An anonymous director reports

VERMILION ENERGY INC. ANNOUNCES 2024 BUDGET, UPDATED RETURN OF CAPITAL FRAMEWORK AND 20% DIVIDEND INCREASE

Vermilion Energy Inc. has released its 2024 budget and updated return of capital framework, including a 20-per-cent dividend increase.

Highlights

• 2024 fund flows from operations (FFO) and free cash flow (FCF) are forecasted to be approximately $1.3-billion and $700-million, respectively, based on forward commodity prices; FCF represents an approximately 40-per-cent increase versus the company's 2023 forecast;
• 2024 capital expenditure budget of $600-million to $625-million includes increased investment in the company's British Columbia Montney asset and advancement of key growth projects in Germany and Croatia;
• 2024 production guidance of 82,000 to 86,000 boe/d (barrels of oil equivalent per day) reflects a mid-year start-up of the new B.C. Montney battery and Croatia gas plant and underpins the forecasted 40-per-cent increase to FCF;
• Vermilion continues to provide investors with market diversification as 40 per cent of its 2024 natural gas production will be produced in Europe and receive European gas benchmark pricing, which is approximately six times higher than forward AECO pricing and supports the company's peer-leading netbacks;
• On Nov. 30, 2023, the European Union published a review of the temporary windfall tax and subsequent market developments in the energy sector. The report stated that the situation in energy markets is very different from the exceptional circumstances when the temporary windfall tax was initially established in October, 2022, and therefore the European Union has not proposed to extend the mandate beyond 2023;
• Quarterly cash dividend increased by 20 per cent to 12 cents per share, effective with the Q1 2024 dividend payable in April, 2024;
• Plan to increase return of capital allocation target to 50 per cent of excess FCF (EFCF), starting April 1, 2024. When combined with the company's forecasted 40-per-cent increase in FCF, the amount of capital allocated to share buybacks in 2024 is expected to double from 2023 levels;
• Since initiating the company's share buyback program in July, 2022, the company has repurchased and retired 7.2 million shares including 4.9 million in 2023 year to date. During the month of November, 2023, the company repurchased 671,000 shares for approximately $12-million and plans to further increase the amount of share repurchases in December;
• The company continues to employ an active commodity hedge program and currently have 30 per cent of its 2024 production (net of royalties) hedged. This comprises 39 per cent of the company's European gas hedged at an average floor of $33 per mmbtu (million British thermal units), 29 per cent of the company's North American gas at an average floor of $3 per mmbtu and 26 per cent of the company's crude oil hedged at an average floor of $80 (U.S.) per barrel;
• Vermilion remains well positioned to generate strong FCF in the years ahead which will support the company's future development plans and return of capital strategy.

2024 budget

Vermilion's board of directors has approved an E&D (exploration and development) capital budget of $600-million to $625-million for 2024. The budget includes increased investment in both drilling and infrastructure for the company's B.C. Montney asset and advancement of key growth projects in Europe. With this level of investment, the company expects to deliver annual average production of 82,000 to 86,000 boe/d, which is consistent with 2023 production levels. This production guidance assumes a mid-year start-up of the new B.C. Montney battery and Croatia gas plant.

Based on forward commodity prices, the company forecasts 2024 FFO of $1.3-billion and FCF of $700-million, which is approximately 40 per cent higher than its 2023 forecasted FCF. The improvement in FCF is primarily driven by increased European gas volumes from the full year impact of the Corrib acquisition and first gas production in Croatia, a full year contribution from Australia and the expected expiration of the temporary windfall tax in Europe. On Nov. 30, 2023, the European Union published a review of the temporary windfall tax and subsequent market developments in the energy sector. The report stated that the situation in energy markets is very different from the exceptional circumstances when the temporary windfall tax was initially established in October, 2022, and therefore the European Union has not proposed to extend the mandate beyond 2023.

North America

In North America, the company plans to invest approximately $380-million of E&D capital, which will be deployed across the company's liquids-rich gas assets in the B.C. Montney and Alberta Deep basin and light oil in southeast Saskatchewan, with approximately half of the capital allocated to the company's Mica Montney asset. The company plans to drill a total of 42 (41.0 net) wells in North America, including 11 (11.0 net) Montney wells in British Columbia, 13 (13.0 net) Deep basin wells in Alberta and 18 (17.0 net) wells in southeast Saskatchewan. In addition, the company is constructing a 16,000 boe/d liquids battery on its B.C. Montney lands which is being financed through a third party financing agreement the company inherited through the initial acquisition of the assets and is excluded from the $380-million E&D capital.

The company is not planning operated drilling operations in the United States in 2024 due to the increased focus and allocation of resources to its Montney development. The company will continue to monitor and evaluate industry activity in the emerging Niobrara play to assess the future potential on the company's Hilight lands, where the company has 15,000 net acres prospective for the Niobrara and Parkman.

The development of the company's B.C. Mica Montney asset continues to progress. During the fourth quarter of 2023 the company completed site preparation for the new B.C. battery and commenced drilling of the first four wells of the company's 11-well winter drilling program. All of these wells are on or offsetting the two B.C. wells drilled on the 16-28 pad in 2023 which continue to produce at strong rates. The company also plans to pilot test down-spacing potential on its land which could add future drilling locations to its inventory. Most of the construction associated with the new 16,000 boe/d battery will take place during the first half of 2024, with completion and startup of the battery expected by mid-year. With the completion of this battery, the company expects its total Montney production capacity to increase to approximately 20,000 boe/d. In the future, the company plans to expand and optimize its facilities to increase total Montney production capacity to 28,000 boe/d, which will support over two decades of Montney drilling inventory on the company's Mica asset.

International

The company plans to invest approximately $230-million across its international assets, consistent with 2023 investment levels. In Europe, the company plans to drill eight (7.6 net) wells, comprising two (1.6 net) wells in Germany, four (4.0 net) wells in Croatia and two (2.0 net) wells in France. Similar to 2023, the largest proportion of the company's European drilling capital will be allocated to Germany, where the regulatory environment continues to be supportive of oil and gas development. Drilling of the company's first exploration gas well in Germany continues to progress with the rig expected to reach total depth in Q1 2024 before moving onto the second well of the program. The company does not anticipate any production from these new Germany gas wells until late 2024 or 2025. The results from this program will provide valuable information in assessing the future potential on the approximate 700,000 net acres of undeveloped land the company has in Germany.

In Croatia, construction of the 15 mmcf/d gas plant on the SA-10 block continues to progress and the company expects the plant to be operational by mid-2024. Assuming a mid-year start-up, the company forecasts approximately $30-million of FFO contribution from this asset in the second half of 2024, based on current strip prices. The company's 2024 drilling plans for Croatia will include four (4.0 net) exploration wells on the SA-7 block.

In France, the company plans to drill two (2.0 net) wells in the Cazaux field, in addition to the company's continuing workover program, which should be sufficient to hold production relatively flat compared with 2023 levels due to the low decline profile of this asset. The company's France assets comprise high netback, low decline oil producing fields that can be maintained through continuing well workover activity and infill drilling.

Return of capital

The company's messaging on return of capital has been consistent throughout 2023. The company set a net debt target of $1-billion, representing low leverage at mid-pricing, and it was disciplined in allocating its FCF throughout the year by prioritizing debt reduction until this target was achieved. The company made a commitment to increase the return of capital to shareholders once the company achieved this net debt target. As part of this commitment, the company intends to provide a ratable increase to its base dividend over time. To this end, the company is pleased to announce a 20-per-cent increase in its quarterly cash dividend to 12 cents per share commencing with the Q1 2024 dividend, payable in April, 2024. This base dividend will amount to approximately $75-million on an annual basis, representing approximately 6 per cent of 2024 FFO.

Since initiating the company's share buyback program in July, 2022, the company has repurchased and retired 7.2 million shares, including 4.9 million in 2023 year to date. During the month of November, 2023, the company repurchased 671,000 shares for approximately $12-million and plans to further increase the amount of share repurchases in December. For the first quarter of 2024, the company will continue to prioritize debt reduction and maintain a return of capital target of 30 per cent of excess FCF (EFCF).

Starting April 1, 2024, the company plans to increase its return of capital target to 50 per cent of EFCF, with the balance going toward debt reduction. EFCF includes a deduction for asset retirement obligations settled and payments on lease obligations, which are continuing costs associated with running the company's business, and more accurately reflects the free cash available to return to shareholders. For 2024, the company estimates total asset retirement obligations settled and lease payments of approximately $100-million, which would result in a forecast EFCF of approximately $600-million. The return of capital will be inclusive of the company's $75-million base dividend, with the variable component of its return of capital directed to share buybacks. Based on the company's updated return of capital allocation targets and the expected increase in FCF in 2024, the company expects the amount of capital allocated to share buybacks in 2024 to be double the amount executed in 2023. The company's enhanced return of capital target provides an opportunity to continue reducing absolute debt as the company believes having a strong balance sheet will reduce volatility and provide the necessary liquidity to be opportunistic.

Vermilion is well positioned for 2024 as it gains operational momentum, achieves its net debt target and increases its return of capital. The company is forecasting a significant increase in 2024 FCF, which it expects to translate into higher shareholders returns through an increased base dividend and potential doubling of its share buybacks. Vermilion has a long record of returning capital to shareholders having paid out over $40 per share of dividends over the life of the company. The company's ability to deliver strong shareholder returns is underpinned by its profitable internationally diversified asset base, which provides exposure to premium global commodity prices, driving high margins, outsized FCF and strong returns on capital employed. The company's 2024 capital program includes the investment in three new and exciting growth projects, which complement the company's robust legacy asset base and will support the company's future development plans and return of capital strategy.

Risk management

The company continues to employ an active commodity hedge program and currently have 30 per cent of its 2024 production (net of royalties) hedged. This comprises 39 per cent of the company's European gas hedged at an average floor of $33 per mmbtu, 29 per cent of the company's North American gas at an average floor of $3 per mmbtu and 26 per cent of the company's crude oil hedged at an average floor of $80 (U.S.) per barrel. The company's crude oil hedges are near-term weighted, representing 40 per cent of Q4 2023 and Q1 2024 production.

About Vermilion Energy Inc.

Vermilion is an international energy producer that seeks to create value through the acquisition, exploration, development and optimization of producing assets in North America, Europe and Australia. The company's business model emphasizes free cash flow generation and returning capital to investors when economically warranted, augmented by value-adding acquisitions. Vermilion's operations are focused on the exploitation of light oil and liquids rich natural gas conventional and unconventional resource plays in North America and the exploration and development of conventional natural gas and oil opportunities in Europe and Australia.

Vermilion's priorities are health and safety, the environment, and profitability, in that order. Nothing is more important to the company than the safety of the public and those who work with Vermilion and the protection of the company's natural surroundings. Vermilion has been recognized by leading ESG (environmental, social and governance) rating agencies for the company's transparency on and management of key environmental, social and governance issues. In addition, Vermilion emphasizes strategic community investment in each of its operating areas.

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