Good day, and welcome to the Vermilion Energy quarter three conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to President Curtis Hicks. Please go ahead, sir.
Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us. I'm Curtis Hicks, President of Vermilion Energy. With me today are Dion Hatcher, Vice President, North America, and incoming President as of January 1, 2022. Lars Glemser, Vice President and CFO. Darcy Kerwin, Vice President, International and HSE, and Kyle Preston, Vice President of Investor Relations. We will be referring to a PowerPoint presentation to discuss the Q3 2021 results we announced yesterday afternoon. The presentation can be found on our website under Invest With Us and Events and Presentations. Slide two in the presentation refers to our advisory on forward-looking statements. These advisories describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Let me start off with a summary of our Q3 results on slide three.
We delivered strong third-quarter results. Production from the quarter averaged 84,633 BOEs a day, which was down slightly from the previous quarter, primarily due to planned maintenance activity. The third quarter is generally a busy period for maintenance activities in Canada, but this year we also had a three-week turnaround scheduled for the Corrib facility in Ireland. This was a major turnaround at Corrib, which occurs only every five years or so, and we're pleased to report that everything went according to plan. The impact from these turnarounds was partially offset by higher production in the Netherlands, Germany, Australia, and the United States, including the contribution from a small bolt-on acquisition in the Powder River Basin in Wyoming. We did have a three-week turnaround plan for Australia in the third quarter as well, but this was deferred until Q4 to optimize work schedules.
On the financial side, we delivered funds from operations of CAD 263 million and free cash flow of CAD 196 million. These figures represent a 52% and a 109% increase, respectively, relative to the previous quarter. The primary driver for the increase in our financial results was the higher commodity prices. Global commodity prices continued to strengthen during the third quarter, which we were able to take advantage of through our internationally diversified asset base. Vermilion's exposure to global commodity prices is what sets us apart from our North American peers. Not only does this global commodity exposure enhance our revenue and cash flow during strong market cycles, but it also serves to reduce cash flow volatility over the long term.
Year to date, we have generated CAD 369 million of free cash flow and expect to generate in excess of CAD 500 million for the full year 2021 based on current strip prices. This significant free cash flow generation has enabled us to accelerate our debt reduction this year well beyond what we projected when we announced our budget in January 2021. Net debt decreased 5% from the previous quarter to CAD 1.8 billion at the end of Q3 2021, and is down 12% since the beginning of the year. We expect to exit 2021 with net debt in the range of CAD 1.65 billion, which would imply a net debt to trailing funds from operation ratio of approximately 1.8 times. Slide four.
Let me now speak to some of our operational highlights during the quarter, starting with our international business. Production from our international assets averaged 27,612 BOEs a day in Q3 2021, a decrease of 1% from the prior quarter, primarily due to the planned turnaround in Ireland, which I referenced earlier. The impact from the turnaround was largely offset by new production added in the Netherlands and Germany and strong operational uptime in Australia. Most of the activity in Europe during the third quarter was focused on completing and tying in the Nijega 1 net and Blesdijke 0.5 net gas wells in the Netherlands and the Burgmoor Z5 gas well, 46% working interest in Germany. In the Netherlands, the Nijega well was tied in during the third quarter, while a Blesdijke well is currently undergoing stimulation operations.
In Germany, the Burgmoor Z5 well was also brought on production during the third quarter. We continued to advance our exploration initiatives in Europe through the acquisition of additional 3D seismic in the Netherlands and Croatia. We also took physical delivery of the gas plant for the SA-10, block in Croatia, which was shipped from the Netherlands. Once we finish the detailed design work, we plan to finish construction of the gas plant in 2022, which will allow the tie-in of two successful gas wells drilled in 2019, which tested at 15 million a day and 17 million a day, respectively. We expect these wells to be on production in early 2023. Slide five. Moving on to North America.
Production from our North American assets averaged 57,022 BOE a day in Q3 2021, a decrease of 2% from the prior quarter, primarily due to planned maintenance in Canada. Production downtime in Canada was partially offset by strong performance from our U.S. business unit, including the impact from a strategic bolt-on acquisition, which we completed during the quarter and which I will touch on shortly. In Saskatchewan, we drilled 19 net wells and completed 19.5 net wells and tied in the remaining Turner wells from our Q2 drilling program in Wyoming. Results from our Turner drilling program continued to meet or exceed expectations from both a cost and production performance basis. With our growing knowledge of this play and region, we were able to identify and execute a strategic acquisition during the third quarter of 2021. Slide six.
The next slide provides a bit more detail on the U.S. acquisition. Although the acquisition was not material from a financial or current production basis, it is a good example of the type of bolt-on opportunities we pursue across all areas of our diversified asset base. The acquisition includes 20,000 net acres of land immediately adjacent to our Hilight field in Wyoming, which we acquired in 2018. The assets have current production of approximately 1,500 BOEs a day, you know, 72% liquids, and generated operating netback in excess of $45 a BOE at current commodity prices. The free cash flow from these assets is expected to self-fund Turner development over the next five plus years. The acquisition increases our Turner drilling inventory by 40 locations to 62, consisting of 24 one-mile and 38 two-mile laterals.
By expanding our land base, we are able to optimize the number of two-mile wells in this play, which will deliver superior economics. While the Turner is the play that underpins our development of this field, we also believe the acquired acreage is prospective for the Niobrara and Parkman Formations based on our initial assessment and recent positive results by nearby industry peers. Across our combined land base in this area, we see over 200 potential drilling locations in the Niobrara and Parkman. It's still early days, but we're encouraged by the results we see from nearby competitors, and we will continue to evaluate our acreage position while monitoring in-industry activity. Total consideration for the acquisition was $76 million, which was funded through our credit facility. Slide seven.
As a result of the strong production results achieved to date, combined with the U.S. annual production guidance to 84,500-85,500 BOEs a day. When we announced our 2021 capital budget of CAD 300 million earlier this year, we indicated that our primary focus for 2021 was to maximize free cash flow and reduce debt while retaining the flexibility to adjust investment levels depending on commodity prices. As we are all aware, commodity prices have been much stronger than anyone anticipated, and because of this, we have been able to exceed our debt reduction target for the year. As a result, combined with this continued strength in commodity prices, we have increased our 2021 capital program by CAD 75 million to CAD 375 million.
The increased level of investment is better aligned with the sustaining capital requirements of our asset base. The incremental capital investment will be primarily directed towards our Alberta condensate-rich natural gas and Saskatchewan light oil drilling programs, together with seismic acquisitions in Europe. In Saskatchewan, we will extend our current drilling program by keeping one rig active through the end of the year, which will add eight net wells. In Alberta, we have advanced the completion date for 8.6 net condensate rich Mannville gas wells into Q4 2021, which were originally planned for Q1 2022. Accelerating this capital into Q4 2021 has allowed us to secure our preferred drilling and completion vendors while also improving overall capital efficiencies by executing the majority of this program in Q4 2021 compared to the busier winter months of 2022.
This capital efficiency improvement will help offset some of the inflation impact that we are seeing in our program costs. The production from this incremental capital will be realized in 2022 and beyond. Slide eight. While we have not finalized our 2022 budget and guidance, we are close, and we wanted to provide the market with a preliminary outlook. When we announced our 2021 budget in January of this year, we indicated that we are allowing our production to decline in 2021 as we focused on maximizing free cash flow and reducing debt. The original production guidance we provided for 2021 of 83,000- 85,000 BOEs a day is a targeted production level for our existing asset base and is a level that we believe is sustainable for the foreseeable future.
While we continue to pursue strategic acquisitions, like the U.S. acquisition completed in Q3, our intent would be to use these acquisitions as a means to high grade and extend our inventory while managing to a similar production range. Our preliminary capital plans for 2022 contemplate a two-well drilling program in Australia, as well as continued strategic investment into Europe to expand our business in that region. In order to achieve our production targets, execute the Australian drilling program, and deliver on our strategic capital investment to support long-term free cash flow generation and accommodate anticipated inflation in our cost structure, we anticipate a 2022 capital program in the range of CAD 400 million-CAD 450 million.
Based on this targeted capital and production range, using forward strip pricing for 2022, we anticipate free cash flow in excess of CAD 600 million, as can be seen in the chart to the right. We expect to release our formal budget in early December. Slide 9. The last slide that I'd like to speak to is our debt position and return of capital framework. As I mentioned, we have been able to accelerate our debt reduction this year due to strong commodity prices and the significant free cash flow generating capacity of our asset base. Based on a revised 2021 guidance, 2022 preliminary outlook and forward commodity strip, you can see the significant deleveraging that has occurred to date and what is expected to occur in 2022 if the commodity strip holds.
We expect to exit 2021 with net debt of approximately CAD 1.65 billion and a net debt to trailing FFO ratio of 1.8x. For perspective, this compares to 4x at the start of the year. For 2022, using current strip pricing, we are forecasting net debt in the range of CAD 1 billion by the end of the year, which represents greater than a 50% reduction from the net debt level at the end of Q2 2020. This would imply a net debt to trailing FFO ratio of less than 1x and puts us comfortably back in our targeted leverage range of 0.8x-1.5x, which is the range that Vermilion maintained during its first 10 years as a dividend or distribution paying company.
We have been consistent with our messaging over the past year, indicating that we would consider reinstating a dividend once we made significant debt reduction progress and had line of sight to achieving our targeted net debt to trailing FFO ratio of 1.5 times or less. We now have a clear line of sight to achieving our targeted debt to trailing FFO ratio of 1 times or less in 2022. With that, we plan to reinstate a dividend in Q1 2022. Although it's still subject to board approval, our intention is to restate a fixed quarterly dividend, 5%-10% of FFO stress tested at lower prices, including $55 a barrel for WTI, while continuing to focus on debt reduction.
As further debt targets are achieved, we will consider augmenting our return of capital through fixed dividend increases, share buybacks, and/or special dividends. We look forward to announcing our 2022 budget and sharing more details on a return of capital framework in the coming weeks. That concludes my prepared remarks. With that, I'd like to open it up for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press the star followed by the one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Once again, ladies and gentlemen, that is star one to ask a question. One final reminder, it is star one to ask a question. We can now take the first question from Harp Singh from Harp Investments.
Hi, gentlemen. How are you guys?
Good, thank you. How are you?
Okay, what is the debt covenants currently on the hedges with the CAD 1.8 billion still outstanding?
It is debt covenants, I think.
Yeah. Sorry, your question there was related to covenants?
Because the reason for it is you got a forward hedge of six months, currently running into 2022, you guys walked in. I'm just curious what the covenants is there. You know, let's say the forward strip going into 2022, you know, I noticed the hedges are pretty much locked in for that six months. And what is it at 30%? What's the rate there?
Yeah. From a hedging perspective, we are about 20% hedged for 2022. You know, we typically target 25%-50% on a rolling fourth quarter basis. And then we do have optionality within the various commodities. For 2022, we are about 50% hedged on European gas. That will be about 60% for the first quarter and then drops off from there. And then basically 20% hedged on the oil side. So the impact of those hedges is fully embedded in our free cash flow estimates of CAD 500 million for 2021, and then in excess of CAD 600 million for 2022.
Okay. Paying down the debt, getting it down to the end of the year, down to CAD 1.65 billion, what are you guys forecasting if everything basically stays, commodity prices sort of behave and are in a multi-year bull market? You know, what are we looking at, like going forward? Are we looking at trying to get it down by the end of 2022, fourth quarter, into the billion-dollar mark?
Yeah. No, great question. You know, ignore the multi-year impact on debt reduction. I think if you just look out to 2022, you know, if we go into that year with CAD 1.65 billion of debt, we've got free cash flow generation in excess of CAD 600 million at current strip pricing. That takes us down to a billion-dollar level. You know, I think something that we've been quite clear on with investors is we want to make sure that decisions are structurally sound.
When we look at debt to FFO and that target of 1.5 times that we've been quoting, when you start to get down to that $1 billion of absolute debt, and you look at our mid-cycle price deck, which is $55 WTI, $2.50 North American Gas, CAD 8 European gas. We see ourselves getting to that structural comfort level in terms of debt to FFO of 1.5 times on that absolute debt number. That has really given us the confidence here to accelerate our messaging around return of capital to shareholders, and messaging that first quarter of 2022, we will be looking to reinstate a fixed dividend. Now, we are really trying to make sure that is structurally sound as well.
The 5%-10% of FFO that we have quoted in our Q3 release here, that's attached to the same mid-cycle price deck that I quoted there in terms of CAD 1 billion of debt. You do the math in terms of what 1.5 times implies on FFO. Let's call that in that CAD 700 million range. That's not a bad way to think about sort of the quantum of the fixed dividend. We think that that works quite nicely with still a debt reduction strategy in 2022, and then it really unlocks further optionality around return of capital to shareholders as we make progress towards that debt target.
You know, that was the messaging we really wanted to get across here in the Q3 report. This is a first step in our return of capital strategy with shareholders. Because of the quantum of free cash flow in the system, we think that we're able to execute on multiple levels of initiatives in terms of return of capital as well as debt reduction.
Okay. Can I also get a little bit of color on just the impairment and the write-downs there? Just, you know, just a little bit of color on that, please.
Yeah. 2020 was characterized by write-downs from an impairment perspective. I would say 2021 has been characterized by write-ups of those impairments, just as we've had, you know, a strong backdrop from a pricing perspective. That has been the driver behind the impairment reversals that we've seen through the first three quarters here of 2021.
Okay. How about any currency hedges? Is there any currency hedges impacted because of the international exposure?
None.
None. Okay, great. Thank you very much. That's it for me. Thank you.
Thank you.
Once again, if you would like to ask a question, please press star one now. We can now take the next question from Menno Hulshof from TD Securities.
Good morning, everyone, and thanks for taking my question. I just have one. What are you seeing in the Powder River Basin that gave you the confidence to do that acquisition, and what are you anticipating for activity levels in the Powder River in 2022? Then I guess longer term, how meaningful do you think that play could become?
This is Dion Hatcher. We, you know, we've been there for a few years. We've drilled in excess of 20 wells. What we like, it's still early days, and we think we can optimize the play. That means things like completion strategies, pumping strategies, and as well length. We'll be able to go for more of a one-mile to two-mile length. That's near-term optimization potential, which of course will improve our free cash flows. Longer term, maybe I can comment on like we need you know. We're gonna drill maybe five-six wells a year to keep that asset flat. If you look at the well counts and particularly lengths of those wells, again, we see some upside in being able to grow that asset over time.
Okay. Thanks a lot.
Great. Thank you.
Thanks, Menno.
This concludes today's Q&A. I'd now like to turn the call back over to your host, Curtis Hicks, for any additional or closing remarks.
Thank you, operator. Thanks to all of you again for participating in our Q3 2021 results conference call. If there are any further questions, I would suggest that you reach out to our investor relations department, and the information to reach out is available on our website. With that, I wanna thank you all again, and have a great day.
This concludes today's call. Thank you for your participation. You may now disconnect.