Vermilion Energy eyes Croatia

Solid Q2 results beat expectations

Vermilion Energy Inc. unveiled the latest stamp in its oil and gas exploration passport — Croatia in Eastern Europe — while jacking up its second- half capital spending and reporting second- quarter results that beat analyst expectations on Monday.

Calgary’s most travelled international intermediate announced it was awarded in June four exploration blocks covering nearly one million hectares in northeast Croatia near the Hungarian border by the Croatian Hydrocarbon Agency, conditional upon negotiating a definitive contract.

It said it will pay a $ 1.3- million initial bonus, then invest a mandatory $ 7.3 million over three years and $ 11.6 million in an optional extension of two years.

“We think Croatia is quite prospective. There hasn’t been very much investment there over the past few decades,” said president and chief operating officer Tony Marino on a conference call with analysts.

“We think that we can bring some new things to bear with respect to technology and the types of projects and prospects we would pursue.”

Vermilion said it is bumping up 2015 capital spending by $ 70 million to about $ 485 million to fund a two- well sidetrack drilling program in Australia it had deferred earlier this year, as well as incremental projects in France and Canada. Its original 2015 budget was $ 525 million but it was cut to $ 415 million due to persistently low world oil prices.

It said regulatory approvals for the Royal Dutch Shell- operated Corrib offshore gas project in Ireland are being granted more slowly than expected, pushing the timeline for startup from mid- year to late in the year. Vermilion’s 18.5 per cent working interest in the project is expected to deliver peak production of 58 million cubic feet per day ( about 9,700 barrels of oil equivalent per day) after about six months of ramp- up.

Vermilion said the late start has subtracted about 3,000 boe/ d from its average 2015 annual production guidance but it is making up the difference elsewhere and is still guiding to between 55,000 and 57,000 boe/ d, with the final number likely at the low end of the range.

“This represents year- over- year organic production growth exceeding 10 per cent even while reducing 2015 capital spending by 30 per cent or $ 200 million from 2014 levels,” said chief executive Lorenzo Donadeo on the call.

Financial analysts said Vermilion’s second- quarter production was in line at 51,800 boe/ d, up three per cent over the first quarter. Cash flow of $ 1.17 per share beat consensus of $ 1.14 as royalties and taxes were lower than expected.

“The story in our view remains intact and among our favoured defensive names,” said analyst Patrick O’Rourke of AltaCorp Capital.

“While the market may be disappointed by the delay in Corrib timing, in our view the impact on the long- term investment thesis is negligible, and the company’s ability to still meet full- year guidance despite about 3,000 boe/ d lost from Corrib demonstrates the strength of the portfolio.”

Kyle Preston of National Bank Financial said Vermilion had a “solid quarter.”

“The delayed startup of Corrib is disappointing but not entirely unexpected, and in the grand scheme of things we do not expect this to have a significant impact on the underlying value or growth potential of the company.” The company reported net earnings in the three months ended June 30 of $ 6.8 million versus $ 54 million in the same period last year as cash flow fell to $ 129 million from $ 216 million. Its average realized oil price declined to $ 68.90 per barrel from $ 109.89 and gas fell to $ 4.86 per thousand cubic feet from $ 6.19 per mcf.

Last month, Vermilion announced farm- in agreements with an affiliate of American producer ExxonMobil and a jointly held affiliate of ExxonMobil and Royal Dutch Shell, through which it will earn a 50 per cent stake in their working interests in 19 onshore exploration licences in northwest Germany.

In exchange, it has committed to drill 11 exploratory wells over the next five years, a program expected to cost between 45 million and 75 million euros ($ 64 million to $ 107 million Cdn), depending on whether minority partners buy in.

The delayed startup of Corrib is disappointing but not entirely unexpected.