Vermilion Energy Q1 2026 Earnings Call - European gas and liquids drive strong cash flow and rapid deleveraging

Conference Call Operator: Good morning, ladies and gentlemen, and welcome to the Vermilion Q1 2026 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star 0 for an operator. This call is being recorded on May 6, 2026. I would now like to turn the call over to Dion Hatcher, President and CEO. Please go ahead.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Morning, ladies and gentlemen. I’m Dion Hatcher, President and CEO of Vermilion Energy. With me today are Lars Glemser, Vice President and CFO, Darcy Kerwin, Vice President International and HSE, Brandon McCue, Vice President North America, Lara Conrad, Vice President Business Development, and Travis Ferguson, Director of Investor Relations and Corporate Planning. Please refer to our advisory and forward-looking statements in our Q1 release. It describes the forward-looking information, non-GAAP measures, and oil and gas terms used today, and it outlines the risk factors and assumptions relevant to this discussion. I’d like to begin today with a comment on the macro environment. First quarter of 2026 was marked by heightened geopolitical uncertainty, but continuing impacts in the global energy markets today. This uncertainty underscores the critical importance of energy security.

Vermilion’s substantial resource base with exposure to multiple commodities, including gas production in Europe and liquids production tied to Brent benchmarks, provides unique exposure to global prices. This diversity of production extends to our gas-related assets in Canada. We have strategically positioned ourselves in the oily window in the Montney and have numerous liquids-weighted zones in the Deep Basin. Operationally, we delivered another strong quarter, with production volumes averaging 125,600 BOEs per day, exceeding the upper end of our guidance. Canadian operations contributed an average of 99,700 BOEs per day. That’s a 10% increase over the prior quarter, driven by very strong Deep Basin performance and new Montney wells brought online ahead of schedule. International operations averaged 25,900 BOEs per day.

That’s reflective of cyclone-related downtime in Australia and natural declines in our European assets, which is prior to the next German gas well coming online in mid-year. In total, our production mix consisted of approximately 59% Canadian natural gas, 13% European natural gas, and 28% liquids, with those liquids largely priced off of Brent and WTI. Our realized oil price increased by over 20% from the prior quarter, while our European gas production achieved an average sales price of approximately CAD 16 per MMBtu. This meant that nearly 80% of our Q1 revenue was driven by European gas and liquids production. This underscores the value of our exposure to global pricing. Market fundamentals for European gas remain very supportive, with Q2 pricing in excess of CAD 20 per MMBtu. That is over 10 times higher than the equal pricing in Q2.

The next four quarters are expected to average approximately CAD 20 per MMBtu. Disruptions in the Strait of Hormuz have impacted global LNG flows at a time when European gas inventories are at multi-year lows, with storage levels in Germany at about 25% and the Netherlands at 10%. European countries will need to add approximately 2 TCF of gas to storage by November to meet the mandated 80% capacity levels, requiring competitive action in the LNG market. Of note, we continue to see a more positive tone from governments recognizing Vermilion as a responsible operator with decades of experience, one who has a key role to play in their energy landscape. To further enhance our exposure to premium priced gas markets, we recently joined the Rockies LNG consortium to evaluate delivering a portion of our Montney gas to the Cedar LNG project.

This would complement our existing agreement on the Alliance Pipeline that connects us to the premium price Chicago hub for pricing average approximately CAD 5 per MMBtu in Q1. We’ll now pass over to Lars to discuss Q1 results in more depth.

Lars Glemser, Vice President and Chief Financial Officer, Vermilion Energy: Thank you, Dion. In the quarter, Vermilion generated CAD 232 million of funds from operations, with CAD 135 million of E&D capital expenditures, resulting in CAD 98 million of free cash flow. Net debt was reduced by an additional CAD 50 million to CAD 1.29 billion as of March 31st, bringing our total debt reduction to CAD 770 million over the past year. The timing of lifting in France reduced Q1 FFO as a result of timing. This reduced Q1 FFO by CAD 10 million but will benefit Q2 FFO by CAD 13 million due to the increase in the dated Brent contract. Debt reduction remains a priority, and we now have more visibility to our CAD 1 billion net debt target through our recent deleveraging resulting from strong operational execution and an improving commodity price outlook.

This focus on debt reduction has resulted in a 40% reduction in interest costs per BOE versus Q1 of 2025, and our core DUP asset base has driven Q1 G&A per BOE down by over 50% versus 2025. In addition to the CAD 50 million of debt reduction this quarter, we also paid CAD 21 million to shareholders in dividends and repurchased CAD 5 million of shares through our NCIB. With the move higher in oil and European gas prices in March, we recognized a loss on hedges in the quarter. It is important to note that this is largely driven by non-cash losses on hedges in place for future quarters, and that the portion of our production that remains unhedged will stand to benefit from increased pricing going forward. The realized portion of hedge losses in the quarter was CAD 15 million.

For the balance of the unrealized hedge loss to be realized, pricing would have to remain at March 31, 2026 levels for the duration of our current hedge book. For additional context, we have updated our forecast of 2026 excess free cash flow in our most recent corporate presentation. After incorporating current prices and the current 2026 estimated realized hedge losses, Vermilion will generate double the EFCF when compared to our 2026 budget projections. On the operations front, we maintained a 3-rig drilling program in the Deep Basin, drilling 10 wells, completing 14, and bringing on production 18 liquids-rich gas wells. Several of these wells ranked among the best wells in Alberta throughout the quarter. We have now shifted our Deep Basin drilling to higher liquids rate wells to capitalize on favorable pricing, which highlights the flexibility of our asset base and depth of inventory.

In the Montney, we drilled 5, completed 6, and brought online 6 liquids-rich gas wells. These wells were brought on ahead of schedule and with strong initial oil rates, while also coming in at a lower capital cost than we had previously guided to. We achieved another milestone. Our planned per-well cost in the Montney is now CAD 8.2 million, down CAD 300,000 from CAD 8.5 million previously. In Europe, we are on track to bring the first Wisselhorst well online in Germany by mid-2026. Plan to spud follow-up wells on the Bommelsen license early next year and expect to commence drilling in the Netherlands in the second half of 2026. These activities support regional energy security through reliable, lower-emissions gas compared to imported alternatives. In Australia, our operations in the quarter were impacted by 2 cyclone events, the first consecutive direct hits ever.

We are proud to say that we successfully managed all aspects of the safe shut-in of operations and evacuation of personnel, with production resuming subsequent to the quarter following necessary repairs. While production operations were shut in, we were able to export 300,000 barrels of oil in February. During the quarter, we signed an agreement to acquire producing assets in Germany, adding approximately 1,000 BOE a day of low decline production, weighted 85% to natural gas, which increases our European TTF-linked gas and Brent-linked oil production, enhances cash flow, and provides strategic infrastructure control. The transaction is expected to close in the second half of 2026. We also announced the award of three new concessions in the North German Basin, doubling our acreage to well over 1 million net acres.

Finally, we signed an agreement to divest our remaining 60% interest in the SA7 block in Croatia for net proceeds of approximately EUR 15 million or CAD 24 million. Proceeds from this sale will primarily reduce debt, with the transaction expected to close in the 2nd half of the year. These recent steps are aligned with our strategy to reposition our asset base to further enhance long-term profitability. Operational momentum remains strong, and we continue to trend toward the upper end of our full-year production guidance range without an increase to our capital budget. We will actively manage around lower AECO pricing to prioritize value over volumes, and we expect Q2 2026 production to average between 123,000 and 125,000 BOE a day.

With our focus on liquids-rich production, liquids weighting is expected to increase from 28% in Q1 to approximately 31% in Q2. I will now pass it back to Dion.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thank you, Lars. Also like to thank our Australia staff for their outstanding commitment over the last several months. I’ve been with Vermilion for 20 years, and in that time frame, we’ve never experienced back-to-back cyclone events. Being hit by a Category 3 storm followed by a Category 4 storm shortly thereafter was a real test for our team, and they performed exceptionally well in preparing for the storms, preparing our platform, and safely restoring production. In summary, this was another strong quarter for Vermilion. Our repositioned portfolio and focus on operational excellence reduced our unit cost structure and delivered production above our expectations. Our controllable expenses, that is operating, transportation, G&A, and interest, was lower by 25% compared to Q1 2025. Our OpEx was down CAD 2 BOE or 14%.

G&A was down CAD 2 per BOE or over 50%, and interest was down almost CAD 2 per BOE or over 40%. This lower cost structure helped reduce net debt by another CAD 50 million this quarter, bringing the total reduction to CAD 770 million since Q1 of last year. These gains are coupled with our improving capital efficiencies. In the Montney, we’ve reduced our planned capital cost per well by another CAD 300,000, improving full-cycle economics on our Mica asset, which translates to another CAD 60 million reduction of future capital requirements, bringing the total reduction in the last two years to over CAD 250 million. In the Deep Basin, we continue to realize operational wins.

We’re now starting to exceed the CAD 200 million of synergies that we estimated shortly after closing the acquisition. In Europe, we continue to see steady production from the Osterheide Well and advance the work to support first production from our Wisselhorst Well, our largest discovery in Europe to date, along with other key infrastructure supporting growing German gas production over time. In closing, we built a very large resource base of 1.3 million net acres in Canada and over 2 million net acres in Northern Europe. This long-duration asset base, compared with our strong technical teams, capital allocation flexibility, and a focus on operational excellence when combined with only 153 million shares, positions Vermilion to generate growing and sustainable free cash flow per share. With that, we’ll now open the line for questions.

Conference Call Operator: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by 1 on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to remove your hand from the queue, please press star, followed by 2. If you’re using a speakerphone, please lift the handset before pressing any keys. Just a moment for your first question. Your first question comes from Jeremy McCrea with BMO Capital Markets. Please go ahead.

Jeremy McCrea, Analyst, BMO Capital Markets: Yeah. Hi, guys. I just wanna understand more about Germany here, your growth plans with this new acreage potentially hold. Is there any, you know, loosening of regulations? Just can you give us a bit more of a, you know, the five-year outlook here for Germany and if it can be a much bigger part of the Vermilion portfolio?

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thanks, Jeremy, for the question. I’ll just kick it off here before I pass it over to Darcy. I mean, I just want to say I think Germany is core to us. We just spent a few weeks there, and really exciting with first Osterheide Well, as noted, continuing to produce strong, and the second well, Wisselhorst, coming on here in a matter of weeks by mid-year, and it’s looking really good. More importantly, just the size of the resource. You know, what we’ve said in our investor days, our plan is to double Germany production by 2030, the exciting thing for us is that’s only 2.9 net wells of the 30 that we’ve identified.

With that, Darcy, maybe you want to provide some color on where we are, but also maybe the regulatory environment we’re getting.

Darcy Kerwin, Vice President International and HSE, Vermilion Energy: Yeah. Thanks, Jeremy, for the question. I think you made reference to the, this new exploration land that we’ve acquired. We are very excited about these 3 additional exploration concessions that we’ve gotten in Germany. Brings our total acreage to well over 1 million acres. This acreage, it’s located in the same fairway where we’ve had historical success in the Netherlands and more recent success in Germany, we’re on trend with those, all of those discoveries. We see potential certainly on these new concessions for additional discoveries. You know, they’ve just been granted to us, we do need some time to evaluate this new acreage and understand exactly what’s there before we kinda translate that into specific drilling targets.

You know, we have a decade of experience and a decade of running room ahead of us, so this really just adds to our position. In terms of the regulatory environment, you know, I think Germany has proven to be a pretty practical country to work in. We’ve had some success in getting permits and working with both the local and the federal governments to bring these discoveries on. What we have seen in Germany specifically and more broadly across Europe is a much more receptive environment when we’re talking to host governments around the importance of domestic gas production and its importance to security of supply. You know, we’ve always kind of enjoyed that in Germany, but again, it’s continuing to improve.

Starting to see discussions both publicly and within government in the Netherlands about the importance of security of supply and the importance of domestic production. Starting to hear noises about, from countries like Ireland and France about, you know, the wisdom of some of their production and exploration bans and whether they should be re-looking at those sort of things. I think the environment is much more open for what we’re trying to do, and I think a recognition of that what we’re doing is important to energy security in Europe.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thanks, Darcy.

Jeremy McCrea, Analyst, BMO Capital Markets: Maybe I’ll just kind of a bit of a follow-up there then. Is there, like, an M&A market here that’s opening up potentially a little bit more where there could be some more deals? You know, maybe just describe what the M&A market looks like now, assuming normalized pricing in that.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: I’m gonna pass it over to Lara. Lara, you wanna provide some comments on M&A Europe?

Lara Conrad, Vice President Business Development, Vermilion Energy: You bet. I mean, we just recently announced our one deal of acquiring 1,000 barrels a day in Germany. What we liked about that is it’s adjacent or increasing our working interest in existing assets. We do see potential. I think Vermilion I mean, I’m new to Vermilion, but Vermilion is not new to Germany and has developed strong relationships with the players there. We’ve got a super team in Germany. So I think you’ll see us active in all deal flow as well as looking proactively. Germany, we do view as core to us, so we’ll continue to assess opportunities there.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thanks, Lara.

Jeremy McCrea, Analyst, BMO Capital Markets: Okay. Thank you, guys.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thanks, Jeremy McCrea.

Conference Call Operator: Your next question comes from Spencer Leman with CIBC World Markets. Please go ahead.

Spencer Leman, Analyst, CIBC World Markets: Hey. Good morning, guys. Thanks for taking my question. Just kinda touching more on the regulatory environment. Are you seeing Discussions are looking good, right, in terms of government policy, in terms of increasing production? Has anything materialized in terms of fast-tracking permits, or have you heard any conversations around maybe what that might look like if the countries are looking to increase production?

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thanks for the question. You know, I can summarize maybe what Darcy said, and please jump in, Darcy, if you have other comments. I mean, I think there’s Just like Canada and every jurisdiction, there’s an established timeline and steps to assess and acquire permits in all jurisdictions. I think the way to think about it is, you know, we’re seeing the resources assigned from the government’s point of view to ensure that those timelines are met and those permits are awarded in a timely manner. What that means is, you know, we brought 2 wells on last fall in the Netherlands. We’re going to bring our Wisselhorst well on mid this year. We’re drilling another well here, kicking it off in the summer in Netherlands. We got our 2 German wells planned early next year, right?

It’s a daisy chain of activity and, you know, what we do is we’re planners, right? We’re working on permits now that we’re gonna drill in 2027, 2028, 2029. We just get ahead of it, and what we want in all jurisdictions is stable and predictable. We have no issues with the rules. We just wanna make sure they’re followed consistently with good timelines. That’s what we’re seeing, and frankly, that works well for us. Anything I missed there, Darcy?

Spencer Leman, Analyst, CIBC World Markets: Okay. Yeah, great.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Good, sir.

Spencer Leman, Analyst, CIBC World Markets: That’s really good color. Oh, sorry. Darcy, did you wanna go?

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: No, sorry. No, I didn’t have anything to add, Spencer. Thanks.

Spencer Leman, Analyst, CIBC World Markets: Okay. Yeah, no, that’s great. Just a follow-up question pivoting over now to Deep Basin. You guys have obviously shown over the years in terms of bringing costs down across the Montney, and I’m just kinda curious in terms of applying those cost-saving practices to the Deep Basin on the acquired lands. Do you see similar ability to reduce costs across those lands over time, and what would kind of be the cadence or timeline of kind of achieving those better practices?

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thanks, Spencer. Spencer, I’ll kick it off here and pass it to Randy McQuaig, you know what? Hopefully, the read-through, I made a comment here on the script that we’re now starting to exceed the 200 million CAD of synergies that we identified post the acquisition, and that is a combination of expense plus also capital. You know, I think we showed some things on there Investor Day around per well costs coming down, you know, year-over-year. And with the three rigs we’re running consistently in Deep Basin, you know, we’re seeing those wins. I mean, Randy, over to you to build on those comments.

Randy McQuaig, Vice President North America (implied), Vermilion Energy: Yeah. Yeah. It’s fair comment. You know, I think the Deep Basin, you know, with our 3-rig program, we’ve really been able to leverage our operational scale and our dominant position in that Deep Basin. We have seen costs come down as they flow through. We’ll kinda work through it in the next couple quarters here. I would say we have definitely seen costs come down and continue to work on, you know, with this continuous improvement, we expect to see, you know, further efficiencies as we continue to get more active in the program.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Thanks, Randy.

Spencer Leman, Analyst, CIBC World Markets: Great. Thanks, guys. I’ll turn it back.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Yeah. Thanks, Spencer.

Conference Call Operator: There are no further questions at this time. I’d like to turn the call back over to Dion Hatcher for any closing remarks.

Dion Hatcher, President and Chief Executive Officer, Vermilion Energy: Well, thanks again, for the call, and, with that, we’ll close the line. Enjoy the rest of your day.

Conference Call Operator: Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation. You may now disconnect.