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Vermilion Energy Inc. Announces Strategic Acquisition of Multi-Decade Free Cash Flow Generating Montney Assets

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Vermilion Energy Inc. Announces Strategic Acquisition of Multi-Decade Free Cash Flow Generating Montney Assets

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Vermilion Energy Inc. is pleased to announce that we have entered into an arrangement agreement to acquire Leucrotta Exploration Inc. for a net cash purchase price of $477 million. Leucrotta is a Canadian publicly listed Montney-focused oil and natural gas exploration and development company with lands located in the Mica area of Northeast British Columbia and Northwest Alberta. The common shares of Leucrotta are listed on the TSX Venture Exchange under the symbol LXE.

Highlights                                                                                                                                             

  • Strategic acquisition of fully delineated, multi-decade free cash flow generating Montney assets in Northeast British Colombia and Northwest Alberta
  • Large contiguous land base of 77,000 net acres of Montney mineral rights that provide an expected 20+ years of low-risk, self-funding, high-deliverability drilling inventory
  • Average production of 13,000 boe/d targeted in 2023, with infrastructure plans in-place to achieve plateau production of 28,000 boe/d within a few years
  • Fully funded project development expected to contribute annual free cash flow (“FCF”)(1) in excess of $200 million once plateau production level of 28,000 boe/d is achieved, based on 2023 forward strip pricing(2)
  • Significantly improves the depth and quality of Vermilion’s drilling inventory and positions us for sustainable long-term shareholder returns
  • Pro-forma the Leucrotta acquisition, Vermilion retains its international diversification with approximately 58% of FFO derived from international operations including European gas
  • Inclusive of the Leucrotta acquisition, we have announced in excess of $1.2 billion of acquisitions equally balanced between international and North America in 2021 and 2022, fully funded with 2022 free cash flow and without issuing any equity, resulting in production per share growth of 16%
  • 2022 production guidance increased to 86,000 to 88,000 boe/d and E&D capital budget increased to $500 million to account for the Leucrotta acquisition, assuming a second half of May 2022 closing date
  • We remain on track to achieve our $1.2 billion net debt target in 2H 2022 and augment our return of capital to shareholders

Leucrotta Acquisition

Under the Arrangement, Vermilion will acquire all of the issued and outstanding Leucrotta Shares (including any securities convertible into Leucrotta Shares that are exercised prior to or in conjunction with the Arrangement) for cash consideration of $1.73 per share. As part of the Arrangement, a portion of the Leucrotta land base and approximately $43.5 million of cash will be transferred to a new company (“ExploreCo”) which will be managed by the existing Leucrotta team. The net cash purchase price is $477 million after adjusting for positive working capital. Holders of Leucrotta Shares will also receive one common share and 0.1917 common share purchase warrants of ExploreCo for each Leucrotta Share held. Additionally, under the Arrangement, Vermilion will acquire an approximate 12.5% equity stake in ExploreCo for approximately $14 million and obtain board representation and other customary investor rights. The Arrangement remains subject to certain closing conditions, including receipt of applicable court, Leucrotta shareholder and securityholder approvals and other regulatory approvals, and is expected to close in the second half of May 2022. All of the officers and directors and certain shareholders of Leucrotta (representing 41% of the fully diluted shares outstanding) have entered into voting support agreements and have agreed to vote in favour of the arrangement. The Arrangement includes a break fee of $20 million payable to Vermilion.

The primary Leucrotta asset is the Mica property, comprised of 81,000 gross (77,000 net) contiguous acres of Montney mineral rights in the Peace River Arch straddling the Alberta and British Columbia borders. After spending over two years evaluating this and other assets across the Montney fairway, Vermilion’s team has developed a deep technical understanding of each zone within the Montney. Our team includes members with over 20 years of industry experience in finding and developing conventional and unconventional energy resources in basins worldwide, including the Montney. We have conservatively identified 275 multi-zone, extended reach, drilling prospects to date, representing an expected two decades or more of low-risk, self-funding, high-deliverability drilling inventory with strong rates of return. There is meaningful upside in other zones, which could add significant inventory to this land base and the optionality for cube development.

The multi-zone development nature of these assets is a natural extension of the multi-zone development that our Canadian Business Unit has been focused on in West Central Alberta for over a decade. Integrating these assets into our Canadian asset base will allow us to high-grade our North American portfolio and is expected to add decades of inventory while continuing to develop and grow our international portfolio with the goal of maximizing free cash flow for shareholders over the near and long-term.

The Leucrotta assets to be acquired are forecasted to produce approximately 13,000 boe/d in 2023, with anticipated capacity to grow to a sustainable plateau production base of 28,000 boe/d over the next few years. Assuming a second half of May 2022 closing date, we plan to invest $75 million for the remainder of 2022 in the assets which will include the drilling of a 6-well pad in Alberta and infrastructure development. Our longer-term development plan contemplates drilling to maintain the plateau production base over the next 20+ years. All necessary infrastructure plans are in place to achieve these production targets, with an option to expand in the future. Due to our high working interest, Vermilion will have discretion over the pace of development of this asset and we will determine the appropriate level of capital allocation based on a portfolio approach and balanced with our return of capital priorities. The development plan is self-funded and expected to contribute annual FCF in excess of $200 million once plateau production level of 28,000 boe/d is achieved, based on 2023 forward strip pricing(2). The assets have total proved reserves of 20.1 MMboe and total proved plus probable reserves of 49.5 MMboe, as of December 31, 2021 based on a GLJ Ltd. evaluation, representing less than 20% of the estimated recoverable resource.

Revised 2022 Guidance and Outlook

Vermilion is increasing its 2022 E&D capital budget to $500 million and increasing its annual production guidance to 86,000 to 88,000 boe/d to account for the Leucrotta acquisition, assuming a second half of May 2022 closing date. With the execution of the planned Mica drilling program and the anticipated close of the Corrib acquisition in second half 2022, we expect to exit the year with corporate production in the range of 95,000 to 100,000 boe/d. Our intention is to maintain the production base in this range for the foreseeable future as we focus on high grading and optimizing our portfolio inventory in order to maximize free cash flow generation over the long-term.

The Leucrotta acquisition aligns with our long-term value driven acquisition strategy which targets underexploited consolidation opportunities in core areas with multi-zone development. This acquisition is expected to enhance our North American portfolio by adding an inventory-rich land base in the Montney, providing decades of drilling inventory that we will high-grade as we grow our production base and further strengthen our free cash flow profile. The combination of the Corrib acquisition and the Leucrotta acquisition will allow us to maintain our geographic diversification. On a pro forma basis, including both acquisitions, we expect our international production and FFO weighting to be approximately 36% and 58%, respectively. This diversification, which provides exposure to global commodity prices, has afforded us the ability to fund both of these transactions, with internally generated free cash flow in 2022. Inclusive of the Leucrotta acquisition, we have announced in excess of $1.2 billion of acquisitions equally balanced between international and North America in 2021 and 2022 without issuing any equity.

As a result of our strong near-term FCF generation, combined with our profitable inventory to support this FCF profile for years to come, we remain on track to meet our net debt targets and enhance our return of capital strategy. We continue to anticipate reaching our $1.2 billion debt target in 2H 2022, which implies a leverage ratio less than 1.3x at mid-cycle prices(3), and will look to increase our return of capital once we achieve this target. The intended incremental return of capital may come in the form of an increase to the quarterly dividend, share buybacks, special dividends or any combination thereof.

The revised guidance does not include any contribution from the Corrib acquisition. We continue to anticipate the Corrib transaction closing in 2H 2022 and will revise our formal guidance at that time. As a reminder, all interim free cash flow from the acquired Corrib interest is being accrued to Vermilion and will be netted from the final purchase price. Based on the forward commodity strip(4) and including the Leucrotta acquisition, we estimate pro forma FFO of $2.4 billion and FCF of $1.9 billion, with year-end net debt of $0.9 billion and a trailing net debt to FFO ratio of 0.4x.

Key Strategic Objectives

In early 2021, Vermilion updated its strategic plan to 2030 (“VETVision”) which included the following key near-term objectives:

  1. Reduce absolute debt from YE 2020 levels by $600 million by YE 2023, and $1 billion by YE 2025, with a net debt to FFO ratio of less than 1.5x
  2. Execute a deep-value international acquisition to strengthen our diversified portfolio and increase European gas exposure 
  3. Further enhance our long-term return of capital strategy by adding significant Tier 1 inventory

Dion Hatcher stated, “With this acquisition and the previously announced Corrib acquisition, Vermilion has achieved our key near-term VETVision objectives. The Leucrotta acquisition is an important component of our strategic plan as it is a scalable asset and is expected to provide us with 20+ years of high value Tier 1 drilling inventory. Our previously announced Corrib acquisition increases our European gas exposure and accelerates our debt reduction. With the successful completion of both deals, our $1.0 billion debt reduction target should be achieved by the end of this year, three years ahead of schedule, with a corresponding forecast net debt to FFO ratio of 0.4x which is well below our target range of 1.5x. In fact, by the end of 2023, at current strip prices, Vermilion is projected to be net debt free. By the end of this year, we expect to have achieved our key near-term strategic objectives, and most importantly, we did so without the issuance of any additional shares which maximizes the free cash flow for our shareholders and eliminates any potential dilution.”

See related article: EDC releases innovative Sustainable Bond Framework

Advisors

CIBC Capital Markets is acting as exclusive financial advisor to Vermilion with respect to the acquisition. Torys LLP acted as legal counsel to Vermilion with respect to the acquisition.

Conference Call and Webcast Details

Vermilion will discuss the Leucrotta acquisition in a conference call and webcast presentation on March 28, 2022 at 7:00 AM MT (9:00 AM ET). To participate, call 1-888-254-3590 (Canada and US Toll Free) or 1-647-794-4605 (International and Toronto Area). A recording of the conference call will be available for replay by calling 1-888-203-1112 and using conference ID 9664794 from March 28, 2022 at 11:00 AM MT to April 12, 2022 at 11:00 AM MT.

You may also access the webcast at https://produceredition.webcasts.com/starthere.jsp?ei=1538982&tp_key=bc5c862fe1. The webcast link, along with conference call slides, will be available on Vermilion’s website at https://www.vermilionenergy.com/ir/eventspresentations.cfm under Upcoming Events prior to the conference call.

(1)This document references free cash flow which is not specified, defined, or determined under International Financial Reporting Standards (“IFRS”) and is therefore considered non-GAAP financial measures and may not be comparable to similar measures presented by other issuers. Free cash flow represents fund flows from operations in excess of capital expenditures and is used to determine the funding available for investing and financing activities, including payment of dividends, repayment of long-term debt, reallocation to existing business units, and deployment into new ventures.
(2)2023 forward strip prices as at March 25, 2022: Brent US$91.15/bbl; WTI US$86.10/bbl; LSB = WTI less US$5.07/bbl; TTF $28.57/mmbtu; NBP $28.51/mmbtu; AECO $4.31/mmbtu; CAD/USD 1.26; CAD/EUR 1.43 and CAD/AUD 0.94.
(3)Mid-cycle pricing: WTI US$55.00/bbl; AECO $3.43/mmbtu; TTF $12.50/mmbtu.
(4)2022 full year average reference prices as at March 2, 2022: Brent US$99.68/bbl; WTI US$93.06/bbl; LSB = WTI less US$4.22/bbl; TTF $58.44/mmbtu; NBP $57.47/mmbtu; AECO $4.72/mmbtu; CAD/USD 1.27; CAD/EUR 1.42 and CAD/AUD 0.92.

Source: Vermilion Energy Inc.

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