Good morning, ladies and gentlemen, and welcome to the Vermilion Q3 2026 conference call. At this time, all lines are in listen-only mode, and 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 zero for the operator. This call is being recorded on Wednesday, November 4th, 2026. I would now like to turn the conference call over to Mr. Dion Hatcher, President and CEO. Please go ahead.
Thank you. Good morning, ladies and gentlemen. I am 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, Randy McQuaig, Vice President North America, Lara Conrad, Vice President Business Development, and Travis Thorgeirson, Director of Investor Relations and Corporate Planning. Please refer to the advisory and forward-looking statements in our Q3 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. We are delivering on our plan to structurally improve our EFCF, with operational momentum continuing to build as we progress the key milestones communicated during our Investor Day. The rate of change in profitability is being reflected in operational results and outlook, with improvements to our capital efficiencies, base declines, and controllable cost structure.
Our diversified portfolio is benefiting from elevated pricing for European gas, Canadian condensate, and Dated Brent oil. Combination of delivering on production and cost targets while benefiting from higher prices has enabled accelerated debt reduction and increased shareholder returns. This quarter was focused on the execution of planned maintenance activities, which were completed on schedule and without incident, as well as the continued integration of the recently acquired German assets. Planned maintenance work, like this quarter's turnaround in Ireland, demonstrates Vermilion's commitment to safety and operational excellence. Maintenance work complete and production restored, Vermilion expects European gas of approximately 100 million cu ft per day in Q4. Looking beyond the quarter, Vermilion is also pleased to announce our 2027 budget, headlined by E&D capital of CAD 675 million-CAD 725 million and associated production guidance of 122,000-126,000 BOE per day.
2027 program builds on the company's operational momentum with increased drilling activity across the international business, a three-rig program in the Deep Basin, and continued advancement of the Mica's Montney development. This production guidance represents approximately 2% absolute and 5% per-share growth from 2026. Important to note, the 2027 budget includes approximately CAD 150 million of capital that is forecast to add production starting in 2028. This project represents an important step in our five-year plan. Our strategic infrastructure investment in Germany includes a debottlenecking pipeline to increase production from our Wisselshorst discovery well, as the deliverability of this well far exceeded our expectations. This project is planned to start construction in early 2027 and is expected to increase gross capacity to approximately 17 million cu ft per day by the end of 2027.
We're also investing in Australia, where Wandoo crude, which sells for a premium to Brent pricing, offers strong returns. We will execute a two-well campaign utilizing a rig that is part of an industry multi-well program in order to reduce our rig mobilization costs. Most cost-efficient timing of the rig results in production from the Australia drilling program commencing in early 2028. As these projects are completed, Vermilion expects 2028 E&D capital to return towards the 2026 levels in the low CAD 600 million range. Finally, the 2027 budget is consistent with our sustaining or stayed flat capital estimate of CAD 565 million. In 2027, we are forecast to deliver production growth, even though only CAD 550 million of the CAD 700 million of capital adds volumes in 2027. We remain confident in our ability to meet or exceed the multi-year production and capital objectives established at our Investor Day.
Our plan factored in the strategic international capital program in 2027 to increase exposure to European gas and Brent oil. At current commodity prices, our 2026 excess free cash flow forecast is over 60% higher than our initial forecast for the year. As we look to 2027, our excess free cash flow is forecast to be over 20% higher than 2026, even with the higher capital program in 2027. Our excess free cash flow estimate for the five-year period has increased to CAD 1.9 billion. The estimate factors in the 2026 operational outperformance and price, uses the 2027 budget and strip price, then reverts back to the Investor Day conservative price assumptions for 2028 to 2030. That's an increase of CAD 200 million one year into our five-year plan.
With the strength in our underlying business, we also announced our plan to increase the 2027 base dividend by 4% to CAD 0.56 per share annually. This represents the sixth consecutive year of dividend increases, aligning with our commitment to sustainable, growable dividend growth. Vermilion's dividend payout remains among the lowest in the Canadian E&P sector at sub 10% of our fund flows, offering capacity for years of future increases. I will now pass it to Lars to discuss the quarter and add some additional detail on the 2027 budget.
Thank you, Dion. In the third quarter, Vermilion generated fund flows from operations of CAD 237 million on E&D capital expenditures of CAD 146 million, resulting in free cash flow of over CAD 90 million. This cash flow supported increased shareholder returns and further debt reduction in the quarter. Following the increase in our return of capital target to 40%-60% of EFCF announced with Q2 results, we paid CAD 21 million in dividends and repurchased CAD 20 million of shares during the quarter, twice the value repurchased through the first half of the year. Through the first nine months of 2026, Vermilion has returned CAD 92 million to shareholders while reducing net debt by nearly CAD 180 million. This represents a CAD 1.76 per basic share of combined debt reduction and shareholder returns year to date, which we expect will increase with a strong financial outlook for Q4.
During the quarter, we continued to advance key operational initiatives across our international portfolio. In Germany, we closed the previously announced acquisition of producing assets and brought the Wisselshorst well on production in July. Together, production from Wisselshorst and the acquired assets position our German business for production of approximately 7,500 BOE per day in the fourth quarter, which is a 25% increase compared to Q1 of this year. Overall, European gas production in the quarter was impacted by planned turnaround activity in Ireland and non-operated downtime in Germany, which temporarily reduced production to 81 million cu ft per day. All of the required work was completed safely and on schedule, and production has been fully restored, positioning us for fourth quarter European gas production of approximately 100 million cu ft per day.
Subsequent to the quarter, we spudded a well in the Netherlands, with first production expected in the first half of 2027. In Canada, by reallocating capital within the portfolio, we were able to add five net wells in 2026 while managing to the midpoint of our corporate E&D capital guidance. Across our Canadian business, unit operating expenses are down approximately 10% year- over- year, driven by realized synergies and our continued focus on operational excellence. In the Deep Basin, we had multiple wells rank amongst the most prolific in Alberta during the quarter, including one well that produced 12.6 million cu ft per day of natural gas and over 400 bbl per day of condensate in the month of August. This well was the second-highest producing new gas well in the province that month, and the outsized condensate production drove exceptional well economics.
We also set a new industry benchmark by drilling an Upper Mannville well to nearly 7,800 meters, representing the longest Upper Mannville well drilled by any operator. Deep Basin production was temporarily lower in the quarter due to planned third-party maintenance and the timing of drilling activity. We also elected to defer several new well startups and restrict gas production to align with expected higher pricing later in Q4. In the Montney, we brought a four-well pad on production in Alberta, piloting a new completion approach to reduce sand and water recovery. Subsequent to the quarter, we established a new drilling pace benchmark on a pad that will be completed and brought online in the coming months. Vermilion remains focused on translating these operating improvements into repeatable reductions to our CAD 8.2 million per well D&C cost.
The wells brought on production this quarter have been impacted by third-party downtime that has extended into the fourth quarter, but have otherwise produced in line with expectations when capacity has been available. Looking forward, we expect production to average 121,000 BOE per day in the fourth quarter, which will result in full year 2026 production of 122,400 BOE per day on E&D capital expenditures of CAD 620 million. Annual production is above the original midpoint of guidance despite unplanned Australia downtime and shut-ins and deferrals of Canadian gas wells to optimize profitability. We expect to see production growing through Q4 to align with typically higher pricing. As Dion noted, we released our 2027 budget this morning with E&D capital of CAD 675 million-CAD 725 million, supporting production guidance of 122,000 to 126,000 BOE per day. Our Canadian investment is broadly unchanged from 2026.
The increase in our 2027 budget is concentrated in European gas and Brent oil international projects that support production beyond 2027. In our international operations, we plan to invest approximately CAD 315 million in 2027, a roughly 50% increase compared to our 2026 budget. This capital will be focused on advancing high-value European natural gas opportunities, as well as drilling in Australia. In Germany, we plan to drill two follow-up wells at Wisselshorst, with spud planned for the first half of the year. We will drill these two wells back-to-back using the same rig, and we expect cost savings of approximately 20%, along with a 30% improvement in cycle time compared to previous drilling programs. We will also continue development of key infrastructure, including a connection to the broader gas distribution network to support higher production from the discovery at Wisselshorst.
In the Netherlands, we plan to drill two wells targeting larger structures than those pursued in recent drilling programs. In Australia, we plan to commence a two-well drilling program in the second half of 2027, aligning with a broader industry drilling program, which will help reduce mobilization and demobilization costs. Based on the currently planned timing of rig availability, we expect drilling to take place late in the year, with production to come online in early 2028. We will also continue to fund economic workover and optimization projects across the international portfolio. We expect European gas production in 2027 to be in line with 2026, as natural declines at Corrib are offset primarily by year-over-year growth in Germany.
With the successful 2027 Wisselshorst drilling program, we expect European gas production to increase by mid-2028, as production from new discoveries is brought online and the debottlenecking pipeline from the Wisselshorst discovery well is completed. In Canada, we plan to invest CAD 385 million in our liquids-rich gas business. In the Deep Basin, we will target high-return wells across our asset base, with a focus on condensate-rich prospects to capture strong pricing. We expect minimal infrastructure requirements, with drill capital primarily directed to proven developments, while continuing with strategic investments to further strengthen our depth of inventory. In the Montney, we are allocating capital to drilling activity and expanding owned infrastructure, while growing production 10% year- over- year, all within Mica's cash flows.
Finally, we noted in the budget release the revised timing of third-party gas processing infrastructure in Northeast British Columbia, which is expected to shift our 28,000 BOE per day Montney target production rate to early 2029 from mid-2028. In the interim, we are redirecting capital to high-return Deep Basin locations that use existing infrastructure. Exercising the flexibility we have within our portfolio keeps us on track for the production growth and excess free cash flow commitments outlined at our 2025 Investor Day. This is a clear demonstration of the strength of Vermilion's diversified approach that offers enhanced optionality for capital allocation. Once the Montney reaches its target production rate, which requires CAD 45 million of infrastructure and 28 wells to drill between 2027 and 2028, we expect annual drilling to moderate to approximately eight wells to maintain production, with no material infrastructure requirements going forward.
I will now pass it back to Dion.
Thank you, Lars. In summary, Vermilion delivered another strong quarter and made significant progress executing our five-year plan. The 2027 budget builds on that momentum and sets the stage for growth. We are making the investments that will structurally improve our business with improved capital efficiencies, lower base declines, and lower unit costs. Improving business fundamentals in combination with higher production is forecast to deliver per-share excess free cash flow growth. Following the close of the largest cash acquisition in the company's history, Vermilion has reduced net debt by approximately CAD 900 million while growing production per share by 50%. Today, our outlook is even stronger, with fourth quarter fund flows forecast to be significantly higher than Q3, supported by higher European gas and overall liquids volumes, as well as elevated European gas prices.
Looking ahead, European gas fundamentals remain constructive, with inventories entering the winter season significantly below historical averages and Europe increasingly reliant on LNG imports to balance the market. These dynamics are expected to support European gas prices through 2027. With the recent run-up in prices, the current TTF strip for the balance of 2026 is in excess of CAD 40 per MMBtu and in excess of CAD 30 per MMBtu for the full year of 2027. Building on our decades of expertise and extensive land position, we have allocated more capital to Europe to ensure we provide responsibly produced, secure energy for the countries that we operate in. While commodity prices will fluctuate, our focus remains on the factors we can control. With operational tailwinds and commodity price support, the company is very well-positioned to continue generating sustainable free cash flow and shareholder value.
With that, we will now open the line for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Amir Arif from ATB Cormark. Please go ahead.
Hi, thanks. Good morning, guys. Congrats on a good quarter. A few quick asset questions for you here. Starting with Germany, the next two wells that you are drilling, they seem to be in the thicker part of the discovery. Are you expecting better production at all out of these two wells? I just wanted to confirm the timing. I know that you've got the debottlenecking project ongoing. I think that's what allows for production to grow in mid-2028. I'm just wondering when the production adds from the two wells being drilled next year will come on.
Great. Thanks, Amir. I'll pass it over to Darcy to just walk you through that. The summary level would be the pipeline, the Wisselshorst pipeline. That's the one I noted on the call will kick off construction in early 2027 and be on production late 2027, and then the two Wisselshorst wells will be on by mid-2028. Darcy, do you want to walk us through what you think of those next prospects, any other details?
Yeah, thanks, Amir, for the question. I'll kind of step back, maybe give a bit of a broader view of Germany and the Visselhövede area. In the immediate term, on a gross basis, we expect 3 million-5 million cu ft a day from that first Visselhövede discovery well. That's certainly not indicative of the capabilities of the well, but really the current capacity in the local network. The first step of kind of getting past that restriction is we will build a new 12-inch sales pipeline for this initial well. We're well along here. We've ordered pipe, we've ordered long lead items. We've recently selected the construction contractor that we will use. We do plan to break ground on that project in Q1 2027. As Dion said, we expect startup of this pipeline late in 2027.
That increases the takeaway capacity for the original Visselhövede source well to kind of that 15 million-17 million cu ft a day, which matches the onsite processing facility there. If I step away from Visselhövede just for a second, just wanted to provide a production update on the deep gas well that we brought on at Osterheide, a well that we had originally forecast with restricted rates when we drilled it. This well has produced a little over 8.5 million cu ft per day since it started up, and our production in August recently here was over 13 million cu ft a day. That has been the highest month of production since we started up the well in 2025, allowing us certainly to capitalize on the stronger-than-expected local demand in the network there and really capitalize on that high gas price environment.
It is worth pointing out that this well, since it started up, has generated over CAD 65 million of free cash flow. When I compare the Osterheide well with the Visselhövede source discovery well, that Visselhövede well is 2.5 times the size of this Osterheide well. That initial Visselhövede well will be quite impactful once these sales restrictions have been removed with the pipeline. If I go back to the Visselhövede source area, focusing on the new wells, we are planning two follow-up wells on that same exploration license where we made the discovery at Wisselshorst Z1a. Lease construction is going to start right away here in November, and then we expect the rig move is scheduled for later in Q1.
We would expect those wells to be drilled and into well testing early Q4 of next year, and then that puts us on schedule for first gas from those two wells mid-2028. From a production point of view, these next two wells will not have that same restriction as Z1a had. They will both tie into the higher capacity sales network in the area, rather than the kind of local distribution network that we used for Z1a. We would expect production from these two wells starting in 2028 at a rate of about 15 million-17 million cu ft again.
Would that be per well, or is that a combined? Sorry for the-
That's a combined from those two wells, limited by the gas processing installation on that particular site.
Okay. Appreciate that color. Just moving over to the Netherlands, the two wells you're going to drill there, I know you mentioned you're chasing larger targets. Will these carry a higher exploration risk, or are they more development-type wells, similar to what you used to drill in the past?
Oh, thanks, Amir. I'll pass it back to Darcy. Yeah, sorry, just to close out the German, Darcy, for a lot of good color there. The only thing I would add to that is, and maybe we've talked about this before, but that Visselhövede well, the one that Darcy mentioned 2.5 times, the Osterheide well, that's over 60 Bcf of gas recoverable. When we look at the Z2 and Z3, and maybe that's where you're going with the thickness, we do put those in our plan as risked wells. That means we're forecasting results that are less than the discovery well, even though we're about a kilometer away from the first well. Anyway, potentially some upside there. You got to drill the wells, of course, but sure is nice to be drilling those wells offsetting a really large discovery well.
With that, some good things happen in the Netherlands, and Darcy, back to you.
Yeah, Amir, in the Netherlands, as we said, we are currently drilling a well here with two more wells planned in 2027. You correctly pointed out that those wells are potentially larger than some of the wells we have been drilling recently in the Netherlands. I would not necessarily read through to that they are higher-risk opportunities. They are opportunities where we are stepping out a little bit further from a surface point of view from our existing areas, and we had kind of limited ourselves from a permitting point of view to drilling more kind of wells in the heart of our operations. The wells we are drilling next year are still off existing pads, but they do allow us to reach what we think are larger prospects than we have seen in the last couple of years.
But I think similar risk levels than the drilling you have seen from us in the Netherlands in the last five years, certainly.
Thanks, Darcy. I mean, to summarize that, Amir, what we are really excited about is we have got the well we are drilling in the Netherlands and two more next year, and then the two wells that Darcy walked through at Visselhövede. So, we have got a five-well program over the next nominally four quarters. If you think about the EURs on those wells, they are 20 Bcf-40 Bcf. So, with five wells and some larger structures, we are pretty excited about converging on the budget results, if not better, given the quality of the targets. So, we look forward to reporting more as we get into the second half of next year.
Yeah, that should be good drilling coming up. Just shifting over to Australia, the two wells you are going to drill in late 2027 with production adds in 2028, will those offset production declines, or is it enough, or two wells enough to sort of get that field level production to grow into 2028?
Got it. Sorry, are you referring to the Australia?
Australia, yeah.
Yeah. Quick answer there, and Darcy, jump in. But yeah, as a reminder, we drill in Australia every two to four years. With commodity prices the way they are, Brent, Dated Brent in particular, and the premium you get, it's quite attractive. We had foreshadowed this during the Investor Day back in December that 2027 was likely to be a higher capital year. So, adding those Australia drills gets you from the low CAD 600s to the CAD 700 midpoint of our guidance. To your point, they're high-rate wells, and so these wells are typically 1,000 barrels. We do choke them, and then we're able to hold the platform flat for two to four years, depending on the restrictions and the quality of the wells. It's infill drilling.
Again, we drill lots of wells in that platform and quite excited to have a hot rig that's going to be in the area to execute the program as well. But sorry, Darcy, anything I missed there on those particular wells?
Yeah, I think those two particular wells, we look at 2028, you certainly will see some growth over the rates that we have seen in 2026 and 2027. Certainly as a result of those two wells, but also getting back to normal operations at Wandoo. As you know, we have been impacted by two cyclones this year that took us offline for quite some time. Yeah, I think you should expect to see some pretty good growth in Australia in 2028 versus 2027, sir.
I appreciate the color, but if I had to put some numbers around it, so we are 4,000 barrels a day at the field level, even if you choke it back to wells? Would that be fair in 2028?
Yeah, those are fair numbers. We are going to exit the year at around 3,000 Australia, to Darcy's point, with some of the maintenance work behind us planned through the year and the wells ramping up. So, without those wells, your run rate over 3,000, you will drill the wells, and then we will be 4,000 to 5,000, I think, is how you would think about it, Amir. Again, some of that, with pricing the way it is and the premiums on that crude, we have got the flexibility with volumes behind pipe there to be 5,000, and that will be a game day decision.
Okay. Sounds good. One final question just in the Montney. I know you talked about a new completion approach to reduce the sand and water recovery. Can you just provide a little more color? Are you changing the completion approach, or is it more in terms of the flowback timing and style?
I will pass it to Randy here. The read-through is the team has done a great job, as you know, taking costs down by 25%, and we thought it interesting to flow through some examples of things the teams are doing to continue to find ways to take those costs down. Randy, maybe any more color on those pilots and where you think it is going?
Yes, thanks. I think when we looked at, we kind of trialed a soak time period here where we let the well soak before bringing them flowback after we fracked. We certainly did see less frac sand recovery and less load fluid water recovery. I think from our standpoint, we need to do a bit more analysis on it, but I think, to Dion's point, we are continually trialing different DCET techniques and completion techniques, and also operation techniques as we sort of kind of level this thing out to get it up to peak production and understand that. We see there are savings for sure in both our capital side and our OPEX side with this trial, and we just need to analyze a little bit more to understand if this is the new go-forward plan.
Maybe super quick on the drilling pace. I know a couple records there.
Yes, we are very excited with the work we have done here. Lars noted it in there that we had a pacesetter well here in our last drilling program. We will continue with that. Hopefully, we want to be able to follow that up with the next two trials we are doing in the 2027 program. With that, I think, where we do see, we quote 8.2 million DCET, we do have line of sight to get this down to 8 million, and that is really what we are striving towards, and then obviously never stopping beyond that.
Thanks, Randy.
Got it. Appreciate the additional details. Thanks, guys.
Nope. Thanks for your questions.
Thank you. There are no further questions at this time. I will turn the call back over to Mr. Dion Hatcher.
Good. All right. With that, I want to thank everyone for participating in the call. Enjoy the rest of your day.
Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.