Please stand by. We're about to begin. Good day everyone. Welcome to the Vermilion Energy Corrib Acquisition and 2022 Budget Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Curtis Hicks, President. 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, and with me today are Dion Hatcher, Vice President, North America, and incoming President as of January 1, Lars Glemser, Vice President and CFO, Darcy Kerwin, Vice President, International and HSE, Jenson Tan, Vice President, Business Development, and Kyle Preston, Vice President of Investor Relations. This morning, we announced the acquisition of an incremental 36.5% interest in our operated Corrib project in Ireland, along with our 2022 budget and guidance, as well as plans to reinstate a quarterly dividend. During this conference call, I will be referring to a PowerPoint presentation that can be found on our website under Invest With Us and Events and Presentations. Slide 2 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. Well, it's certainly nice to see oil prices recovering this morning after Friday's sell-off. Before I get into the presentation, I just wanna point out that all the financial forecasts included in the press release and presentation were priced using the forward strip closing prices from last Friday. With that, let me start off with a summary of the Corrib acquisition. As we announced this morning, we have entered into an agreement with Equinor to acquire its fully owned subsidiary, Equinor Energy Ireland, which owns a 36.5% interest in Corrib, for total consideration of $556 million before closing adjustments and contingent payments.
The acquisition is expected at 23 million barrels of 2P reserves and approximately 7,700 BOE per day of high margin, low decline, low emission production. This production is forecast to generate approximately CAD 365 million of funds flows from operations and CAD 361 million of free cash flow in 2022. The purchase price equates to an FFO multiple of 1.5x and has a free cash flow yield of 65% at current forward strip prices. The transaction has an effective date of January 1st, 2022, and is expected to close during the second half of 2022 after all requisite approvals have been received.
Between the effective date and the closing date, all of the free cash flow generated by the asset will be netted off the purchase price and will reduce the cash payment to close, which we estimate will be between $200 million and $300 million, depending on the actual closing date. We expect to self-fund this acquisition with free cash flow generated in 2022. As part of the transaction, we have entered into an agreement with Equinor to hedge approximately 70% of the production for 2022 and 2023. For reference, the NBP forward price is currently trading at approximately $23 per MMBtu in 2022 and $15 in 2023, which are the price levels we expect to hedge at over the next few days.
Given the recent volatility in European gas prices, we have also agreed to a contingent payment on a portion of the 2022 revenue if European gas prices exceed a certain level. The details of the contingent payment structure are outlined in the press release, but I will point out that the contingent payment is capped at $25 million, and based on the forward strip today, we estimate the contingent payment would amount to approximately CAD 13 million payable in 2023. The structure of this transaction, including the deal contingent hedges, allows us to lock in the majority of cash flow for the next two years during a period of unprecedented high European natural gas prices, providing high certainty of an approximate two-year payback period. Vermilion has a long history with Corrib.
We first acquired a non-operated 18.5% interest in the project in 2009. In 2018, we increased our ownership to 20% and took over operatorship of the project. With the closing of the acquisition we announced this morning, our ownership will increase to 56.5%. As part of our M&A strategy, we are always looking for accretive acquisitions that consolidate or complement our existing asset base. This acquisition ticks all the right boxes. It consolidates ownership in an operated asset with high margins, low decline, and low emissions at an attractive price.
Corrib has an estimated 2022 operating netback of about $130 per barrel of oil equivalent and an annual decline rate of approximately 15%, while delivering best in class Scope 1 and 2 emissions intensity of 4.2 kilograms of carbon emissions per barrel of oil equivalent. Because we already operate the asset, it means there is essentially zero integration risk and very little incremental go-forward costs. This is a highly accretive acquisition. Based on forward strip pricing, we estimate a 2022 pro forma FFO and FCF per share accretion in excess of 30% and 50%, respectively, with additional accretion expected in 2023 and beyond. The acquisition is self-funded and reduces our leverage in 2022 by 11%, with further deleveraging expected in 2023 and beyond. This is achieved without the need of issuing equity.
As a result, it will serve our long-term shareholders well by minimizing dilution and enhancing our ability to return capital to shareholders. The acquisition significantly increases our exposure to premium-priced European gas and rebalances the international weighting of our portfolio. On a full-year pro forma basis, our production base will be 22% exposed to euro gas, while our FFO will be 42% exposed to euro gas. Our international production and FFO weighting will increase to 39% and 60% respectively. As the acquired asset will generate netbacks for 2022 in the order of $130 per BOE, you can understand the value of having euro gas in the portfolio. We believe our expertise as an operator in Ireland and our relationships with the key regulatory and government bodies was a key component of our winning bid.
This transaction aligns with our historical value-driven strategy of acquiring from majors, which typically results in outsized returns for Vermilion. The Corrib acquisition delivers a very high IRR of 41% and is expected to reach payout in approximately two years. This level of return and payout would be very difficult to achieve on a North American transaction. As I've mentioned, one of the key attributes of this acquisition is the increased exposure to premium-priced European gas. On slide six, we show you the impact from this acquisition on our commodity mix. On a 2022 pro forma basis, European gas will represent approximately 22% of our production base and approximately 42% of our FFO. The increase in FFO weighting relative to production illustrates the significant margin expansion we get from this increased European gas exposure, as driven by the high netbacks we receive.
Vermilion's international diversification and exposure to global commodity prices has always translated into strong operating netbacks, even when compared to some of our oil-weighted peers. On slide 7, using RBC's comp sheet, you can see that Vermilion has the highest netback among our peers, despite having a relatively balanced portfolio between oil and natural gas. I want to spend a little time talking about the European gas market fundamentals. In the chart on the right-hand side of this slide, we show you the historical and forward prices for the NBP benchmark in gray compared to AECO benchmark prices in orange, with all prices referenced in Canadian dollars per MMBtu. We overlay this with Vermilion's average corporate realized natural gas price for each of the years in the chart. There are 2 key takeaways from this chart.
First, euro gas prices trade at a significant premium to North American gas prices and remain elevated for 2022 and 2023. Second, as a result, Vermilion receives a substantially higher gas price compared to AECO, and the acquisition will significantly enhance our corporate realized gas price going forward. There are several market fundamentals supporting the high European gas prices we see today. While prices may not remain at the current prompt level above $30 per MMBtu forever, we believe that many of these factors will support above average pricing over the next several years. To expand on some of these factors, I'll move to slide 9. Declining European domestic production. The North Sea is a mature basin and is in decline. Onshore production in Europe is also in decline, and the Dutch government is still committed to shutting in the Groningen field in October 2022.
This is a field that was producing over 2 Bcf a day a few years ago and around 5 Bcf a day a decade ago. The rising use of gas in the power sector. Coal-fired plants are being phased out, which is increasing the dependence on gas-fired power plants. The German government, for instance, recently accelerated the phase-out of coal power generation from a previous target of 2038 to 2030. Natural gas is increasingly being recognized as a necessary transition fuel while renewable infrastructure gets built out. Rising carbon prices. European gas prices are highly correlated with the price of carbon, and as you can see on slide 9, carbon credit prices have increased over 200% in the last couple years.
The uncertainty with respect to gas flows from Russia into Europe increases the current demand for LNG in Europe, further exacerbating the upward pressure on LNG and euro gas pricing. Lower LNG imports due to competition from Asia. Many of you would have seen the headlines a couple months ago about China ordering top energy firms to secure supplies at all costs. Europe competes directly with Asia for LNG, which is contributing to the elevated price of both LNG and euro gas. One of the key differentiating features of Vermilion relative to our peers is our international diversification. We came a little bit more weighted to North America over the last couple years as we expanded our business in these regions, but we were always committed to our international business, and we continued to invest in our international assets while screening various acquisition opportunities as they became available.
There is not much deal flow in Europe compared to North America, and it requires patience to find the right opportunity that fits with our strategy. The Corrib acquisition is a perfect fit as it meets all of our acquisition criteria. The acquisition will also rebalance our international weighting and commodity diversification, which is a unique differentiator in our business model. We now project that about 39% of our production will come from our international assets, and 60% of our 2022 FFO will be derived from our premium-priced European natural gas, Brent oil in Europe, and Brent premium-priced oil in Australia. We see this contribution weighting continuing beyond 2022. As I review the next 2 slides, keep in mind that these per share metrics are being achieved while accelerating deleveraging.
These slides illustrate the strong FFO and FCF per share accretion metrics, which I've already outlined. 33% on FFO and 53% on FCF. One of the reasons this acquisition delivers such strong per share accretion is the fact that we did not have to issue any equity to complete the deal. With the unique structure of the deal, whereby approximately 70% of production is hedged for 2 years, combined with the long closing period, we're able to lock in the majority of cash flow over the next 2 years, which will grind down the purchase price, reduce the amount of cash required to close, enable us to achieve the acquisition economics we quoted earlier.
From a corporate perspective, this high return acquisition accelerates our deleveraging and increases our FCF, which will allow Vermilion to accelerate and increase the return of capital on a per share basis. Vermilion avoided issuing equity and selling assets into a difficult market during the initial phase of the most recent downturn in order to avoid significant dilution. This acquisition is self-funded and reduces leverage without the need of issuing equity. As a result, it will serve our long-term shareholders well and will ensure per share return of capital is maximized. Vermilion was trading at one of the highest free cash flow yields prior to announcing this acquisition, which you can see on the next two slides using research from Peters & Co. Given the significant free cash flow accretion from this acquisition, our free cash flow yield increases to well over 50%.
To put this into perspective, we are forecasting 2022 full year pro forma free cash flow in excess of CAD 1 billion, which compares to our market cap of about CAD 1.9 billion based on Friday's close. If we look at it on a capital structure neutral basis, using debt-free adjusted free cash flow as a percentage of enterprise value, as shown on slide 14, again using Peters & Co. research, we still screen as having the highest yield across this peer group, approximately 34%. Corrib is a very low emission intensity asset with a best in class Scope 1 and 2 emissions intensity of 4.2 kilograms of carbon emissions per BOE. This chart puts it into better perspective comparing Corrib and Vermilion against our industry peers, which are shown here segregated by their oil or gas weighting.
Moving on to our 2022 budget guidance and budget and guidance. Our board has approved a 2022 E&D capital budget of CAD 425 million with associated production guidance of 83,000-85,000 BOE per day. This is in line with the preliminary outlook we provided with our Q3 2021 release a couple weeks ago. This guidance does not include any impact from the Corrib acquisition due to the uncertain closing date. As soon as we get confirmation of the closing date, we will update our 2022 guidance. We have updated the following financial figures based on market close strip pricing from last week and have therefore incorporated the impact of the 10%+ drop in 2022 full year oil prices.
Based on these forward commodity prices, we forecast 2022 full year pro forma FFO inclusive of the Corrib acquisition in excess of CAD 1.45 billion and free cash flow in excess of CAD 1 billion. Our base business is forecast to generate FFO and free cash flow in excess of CAD 1.1 billion and CAD 650 million respectively, excluding the acquisition. The majority of free cash flow after dividends will be allocated to debt reduction and funding the Corrib acquisition.
We forecast approximately CAD 400 million of debt reduction in 2022 after funding the Corrib acquisition, resulting in year-end net debt of less than CAD 1.3 billion and a net debt to trailing full-year pro forma FFO ratio of less than 0.9 times, which is 11% lower compared to what it would have been on a standalone basis of approximately 1.0 x. Keep in mind, we'll not be including the production or FFO from this acquisition in our financial statements or quarterly reports until the acquisition closes. It is important to note that regardless of the closing date, the economic impact of this acquisition does not change. We plan to reinstate a dividend in the first quarter of 2022, starting with a base quarterly dividend of CAD 0.06 per share.
This equates to an annual cash outlay of approximately CAD 40 million, which is less than 3% of 2022 full year pro forma FFO and approximately 5% of FFO under our mid-cycle commodity price assumptions. At this level, we believe the quarterly dividend is sustainable through various commodity cycles. We still have more debt to pay down, but we have line of sight to our ultimate debt and leverage targets and believe this dividend level provides the appropriate balance between providing a cash return to our shareholders at this time while allowing for further debt reduction. Our next leverage target is 1.5x net debt to trailing FFO at mid-cycle pricing, which implies an absolute net debt level of approximately CAD 1.2 billion.
As we approach this target, we will consider additional return of capital to shareholders through one or a combination of base dividend increases, special dividends, and/or share buybacks. The Corrib acquisition we announced today significantly enhances the company's free cash flow profile and ability to return capital to shareholders in the future. Slide 18 shows our projected debt level and leverage for 2022, including the impact from the Corrib acquisition and budget we announced today.
We expect to pay down approximately CAD 400 million of debt after funding the Corrib acquisition and end the year with net debt of less than CAD 1.3 billion and a net debt to trailing FFO ratio of less than 0.9 times on a full-year pro forma basis, which is about 11% lower than our base business of 1.0 times. Lastly, we have provided you with a snapshot of our hedge position, including the impact from the Corrib acquisition hedges that will be put in place shortly. We will be about 24% hedged in 2022 on a corporate basis, comprised of about 22% hedged on oil and just about 50% on European gas for 2022, including the acquisition hedges.
For 2023, we remain unhedged on oil, and for Euro gas, we'll be approximately 26% hedged, including the Corrib acquisition hedges. In summary, we believe the Corrib acquisition is very positive development for Vermilion and our shareholders. It is de-leveraging and highly accretive on an FFO and FCF per share basis for 2022 and beyond, and enhances our ability to return additional capital to shareholders. The acquisition is self-funded with a quick 2-year payout and high 41% IRR. The fact that we are able to self-fund it eliminates the need for a dilutive equity issuance and maximizes free cash flow per share on a long-term basis, which will provide for strong capital appreciation potential combined with increasing return of capital to shareholders over time. The Corrib acquisition increases our exposure to premium priced European gas and rebalances our international weighting.
The acquisition aligns with our corporate strategy as it consolidates interest in an operated high margin, low decline and low emission asset. Our 2022 budget and guidance is in line with the preliminary outlook we provided and aligns with our go forward sustaining capital requirements. Our plan to reinstate a 6% per share quarterly dividend will provide a sustainable base dividend for shareholders while allowing for further debt reduction and capacity for future dividend increases, which will be evaluated as we achieve further debt targets. Putting this all together, we believe Vermilion is well positioned to provide strong shareholder returns. Operator, that concludes my prepared remarks. With that, I'd like to open it up for questions.
Thank you sir. At this time, if you'd like to ask a question at this time, please signal by pressing star one on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, everyone, that is star one, if you'd like to ask a question. We'll pause for just a moment to allow everybody the opportunity to signal. All right. Once again, that's star one if you'd like to ask a question. We'll first go to Menno Hulshof with TD Securities.
Good morning everyone and congrats on the acquisition. In some of your older slide decks, you talked about future development opportunities at Corrib, and they're notably absent in recent slide decks. Are any of those still on the table? And if so, which look most interesting in terms of mitigating that 15% annual decline? And what is your best guess on how long you can economically produce from this platform?
Yeah. Thanks Menno. Darcy here. We're progressing a number of different optimization projects to ensure that we maximize the value of this asset. This includes low risk projects such as compression projects to reduce the field pressures with additional compression. In terms of development, there are several well workover candidates that we're looking at. I'd say at this stage, the development projects are still being evaluated and would certainly represent incremental upside to the transaction we discussed today. I think the second part of your question was around kind of life of field there. Our current forecast shows production kind of out into that 2034 period. So we do have a pretty good runway of life of field there.
Some of the compression projects that we are looking at kind of for later field life would substantially or have the potential to substantially increase that field life as we reduce abandonment pressures.
Okay. That helps. Just in terms of, I suppose this is a somewhat related question. Sustaining capital looks extremely low this year. What's a reasonable expectation over the next, call it, three to four years? Is there any reason to think that some of those opportunities might make their way into the budget anytime soon?
Well, thanks Menno, for the question. You know, we'll be a larger entity as a result of this acquisition. This is Dion, by the way. You know, our production the second half of next year will be, you know, 92,000 barrels a day. We're looking at the current year, and you know, we think the CAD 425 is a good proxy for our base business with our guidance and our, you know, midpoint around 84,000. If you look at 2023, again, still early days, but you're looking at that incremental decline from Corrib. As Darcy would have mentioned, you know, it's in the order of 14%-15%, so it's a relatively small volume. Let's peg it at 1,000 BOEs a day.
The question will be, you know, how much capital do we wanna allocate and which type of projects to, you know, backfill, for lack of a better word. I think it's gonna be in the order of CAD 15 million, maybe CAD 10 million-CAD 20 million. Now, in saying that, we do have our CEE assets, and we've been investing there. We had those two wells in particular in Croatia that tested at 15 and 17 million a day. In 2022, we'll be working on our installation of our gas plant, which is now in country. We'll have some volumes coming on in the CEE in 2023. Again, we'll work through those details as we get through the year.
As a conservative, you know, first pass estimate, I would say an incremental CAD 10 million-CAD 20 million for that incremental PDP associated with looking from 2022 into 2023.
Perfect. That's really helpful. Maybe I'll just wrap things up with an M&A question. You talked about the euro gas outlook being extremely good. We can all agree on that. You also mentioned limited deal flow in Europe. Are you seeing other natural gas acquisition or consolidation opportunities on the continent? Or is this likely the end of the line for euro M&A for the next little while? I'm thinking of the Netherlands in particular, given the wind down of the Groningen field.
Yeah. Thanks. This is Jenson Tan. I think we're always looking for opportunities in and around our current assets. We did have two German acquisitions that we had recently that were natural gas exposure there. It is true that it's hard to predict what's gonna come to market in the natural gas commodities and exposure in Europe. I'd say that we continue to build our relationships with the majors as well as the other industry players around our assets. I think it's hard to predict, but there are opportunities out there. There are some of the majors like Shell and Exxon, who have disclosed that they are minimizing their portfolio in Europe. We are thinking that some of those assets may be coming to market very soon.
One of those might be in the Netherlands. That's co-owned by Exxon and Shell.
Thanks a lot. That's it for me.
All right. Once again, star one if you'd like to ask a question. We'll next go to Jeremy McCrea with Raymond James.
Yeah. Hi, guys. Just a couple questions here from me as well too. I was wondering if you can give a bit more background on how this deal came together. You know, were you guys a sole bidder? I guess essentially, how did you manage to get this acquisition at such an attractive price? And then just to follow up there, like, what are some of the, you know, maybe the key risks that this may not close next year here?
Sure. Again, this is Jenson here. This asset came about as Equinor looked at their portfolio and decided that it would fit with their strategic intent to dispose of the asset. Corrib has been an important non-operated project for Equinor in the last several years. They did end up going to the market. It did involve several parties that were involved there. Now what I would say throughout that process is that Vermilion has been in a very unique position because we are the operator of the asset. We are a joint venture partner. We've known Equinor very well in that joint venture space for quite some time. We think that provided a very unique advantage to us as far as providing deal certainty on completion.
Europe and specifically Ireland don't have a lot of players. Ireland specifically is not known for a very deep hydrocarbon basin, and so I think there was always a very limited set of people who might be interested or companies that might be interested in Ireland. I would say that given the volatility in gas pricing, that posed some challenges, but we did put in this very unique hedge structure that allowed both parties to get certainty on the pricing and really lock in economics that we find to be quite attractive. Let me just. What was the other part of your-
Risk.
The risks of closing. Yeah. As far as the steps to get to closing, there's really three main conditions to get to closing. One is the Irish merger clearance, one is government approval, and three is partner approval. We don't see any of these as being problematic. We know the government, we know the partners very well. We've been in the assets since 2009. We've been the operator since 2018. Initial indications are that they should be very supportive of the approvals and the transaction. Now, getting deals to close in Europe and internationally do take longer than in North America typically. I would say it's when we look at this transaction, we don't see anything atypical. We don't see any major risk to get to close.
Our base case right now is probably six months, but it's very difficult to predict the timelines when government approvals are involved. That's just a base case at this point.
Okay. Perfect, guys. Thanks. Thank you. Congrats on the transaction here as well.
Thank you.
All right. One more time, that is star one if you'd like to ask a question. We'll now go to Travis Wood with National Bank Financial.
Yeah. Thanks. Good morning. My question, I wanted to follow on something that Menno Hulshof had brought up. I just wanted to be clear. Is it still safe to say that the base asset here at Corrib is declining at about 15%?
Yeah, Travis, that's about right. The decline over the next two years is averaging kind of in that 14%-15%, and we expect that decline will continue to flatten as we get closer to the end of field life, and that's what provides that long tail of production that I mentioned answering Menno's question there. But yeah, in the next couple of years, that 15% is right, and then flattening over time.
Okay. Perfect. Just staying on the asset side, but in Australia, it's been a while since there's been some wells brought on. Sure. What are you budgeting for the Australia piece of the budget for those two wells, maybe for the drilling side of the equation?
Hi, Travis, it's Dion. Yeah, for those two wells, we're budgeting CAD 55 million. We've contracted the jackup rig, and we would look to pick up that rig in Q2. We'll time it to be post the cyclone season. That'll set us up for first production kind of mid-year. As a reminder, these are very high-rate wells. They'll come on in excess of 1,500 barrels a day, and we often restrict the production to optimize our crude marketing. If we look at the economics, like even at a mid-cycle $55 oil, we see these wells in excess of 100%. Gosh, at current prices, in excess of 200%. As a reminder, we do sell that crude for $11 premium to Brent pricing, which helps drive those robust economics.
To answer your question, CAD 55 million and mid-year on production dates.
Okay. Not a lot of change in drilling costs or no real inflationary issues taking place on those as I think about what they had cost in the past. Pretty flat.
Yeah, we've been able to. I mean, these are long lead projects. We put a lot of effort into planning and securing the rigs, and we've, you know, been able to lock in the majority of those prices, in particular the rig rates. We're comfortable with CAD 55 million.
Okay. Thanks Dion. Last question, this might be for Lars. From a debt perspective, I mean, the focus has been on leverage. You're on pace to hit that target shortly here. This transaction shifts that a little bit. You know, how are you guys thinking about, you know, you purchased some free cash at some very good metrics, but, what's the balance here to continue to look at acquisitions and how you're thinking about debt targets and leverage targets, as you look out through 2022?
Yeah. Thanks Travis. Lars here. You know, I think the thing we would point out is the pro forma deleveraging we see for 2022 is actually 11% accretive, relative to the base company. I think that's the big point we're trying to get across, is that this is truly deleveraging for 2022. We see that deleveraging persisting into 2023 and beyond as well. As a result, this acquisition makes us a larger company on an FFO and FCF basis by more than 30% and 50% respectively. As a result of that, our absolute debt target can be increased to the CAD 1.2 billion that we quoted in today's press release versus the previous CAD 1 billion. We actually forecast hitting that target sooner as a result of this transaction.
Just to put it into perspective, Travis, when we released our Q3 earlier this month, we were referencing hitting our debt target at the end of 2022. That was when oil was at $75 for full year 2022. What we've done here over the last couple weeks is we've continued to update our forecast as oil has been quite volatile. Then as Curtis pointed out, the press release that we released this morning was using a $65 full year 2022 WTI. What we're actually seeing here is an acceleration of deleveraging in terms of being able to pivot to more of a return on capital focus as a result of this transaction.
Now, in terms of going forward around capital allocation, you know, I think anything that we do from that perspective will be completely aligned, with our objectives here around achieving debt reduction targets and, ultimately getting to a point where we're returning more of our free cash flow to shareholders from a return on capital perspective.
Okay. That's great color. Thanks for answering all my questions, guys.
Thanks, Travis.
All right. Again, everyone, if you'd like to ask a question at this time, please signal by pressing star one on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment. We'll pause for just another moment to allow one more opportunity for people to signal. Okay, it looks like we have no further questions at this time, so I'd like to turn the call back over to our speakers for any additional or closing remarks.
No further remarks, but thank you all for participating in our Corrib acquisition and 2022 budget conference call. I hope you all have a great day.
That does conclude today's conference. We thank everyone again for their participation. You may now disconnect.