LEADING BY EXAMPLE
VERMILION ENERGY CEO LORENZO DONADEO PROVES THAT PLAYING DEFENSE AT HOME AND OFFENSE ABROAD IS A WINNING STRATEGY IN THIS DOWNTURN
Stay calm and mind the balance sheet. That was Vermilion Energy CEO Lorenzo Donadeo’s philosophy in 2015, as the Calgary-based intermediate weathered an industry downturn that wreaked havoc on corporate bottom lines and resulted in huge layoffs across the sector. “Having been through a couple of these before, you realize you have to stay calm and reassure the rest of the organization that we can work through this together,” says Donadeo, who co-founded the company in 1994. “What we tried to do was focus on things we can control – reducing our cost structure, managing our balance sheet and making sure our debt stayed at a level we were comfortable with.”
Donadeo’s ability to stay cool under pressure, successfully steer Vermilion through a stormy year, still grow production and pull off two significant transactions are key reasons why he was chosen as Alberta Oil’s 2016 CEO of the Year. Downturns aren’t fun, and Donadeo – with 34 years’ experience in the business – knows this intimately. He and the company went through one in 1998, and again in 2008-2009. During those tough times, Vermilion’s top executive put a profitability enhancement program in place. He did it again in 2015. The program is a companywide mandate to do more with less, and Donadeo says the entire company focused on reducing capital spending, operating costs, general and administrative costs and increasing profitability and revenues where it could.
The program served Vermilion well in 2015. The company estimates it will result in savings of between $70 million and $80 million for the year. “When people worry too much they sometimes take their eye off the ball and lose track of what they are really here to do,” Donadeo says. “The program is a way to keep everyone focused.” In 2015, one of Vermilion’s focuses was on capital spending. In December of 2014, Vermilion set its capital budget guidance at $525 million. But as oil prices plunged early in the year, it cut it to $415 million in February. In August of 2015, Vermilion changed its capital expenditures target once more, increasing it to $485 million. In the end, it spent $40 million less in 2015 than in 2014, yet still achieved record quarterly production of 56,280 boe/d in the third quarter of 2015.
Along the way, Vermilion also made two important acquisitions. In June it was awarded four exploration blocks in northeast Croatia near the Hungarian border. Then in July it signed a farm-in agreement on 19 onshore exploration licenses in northwestern Germany with units of ExxonMobil and Royal Dutch Shell. The moves increase Vermilion’s footprint in Europe, a region few Canadianbased intermediate companies operate in. The company still has a sizeable presence in Western Canada. Its average production during the third quarter of 2015 from assets in Alberta and Saskatchewan was
approximately 25,700 boe/d. But Europe is increasingly becoming an important area for Vermilion. It first entered Europe in 1997, and it’s steadily built up its asset base and land position since then – with assets in France, the Netherlands, Germany, Ireland and now Croatia.
But why Europe? Natural gas prices in Europe were about US$6.30 per thousand cubic feet in December, roughly three times what the company was getting for the commodity in North America. Also, oil has been trading at about US$8$10 more per barrel in Europe than it is in Canada. Because there aren’t many Canadian-based intermediate companies operating in the space, Vermilion faces less competition in the Old Continent than it does in Western Canada. “What these two acquisitions do is position Vermilion for the next five-to-10 years with future growth,” Donadeo says. As for current growth, Vermilion is concentrating on the Corrib offshore natural gas field in Ireland. The company has an 18.5 per cent interest in the field, which is operated by Shell and produced first gas in November. Once Corrib reaches peak production, it will add 9,700 boe/d to Vermilion’s portfolio, one that will be more concentrated in Europe than it will be in Canada.
In the meantime, Donadeo continues to keep a watchful eye on Vermilion’s balance sheet. The company says its capital budget for 2016 will be $350 million, and production will increase to between 63,000 and 65,000 boe/d. But Donadeo has bigger plans for the company than just treading water. He says that with the drilling inventory it has, Vermilion could be producing between 75,000-80,000 boe/d by 2020. “With Corrib coming online, our balance sheet is going to be in great shape and we’ve got a great team here,” Donadeo says. “Vermilion is going to come out stronger than it was going into the downturn. We see pretty steady growth from 2020 and beyond.”