Good morning, afternoon, and evening. My name is Jake, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vermilion Announces the Strategic Acquisition of Leucrotta Exploration conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then one on your telephone keypad. If you would like to withdraw your question, please press star two. Thank you. Mr. Dion Hatcher, you may begin your conference.
Well, good morning, ladies and gentlemen. Thank you for joining us. I'm Dion Hatcher, President of Vermilion Energy. With me today are Lars Glemser, Vice President & CFO, Bryce Kremnica, Vice President, North America, Jenson Tan, Vice President, Business Development, Jeff McDonald, Vice President, Geosciences, and Kyle Preston, Vice President of Investor Relations. We'll be referencing a PowerPoint presentation to discuss the acquisition of Leucrotta Exploration that we announced this morning. The presentation can be found on our website under Invest With Us in Events and Presentations. Please refer to our advisory on forward-looking statements at the end of the presentation. It describes the forward-looking information, non-GAAP measures, and oil and gas terms used today and outlines the risk factors and assumptions relevant to this discussion. Starting on slide two. This morning, we announced the acquisition of Leucrotta Exploration for total cash consideration of CAD 477 million.
This is a strategic acquisition for Vermilion as it significantly enhances our North America depth and quality of inventory. The primary asset is the Mica Asset, which is comprised of 77,000 net acres. This land base contains multi-zone, inventory-rich Montney resource that provides multi-decades of high-value tier one drilling inventory. Concurrent with this transaction, Vermilion will also acquire a 12.5% equity stake in ExploreCo for CAD 14 million. ExploreCo will retain a portion of the land base and approximately CAD 45 million of cash. It will be managed by the existing Leucrotta team. ExploreCo accelerates the delineation of the lands north of the Peace River. Our ExploreCo equity and a board seat positions us well strategically on those prospective lands.
The Mica Asset is forecast to produce 13,000 BOEs a day in 2023, and we have an infrastructure plan in place for self-funded growth to a sustainable production plateau of 28,000 BOEs a day over the next few years. At the production plateau rates, the asset is expected to generate free cash flow in excess of CAD 200 million per year. This acquisition is aligned with our focus on a strong balance sheet, a return of capital, and a diversified international portfolio. It is fully funded with our 2022 free cash flow, and we remain on track to achieve our CAD 1.2 billion debt target in the second half of 2022. It improves our long-term ability to return capital to our shareholders by adding an additional CAD 200 million a year of free cash flow.
Finally, by high-grading our North American drilling, in addition to our planned European development activities, we forecast our international production to remain consistent with the current weighting, which has increased from 31% in 2021 to the current 36% in 2022. On slide three, I would like to emphasize how this acquisition aligns with our acquisition strategy. We have been successfully developing multi-zone assets in West Central Alberta for over a decade, starting with the Cardium oil in 2010 and then moving on to the Mannville Ellerslie Condensate Ridge in 2014. We target core areas with multi-zone development potential and infrastructure synergies. The multi-zone development nature of the Montney is a natural extension of what we've been doing in the Deep Basin for over a decade. We also believe this acquisition complements the Corrib acquisition we announced late last year.
Corrib is a high netback European gas asset that generates significant free cash flow that can be used to fund high-value inventory deals like the Montney. We're able to fund both acquisitions worth CAD 1.1 billion with free cash flow being generated in 2022, as you can see on slide four. I will walk you through the chart on the right. The first blue bar shows the amount of free cash flow we are forecasting for 2022 when we announced our budget in November. The second bar shows the incremental free cash flow added from the Corrib acquisition, and the third bar shows our free cash flow, how much our free cash flow has increased over the past three months from the increase in commodity prices, in particular, our exposure to European gas.
This corresponds to the CAD 1.9 billion of pro forma free cash flow we are currently shown in our March investor presentation. The next two bars show the estimated purchase price of the Corrib acquisition and the Leucrotta acquisition, along with the CAD 40 million associated with our 24-cent per annum dividend. The end result is that even after funding the CAD 1.1 billion of strategic acquisitions and our dividend, we still have approximately CAD 800 million of excess free cash flow remaining, which is more than we budgeted for in November. The bottom line is that these two acquisitions not only strengthen the company over the long term, but they also do not compromise our near-term debt reduction targets or the return of capital we have defined.
Slide five shows how the combination of the Corrib and Leucrotta acquisition aligns with our strategy of international diversification. In 2023, we expect our international assets to represent 36% of our production, 58% of our fund flow, and 68% of our free cash flow, respectively. This diversification is a strategic advantage for Vermilion, and we intend to maintain or enhance our international exposure. We believe our European development activities, including Central and Eastern Europe, will maintain the international production weighting to our current levels. In addition, with our successful track record of acquiring from the majors and their planned divestments, this may provide another path to increasing our exposure to European gas. Slide six speaks to the significant accretion and per share value of these acquisitions.
We have announced in excess of CAD 1.2 billion of strategic acquisitions in 2021 and 2022, and are able to fund these acquisitions without issuing equity and without diluting our shareholders. Comparing our anticipated 2022 exit rate to our 2022 budgeted production, we are adding over 13,000 BOEs a day of absolute production, which represents a production per share growth rate of 16%. Another way to look at this, it is the equivalent of buying back 16% of our shares. What excites me about this acquisition is that we acquired this asset for CAD 477 million, or about one quarter's worth of free cash flow in 2022. We expect it to deliver over CAD 200 million of free cash flow for over a decade. You could also think about this acquisition from an inventory point of view.
After accounting for the production, we are paying approximately CAD 1.5 million for each two-mile tier one drill location, compared to the PV that ranges from CAD 10 million-CAD 20 million per location. That high quality inventory further underpins our long-term return of capital to our shareholders. I'm now gonna turn it over to Jeff McDonald, our Vice President of Geosciences, to speak to the next three slides, which provide more details on why we like this asset, the evaluation process we undertook, and the long-term development plans. He will review with you the depth of the Montney experience, as well as our strong operational expertise in the Deep Basin and the Powder River. As well, the low-risk nature of the development due to the level of delineation of the asset and amount of technical data that has been reviewed.
I'm very confident in the team's ability to develop the Mica asset. Over to you, Jeff.
Thank you, Dion. Slide seven. As Dion mentioned earlier, we continually evaluate North American basins for opportunities to leverage our expertise in developing delineated but underexploited, low risk multi-zone opportunities. With this goal in mind, Vermilion has built a technical team comprised of leadership and members involved in the very early stages of success in several unconventional plays, with local examples including the Kaybob and East Shale Basin of the Duvernay and across the Oil Fairway of the Montney, successfully expanding the liquids-rich gas fairway into the oil window in areas such as Karr, Gold Creek, Bezanson, and Puskwaskau. Vermilion's screening of opportunities focused on finding a large delineated and contiguous acreage position with the ability to provide predictably robust rates of return and sustain a meaningful capital efficient production rate.
We prioritize finding an asset that is self-funding from very early in its development life to begin generating shareholder returns quickly. Leucrotta's Mica asset on the Peace River Arch fits these criteria very well. Slide eight. The primary asset of this acquisition is the Mica property. It is comprised of 120 net sections of Montney mineral rights on the Peace River Arch straddling the Alberta and British Columbia border immediately south of the Peace River. After spending over two years evaluating this and other assets across the fairway, our team has developed a deep technical understanding of each zone within the Montney. From our analysis, we have conservatively identified 275 multi-zone, well-delineated two-mile lateral drilling prospects to date. I wanna emphasize that these locations represent more than two decades of low risk, self-funding, high deliverability drilling inventory with strong rates of return.
These rates of return exceed 100% at current prices, and notably, the Middle Montney target delivers rates of return that well exceed 200% and payout in under six months. Even in lower price environments, more than a decade of inventory exists at this asset that can compete on an economic basis with other premier unconventional plays in North America. The asset has approximately 50 million BOE of book 2P reserves, which represents less than 20% of the total estimated recoverable resource. This provides a meaningful reserve growth platform for Vermilion in the coming years. Slide nine. We plan to invest CAD 75 million from May to December this year to drill a six-well pad on the Alberta side of this asset, along with the build-out of requisite infrastructure.
This will be followed by a CAD 110 million investment in 2023 to drill nine wells, along with the associated infrastructure, which is expected to deliver average production rates of approximately 13,000 BOE a day. We have infrastructure plans in place to reach a plateau production base of 28,000 BOE a day over the next few years, with the option to expand. The longer-term development plan contemplates drilling eight-12 wells per year to maintain an optimal production level over the next several decades. Because we have nearly 100% working interest in this land, Vermilion will have discretion over the pace of development, and we will determine the appropriate level of capital allocation based on a portfolio approach.
Within that global portfolio, Mica represents a stable, low risk, and long life asset that will generate significant free cash flow decades into the future. I will now hand it back to Dion.
Thanks, Jeff. As you can tell, we put a lot of work and effort into this evaluation. We're very excited with the future development potential. On slide 10, we show an updated 2022 guidance as we incorporate the impact of this acquisition. Our 2022 E&D capital budget has increased by CAD 75 million- CAD 500 million, and our production guidance has increased to a range of 86,000-88,000 BOE a day. This excludes the Corrib acquisition volumes. With the execution of the six-well Montney pad at Mica and the anticipated close of the Corrib acquisition in the second half of 2022, we expect to exit the year with corporate production in the range of 95,000-100,000 BOE a day.
While we have not announced the 2023 budget, it is our intention to maintain the production base in this range for the foreseeable future as we focus on high grading and optimizing our North American portfolio inventory in order to maximize free cash flow generation over the long term. Slide 11 shows our updated pro forma financial outlook, applying the same March 2nd forward price used in the March investor presentation. The 2022 fund flow and free cash flow forecast remains strong at CAD 2.4 billion and CAD 1.9 billion respectively, and our net debt remains manageable at CAD 900 million after accounting for the Leucrotta acquisition. As I mentioned earlier, this transaction does not jeopardize our debt reduction targets, and we continue anticipating reaching our CAD 1.2 billion debt target during the second half of 2022.
As you can see, we maintain a very strong leverage metrics, 0.4 times debt to fund flow, and we continue to trade at a compelling valuation, 2x EV/DACF or a 40% free cash flow yield. With less than 10% of our 2023 production hedged, we are well-positioned for strong free cash flow in 2023 and beyond. Slide 12 provides a snapshot of our debt reduction trajectory. Again, we expect to achieve our CAD 1.2 billion debt target in the second half of 2022 and exit the year with net debt of CAD 900 million and a debt to fund flow ratio of 0.4 times. Based on our preliminary 2023 estimates and using forward strip pricing, we would be essentially debt free in 2023.
As we achieve these debt targets, we will evaluate options to increase return of capital, which could include an increase to the base dividend, share repurchases, further debt reduction, or special dividends. In conclusion, on slide 13, I would like to provide you with a few more insights into some of the strategic objectives we have achieved over the past couple of years. The Corrib and Leucrotta acquisitions were well thought out and evaluated, and they achieved several key objectives we set for the company. In early 2021, we completed our Best Vision, which is a detailed roadmap of where we want the company to be by 2030. With the transition to a new executive team, we thought it was important to go through this exercise and ensure we all knew where we were headed and aligned on the actions required to get there.
Based on that exercise, three of our key near-term objectives were. First, we established a target to reduce absolute debt from year-end 2020 levels by CAD 600 million by year-end 2023 at CAD 1 billion by year-end 2025. We are on track to achieve our 2025 debt target by the end of 2022. That is three years ahead of schedule. Second, we wanted to execute a deep value international acquisition to further strengthen our international portfolio and increase our exposure to European gas. The Corrib acquisition achieved this, and we will continue to pursue other international acquisition opportunities as the right ones become available. Third, we wanted to further enhance our long-term return of capital by adding significant tier one inventory through the expansion of our core areas. The reinstatement of the base dividend and the Powder River, and now Leucrotta acquisitions have achieved this.
We are very well positioned for an increased return of capital. Lastly, we have achieved these near term objectives without adding any additional equity and avoiding dilution, which puts Vermilion in a very strong position to provide outsized, sustainable, long-term shareholder returns. That concludes my prepared remarks. With that, we would like to open it up for questions.
Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. Just keep in mind if you are using your speakerphone, make sure your mute function is released so that signal can reach our equipment. Once again, star one for questions. We will begin with Jeremy McCrea with Raymond James.
Yes. I have a couple of questions here. Just in terms of, can you just give the background in terms of how this started? Was this a wide process or like I know Leucrotta was, you know, potentially looking to be sold a couple years ago. Did you approach them? Just some of the background there. Just on the assets, is there anything you'd like to do differently that Leucrotta has done in the past in terms of, you know, completion designs, you know, anything like along those lines there?
Sorry, Jeremy, I missed the second part of the question. First one is on the background of the deal. Apologize. Do you,
Yeah, just are you planning to do anything different than Leucrotta was doing? Like I know Leucrotta was doing more exploration type of work, and are you gonna come in and do more development? I guess, are you gonna do like bigger frack designs? Anything that you see that you would like to try differently than what Leucrotta was doing in the past, just given a different way to approach the businesses now.
Okay. I'll answer the first one, and I can hand the second one over to Jeff to comment on that. So for background on the deal, I mean, we formed a team internally, as Jeff mentioned, several years ago. What we wanted to do, and I think I might have said this before, by the time we announce something, it's well thought out and probably years in the discussion internally. What we wanted to do is look across the basin and identify, prioritize, inventory and assets that might work for our shareholders longer term. At the same time, of course, our top priority was debt reduction, and so we continued to make significant progress on our debt reduction.
I think as mentioned in the presentation, that's been further enhanced and accelerated with some of the commodity prices that we're seeing this year. That got us to a position here recently where we reached out to Leucrotta and initiated some discussions through that process. Working with that management team, we were able to get to a point we're able to announce this acquisition today. With respect to commentary on operations and maybe completions, I'll pass it over to Jeff McDonald.
Okay, thanks for the question, Jeremy. We view Leucrotta's activity on the Mica asset as having delineated it very well. As a delineation focus company, their laterals were shorter. They had a mixture of completion types. All of that data we were able to integrate into our models to normalize it and try and build type curves that reflect the true potential of the acreage across all of the zones and across all of that acreage. Leucrotta has moved somewhat into a development mode. They have drilled a pad. We would intend to increase the lateral length of those wells. What I would say is that we're encouraged by the results that we see there.
We can definitely take that data and integrate it into our own models to optimize what we think is the best way to go. I would say that, you know, we're encouraged by their results, and we're encouraged by the activity that they've taken to this point, and we'll look to improve upon that in the future.
You guys say there's probably about 275 Tier 1 locations. How many, say, Tier 2 and Tier 3 locations would you think there potentially is or that you've preliminary mapped here right now? Is it only the 275 locations?
Yeah, I can go. Like, we've taken a conservative approach with the inventory at 275, but I don't know if you wanna elaborate on what the range of other locations might be, Jeff.
Sure, Dion. Yeah, we look at the 275, you know, certainly the lion's share of those are definitely very robust from an economic perspective and would have IRRs that exceed 100%. I think when you refer to tier two locations, you know, what would the rates of return on those zones be? Those are still definitely economic, and so certainly, more than half of that inventory would have rates of return that are better than 50%. On an average basis for all of the inventory there, we would expect that at a 100% rate of return threshold would be met.
Okay. Over to you, Chris.
Thanks, Jeremy.
We'll now move to a question from Menno Hulshof with TD Securities.
Good morning, everyone, and thanks for taking my questions. I'll just start with one on synergies. I know you didn't specifically cite an estimate, but where do you see the synergies upside with this deal, be it infrastructure or otherwise?
Oh, thanks, Menno for the question. You know, it's the Mica asset, which we really like, is a somewhat of a self-contained asset with the infrastructure in place. What we like with those stacked horizons, with the gas plant and infrastructure there's some build-out of the battery to the pipeline. But it really is a kit that we can develop and extract a lot of value with the low operating costs and again, multi-stacked horizons with a pad-type development. I think from a synergies point of view, at a corporate level, I mean, this will be managed within our Canadian business unit. We've got, for example, our drilling and completion team out of Calgary drills wells in all our assets, including the Powder River Basin.
Those wells are deeper and than the Montney and actually have similar completion intensities. We'll leverage internal resources from a G&A point of view. Again, the team that Jeff referred to and I referred to will effectively shift gears and work on that asset. It's not much from a G&A point of view that we would look to add. I think the real opportunity, and Jeff talked about this, again, we really like the delineation, the low risk nature of the play.
With these type of plays, I mean, we didn't bake in any efficiencies going forward, but with the number of drills and the way that the industry, and I would say Vermilion as well, pride ourselves as a strong operator, we look to further enhance and optimize things like completions and pad design and cube designs. Those, I think, are the real opportunities as we move forward on this type of play.
Terrific. Thanks for that, Dion. Maybe I'll just follow up with a question on relative economics. How do you expect the acquired assets to compete for capital with your existing Western Canadian portfolio?
Thanks, Menno. What we see is we're capital allocators, and so when we look across the portfolio, as mentioned in the presentation, we're gonna want to maintain and ideally enhance our European exposure. With the planned activities that we have with drilling in Europe and in particular with the CEE development on those Croatia wells, we see ability to maintain that production base international at 36%. Hopefully, we can do better with potentially some acquisitions there as well. If you then swing back to North America, I mean, what we'll do is we'll look to high grade across the portfolio and target a production range for North America in that 55,000-60,000 BOE a day.
What that means is when we look at Mica and the, you know, these Middle Montney wells with rate returns in excess of 200%, we're gonna wanna allocate capital to the new asset to Mica and grow that production up to that production plateau of 28,000 BOE a day, and then reap the reward of CAD 200 million a year of free cash flow. What that means then is if we're capping the North America and optimizing the North American production within that 55,000-60,000. I think what you're gonna see is less capital being allocated to Alberta and less capital being allocated to Saskatchewan.
Those are assets that have been great for us, and we're now targeting them to be more flat in nature, and we'll just, again, work them hard and maximize the free cash flow within those assets. The U.S., we talked about before the Powder River Basin. We like that little tuck-in we did last year. We're moving to more two-mile wells on that asset base. Though it's not a lot of activity, you know, we'll drill 6-8 wells there, and I think we can, you know, nominally double the production in the U.S. from here. You know, that's how we're currently thinking about capital allocation across the company. I think the key point is maintaining and ideally enhancing the international portfolio and then high grading across North America.
Thanks, Dion. That's all I had.
Great. Thanks, Menno.
As a reminder, to ask a question, please press star one. We'll now move to Travis Wood, National Bank Financial.
Yeah, good morning. My question, I have two. The first, do you plan on hedging any of, I guess, primarily the natural gas exposure, just as you think about ramping production here, right through 2023? The second question would be, how should we think about this, the plateau time horizon, with respect to infrastructure expansion? Is it more related as you think about the corporate volumes? Like, is this intended to offset declines elsewhere, so you kinda stay within that 100+ thousand BOE a day range over the next several years? Or can you kinda walk us through the cadence of that add to 2028?
Yeah, maybe I'll talk to the second part of the question first and then pass it over to Lars to talk about hedging. How we think about that, as noted in the presentation, 95,000 to 100,000 BOEs a day will be our exit rate. We would look to hold that and then ultimately maximize our free cash flow across the platform. For Mica, you know, the good news is we've got quite a bit of flexibility given the working interest and the infrastructure that will be in place. I expect us to allocate increasing amounts of capital, and it is self-funded, as discussed, to the Mica asset.
At this point, I think we would reach plateau 25 in 2025 or 2026, again, within our discretion of how fast we wanna ramp up that asset. As we're doing that, again, if we keep the production in North America at 55,000-60,000 BOEs a day, then we'll allocate and basically high grade across the North American portfolio, as mentioned to Menno, in order to achieve that. So again, nominally 95,000-100,000 BOEs a day, flat production, and really truncating the North American production to then high grade within the portfolio. With that, I'll pass it over to Lars to talk about our hedging plans.
Yeah. Hi, Travis. From a hedging perspective, you know, I think gas is what we have been primarily focused on here through the first three months of 2022, both on the European and North American side. In terms of North American gas, we're about 45% hedged for the last three quarters of 2022, and then that drops off into 2023. With the rally in prices last week, I would say prices right now in the strip are in excess of what we were using in our evaluation here. We will be looking to lock some of that in as we roll forward here.
Ultimately, we'll continue to target that corporate hedge position of 25%-50% on a rolling four-quarter basis, and we will start to lock in more North American gas, given that we'll have a bit more of a meaningful presence in the portfolio going forward.
Okay. That's all for me. Thank you.
Thank you, Travis.
Once again, for any final questions, star one. We'll hear from Logan Frazier. Pardon me. Actually, that will conclude our question and answer session. We thank you for participating. At this time, I'll turn the call back over to your host for any closing remarks.
Well, I wanna thank you again for participating in our Leucrotta acquisition conference call.
Ladies and gentlemen, this will conclude your conference for today. We thank you for your participation. You may now disconnect.