Vermilion's Production Down in Third Quarter, Crude Oil Inventory Levels Up
Vermilion Energy Trust has reported its interim operating and unaudited financial results for the three and nine month periods ended September 30, 2008.
Third Quarter Highlights
Recorded production of 31,927 boe/d in the third quarter of 2008 as compared to 33,743 boe/d in the second quarter of 2008. Previously announced shut-in production in the Netherlands, combined with scheduled downtime in Australia were the primary drivers behind the production decline. Production was relatively flat as compared to 32,172 boe/d recorded in the third quarter of 2007, and is expected to remain stable over the balance of the year. Vermilion had projected softer production levels in the second half of 2008 and has maintained its 2008 production guidance unchanged between 32,000 and 33,000 boe/d.
Generated fund flows from operations of $131.8 million ($1.73 per unit) in the third quarter of 2008 compared to $190.3 million ($2.50 per unit) in the second quarter of 2008. A significant draw on crude oil inventories in the second quarter of 2008 was the principal reason for the higher cash flow in the second quarter, as compared to
the third quarter of 2008. As only two shipments of crude occurred in each of Australia and the Aquitaine Basin in France, Vermilion's crude oil inventory levels increased to 390,000 barrels at the end of the third quarter compared to 114,000 barrels at the end of the second quarter.
Vermilion distributed $0.57 per unit in the quarter, equivalent to 30% of fund flows from operations, representing the lowest cash payout ratio in its peer group of oil and gas income trusts. Since converting to a trust in January 2003, Vermilion has distributed more than 100% of the initial unit price at the time of conversion and has never decreased its distribution payments.
Total payout comprising of net distributions, capital expenditures, reclamation fund contributions and asset retirement costs incurred was 68% of fund flows from operations in the third quarter of 2008 and 50% year to date in 2008.
Vermilion further reduced its net debt from the second quarter by approximately $63 million to $222 million, equivalent to approximately 0.4 times annualized third quarter 2008 fund flows from operations. Vermilion's existing line of credit of $675 million is expected to be an important tactical advantage as Vermilion continues
to pursue acquisitions.
Vermilion drilled 14 Drayton Valley and central Alberta wells in the third quarter of 2008, and continued its workover and recompletion programs in Canada and France. On October 22, 2008, Vermilion began drilling the first of two wells at its Wandoo Field in Australia. The plan is to drill both wells concurrently and Vermilion expects both wells will be drilled, completed and tied-in before year-end.
On September 8, 2008, Verenex Energy Inc., in which Vermilion holds approximately 18.8 million shares representing a 42.4% equity interest, announced that it has initiated a process to identify, examine and consider a range of strategic alternatives available to Verenex to maximize shareholder value.
Vermilion is well positioned to weather a prolonged global economic downturn and believes the distressed markets may provide the opportunity to acquire producing properties at attractive metrics. The Trust's conservative business model and low payout ratio are expected to provide a significant cushion in a low commodity price environment, which should enable Vermilion to maintain its current distribution levels for the foreseeable future.
Vermilion expects fourth quarter production volumes will remain stable near 32,000 boe/d. Normal production declines in Canada, France and the Netherlands will be offset by slightly higher Australian volumes as no
significant downtime is planned at Wandoo in the fourth quarter. Accordingly, Vermilion is maintaining production guidance between 32,000 and 33,000 boe/d for 2008. New production from the two wells that are currently drilling at Wandoo is expected to be tied-in near the end of 2008 and will not have a significant impact on fourth quarter 2008 volumes. Production from each of these wells is expected at approximately 1,000 boe/d.
Capital expenditures in the fourth quarter are projected at approximately $85 million, with roughly half of that amount aimed at the Wandoo drilling program. Vermilion expects year-end net debt to approach $260 million,
representing less than six months trailing cash flow.
Vermilion anticipates a capital expenditure program of between $175 million and $250 million for 2009. The Trust believes one of its primary responsibilities is to maintain a stable stream of distributions for unitholders, and Vermilion does not anticipate any change in distributions in 2009. Management also believes that the Trust's strong balance sheet provides a good opportunity to pursue acquisitions in a more favourable 'buyer's
market' for property transactions.
In 2009, Vermilion is projecting record activity levels in France and the Netherlands and a slight slowdown in western Canadian activity. Australian capital spending in 2009 will be limited to maintenance capital spending as the trust assesses the performance of the 2008 drilling activity.
Approximately one-third of Vermilion's 2009 capital expenditure program is geared towards non-reserve-additive activities, including long term studies related to the waterflood and enhanced oil recovery programs, seismic and land expenditures and subsurface and facilities maintenance. This portion of the capital program is focused on the potentially significant expansion and long-term sustenance of Vermilion's existing reservoirs.
Approximately 40% to 45% of Vermilion's 2009 capital program will be focused in France, where Vermilion anticipates drilling six to ten wells in its most active program in France since 1998. Besides new wells in the
Champotran/La Torche field, drilling plans include a water injection well at Les Mimosas to support oil production from that field. New drilling in the Parentis field is being temporarily deferred until commodity prices rebound. Vermilion will continue with a robust workover and recompletion program in the Chaunoy, Cazaux and Parentis fields.
Approximately 25% to 30% of the capital program is earmarked for Canada, where Vermilion will maintain its successful natural gas drilling, workover and recompletion program in Drayton Valley and a smaller coalbed methane and shallow gas program in Central Alberta.
In the Netherlands, subsidence concerns led Vermilion to shut in approximately 1,000 boe/d of production in July 2008. Vermilion has applied to re-instate 150 boe/d and is reviewing new reservoir data, but has not made any decision regarding the balance of this production. Approximately one quarter of the 2009 capital program is aimed at the Netherlands, where Vermilion hopes to drill four to five wells in 2009. None of the drilling will be in the area affected by subsidence concerns. Potential additional production volumes from this drilling program are excluded from Vermilion's 2009 guidance figures, as drilling is not expected to begin until the third quarter of 2009 with tie-in expected at year-end.
Preliminary production estimates reflect average volumes in 2009 of between 31,500 and 33,000 boe/d.
Verenex Energy Inc., in which Vermilion holds approximately 18.8 million shares representing a 42.4% equity interest, announced that it has initiated a process to identify, examine and consider a range of strategic alternatives available to Verenex to maximize shareholder value. The company continues to achieve positive drilling results in Libya. On November 6, 2008 Verenex announced that its two most recent wells have also encountered hydrocarbons in the target zones. To date, Verenex has drilled sixteen wells, all of which encountered hydrocarbons. Eleven of these wells, which include nine new field exploration wells and two appraisal wells have been tested at combined rates of 98,000 boe/d of production. The company is developing a commerciality application that contemplates an initial production phase of up to 50,000 boe/d.
On November 3, 2008, Verenex reported that DeGolyer and McNaughton ("D&M"), an independent engineering firm, provided an updated assessment of oil and gas resources in Verenex's discoveries and portfolio of exploration prospects in Area 47. In summary, the aggregate of D&M's updated September 30, 2008 best estimate of gross contingent resources and risked mean estimate of gross prospective resources, on an oil equivalent basis, has increased by 36% to approximately 2.15 billion barrels.