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Providing coverage of Alaska and northern Canada's oil and gas industry
June 2015

Vol. 20, No. 24 Week of June 14, 2015

Global adventures pay off

Vermilion Energy, a mid-sized Calgary-based producer, is reveling in its European-tilted operations to the point where Chief Executive Officer Lorenzo Donadeo is delving into possible expansion across the Atlantic.

Given all the geopolitical tensions in Europe and the continent’s reliance on Russia for 30 percent of its gas supply, he said Europe is looking for alternative suppliers.

That has spurred the company to start “actively looking” to buy assets or smaller producers in Europe, especially Germany, where it made an entry last year, and the Netherlands.

Vermilion is one of the rare players in its peer group with stakes in North America and Australia, along with several countries in Europe, including France and Ireland along with Germany and the Netherlands.

It’s an unusually far-flung portfolio for a company that produced a modest 50,386 barrels of oil equivalent per day in the first quarter, up 8 percent from a year earlier.

But the appeal of reaching beyond its home base is evident in its operating netbacks, with Brent-priced sales in Australia and France fetching US$44.76 per boe compared with its West Texas Intermediate returns of US$31.68.

Realized prices above WTI

Its realized prices of US$58.25 per barrel for crude and natural gas liquids were 28 percent above WTI and US$5.26 per thousand cubic feet for gas, 20 percent better than its returns at the AECO trading hub in Alberta.

As a rule of thumb, Vermilion said European gas prices are triple those of North America.

But, even after those benefits, the company’s earnings for the first quarter dropped 99 percent to C$1.2 million from C$103 million in the same period of 2014, while the commodity price environment prompted it to reduce its capital budget for 2015 by 40 percent to C$415 million.

“Our international assets will generate about 80 percent of our funds flow from operations and they represent only about 56 percent of our production,” Donadeo said.

The major advance in Vermilion’s gas production is scheduled for mid-year when the Corib project in Ireland, a joint venture with Royal Dutch Shell, comes onstream at 58 million cubic feet per day.

AltaCorp Capital analyst Patrick O’Rourke said in a research note that although Vermilion’s opening quarter production missed expectations the company remains among the “most defensive names available to Canadian intermediate E&P investors give them diversifying exposure to European gas, Brent and North American pricing structures.”

- Gary Park






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