Vermilion Energy Inc. has operations worldwide, but southeast Saskatchewan figures prominently in their plans for 2019.
In Canada, Vermilion as has approved an exploration and development budget of $319 million for 2019, representing a 23 per cent increase from its post-Spartan capital budget for 2018.
“This will mark our most active capital program ever in Canada as we focus on our first full year operating the former Spartan assets. We plan to drill or participate in 143 (129.0 net) light oil wells in Saskatchewan and 20 (17.7 net) wells in Alberta, including 19 (16.7 net) Mannville wells,” the company said in an Oct. 25 press release announcing its third quarter 2018 results.
Vermilion’s third quarter 2018 production increased by 19 per cent from the prior quarter to 96,222 barrels of oil equivalent per day (boepd). The increase was primarily due to the full quarter contribution from the Spartan acquisition and new production added from their 2018 drilling program.
In Canada, production averaged 57,397 boepd in third quarter 2018, representing a 31 per cent increase from the previous quarter primarily due to the Spartan acquisition.
Production was partially offset by downtime due to third party gas plant maintenance, rate restrictions on certain wells and weather-related project delays. Vermilion drilled or participated in 65 (59.0 net) wells and brought on production 53 (49.8 net) wells in third quarter 2018.
The company successfully executed a five rig drilling program in Saskatchewan in the quarter, drilling or participating in 60 (54.6 net) wells across its combined land base. Vermilion also operated one rig in Alberta during the quarter which included the drilling of four (4.0 net) Mannville wells and one (0.4 net) Cardium well.
Results from all programs have been in line with the company’s expectations.
Canadian oil differentials widened towards the end of the quarter, which had a modestly negative impact on Vermilion’s realized pricing.
“The majority of our Canadian liquids production receives significantly advantaged pricing relative to Alberta-based light crude oil. We have no heavy crude (Western Canada Select) in our Canadian oil mix. Approximately 70 per cent of our Canadian oil is produced in southeast Saskatchewan and receives a price referenced to LSB (Light Sour Blend).
“The remaining 30 per cent of our Canadian oil production is comprised of a combination of condensate and light oil in west-central Alberta and the Kerrobert area of Saskatchewan, which is price referenced to the C5+ and MSW (Mixed Sweet Blend) benchmarks respectively. In the forward market for the balance of the year, the discount on all Canadian oil products has widened significantly.
“However, LSB and C5+ have widened to a much lesser extent than WCS and MSW. For example, LSB in the current prompt market has strengthened by approximately US$11.00 per barrel relative to MSW compared to the average for Q3 2018,” the company said in the release.
Although Vermilion does not actively target natural gas in our Canadian operations, it still produces gas from high margin condensate-rich and liquids-rich gas wells and associated gas from its light oil assets. Subsequent to the quarter, AECO gas prices have improved significantly, with the forward curve indicating a fourth quarter 2018 price that is nearly double the third quarter 2018 price, representing a potential $1.00/metric cubic foot (mcf) quarter-over-quarter improvement should the forward curve be realized.
For every $1.00/mcf increase in AECO gas prices, Vermilion estimates an additional annual FFO contribution of approximately $50 million.
Vermilion’s board of directors has approved a 2019 capital budget of $530 million with associated production guidance of 101,000 to 106,000 boepd. The midpoint of this guidance range represents year-over-year production growth of 18 per cent, or seven per cent on a per share basis.
