund flows from operations: Calculated as net debt (capital management measure) over the FFO (total of
segments measure) from the preceding four quarters. The measure is used to assess the ability to repay debt.
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
Vermilion Energy Inc. ■ Page 66 ■ 2022 Annual Report
deficit or surplus. We believe that including these components provides a useful measure of the economic investment associated with our acquisition
activity. A reconciliation to the acquisitions line item in the Consolidated Statements of Cash Flows can be found in Supplemental Table 3 of this
MD&A.
Cash dividends per share: Represents cash dividends declared per share that 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.
Vermilion Energy Inc. ■ Page 67 ■ 2022 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, 2022. Vermilion has limited the scope of design controls and
procedures ("DC&P") and internal controls over financial reporting to exclude controls, policies and procedures of Leucrotta Exploration Inc., which
was acquired on May 31, 2022. The scope limitation is in accordance with section 3.3(1)(b) of NI 52-109 which allows an issuer to limit the design of
DC&P and ICFR to exclude controls, policies, and procedures of a business that the issuer acquired not more than 365 days before the end of the
fiscal period. Total assets and revenues excluded from management's assessment of internal control over financial reporting represents 8% and 2%,
respectively, of the related Consolidated Financial Statement amounts as at and for the year ended December 31, 2022.
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, 2022 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, 2022.
(“Dion Hatcher”)
(“Lars Glemser”)
Dion Hatcher
President & Chief Executive Officer
March 8, 2023
Lars Glemser
Vice President & Chief Financial Officer
Vermilion Energy Inc. ■ Page 68 ■ 2022 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and the 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, 2022,
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, 2022, 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, 2022, of the Company and our report dated March 8, 2023, expressed
an unqualified opinion on those financial statements.
As described in Management’s Report to Shareholders, management excluded from its assessment the internal control over financial reporting at
Leucrotta Exploration Inc., which was acquired on May 31, 2022, and whose financial statements constitute 8% of total assets and 2% of total
revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2022. Accordingly, our audit did not include
the internal control over financial reporting at Leucrotta Exploration Inc.
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 8, 2023
Vermilion Energy Inc. ■ Page 69 ■ 2022 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 sheet of Vermilion Energy Inc. and subsidiaries (the "Company") as of December 31, 2022
and 2021, the related consolidated statements of net earnings and comprehensive income, 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, 2022, 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, 2022 and 2021, and its financial performance and its cash flows for each of the two years in the period ended
December 31, 2022, 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, 2022, 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 8, 2023, expressed an
unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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) relate 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 separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of capital assets acquired from Leucrotta Exploration Inc. - Refer to Notes 2 and 4 to the financial statements
Critical Audit Matter Description
The Company completed the acquisition of Leucrotta Exploration Inc. for $500 million on May 31, 2022. The Company accounted for the acquisition
as a business combination, which required that assets acquired, and liabilities assumed to be measured at fair value on the acquisition date.
Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including capital
assets of $559 million. The fair value of capital assets is estimated based on the future after-tax cash flows of the underlying proved and probable oil,
natural gas liquids 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 fair value requires management to make significant estimates and assumptions related to future oil, natural gas liquids and natural gas
prices, discount rate, reserves, and future operating and development costs.
Given the significant judgments made by management related to future oil, natural gas liquids and natural gas prices, discount rate, 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 required a high degree of auditor judgment in applying audit procedures and in evaluating 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 70 ■ 2022 Annual Report
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to future oil, natural gas liquids and natural gas prices, discount rate, reserves and future operating and development
costs used to determine the fair value of capital assets included the following, among others:
•
•
•
•
Evaluated the effectiveness of the relevant controls, including those over the determination of the future oil, natural gas liquids and natural
gas prices, discount rate, 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; and
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 as of December 31, 2022 and performing rollback procedures to May 31, 2022 to assess any significant changes in assumptions,
comparing future operating and development costs to historical results, and evaluating whether they are consistent with evidence obtained
in other areas of the audit.
• With the assistance of fair value specialists:
◦
◦
Evaluated the future oil, natural gas liquids 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; and
Evaluated the reasonableness of the discount rate by testing the source information underlying the determination of the discount
rate and developing a range of independent estimates and comparing to the discount rate determined by management.
Capital asset impairment reversal – Refer to Note 2 and 6 to the financial statements
Critical Audit Matter Description
The Company reviews all Cash Generating Units (“CGUs”) for indicators of potential impairment or reversal of impairment at each reporting date. As
a result of increasing commodity price forecasts during the year, indicators of impairment reversal were identified for those CGUs where impairment
loss was recognized in prior years. An impairment reversal is recognized if the carrying amount of the CGU is less than 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 reversal requires management to make significant estimates and assumptions related to future
oil, natural gas liquids and natural gas prices, discount rate, reserves, and future operating and development costs. Impairment reversals totaling
$192 million were recorded for the year ended December 31, 2022.
Given the significant judgments made by management related to future oil, natural gas liquids and natural gas prices, discount rate, 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.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to future oil, natural gas liquids and natural gas prices, discount rate, reserves, and future operating and development
costs used to determine the recoverable amount of the CGUs included the following, among others:
•
•
•
•
•
Evaluate management’s assessment and independently assess petroleum natural gas assets for indicators of impairment or impairment
reversal.
Evaluated the effectiveness of the relevant controls, including those over the determination of the future oil, natural gas liquids and natural
gas prices, discount rate, 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; and
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.
• With the assistance of fair value specialists:
◦
Evaluated the future oil, natural gas liquids 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; and
Vermilion Energy Inc. ■ Page 71 ■ 2022 Annual Report
◦
Evaluated the reasonableness of the discount rate by testing the source information underlying the determination of the discount
rate and developing a range of independent estimates and comparing those to the discount rate determined by management.
Valuation of deferred tax asset - Refer to Notes 2 and 11 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 taxable income, specifically forecasts of
future revenue (commodity price forecasts and forecasted reserves). The Company recorded a deferred income tax asset for Ireland primarily arising
from past taxable losses in this jurisdiction.
To determine whether it is probable that the deferred income tax assets in Ireland 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 income tax specialists.
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
Ireland 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 Ireland.
Evaluated management’s ability to accurately forecast future taxable income 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 – Income taxes relating to the probability of forecasted future revenue and the length of the forecast
period.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Canada
March 8, 2023
We have served as the Company's auditor since 2000.
Vermilion Energy Inc. ■ Page 72 ■ 2022 Annual Report
Consolidated Financial Statements
Consolidated Balance Sheet
thousands of Canadian dollars
Note
December 31, 2022
December 31, 2021
Assets
Current
Cash and cash equivalents
Accounts receivable
Crude oil inventory
Derivative instruments
Prepaid expenses
Total current assets
Derivative instruments
Investment in securities
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
19
19
19
9
19
9
5
11
4, 7
4, 6
19
13
9
19
9
12
10
8
11
13
13,836
373,651
19,657
162,843
144,459
714,446
132,598
56,366
125,533
270,593
5,691,522
6,991,058
481,444
13,058
55,845
341,698
892,045
—
1,081,351
51,507
1,087,757
477,340
3,590,000
4,243,794
35,409
123,505
(1,001,650)
3,401,058
6,991,058
6,028
328,584
20,070
19,321
98,842
472,845
—
—
374,993
233,290
4,824,195
5,905,323
440,658
—
268,973
37,182
746,813
51,213
1,651,569
60,190
1,000,554
328,839
3,839,178
4,241,773
49,529
28,467
(2,253,624)
2,066,145
5,905,323
(Signed “Manjit Sharma”)
Manjit Sharma, Director
Vermilion Energy Inc. ■ Page 73 ■ 2022 Annual Report
Consolidated Statements of Net Earnings and Comprehensive Income
thousands of Canadian dollars, except share and per share amounts
Note
Dec 31, 2022
Dec 31, 2021
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) loss on derivative instruments
Interest expense
General and administration
Foreign exchange loss
Other income
Accretion
Depletion and depreciation
Impairment reversal
Gain on business combinations
Earnings before income taxes
Income tax expense
Deferred
Current
Windfall taxes
Net earnings
Other comprehensive income
Currency translation adjustments
Hedge accounting reserve
Fair value adjustment on investment in securities, net of tax
Comprehensive income
Net earnings per share
Basic
Diluted
Weighted average shares outstanding ('000s)
Basic
Diluted
3,476,394
(306,017)
244,834
3,415,211
244,834
489,034
78,896
44,390
(134,907)
82,858
57,677
69,269
(11,149)
58,170
577,134
(192,094)
—
1,364,112
2,051,099
288,707
226,471
222,859
738,037
2,079,761
(186,122)
147,091
2,040,730
147,091
413,013
77,161
41,565
508,478
73,075
52,877
71,576
(21,422)
43,552
571,688
(1,302,619)
(17,198)
658,837
1,381,893
187,343
45,854
—
233,197
1,313,062
1,148,696
60,543
5,599
28,896
1,408,100
(55,632)
6,113
—
1,099,177
8.03
7.80
7.13
6.97
163,489
168,426
161,172
164,765
19
15
9
19
8
6
6
11
11
5
16
16
Vermilion Energy Inc. ■ Page 74 ■ 2022 Annual Report
Consolidated Statements of Cash Flows
thousands of Canadian dollars
Operating
Net earnings
Adjustments:
Accretion
Depletion and depreciation
Impairment reversal
Gain on business combinations
Unrealized (gain) loss on derivative instruments
Equity based compensation
Unrealized foreign exchange loss
Unrealized other expense
Deferred tax expense
Asset retirement obligations settled
Changes in non-cash operating working capital
Cash flows from operating activities
Investing
Drilling and development
Exploration and evaluation
Acquisitions, net of cash acquired
Acquisition of securities
Changes in non-cash investing working capital
Cash flows used in investing activities
Financing
Repayments on the revolving credit facility
Issuance of senior unsecured notes
Payments on lease obligations
Repurchase of shares
Cash dividends
Cash flows used in financing activities
Foreign exchange gain (loss) 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, 2022
Dec 31, 2021
Year Ended
1,313,062
1,148,696
8
6, 7
6
9
15
11
8
19
6
7
3, 5
5
19
12
12
10
13
13
19
58,170
577,134
(192,094)
—
(540,801)
44,390
84,464
1,833
288,707
(37,514)
216,869
1,814,220
(528,056)
(23,761)
(510,309)
(23,282)
26,116
(1,059,292)
(1,121,868)
499,037
(21,168)
(71,659)
(32,711)
(748,369)
1,249
7,808
6,028
13,836
75,042
144,814
43,552
571,688
(1,302,619)
(17,198)
181,094
41,565
64,963
778
187,343
(28,525)
(56,884)
834,453
(339,390)
(35,406)
(131,628)
—
36,724
(469,700)
(341,259)
—
(22,187)
—
—
(363,446)
(2,183)
(876)
6,904
6,028
71,369
13,212
Vermilion Energy Inc. ■ Page 75 ■ 2022 Annual Report
Consolidated Statements of Changes in Shareholders' Equity
thousands of Canadian dollars
Shareholders' capital
Balance, beginning of year
Vesting of equity based awards
Equity based compensation
Share-settled dividends on vested equity based awards
Repurchase of shares
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
Fair value adjustment on investment in securities, net of tax
Balance, end of year
Deficit
Balance, beginning of year
Net earnings
Dividends declared
Share-settled dividends on vested equity based awards
Repurchase of shares
Balance, end of year
Total shareholders' equity
Note
13
13
5
13
Year Ended
Dec 31, 2022
Dec 31, 2021
4,241,773
44,811
13,699
4,377
(60,866)
4,243,794
49,529
30,691
(44,811)
35,409
28,467
60,543
5,599
28,896
123,505
(2,253,624)
1,313,062
(45,769)
(4,377)
(10,942)
(1,001,650)
3,401,058
4,181,160
49,922
8,365
2,326
—
4,241,773
66,250
33,201
(49,922)
49,529
77,986
(55,632)
6,113
—
28,467
(3,399,994)
1,148,696
—
(2,326)
—
(2,253,624)
2,066,145
Vermilion Energy Inc. ■ Page 76 ■ 2022 Annual Report
Description of equity reserves
Shareholders’ capital
Represents the recognized amount for common shares issued (net of equity issuance costs and deferred taxes) less the weighted-average carrying
value of shares repurchased. If the price paid to repurchase common shares is less than the carrying value of the shares repurchased, the difference
is recorded to contributed surplus. If the price paid to repurchase common shares exceeds the carrying value of the shares repurchased, the
difference is recorded as an increase to deficit.
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, hedge accounting reserve and fair value adjustments on investments.
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, 2022, accumulated losses of $4.3 million and $1.3 million were
recognized in the consolidated statement of net earnings 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.
Fair value adjustment on investment in securities, net of tax, are a result of changes in the fair value of investments that have been elected to be
subsequently measured at fair value through other comprehensive income.
Deficit
Represents the cumulative net earnings less distributed earnings and surplus of the price paid to repurchase common shares of Vermilion Energy
Inc. over the weighted-average carrying value of the shares repurchased.
Vermilion Energy Inc. ■ Page 77 ■ 2022 Annual Report
Notes to the Consolidated Financial Statements for the year ended December 31, 2022
and 2021
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 8, 2023.
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.
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.
Vermilion Energy Inc. ■ Page 78 ■ 2022 Annual Report
For the purposes of the depletion calculations, oil and gas reserves are converted to a common unit of measure on the basis of their relative energy
content based on a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent.
Impairment of capital assets and exploration and evaluation assets
Depletion units are aggregated into cash generating units (“CGUs”) for impairment testing. CGUs are the lowest level for which there are identifiable
cash inflows that are largely independent of cash inflows of other groups of assets. CGUs are reviewed for indicators of potential impairment at each
reporting date.
E&E assets are tested for impairment when reclassified to capital assets or when indicators of potential impairment are identified. E&E assets are
reviewed for indicators of potential impairment at each reporting date. If indicators of potential impairment are identified, E&E assets are tested for
impairment as part of the CGU attributable to the jurisdiction in which the exploration area resides.
If an indicator of potential impairment exists, the CGU’s carrying value is compared to its recoverable amount. A CGU’s recoverable amount is the
higher of its fair value less costs of disposal and its value-in-use. If the carrying amount of a CGU exceeds its recoverable amount, an impairment
loss is recognized to reduce the carrying value of the CGU to its recoverable amount.
If an impairment loss has been recognized in a prior period, an assessment is performed at each reporting date to determine if there are indicators
that the circumstances which led to the impairment loss have reversed. If the change in circumstances results in the recoverable amount being
higher than the carrying value after the impairment loss, then the impairment loss (net of depletion that would otherwise have been recorded) is
reversed.
Lease obligations and right-of-use assets
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for
consideration. At the lease commencement date, a lease obligation is recognized at the present value of future lease payments, typically using the
applicable incremental borrowing rate. A corresponding right-of-use asset is recognized at the amount of the lease obligation, adjusted for lease
incentives received and initial direct costs. Vermilion does not recognize leases for short-term leases with a lease term of 12 months or less, or
leases for low-value assets.
Payments are applied against the lease obligation and interest expense is recognized on the lease obligations using the effective interest rate
method. Depreciation is recognized on the right-of-use asset over the lease term.
Cash and cash equivalents
Cash and cash equivalents include cash on deposit with financial institutions and guaranteed investment certificates.
Crude oil inventory
Crude oil inventory is valued at the lower of cost or net realizable value. The cost of crude oil inventory produced includes related operating expense,
royalties, and depletion determined on a weighted-average basis.
Asset retirement obligations
Vermilion recognizes a provision for asset retirement obligations when an event occurs giving rise to an obligation of uncertain timing or amount.
Asset retirement obligations are recognized on the consolidated balance sheet as a long-term liability with a corresponding increase to E&E or
capital assets.
Asset retirement obligations reflect the present value of estimated future settlement costs. The discount rate used to calculate the present value is
specific to the jurisdiction the obligation relates to and is reflective of current market assessment of the time value of money and risks specific to the
liabilities that have not been reflected in the cash flow estimates.
Asset retirement obligations are remeasured at each reporting period to reflect changes in market rates and estimated future settlement costs. Asset
retirement obligations are increased each reporting period to reflect the passage of time with a corresponding charge to accretion expense.
Revenue recognition
Revenue associated with the sale of crude oil and condensate, natural gas, and natural gas liquids is measured based on the consideration specified
in contracts with customers.
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 Energy Inc. ■ Page 79 ■ 2022 Annual Report
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,
investment in securities, 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.
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 Long-term Incentive Plan (“LTIP”) and the Deferred Share Unit Plan ("DSU").
Equity-settled awards issued under the LTIP 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 LTIP 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.
Vermilion Energy Inc. ■ Page 80 ■ 2022 Annual Report
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 income. 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.
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.
Vermilion Energy Inc. ■ Page 81 ■ 2022 Annual Report
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).
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.
Vermilion Energy Inc. ■ Page 82 ■ 2022 Annual Report
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 83 ■ 2022 Annual Report
3. Segmented information
Substantially all sales in the France and Netherlands operating segments for the years ended December 31, 2022 and December 31, 2021 were to
one customer in each respective segment. In 2022 and 2021, France and the Netherlands each contributed more than 10% of Vermilion's
consolidated revenues.
USA
France Netherlands
Germany
Ireland
Australia
Corporate
Total
Year Ended December 31, 2022
Total assets
Drilling and development
Exploration and evaluation
Crude oil and condensate sales
NGL sales
Natural gas sales
Sales of purchased commodities
Canada
3,612,487
275,203
—
910,863
114,128
319,293
—
618,116
63,353
—
823,544
44,250
2
130,150
365,431
19,385
16,698
—
—
—
—
240,276
21,629
23
2,119
—
398,612
465,643
25,087
1,070
62,464
—
3,030
—
15
—
560,738
418,796
324,330
—
—
—
—
249,253
95,173
—
221,187
—
—
—
—
583,127
6,991,058
331
22,666
528,056
23,761
—
—
1,692,229
133,513
10,797
1,650,652
244,834
244,834
(3,488)
(306,017)
Royalties
(196,005)
(44,427)
(40,353)
(512)
(21,232)
Transportation
Operating
Revenue from external customers
1,148,279
121,806
325,078
562,345
460,028
324,345
221,187
252,143
3,415,211
Purchased commodities
—
—
—
(44,849)
(618)
(20,100)
—
—
—
—
(9,751)
(3,578)
—
—
(244,834)
(244,834)
—
(78,896)
(240,899)
(27,372)
(57,588)
(45,903)
(41,523)
(16,580)
(57,478)
(1,691)
(489,034)
General and administration
(28,643)
(5,863)
(16,444)
(4,255)
(6,949)
122
PRRT
Corporate income taxes
Windfall taxes
Interest expense
Realized loss on derivative instruments
Realized foreign exchange gain
Realized other income
—
(10)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(29,889)
(150,647)
(31,513)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,964)
(18,318)
9,319
—
(57,677)
(18,318)
5,016
(1,110)
(208,153)
—
—
—
—
—
(222,859)
(222,859)
(82,858)
(82,858)
(405,894)
(405,894)
15,195
12,982
15,195
12,982
Fund flows from operations
833,878
87,953
201,057
361,540
370,292
304,309
145,443
(669,607)
1,634,865
USA
France Netherlands
Germany
Ireland
Australia
Corporate
Total
Year Ended December 31, 2021
Total assets
Drilling and development
Exploration and evaluation
Crude oil and condensate sales
NGL sales
Natural gas sales
Sales of purchased commodities
Canada
3,100,322
190,242
—
625,053
86,932
189,790
—
545,296
32,540
—
80,208
17,723
14,484
—
771,707
39,587
121
279,263
—
—
—
227,779
422,030
427,362
20,198
6,839
2,640
—
19,234
1,073
32,607
—
1,261
—
23
—
293,083
99,328
214,402
—
—
—
—
217,852
34,785
—
143,014
—
—
—
—
192,975
5,905,323
1,543
27,373
339,390
35,406
—
—
1,211
147,091
1,162,808
104,655
812,298
147,091
(338)
(186,122)
Royalties
(113,651)
(30,747)
(37,666)
(873)
(2,847)
Transportation
Operating
Revenue from external customers
788,124
81,668
241,597
294,850
129,088
214,425
143,014
147,964
2,040,730
Purchased commodities
—
—
—
(38,764)
(1,336)
(26,497)
—
—
—
—
(6,359)
(4,205)
—
—
(147,091)
(147,091)
—
(77,161)
(215,378)
(16,992)
(52,147)
(35,269)
(27,149)
(14,889)
(50,748)
(441)
(413,013)
General and administration
(18,380)
(4,563)
(10,954)
(1,243)
(5,257)
PRRT
Corporate income taxes
Interest expense
Realized loss on derivative instruments
Realized foreign exchange loss
Realized other income
—
—
—
—
—
—
—
—
—
—
—
—
—
9,120
—
(46,567)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9
—
—
—
—
—
—
(3,457)
(9,032)
(15,688)
5,759
—
—
—
—
—
1,522
(73,075)
(52,877)
(15,688)
(30,166)
(73,075)
(327,384)
(327,384)
(6,613)
22,200
(6,613)
22,200
Fund flows from operations
515,602
58,777
161,119
211,771
90,323
195,340
78,880
(391,950)
919,862
Vermilion Energy Inc. ■ Page 84 ■ 2022 Annual Report
Reconciliation of fund flows from operations to net earnings:
Fund flows from operations
Equity based compensation
Unrealized gain (loss) on derivative instruments
Unrealized foreign exchange (loss) gain
Accretion
Depletion and depreciation
Deferred tax expense
Gain on business combinations
Impairment reversal
Unrealized other expense
Net earnings
4. Business combinations
Year Ended
Dec 31, 2022
1,634,865
(44,390)
540,801
(84,464)
(58,170)
(577,134)
(288,707)
—
192,094
(1,833)
1,313,062
Dec 31, 2021
919,862
(41,565)
(181,094)
(64,963)
(43,552)
(571,688)
(187,343)
17,198
1,302,619
(778)
1,148,696
Leucrotta Exploration Inc.
On May 31, 2022, Vermilion closed the acquisition of all outstanding common shares of Leucrotta Exploration Inc. (“Leucrotta”), a Canadian publicly
listed, Montney-focused oil and natural gas exploration and development company. The primary asset acquired is the Mica property, comprised of
81,000 gross (77,000 net) contiguous acres of Montney mineral rights in the Peace River Arch straddling the Alberta and British Columbia borders.
Prior to May 31, 2022, Vermilion controlled 7,536,800 common shares of Leucrotta. On May 31, 2022, Vermilion transferred consideration and
assumed ownership of all remaining outstanding common shares of Leucrotta. The acquisition was funded through Vermilion’s revolving credit
facility.
The total consideration and the fair value of the assets acquired and liabilities assumed at the date of acquisition are detailed in the table below:
Cash consideration paid
Fair value of previously held equity interest
Total consideration
Cash acquired
Capital assets
Exploration and evaluation assets
Deferred tax liabilities
Asset retirement obligations
Derivative liability
Acquired working capital deficiency
Net assets acquired
Consideration
486,488
13,039
499,527
Allocation of consideration
2,659
559,094
43,227
(97,891)
(1,440)
(339)
(5,783)
499,527
The results of operations from the assets acquired and liabilities assumed have been included in Vermilion’s consolidated financial statements
beginning May 31, 2022 and have contributed revenues of $55.7 million and net earnings of $17.1 million. Had the acquisition occurred on January
1, 2022, consolidated petroleum and natural gas revenue would have been $3,444.7 million and consolidated net earnings would have been
$1,322.0 million for the year ended December 31, 2022.
Vermilion Energy Inc. ■ Page 85 ■ 2022 Annual Report
5. Investment in securities
Vermilion holds investments in Coelacanth Energy Inc., a Montney-focused oil and natural gas exploration and development company listed on the
TSX Venture exchange. Vermilion has acquired shares via a private placement concurrent with the closing of the purchase of Leucrotta and via open
market purchases. Vermilion has made an optional election to subsequently measure the investment at fair value through other comprehensive
income. The investment is classified as a level 1 instrument on the fair value hierarchy and therefore uses observable inputs when making fair value
adjustments.
The total consideration paid and the fair value of the investment acquired are detailed in the table below:
Balance at January 1
Acquisition of securities
Fair value adjustment
Balance at December 31
6. 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 reversal
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, 2022
Amount
—
23,282
33,084
56,366
2021
3,107,104
180,806
339,390
551
11,495
1,302,619
(538,704)
528,714
(107,780)
4,824,195
10,849,047
(6,024,852)
4,824,195
2022
4,824,195
572,535
528,056
13,871
1,223
192,094
(546,381)
65,462
40,467
5,691,522
12,058,520
(6,366,998)
5,691,522
In the first quarter of 2022, indicators of impairment reversal were present in our Canada - Saskatchewan and France - Neocomian cash generating
units ("CGUs") due to an increase and stabilization in forecast oil prices. As a result of the indicators of impairment reversal, the Company performed
impairment reversal calculations on the identified 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 12.0%. Based on the results of the
impairment reversal calculations completed, recoverable amounts were determined to be greater than the carrying values of the CGUs tested and
$144.4 million (net of $47.7 million deferred income tax expense) of impairment reversal was recorded. Inputs used in the measurement of capital
assets are not based on observable market data and fall within level 3 of the fair value hierarchy.
The following benchmark price forecasts were used to calculate the recoverable amounts:
Brent Crude ($ US/bbl) (1)
WTI Crude ($ US/bbl) (1)
0.80
Exchange rate (CAD/USD)
(1) The forecast benchmark prices listed are adjusted for quality differentials, heat content, transportation and marketing costs and other factors specific to the Company’s operations when determining recoverable amounts.
2030 2031 (2)
100.50 89.50 79.64 81.23 82.86 84.51 86.21 87.94 89.69 91.48
95.00 85.00 75.64 77.15 78.70 80.27 81.88 83.52 85.19 86.89
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
2024
2025
2027
2023
2022
2026
2028
2029
(2) In 2032 and beyond, commodity price forecasts are inflated at a rate of 2.0% per annum. In 2032 and beyond there is no escalation of exchange rates.
Vermilion Energy Inc. ■ Page 86 ■ 2022 Annual Report
The following are the results of tests completed, recoverable amounts, and sensitivity impacts which would decrease impairment reversals taken:
Operating Segment
Canada
France
Total
(1) Impairment reversals are subject to the lower of the recoverable amount and the carrying value, which includes depletion and depreciation of the CGU had no impairment charges been previously taken.
CGU
Saskatchewan
Neocomian
2,150,936
166,818
2,317,754
Impairment Reversal (1) Recoverable Amount
159,985
32,109
192,094
1% increase in
discount rate
—
—
—
5% decrease in
pricing
—
—
—
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, 2022:
($M)
Office space
Gas processing facilities
Oil storage facilities
Vehicles and equipment
Total
7. Exploration and evaluation assets
As at Dec 31, 2022
As at Dec 31, 2021
Depreciation
Balance
Depreciation
8,328
7,691
2,429
4,716
23,164
31,199
13,415
8,970
13,944
67,528
8,921
7,691
2,644
3,629
22,885
Balance
38,216
20,504
11,480
6,038
76,238
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
8. 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 rates
Foreign exchange
Balance at December 31
Vermilion Energy Inc. ■ Page 87 ■ 2022 Annual Report
2022
233,290
43,227
23,761
646
(1,223)
(30,503)
1,395
270,593
476,571
(205,978)
270,593
2022
1,000,554
5,184
207,919
(37,514)
58,170
(145,555)
(1,001)
1,087,757
2021
254,094
—
35,406
110
(11,495)
(35,549)
(9,276)
233,290
408,494
(175,204)
233,290
2021
467,737
28,655
85,022
(28,525)
43,552
439,849
(35,736)
1,000,554
Vermilion calculated the present value of the obligations using a credit-adjusted risk-free rate, calculated using a credit spread of 4.5% as at
December 31, 2022 (December 31, 2021 - 4.9%) added to risk-free rates based on long-term, risk-free government bonds. Vermilion's credit spread
is determined using the Company's expected cost of borrowing at the end of 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, 2022
3.3 %
4.1 %
3.4 %
2.7 %
2.5 %
3.2 %
4.2 %
Dec 31, 2021
1.8 %
1.9 %
0.8 %
(0.3) %
0.1 %
0.5 %
1.9 %
Vermilion has estimated the asset retirement obligations based on current cost estimates of $2.3 billion (2021 - $2.0 billion). Current cost estimates
are inflated to the estimated time of abandonment using inflation rates of between 1.6% and 4.2% (2021 - between 1.1% and 3.1%), resulting in
inflated cost estimates of $3.7 billion (2021 - $3.1 billion). These payments are expected to be made over the next 60 years, with the majority of the
costs incurred in the first 40 years.
A 0.5% increase/decrease in the discount rate applied to asset retirement obligations would decrease/increase asset retirement obligations by
approximately $64.8 million. A one-year increase/decrease in the expected timing of abandonment spend would decrease/increase asset retirement
obligations by approximately $54.0 million.
Vermilion Energy Inc. ■ Page 88 ■ 2022 Annual Report
9. Derivative instruments
The following table reconciles the change in the fair value of Vermilion’s derivative instruments:
Fair value of contracts, beginning of year
Reversal of opening contracts settled during the year
Assumed in acquisitions
Realized loss on contracts settled during the year
Unrealized gain (loss) during the year on contracts outstanding at the end of the year
Net receipt from counterparties on contract settlements during the year
Fair value of contracts, end of year
Comprised of:
Current derivative asset
Current derivative liability
Non-current derivative asset
Non-current derivative liability
Fair value of contracts, end of year
The (gain) loss on derivative instruments for 2022 and 2021 were comprised of the following:
Realized loss on contracts settled during the year
Reversal of opening contracts settled during the year
Unrealized (gain) loss on contracts outstanding at the end of the year
(Gain) loss on derivative instruments
Year Ended
Dec 31, 2022
(300,865)
164,208
(339)
(405,894)
376,593
405,893
239,596
162,843
(55,845)
132,598
—
239,596
Dec 31, 2021
(119,772)
112,679
—
(327,384)
(293,773)
327,385
(300,865)
19,321
(268,973)
—
(51,213)
(300,865)
Year Ended
Dec 31, 2022
405,894
(164,208)
(376,593)
(134,907)
Dec 31, 2021
327,384
(112,679)
293,773
508,478
Vermilion executes derivative instruments where there is an underlying exposure to offset the position. Consistent with our accounting policy we do
not match unrealized gains / losses on these contracts with the underlying exposure. Please refer to Note 19 (Supplemental information) for a listing
of Vermilion's outstanding derivative instruments as at December 31, 2022.
10. Leases
Vermilion had the following future commitments associated with its lease obligations:
($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
As at
Dec 31, 2022
23,588
40,374
16,246
177
80,385
(9,392)
70,993
(19,486)
51,507
25,422
4,254
Dec 31, 2021
19,045
38,136
25,226
3,686
86,093
(10,871)
75,222
(15,032)
60,190
27,368
5,181
Vermilion Energy Inc. ■ Page 89 ■ 2022 Annual Report
11. 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:
Derivative contracts
Asset retirement obligations
Capital assets
Stock based compensation
Other
Unrealized foreign exchange
Non-capital losses
Deferred tax liabilities
As at
Dec 31, 2022
Dec 31, 2021
200,781
—
39
—
5,818
(81,105)
—
125,533
58,941
100,670
734,146
(5,805)
(16,322)
(4,282)
(390,008)
477,340
477,903
74,043
2,879
8,651
83,461
(268,615)
(3,329)
374,993
—
104,258
322,641
—
(10,518)
—
(87,542)
328,839
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
Expected tax expense
Increase (decrease) in taxes resulting from:
Petroleum resource rent tax rate (PRRT) differential (1)
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 (3)
Derecognition (recognition) of deferred tax assets
Windfall taxes (3)
Other non-deductible items
Provision for income taxes
(1)
Year Ended
Dec 31, 2022
2,051,099
24.60 %
504,570
Dec 31, 2021
1,381,893
24.61 %
340,084
13,729
101,701
(11,610)
(5,691)
14,274
(118,304)
222,859
16,509
738,037
27,281
43,301
6,794
(14,391)
5,862
(190,423)
—
14,689
233,197
(2)
(3)
In Australia, current taxes include both corporate income tax rates and PRRT. For both 2022 and 2021, 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 2022 were: 25.8% in France, 50.0% in the Netherlands, 31.3% in Germany, 25.0% in Ireland, and 21.0% in the United States (2021:
27.4% in France, 50.0% in the Netherlands, 31.4% in Germany, 25.0% in Ireland, and 21.0% in the United States).
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 December 21, 2021, the Dutch Senate approved the
2022 Tax Plan that included an increase to the Dutch corporate tax rate from 25.0% in 2021 to 25.8% in 2022. Due to the tax regime applicable to natural gas
producers in the Netherlands, the increase to the corporate tax rate is not expected to have a material impact to Vermilion taxes in the Netherlands. On
September 30, 2022 the Council of the European Union agreed, by way of regulation, to the implementation of a temporary windfall tax on the profits of oil and
gas producers resident in the European Union. This windfall tax is referred to as a temporary solidarity contribution and is calculated on the amount by which
the taxable profits for the elected years exceeds the greater of zero and 120% of the average taxable profits for the 2018 to 2021 period. The regulation requires
Member States to implement the temporary solidarity contribution at a minimum rate of 33% while providing Member States with the option to apply the
temporary solidarity contribution to fiscal years beginning on or after January 1, 2022, January 1, 2023, or both. The temporary solidarity contribution is
considered a tax pursuant to IAS 12 “Income Taxes”. The related legislation became substantively enacted during the fourth quarter of 2022 resulting in a full
year of windfall taxes being recognized during the fourth quarter.
Vermilion Energy Inc. ■ Page 90 ■ 2022 Annual Report
The following table summarizes the manner of implementation of the temporary solidarity contribution by the Member States in which Vermilion
operates:
Jurisdiction
France
Netherlands (1)
Germany
Ireland (2)
2023
N/A
N/A
33.0 %
N/A
2022
33.0 %
33.0 %
33.0 %
N/A
(1)
(2)
For 2023 and 2024, Netherlands has implemented a windfall royalty. This royalty applies if annual realized pricing (net of hedges) exceeds €0.50/Nm3. This
royalty is assessed annually at a rate of 65% on realized pricing (net of hedges) less €0.50/Nm3 and payments on this royalty are deductible in calculating
current income taxes.
As at December 31, 2022, Ireland has not legislated a windfall tax rate. A rate of 75% was announced in November 2022.
At December 31, 2022, Vermilion had $2.4 billion (2021 - $2.7 billion) of unused tax losses of which $1.4 billion (2021 - $1.4 billion) relates to
Vermilion's Canada segment and expire between 2025 and 2042. The majority of the remaining unused tax losses relate to Vermilion's Ireland
segment and do not expire.
At December 31, 2022, Vermilion recognized $118.3 million (2021 - recognized $190.4 million) of deferred income tax assets primarily relating to the
aforementioned non-expiring tax loss in Ireland that are expected to be utilized due to an increase in forecasted commodity prices.
The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been
recognized as at December 31, 2022 is approximately $0.7 billion (2021 – approximately $0.4 billion).
12. Long-term debt
The following table summarizes Vermilion’s outstanding long-term debt:
Revolving credit facility
2025 senior unsecured notes
2030 senior unsecured notes
Long-term debt
As at
Dec 31, 2022
147,666
404,463
529,222
1,081,351
Dec 31, 2021
1,273,755
377,814
—
1,651,569
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 2025 senior unsecured notes as at December 31, 2022 was $391.3 million (December 31, 2021 - $387.0 million). The
fair value of the 2030 senior unsecured notes as at December 31, 2022 was $496.8 million (December 31, 2021 - nil).
The following table reconciles the change in Vermilion’s long-term debt:
Balance at January 1
Repayments on the revolving credit facility
Issuance of 2030 senior unsecured notes
Amortization of transaction costs
Foreign exchange
Balance at December 31
2022
1,651,569
(1,121,868)
499,037
1,833
50,780
1,081,351
2021
1,933,848
(341,259)
—
778
58,202
1,651,569
Vermilion Energy Inc. ■ Page 91 ■ 2022 Annual Report
Revolving credit facility
As at December 31, 2022, Vermilion had in place a bank revolving credit facility maturing May 29, 2026 with the following terms:
Total facility amount
Amount drawn
Letters of credit outstanding
Unutilized capacity
As at
Dec 31, 2022
1,600,000
(147,666)
(13,527)
1,438,807
Dec 31, 2021
2,100,000
(1,273,755)
(11,035)
815,210
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. On April 26, 2022, contemporaneous with the issuance of the 2030 senior unsecured notes and at Vermilion's election, the
maturity date of the facility was extended to May 29, 2026 (previously May 31, 2024) and the total facility amount was reduced to $1.6 billion
(previously $2.1 billion).
The facility bears interest at a rate applicable to demand loans plus applicable margins.
As at December 31, 2022, 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, 2022
As at
Less than 4.0
Less than 3.5
Greater than 2.5
0.51
0.07
27.10
Dec 31, 2021
1.61
1.24
14.78
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 consolidated balance sheet.
Consolidated total senior debt: Consolidated total debt excluding unsecured and subordinated debt.
Consolidated EBITDA: 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, 2022, 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, 2022 and December 31, 2021, Vermilion was in compliance with the above covenants.
2025 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 Energy Inc. ■ Page 92 ■ 2022 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
2022
2023 and thereafter
2030 senior unsecured notes
Redemption price
101.406 %
100.000 %
On April 26, 2022, Vermilion closed a private offering of US $400.0 million 8-year senior unsecured notes. The notes were priced at 99.241% of par,
mature on May 1, 2030, and bear interest at a rate of 6.875% per annum. Interest is paid semi-annually on May 1 and November 1, commencing on
November 1, 2022. The notes are senior unsecured obligations of Vermilion and rank equally with existing and future senior unsecured
indebtedness.
The senior unsecured notes were recognized at amortized cost and include the transaction costs directly related to the issuance.
Vermilion may, at its option, redeem the notes prior to maturity as follows:
•
•
•
On or after May 1, 2025, Vermilion may redeem some or all of the senior unsecured notes at the redemption prices set forth below,
together with accrued and unpaid interest.
Prior to May 1, 2025, Vermilion may redeem up to 35% of the original principal amount of the notes with an amount of cash not greater
than the net cash proceeds of certain equity offerings at a redemption price of 106.875% of the principal amount of the notes, together with
accrued and unpaid interest.
Prior to May 1, 2025, Vermilion may also redeem some or all of the notes at a price equal to 100% of the principal amount of the notes,
plus a “make-whole premium,” together with applicable premium, accrued and unpaid interest.
Year
2025
2026
2027
2028 and thereafter
Redemption price
103.438 %
102.292 %
101.146 %
100.000 %
13. Shareholders' capital
The following table reconciles the change in Vermilion’s shareholders’ capital:
Shareholders' capital
Balance at January 1
Vesting of equity based awards
Shares issued for equity based compensation
Share-settled dividends on vested equity based awards
Repurchase of shares
Balance at December 31
2022
2021
Shares ('000s)
Amount ($M)
Shares ('000s)
162,261
2,578
549
178
(2,339)
163,227
4,241,773
44,811
13,699
4,377
(60,866)
4,243,794
158,724
2,385
911
241
—
162,261
Amount ($M)
4,181,160
49,922
8,365
2,326
—
4,241,773
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, 2022 were $45.8 million or $0.28 per common share (2021 - nil).
Subsequent to December 31, 2022 Vermilion declared a dividend of $0.10 per share to be paid April 17, 2023.
On July 4, 2022, the Toronto Stock Exchange approved our notice of intention to commence a normal course issuer bid ("the NCIB"). The NCIB
allows Vermilion to purchase up to 16,076,666 common shares representing approximately 10% of its public float as at June 22, 2022 beginning
July 6, 2022 and ending July 5, 2023.
In 2022, Vermilion purchased and cancelled 2.34 million common shares under the NCIB for total consideration of $71.7 million. The surplus
between the total consideration and the carrying value of the shares repurchased was recorded as an increase to deficit.
Subsequent to December 31, 2022 Vermilion purchased and cancelled 1.14 million common shares under the NCIB for total consideration of $22.4
million.
Vermilion Energy Inc. ■ Page 93 ■ 2022 Annual Report
14. Capital disclosures
Vermilion defines capital as net debt (long-term debt (excluding unrealized foreign exchange on swapped USD borrowings) plus adjusted working
capital (defined as current assets less current liabilities, excluding current derivatives and current lease liabilities)) and shareholders’ capital. In
managing capital, Vermilion reviews whether fund flows from operations is sufficient to fund capital expenditures, dividends, and asset retirement
obligations.
Vermilion monitors the ratio of net debt to fund flows from operations. As at December 31, 2022, our ratio of net debt to trailing fund flows from
operations is 0.82 (2021 - 1.79). Vermilion manages the ratio of net debt to fund flows from operations (refer to Note 3 - Segmented information) by
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 1.0 over time.
The following table calculates Vermilion’s ratio of net debt to fund flows from operations:
Year Ended
Dec 31, 2022
1,081,351
265,111
(1,876)
1,344,586
Dec 31, 2021
1,651,569
9,284
(16,067)
1,644,786
0.82
1.79
Long-term debt
Adjusted working capital (1)
Unrealized FX on swapped USD borrowings
Net debt
Ratio of net debt to four quarter trailing fund flows from operations
(1)
Adjusted working capital is defined as current assets (excluding current derivatives), less current liabilities (excluding current derivatives and current lease
liabilities).
15. Equity based compensation
The following table summarizes the number of awards outstanding under the LTIP:
Number of LTIP and Five Year Compensation Awards ('000s)
Opening balance
Granted
Vested
Forfeited
Closing balance
2022
6,405
1,108
(1,733)
(277)
5,503
2021
6,244
2,745
(1,520)
(1,064)
6,405
For the year ended December 31, 2022, the awards had a weighted average grant date fair value of $25.60 (2021 - $9.53). 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 (2022 - 1.0; 2021 - 1.1) adjusted by an estimated annual forfeiture rate (2022 - 3.8%; 2021 - 4.2%). Equity based
compensation expense of $29.2 million was recorded during the year ended December 31, 2022 (2021 - $31.3 million) relating to the awards.
As at December 31, 2022, there were 392,757 DSUs outstanding with a weighted average grant date fair value of $12.89. In 2022, there were
56,262 DSU grants with a weighted average grant date fair value of $26.70. Equity based compensation expense of $1.5 million was recorded during
the year ended December 31, 2022 (2021 - $1.9 million) relating to the DSUs.
Vermilion Energy Inc. ■ Page 94 ■ 2022 Annual Report
16. Per share amounts
Basic and diluted net earnings per share have been determined based on the following:
Net earnings
Basic weighted average shares outstanding ('000s)
Dilutive impact of equity based compensation ('000s)
Diluted weighted average shares outstanding ('000s)
Basic earnings per share
Diluted earnings per share
17. Financial instruments
Classification of financial instruments
Year Ended
Dec 31, 2022
1,313,062
Dec 31, 2021
1,148,696
163,489
4,937
168,426
8.03
7.80
161,172
3,593
164,765
7.13
6.97
The following table summarizes the carrying value relating to Vermilion’s financial instruments:
($M)
As at Dec 31, 2022
FVTPL
FVTOCI
Amortized
Cost
As at Dec 31, 2021
Total
FVTPL
FVTOCI
Amortized
Cost
Total
Cash and cash equivalents
Derivative assets
Investment in securities
Derivative liabilities
Accounts receivable
Accounts payable and accrued liabilities
Dividends payable
Lease obligations
Long-term debt (1)
13,836
295,441
—
(55,845)
—
—
—
—
—
13,836
—
295,441
—
56,366
56,366
(55,845)
—
373,651
—
(481,444)
—
(13,058)
—
—
(51,507)
— (1,081,351) (1,081,351)
—
—
—
—
373,651
(481,444)
(13,058)
(51,507)
6,028
19,321
—
(320,186)
—
—
—
—
—
—
—
—
—
328,584
(440,658)
—
(60,190)
6,028
—
19,321
—
—
—
(320,186)
—
328,584
—
(440,658)
—
—
—
—
(60,190)
— (1,651,569) (1,651,569)
(1)
The carrying value of the above equals fair value except for long-term debt. The fair value of long-term debt was $1,035,671 (2021 - $1,660,778).
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, investment in securities, 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, 2022 and 2021.
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.
Vermilion Energy Inc. ■ Page 95 ■ 2022 Annual Report
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.
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
€ 5.0/GJ increase in European natural gas price used to determine the fair value of derivatives
€ 5.0/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, 2022
Dec 31, 2021
5,640
(5,640)
5,441
(5,441)
—
—
(88,524)
91,828
3,750
(3,750)
(273)
273
2,086
(2,086)
(9,324)
1,636
(10,554)
10,554
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, 2022, Vermilion’s maximum exposure to receivable credit risk was
$669.1 million (December 31, 2021 - $347.9 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, 2022 and 2021 is not material. As at the balance sheet
date, approximately 0.5% (2021 - 0.8%) of the accounts receivable balance was outstanding for more than 90 days. Vermilion considers the balance
of accounts receivable to be collectible.
Vermilion Energy Inc. ■ Page 96 ■ 2022 Annual Report
Vermilion’s derivative assets primarily relates to the fair value of financial instruments used as part of the Company’s risk management program to
mitigate the effects of changes in commodity prices on future cash flows. Vermilion manages this risk by monitoring the creditworthiness of
counterparties, transacting primarily with counterparties that have investment grade third party credit ratings, and by limiting the concentration of
financial exposure to individual counterparties. As a result, Vermilion has not obtained collateral or other security to support its financial derivatives.
Vermilion’s cash deposited in financial institutions and guaranteed investment certificates are also subject to counterparty credit risk. Vermilion
mitigates this risk by transacting with financial institutions with high third party credit ratings.
Liquidity risk
Liquidity risk is the risk that Vermilion will encounter difficulty in meeting obligations associated with its financial liabilities. Vermilion does not
consider this to be a significant risk as its financial position and available committed borrowing facility provide significant financial flexibility and allow
Vermilion to meet its obligations as they come due.
The following table summarizes Vermilion’s undiscounted non-derivative financial liabilities and their contractual maturities:
3 months to
1 year
23,412
25,475
($M)
December 31, 2022
December 31, 2021
1 month
192,572
191,297
1 month to
3 months
278,520
223,885
1 year to
5 years
607,796
1,718,475
18. 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, 2022 and 2021:
Short-term benefits
Equity based compensation
Number of individuals included in the above amounts
Year Ended
Dec 31, 2022
5,124
8,951
14,075
16
Dec 31, 2021
4,654
14,570
19,224
18
During the year ended December 31, 2022, Vermilion recorded $0.1 million of office rent recoveries (2021 - $0.2 million) relating to an office sub-
lease to a company whose Managing Director was also a member of Vermilion's Board of Directors during the year, but is no longer as at December
31, 2022. 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.
Vermilion Energy Inc. ■ Page 97 ■ 2022 Annual Report
19. 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, 2022
Dec 31, 2021
(45,067)
413
(45,617)
40,786
304,516
(12,046)
242,985
216,869
26,116
242,985
(132,507)
(6,668)
(71,156)
142,988
32,643
14,540
(20,160)
(56,884)
36,724
(20,160)
As at December 31, 2022, prepaid expenses includes a deposit of $68.5 million related to a previously announced transaction to acquire an
additional working interest within the Corrib natural gas project and $23.0 million for a land acquisition.
Cash and cash equivalents was comprised of the following:
Cash on deposit with financial institutions
Guaranteed investment certificates
Cash and cash equivalents
Wages and benefits included in operating expenses and general and administration expenses were:
Operating expense
General and administration expense
Wages and benefits
As at December 31, 2022, we had the following contractual obligations and commitments:
As at
Dec 31, 2022
13,701
135
13,836
Dec 31, 2021
5,901
127
6,028
Year Ended
Dec 31, 2022
75,165
45,525
120,690
Dec 31, 2021
73,739
54,771
128,510
($M)
Long-term debt (1)
Lease obligations
Processing and transportation agreements
Purchase obligations
Drilling and service agreements
Total contractual obligations and commitments
(1)
Less than 1 year
1 - 3 years
3 - 5 years
After 5 years
69,235
46,245
40,267
27,481
5,051
188,279
533,362
49,730
52,786
4,907
58,122
698,907
225,861
29,062
23,133
444
—
278,500
634,875
8,597
101,629
285
—
745,386
Total
1,463,333
133,634
217,815
33,117
63,173
1,911,072
(2)
Interest on revolving credit facility calculated assuming an annual interest rate of 6.19%.
Commitments denominated in foreign currencies have been translated using the related spot rates on December 31, 2022.
Vermilion Energy Inc. ■ Page 98 ■ 2022 Annual Report
The following tables summarize Vermilion's outstanding risk management positions as at December 31, 2022:
AECO
Q1 2023
Q2 2023
Q3 2023
Q4 2023
Unit Currency
mcf
mcf
mcf
mcf
CAD
CAD
CAD
CAD
AECO Basis (AECO less NYMEX Henry Hub)
Daily
Bought Put
Volume
Weighted
Average
Bought Put
Price
Daily Sold
Call
Volume
Weighted
Average
Sold Call
Price
Daily Sold
Put
Volume
Weighted
Average
Sold Put
Price
Daily Sold
Swap
Volume
Weighted
Average
Sold Swap
Price
Daily
Bought
Swap
Volume
Weighted
Average
Bought
Swap Price
4,739
3.69
4,739
7.70
—
—
—
—
—
—
24,000
5,000
5,000
1,685
—
—
—
—
—
—
4.00
4.00
4.00
4.00
—
—
—
—
—
—
24,000
5,000
5,000
1,685
—
—
—
—
—
—
8.44
8.75
8.75
8.75
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28,435
14,217
14,217
4,791
23,000
23,000
7,750
—
—
—
—
4.95
4.19
4.19
4.19
(1.13)
(1.13)
(1.13)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
mcf
mcf
mcf
mcf
mcf
mcf
mcf
USD
USD
USD
USD
USD
USD
USD
Daily
Bought Put
Volume
Weighted
Average
Bought Put
Price
Daily Sold
Call
Volume
Weighted
Average
Sold Call
Price
Daily Sold
Put
Volume
Weighted
Average
Sold Put
Price
Daily Sold
Swap
Volume
Weighted
Average
Sold Swap
Price
Daily
Bought
Swap
Volume
Weighted
Average
Bought
Swap Price
Unit Currency
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
mcf
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
18,426
7,370
2,457
4,913
14,740
19,654
19,654
12,284
31,938
3,593
3,593
11.76
11.48
22.71
41.03
24.01
34.53
34.53
44.84
40.69
37.56
37.56
18,426
7,370
2,457
4,913
14,740
19,654
19,654
12,284
31,938
3,593
3,593
19.54
17.46
35.90
84.26
46.12
53.21
53.21
84.99
78.00
74.66
74.66
14,740
4,913
—
—
4.10
4.40
—
—
2,457
3.52
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,685
3,685
—
—
67.41
67.41
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Q2 2023
Q3 2023
Q4 2023
NYMEX Henry Hub
Q1 2023
Q2 2023
Q3 2023
Q4 2023
NBP
Q1 2023
Q2 2023
Q3 2023
Q1 2024
TTF
Q1 2023
Q2 2023
Q3 2023
Q4 2023
Q1 2024
Q2 2024
Q3 2024
VET Equity Swaps
Swap
Swap
Jan 2020 - Apr 2023
Jan 2020 - Jul 2024
Initial Share Price
Share Volume
20.9788 CAD
22.4587 CAD
2,250,000
1,500,000
Cross Currency Interest Rate
Receive Notional Amount
Receive Rate
Pay Notional Amount
Pay Rate
Swap
January 2023
111,600,000 USD
SOFR + 1.35%
150,000,000 CAD
CDOR + 0.88%
20. Subsequent events
In the first quarter of 2022, we signed an agreement to sell an asset package in southeast Saskatchewan. The assets are comprised of
approximately 5,500 boe/d of non-core light oil production in the greater Arcola and Queensdale areas of southeast Saskatchewan. Total cash
consideration is $225 million, before closing adjustments. The transaction has an effective date of September 1, 2022 and is expected to close in
March 2023. The net proceeds will be used to pay down our revolving credit facility.
Vermilion Energy Inc. ■ Page 99 ■ 2022 Annual Report
OFFICERS / CORPORATE SECRETARY
Dion Hatcher *
President & Chief Executive Officer
Lars Glemser *
Vice President & Chief Financial Officer
Terry Hergott
Vice President Marketing
Yvonne Jeffery
Vice President Sustainability
Darcy Kerwin *
Vice President International & HSE
Bryce Kremnica *
Vice President North America
Geoff MacDonald
Vice President Geosciences
Kyle Preston
Vice President Investor Relations
Averyl Schraven
Vice President People and Culture
Jenson Tan *
Vice President Business Development
Gerard Schut *
Vice President European Operations
Robert (Bob) J. Engbloom
Corporate Secretary
* Executive Committee
DIRECTORS
Robert Michaleski 1,3,5
Calgary, Alberta
Dion Hatcher
Calgary, Alberta
James J. Kleckner Jr. 7,9
Edwards, Colorado
Carin Knickel 4,7,11
Golden, Colorado
Stephen P. Larke 3,5,10
Calgary, Alberta
Timothy R. Marchant 6,9,11
Calgary, Alberta
William Roby 7,8,11
Katy, Texas
Manjit Sharma 2,5
Toronto, Ontario
Myron Stadnyk 7,9
Calgary, Alberta
Judy Steele 3,5,11
Halifax, Nova Scotia
1 Chairman (Independent)
2 Audit Committee Chair (Independent)
3 Audit Committee Member (Independent)
4 Governance and Human Resources Committee Chair
__(Independent)
5 Governance and Human Resources Committee Member
__(Independent)
6 Health, Safety and Environment Committee Chair
__(Independent)
7 Health, Safety and Environment Committee Member
__(Independent)
8 Independent Reserves Committee Chair (Independent)
9 Independent Reserves Committee Member
__(Independent)
10 Sustainability Committee Chair (Independent)
11 Sustainability Committee Member (Independent)
AUDITORS
Deloitte LLP
Calgary, Alberta
BANKERS
The Toronto-Dominion Bank
Alberta Treasury Branches
Bank of America N.A., Canada Branch
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
La Caisse Centrale Desjardins du Québec
Citibank N.A., Canadian Branch - Citibank Canada
Canadian Western Bank
JPMorgan Chase Bank, N.A., Toronto Branch
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
Vermilion Energy Inc. ■ Page 100 ■ 2022 Annual Report