When it comes to making acquisitions domestically and internationally, Canada-based Vermilion Energy looks where it can create value and opportunities that can drive strong returns in these days of heightened budget scrutiny and vast hydrocarbon possibilities.

In the last year or so, the company has considered about 100 deals, placed bids on 10 and was successful in securing two. Crucial to the strategy of the oil- and gas-focused company, which has operations in Australia, Canada and Europe, is staying disciplined.

“You want to make sure you don’t chase deals,” CEO Lorenzo Donadeo told E&P. “You don’t fall in love with them.”

Vermilion’s latest acquisition—the approximately $427 million purchase of Elkhorn Resources—adds about 57,000 net acres of high netback, light oil producing assets in southeast Saskatchewan, Canada, to the company’s portfolio. The deal, announced in late April, complements the company’s 15,000 acres in the area, creating a core spot with potential for oil finds in the Williston Basin. Hopes are highest in the Midale formation with additional possibilities in the Frobisher, Bakken and Three Forks/Torguay formations.

“This was a really good fit for what we were already doing in the area,” Donadeo said. “We’ve identified about 150 net drilling locations on [the] land, and we feel that we can really grow this area significantly over the next five years.”

Additional opportunities could exist, considering Donadeo said there is an oversupply of disposable property in the Canadian market that has left more assets than buyers, creating better value opportunities.

“There are not a lot of well-capitalized buyers that can execute some of the deals,” he added. “So it gives us a bit of advantage. We feel we were able to buy [Elkhorn] at a pretty good price.”

Global growth

When shopping internationally, looking at what the majors have to offer could also lead to buys.

“Usually when you buy assets from the majors you’re getting assets that are at the bottom of their portfolio. They’ve been undercapitalized, and they haven’t had a lot of attention because they put their people on the bigger assets,” Donadeo explained. “We like buying from the majors. It’s less competitive, because there aren’t as many companies our size over there that are looking for these kinds of assets. You can buy it cheaper, and usually when you buy it there is more to do with it.”

Vermilion has operations worldwide, but the company’s portfolio is heavy in Europe with assets in France, Ireland, Germany and the Netherlands.

“We have always been bullish on European gas due to the fact that Russia supplies about 30% of Europe’s gas needs,” Donadeo said. “Russia has helped in tying their gas prices to heating oil, so they’ve been able to keep pricing quite strong in Europe.”

Currently, Vermilion is getting about $10.50 per 28 cm (1 Mcf) of gas, which is more than double what could be had in North America where prices are in the $4 to $4.50 range.

Although uncertainty lingers from Russia’s incursion into Ukraine, Donadeo believes it will keep European gas prices in the $10 to $11 range, which bodes well for the company. Those sentiments, when combined with the fact that Russia recently found an alternative market in China for gas—having signed a 30-year supply deal—adds to Russia being a bullish factor.

“As a result of all of that in the last five years we have been growing our European gas exposure, and we have a new Irish gas project called Corrib that comes on middle of next year,” Donadeo said.

At its peak, Corrib is expected to meet as much as 65% of Ireland’s gas needs, estimated to produce about 1.6 MMcm/d (58 MMcf/d). The Corrib gas field (Shell E&P Ireland Ltd., operator, 45% interest; Statoil Exploration Ireland Ltd., 36.5% interest; and Vermillion, 18.5% interest) is located about 83 km (52 miles) offshore Ireland. Plans are for the field to be developed as a subsea tieback with a pipeline connecting it to a processing terminal onshore.

As of April 30, a tunnel related to boring operations was about 95% complete with less than 300 m (984 ft) of tunnel left to be bored, according to Vermilion’s website. First gas is expected in mid-2015.

“When it comes on, with our existing production, production will be around 115 MMcf/d [3.3 MMcm/d] in Europe,” Donadeo said. “We’ll be getting in the $10 to $11 range. So it will be a big driver to more cash flow.”

Exceeding expectations

Vermilion has been around for 20 years, and during that time the company has provided a compounded annual return of about 36.6%. Donadeo said the company has probably never been stronger than it is today in terms of depth, cash flow and the quality of its drilling inventory and assets.

“The key to our success has really been that we run a sustainable growth and income model where we provide production growth plus we provide a reliable and a growing dividend,” which is gaining popularity amongst retirees looking for income, Donadeo continued. He pointed out that Vermilion hasn’t had a dividend cut in 11 years and has actually increased it three times in the last six years.

“If you look at Vermilion from last year to 2016, we’re going to grow by about 55% in production volumes, and our cash flow will grow about 60%,” he said. “We’re 80% weighted to oil and high-priced European gas, so that really helps in terms of providing strong netbacks and high margins.”

Having a sustainable growth and income model requires high netbacks, strong capital efficiencies and low decline rates, Donadeo explained.

Vermilion’s decline rate is about 24%. “We also choke back some of our wells. Right now, our effective decline is closer to about 18%,” he added.

By 2020, Vermilion hopes to be producing as much as 85,000 boe/d. That is double its 2013 production.

“We feel we will still have a strong European focus,” Donadeo added. “We are looking to grow our gas and oil volumes in Europe and Australia. We will also continue to expand in Canada. We are currently looking into going into the United States as well.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.

Comments