Vermilion Energy Inc. Announces Strategic Deep Basin Acquisition

Canada NewsWire

CALGARY, AB, Dec. 23, 2024

CALGARY, AB, Dec. 23, 2024 /CNW/ - Vermilion Energy Inc. ("Vermilion", or the "Company") (TSX: VET) $(VET)$ is pleased to announce it has entered into an arrangement agreement (the "Arrangement Agreement") to acquire Westbrick Energy Ltd. ("Westbrick"), a privately held oil and gas company operating in the Deep Basin, for total consideration of $1.075 billion by way of a plan of arrangement under the Business Corporations Act (Alberta) (the "Acquisition"), expected to close in Q1 2025(1) .

"The strategic acquisition of Westbrick represents a significant step forward in Vermilion's North American high-grading initiative to increase operational scale and enhance full-cycle margins in the liquids-rich Deep Basin," commented Dion Hatcher, President and CEO of Vermilion. "The Deep Basin is an area Vermilion has been operating in for nearly three decades and is currently the largest producing asset in the Company. The Acquisition adds 50,000 boe/d of stable production and approximately 1.1 million (770,000 net) acres of land from which Vermilion has identified over 700 drilling locations, providing a robust inventory to keep production flat for over 15 years while generating significant free cash flow to enhance the Company's long-term return of capital framework."

The Acquisition enhances depth and quality of Vermilion's Deep Basin inventory and complements the Company's high-growth, liquids-rich Montney asset. Vermilion's Canadian liquids-rich gas assets, combined with over 100 mmcf/d of high-netback, low-decline European natural gas production provides the Company with a premium realized natural gas price. Vermilion is committed to strategically growing its international assets both organically, as demonstrated by recent successes in Germany and Croatia, and via acquisitions. In the near term, the Company will focus on operational execution, debt reduction, return of capital, and further high-grading of assets within its portfolio, including non-core asset sales, to enhance long-term shareholder value.

Acquisition Highlights

   -- Approximately 1.1 million (770,000 net) acres of land and four operated 
      gas plants with total capacity of 102 mmcf/d in the southeast portion of 
      the Deep Basin trend in Alberta. This footprint is contiguous and 
      complementary to Vermilion's legacy Deep Basin assets providing 
      significant operational and financial synergies, including: capital 
      efficiency improvements, infrastructure optimization, gas marketing 
      opportunities, and other corporate synergies. These synergies have not 
      been factored into the economic evaluation but are expected to be 
      realized over time. The Acquisition excludes undeveloped Duvernay rights 
      on approximately 300,000 (290,000 net) acres of land which will be 
      retained by the shareholders of Westbrick. 
 
   -- Stable annual production of 50,000 boe/d (75% gas and 25% liquids) 
      expected in 2025(2), based on Vermilion's development plans. This 
      production level represents 5% year-over-year growth and is forecast to 
      generate more than $110 million of annual free cash flow ("FCF")(2,4) 
      based on forward commodity prices(5). Revenue from the acquired assets 
      will be derived approximately 50% from liquids and 50% from gas. In 
      conjunction with the Acquisition, Vermilion plans to actively and 
      opportunistically hedge gas production to mitigate financial risk. 
 
   -- 2025E annual net operating income of $275 million based on forward 
      prices(5) translates into an NOI multiple of approximately 3.9x. The 
      multiple compresses to 3.3x in 2026 as net operating income is forecast 
      to increase to $330 million based on forward pricing(5). 
 
   -- Significant, high-quality drilling inventory adds over 700 locations in 
      the Ellerslie, Notikewin, Rock Creek, Falher, Cardium, Wilrich and Niton 
      formations, with half-cycle IRRs ranging from 40% to over 100% based on 
      estimates provided by McDaniel & Associates Consultants Ltd 
      ("McDaniel")(6) and using three consultant average October 1, 2024 
      pricing assumptions(6). 
 
   -- Proved developed producing ("PDP") and proved plus probable ("2P") 
      reserves estimated at 92 million boe (75% gas) and 256 million boe (74% 
      gas), respectively, based on McDaniel estimates(6). The acquisition price 
      per boe of PDP reserves is $11.70, which translates to an implied recycle 
      ratio of 1.3 times based on 2025 forecasted operating netbacks and 1.5 
      times based on 2026 forecasted operating netbacks, as noted above. 
      Approximately 30% of the over 700 identified drilling locations have been 
      included in the reserves estimates. 
 
   -- Before-tax PDP reserve net present value at a 10% discount rate is 
      estimated at $1.0 billion based on McDaniel estimates(6) and using three 
      consultant average October 1, 2024 pricing assumptions(6). This value 
      represents over 90% of the purchase price, implying significant upside 
      value associated with probable reserves and unbooked locations. 
 
   -- Vermilion's significant debt reduction efforts over the past five years, 
      totaling over $1 billion since 2020, created the balance sheet capacity 
      to execute this long-duration, strategic acquisition, yielding a 15% 
      increase in excess free cash flow ("EFCF")(4) per share in 2025. The 
      Company will continue its disciplined efforts on balance sheet management 
      and capital allocation to ensure debt targets are reached in a timely 
      fashion. 

Contiguous Land Position

Transaction Details

Pursuant to the Acquisition, Vermilion will acquire all of the issued and outstanding shares of Westbrick (the "Westbrick Shares"), including any securities convertible into Westbrick Shares that are exercised prior to or in conjunction with the closing of the Acquisition (the "Closing"). Holders of Westbrick Shares, including any securities convertible into Westbrick Shares that are exercised prior to or in conjunction with Closing, will be provided with the option to elect prior to Closing to receive up to a maximum of 1.7 million Vermilion common shares not to exceed $25 million in value based on Vermilion's five-day volume weighted average trading price on the Toronto Stock Exchange, immediately prior to execution of the Arrangement Agreement. Certain shareholders of Westbrick (the "Supporting Shareholders"), representing in excess of 90% of the Westbrick shares outstanding, have already executed a written resolution approving the arrangement. The Supporting Shareholders have also entered into voting support agreements agreeing not to change their approval of the arrangement as shareholders.

The Acquisition will be funded through Vermilion's undrawn $1.35 billion revolving credit facility. In connection with the Acquisition, Vermilion has also entered into a new fully underwritten $250 million term loan maturing May 2028 through a debt commitment letter with TD Securities Inc. (acting as underwriter) and a new fully underwritten US$300 million bridge facility through a debt commitment letter with Royal Bank of Canada and TD Securities Inc. Upon Closing, Vermilion is expected to have net debt(7) of $2.0 billion with a pro forma year-end 2025 net debt to fund flows from operations ("FFO") ratio(8) of 1.5 times and liquidity of approximately $500 million. In addition to allocating a portion of FCF to debt reduction, Vermilion will also initiate a process to identify and execute non-core asset divestments in order to accelerate debt reduction and further high-grade the portfolio, with the objective of reducing the net debt to FFO ratio to the targeted range of 1.0 times or less.

Pro Forma Outlook -- A Global Gas Producer

Upon Closing, Vermilion will be an approximately 135,000 boe/d entity with greater than 80% of its production derived from its global gas franchise, consisting of liquids-rich gas in Alberta and BC and gas-weighted production in Ireland, Germany, Netherlands and Croatia. Assuming the Acquisition closes mid-Q1 2025, Vermilion anticipates corporate 2025 production to be in the range of 126,000 to 133,000 boe/d with capital expenditures expected to be in the range of $725 to 775 million. Inclusive of the incremental capital being allocated to the newly acquired Deep Basin assets, the aggregate capital investment into Vermilion's global gas portfolio will represent over 70% of total capital for 2025.

Based on a mid-Q1 2025 close and forward commodity prices(5) , including the impact from the current hedge position which covers approximately 25% of 2025 production, Vermilion forecasts pro forma 2025 FFO of $1.2 billion ($7.80 per share)(3) and FCF of approximately $450 million ($2.90 per share)(4) . Based on this forecast, the Company expects to exit 2025 with net debt(7) of approximately $1.8 billion representing a net debt to FFO ratio(8) of 1.5 times. On a pro forma basis, the Company will target a return of capital ("ROC") payout of 40% of EFCF until net debt reaches an appropriate level, at which time we will increase the payout back to 50%. The absolute amount of capital returned to shareholders at the pro forma target is expected to be equivalent to our base business with a 50% ROC payout. Over the long-term, the Acquisition is expected to increase the amount of capital available for shareholder returns. Vermilion plans to provide an updated 2025 budget and financial guidance upon Closing.

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