The merger of Spartan Energy Corp. plus drilling done earlier this year has resulted in a 15 per cent increase in production for Vermilion Energy Inc., according to its second quarter results announced on July 30.
Vermilion acquired all of the issued and outstanding common shares of Spartan Energy Corp., a publicly traded southeast Saskatchewan oil producer, on May 28. Total consideration for the acquisition was $1.4 billion consisting of the issuance of 27.9 million Vermilion common shares valued at approximately $1.2 billion (based on the closing price per Vermilion common share of $44.30 on the Toronto Stock Exchange on May 28) and the assumption of approximately $175 million of Spartan's outstanding debt at the time the transaction closed.
Second quarter (Q2) production increased to 80,625 barrels of oil equivalent per day (boepd). The increase was primarily due to the Spartan acquisition and production added from the company’s first quarter 2018 drilling program.
Fund flows from operations (FFO) for Q2 were $193 million ($1.43/basic share), an increase of 23 per cent from the prior quarter, driven by higher production volumes and higher commodity prices, partially offset by hedging losses. Year-over-year, FFO increased 31 per cent as compared to Q2 2017 on higher production and commodity prices.
In Canada, production averaged 43,817 boepd in Q2, representing a 37 per cent increase from the previous quarter primarily due to the production contribution from the Spartan acquisition. Production also benefited from a successful Q1 drilling program and less weather-related downtime and planned maintenance on third party infrastructure as compared to the first quarter. Vermilion drilled or participated in 18 (16.2 net) wells and brought on production nine (7.9 net) wells in the second quarter. The majority of the drilling activity in the quarter occurred on the acquired Spartan assets, with 17 (15.2 net) of the 18 wells drilled in Canada coming from the inventory acquired from Spartan. Spartan currently has four rigs operating on the acquired Spartan assets and one rig operating on its legacy southeast Saskatchewan assets, along with one rig operating in Alberta.
It’s not common for Saskatchewan oil producers to put out statements regarding production in France, but Vermilion’s varied European interests were also reported.
In France, Q2 2018 production averaged 11,683 boepd, an increase of six per cent from the prior quarter. The increase was primarily due to production additions following the completion of the company’s Q1 2018 drilling program in the Neocomian and Champotran fields and several workovers performed during the first half of the year.
In the Netherlands, production averaged 7,335 boepd in Q2, which was down three per cent from the prior quarter. Subsequent to the end of the second quarter, the company received approval for the production permit on the Eesveen-02 well. The well is expected to come on production in mid-August.
In Ireland, production averaged 57 million cubic feet per day (9,426 boepd) in Q2, a seven per cent decrease from the prior quarter due to natural declines and minor plant downtime related to external electricity supply issues. Vermilion continues to work closely with the Canada Pension Plan Investment Board (CPPIB) and Shell on the transition of ownership and operations of Corrib from Shell to CPPIB and Vermilion.
The transition has progressed well with all technical aspects being ready. Vermilion now anticipates receiving final approvals from the necessary authorities and closing of the transaction in the second half of 2018. Although this closing date is later than the company’s original expectation, and will have a modest impact on its booked production, Vermilion will still benefit from all interim period cash flows between Jan. 1, 2017 and closing as a reduction of purchase price.
Vermilion has elected to accelerate their originally planned 2019 Australia two-well drilling campaign into Q4 of this year. Although this will not contribute production in 2018, it will save approximately $12 million in capital compared to drilling in 2019 and guard against a potential rebound in offshore service costs.
As a result of the accelerated Australia drilling program, combined with minor capital increases driven by changes in foreign exchange rates as compared to the original budget, the company is increasing its 2018 capital budget by $70 million to $500 million. Based on the forward commodity strip, it expects to fully fund this revised capital program and its dividend with internally generated FFO, resulting in a total payout ratio of 90 per cent, even after accounting for the increased Australian capital investment in 2018.
In the press release, president and CEO Anthony Marino said, “During the second quarter, we completed the $1.4 billion acquisition of Spartan Energy Corp., a publicly traded southeast Saskatchewan oil producer. This was the largest acquisition in the history of our company. We are extremely pleased to bring the former Spartan employees and assets into the Vermilion family. The integration of both the assets and employees has progressed very well, and we have no doubt that each new employee will make a meaningful contribution to our future success.
“The transaction significantly increases our presence in the desirable operating jurisdiction of southeast Saskatchewan, while increasing our exposure to high netback light oil in a highly advantaged product marketing setting. While the development plans for the balance of the year will largely align with the capital program Spartan previously had in place, we have already identified additional future development and production optimization opportunities across the asset base, along with a number of cost savings opportunities.
“Following the full integration of the Spartan assets, Vermilion will have an established production base of approximately 100,000 boepd with the capability of generating over $1.2 billion of FFO based on an annualized estimate for Q4 2018 at the strip. We expect the Spartan acquisition to enhance our ability to execute our self-funded growth and income business model, while increasing our capital markets market scale,” Marino said.