Good morning, afternoon, evening. My name is Elaine, and I will be your operator today. At this time, I would like to welcome everyone to the Vermilion Energy Q3 Conference Call. As a reminder, today's conference is being recorded. 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. [Operator Instructions] Thank you. Mr. Dion Hatcher, you may begin your conference.

Well, thank you, Elaine. 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 and CFO; Darcy Kerwin, Vice President, International HSE; Bryce Kremnica, Vice President, North America; Jenson Tan, Vice President, Business Development; and Kyle Preston, Vice President of Investor Relations. We will be referencing a PowerPoint presentation to discuss the Q3 2022 results. Presentation can be found on our website under Invest with Us and Events and Presentations. Please refer to our advisory and 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 outline the risk factors and assumptions relevant to this discussion. As shown on slide 2, we generated $508 million of fund flow in Q3, which is a 12% increase over the prior quarter and is another quarterly record for Vermilion. For perspective, this quarterly fund flow is more than we generated for the full year of 2020. Free cash flow of $324 million was down slightly from the previous quarter due to higher capital expenditures associated with our Australia drilling program, which we successfully completed during the quarter. Majority of Q3 free cash flow was allocated to debt reduction. Our net debt decreased by 11% to $1.4 billion, representing a debt to trailing 12-month fund flow ratio of 0.8 times. As we outlined last quarter, with our formal return of capital framework is our intention to return more free cash flow to our shareholders as debt decreases. In Q3, we paid a cash dividend of CAD0.08 per share and repurchased 2.3 million shares under our NCIB for $72 million. Combined, this amounts to $85 million returned to our shareholders, representing 26% of Q3 free cash…

Thank you. [Operator Instructions] We will take our first question from Greg Pardy from RBC Capital Markets.

Hi, team. It's Robert Mann on here for Greg Pardy. My first question is just surrounding the Corrib deal. Could you provide some guidance around what the net cost or benefit would be if it closed in the first quarter of 2023? And what the probability of the deal is, if the deal does not close for some reason? And if so, how would the unwind work there?

Okay. Well, thanks, Robert. I'll pass it to Lars just to discuss the financial question and then Darcy to address the timing.

Hi, Robert. As Dion mentioned, we have factored in the windfall tax impact of the 36.5% interest on Corrib into our analysis here. As opposed to giving a hard number, what I would guide to is a payout at some point in the second half of 2023, now that we would have to factor in the windfall tax obligation, which we will incorporate into the final purchase price effective Jan 1, 2022. So a payout at some point in the second half of 2023. The thing that I would highlight then is that includes the hedges that we put in place as part of the original transaction. As you get into 2024, you would then have all of that European gas benefiting cash flows on an unhedged basis.

Thanks, Lars. Darcy, do you want to follow up on the second part of the question?

Yes. As it relates to the timing of the close, we certainly do expect that this deal will close. Originally, we did expect it in close in 2022, and that is still a possibility, but we think it's likely to slip now into Q1 of 2023. All the parties continue to work together to complete this transactions. We're all working through the administrative delays related to finalizing documents with the government and our partners. I think, it's worth noting that all cash flows are accruing to our benefit as of January 1, 2022, effective date. So the timing of the close really doesn't impact the financial contributions of the acquisition and kind of put things in perspective, when we last did a deal in Ireland to acquire an additional 1.5% stake in quarter, it took approximately 18 months to close. And so we're used to this kind of longer closure period taking place in Europe. So we do expect to fully close in the first quarter 2022.

That's great. Thank you. And just switching gears here a little bit, if I can. How should we be thinking about cash taxes in 2022 and 2023, not including the windfall tax as a percentage of pre-tax cash flow? Does the 10% to 11% range in 2022 still seem reasonable?

Thanks, Robert. I'll pass it back to Lars for that one.

Yeah. Hey, Robert, for 2022, I think forecasting a cash tax rate of 9% to 11% for the full year would be a reasonable range. Keep in mind that does not include any contribution from the acquired core interest. And then for 2023, pre any kind of windfall tax inclusion, 14% to 16% cash tax would be a reasonable estimate. That does include the contribution of the 36.5% acquired working interest from Equinor.

That's great. Yeah. Thank you. Thanks for taking my questions. I'll turn it back to the operator now.

Thanks, Robert.

Our next question will come from Menno Hulshof from TD Securities. Please go ahead.

Thanks, and good morning, everyone. I'll start with the suspension of the NCIB for Q4. Does that mean, you're simply not electing to buy back stock this quarter, or was there a filing submitted to formally suspend it? I'm just not clear on the mechanics of that? And then the second piece of that is why suspend it at all? It feels like, if the upper end of the windfall tax range is $350 million per annum, that there would still be enough to go around for at least some buyback activity. So any thoughts on that front would be helpful as well?

Thanks, Menno. I'll pass it over to Lars to address those questions.

Good morning, Menno. On the first part of your question, no formal submission has been made in regards to the NCIB. And so what we really wanted to accomplish with this press release was being transparent with shareholders in terms of taking a pause here in the fourth quarter to reassess the impact of a windfall tax that is likely going to be retroactive in nature as well as potentially exposure to a two-year period as well. So we wanted to take some time to prioritize that. When we do our analysis around the appropriate way to return capital over the longer term, every scenario that we run includes a strong balance sheet in terms of being able to support that return of capital over the longer term. If we end up taking a quarter to ensure that we don't put that strong balance sheet at risk, we think that, that is a pause that is worthwhile over the longer term. In terms of the second part of the question, yeah, I think that really factors into taking a pause here in the fourth quarter just to make sure that we do prioritize the balance sheet. And we'll reevaluate the merits of capital allocation as we go into 2023 here incorporating this new information that we have as well as we work through the budget and those other variables.

Thanks, Lars.

Yes. Thanks for that. And then on windfall taxes, did you now have a better sense of how each of the individual countries, are going to manage the EU proposal. And what is your best guess on when we have announcements from each company in which you operate? And is there any risk that these announcements get pushed into 2023?

Thanks Menno, and maybe I’ll take this opportunity just to zoom out and talk a little bit more about the windfall tax, and pass it over to Lars to talk about some of the mechanics. It's been interesting time with the policy in Europe. It's during this energy crisis. It's discussions from price caps to windfall taxes and oil and gas companies. I think it's important to note that the current situation is not solely the result of the war, and really the policies that only resulted in declining supply and increasing demand have created a pretty tight market. You think about Vermilion over the last 25 years, going back to 1997, we put meaningful capital at risk to provide secure energy in Europe. And over that time, we've worked hard or operations to too best-in-class. So for our shareholders, we took some risk and we've deployed capital into that market. And with the guarantees of return and also during some pretty difficult periods here with the commodity price crash, and between 2014 and 2019 as well as, of course, COVID here in 2020. From 1997, we were 6,000 barrels a day. And if we look at where we're going to be in 2022, we're in excess of 31,000 and those production that we have in those jurisdictions that places the need to import energy from other areas, which, of course, from a full cycle emission point of view was actually lower. And then you get to the economic benefits of producing in Europe. I mean we're displacing the need again to import energy, which means there's deployment. There's support of the service sector, and then there's the royalties and taxes that we pay to both communities and the federal level. If you look at 2022 across our portfolio, like we're looking at cash taxes plus royalties in excess of $550 million, and that's prior to the additional windfall tax. With that in perspective, I mean that's in excess of the $500 million of corporate cash flows we generate in 2020. So I mean, as we think about the policies in Europe is really we want stable and predictable policies and two, I'd say, a recognition of twofold. Our business is cyclical and there's periods of low prices, and there's periods of high prices. And we need those periods of high prices to offset the lows of course. And then third, again, the benefits of having producers like Vermilion in that market day-and-date to ensure their secure lower emission energy. But with that, I mean, that's our view is just strategically looking at some of the things that we'll continue to navigate in the near term here, but I'll pass it over to Lars to talk about some of the mechanics of the individual jurisdictions and how it will be applied.

Yes. Menno, I'll just take this chance to reiterate what Dion commented on. We have this disclosure in our press release as well. So the EU regulation requires member states to levy that minimum 33% tax on in-scope companies for 2022 and/or 2023 surplus profits. Surplus profits defined in the regulation as taxable profits exceeding 120% and of the annual average during that 2018 to 2021 period. EU member states are required to implement the tax or some kind of equivalent national measure by December 31, 2022. So, we're within weeks of having that finalization. At the end of the day, depending on the national measures that are adopted by the EU member state as well as the financial years, which measures will be applicable that's where we're basically just applying the EU framework at this point to get that estimate of $650 million to $750 million of two-year cumulative impact. So, I think in short order here, we should have a little bit more certainty on at least 2022 in terms of that deadline.

A bit of a long answer there Menno, but that answers your question.

No, that was great. Thank you.

Our next question will come from Dennis Fong from CIBC World Markets. Please go ahead.

Hi, good morning and thanks for taking my questions. The first one really relates a little bit more towards North American operations. Just wanted to understand a little bit in terms of how you're moderating the potential cost inflation impacts, especially given ramping activity both within Mica and then if I think about Powder River Basin as well?

Thanks, Dennis. I'll pass over Bryce Kremnica, our VP of North America, just to touch on inflationary pressures in North America.

Yes, thanks for the question, Dennis. Yes, overall inflation in North America on the capital side of things is in the range of about 20%. And notably on the OpEx side of things, it's much lower in the 5% range, testament to all the work the team started on managing OpEx and managing contracts. Just jumping over specifically to the Powder River Basin. Inflation there is about 20%, up year-over-year. When compared to Canada, our Alberta assets are up about 20%, and then Saskatchewan is probably up the most in the 30% range. So, we've done lots of great work in the Powder River Basin executing our cost reduction strategies over the last few years, and we continue to do that. This year, we brought a warm crew down from Alberta have only kicked off a program to help manage costs. So we'll continue to do the same. And then with respect to Mica, we got a good view on our costs going into the later half of this year as we've had active operations into Q3, and then we're starting up a new pad into Q4. So we have a good handle on our cost going forward into 2023.

Thanks, Bryce. Yes. And we're seeing -- again, it's interesting. I think that's one of the advantages of our model, Dennis, is to be able to deploy capital in different parts of the business. And put a lot of thought into things like Saskatchewan drilling in the summer when we find costs are lower in the Powder River Basin, again, using crews from Alberta. So, again, very thoughtful there, but we are seeing inflation in doing our best to manage it, as Bryce noted,

Great. And maybe if I wouldn't mind on -- in terms of kind of an add-on to that question, if there were -- if there was incremental activity within Europe, how would you potentially think about contracting services. I mean, obviously, it's less call it, less busy over there. But how are you thinking about the cost impacts of accelerating activity out there?

Yes. I would say it's less. I can pass over to Darcy just to touch on what we're seeing there for inflation on the services side for Europe.

Yes. In Europe, certainly, we're seeing lower inflation numbers on the services side than we're seeing in North America, probably in the range of kind of 5% up to 10%. As you suggested, that's kind of due to limited activity in Europe and we've gotten a little bit of help as well from the exchange rate that even makes that a little bit lower. So, that's, kind of, fully baked into our plans next year. We -- because of the longer time lines in Europe too, we do tend to acquire tubulars and enter into contracts earlier. So, we have a pretty good handle on what the prices look like in Europe for next year.

Great. And then my last question here is just around hedging. I see like a small uptick in natural gas -- European natural gas hedges as we think about 2023 as a percentage of total production. Can you just kind of reiterate your strategy there? Obviously, there's a lot of volatility in the curve. I wanted to kind of understand if anything has changed on that side? Thanks.

Yeah, Travis, we were quite active in August with some of these higher prices. But with that, I'll pass it over to Lars to touch on our strategy and some of the recent hedges we were able to execute.

Yeah. So you can see there in the second half of 2022, European gas hedges got up to that 60% level. 2023, we're at about that 50% level now. Those are probably pretty good bookends to think about in terms of where we could get European gas hedging too. We feel very comfortable with where we're at for 2023 at this point, and it's probably a little bit more around looking to be opportunistic if we do go higher than that versus risk mitigation at this point.

Okay. Perfect. I appreciate it.

Thanks, Dennis.

We will take our next question from Travis Wood from National Bank Financial. Please go ahead.

Yeah. Thanks. And most of my questions were answered or around those questions and the discussion on Windfall. So that was super helpful. But maybe just in the context of the complexities of the windfall tax and maybe just how you guys are thinking about stressing that into 2023. And then as you think about capital allocation, the language was looking to spend more on European gas projects. If you see this or policy language potentially push this into 2023 and possibly 2024. Would that change your decision to continue to add volumes or cash flow out of the region just to offset some of the future tax, or how are you thinking about balancing that against a really strong kind of macro backdrop on pricing?

Thanks, Travis. I'll pass the Lars to address that.

Yeah. So in terms of the first part of your question there, Travis, around sort of the complexities around the windfall tax. If you just sort of rewind here, the EU approved this legislation or the framework of the legislation late September. If you think back to the early part of September, there wasn't a lot of discussion around a EU-led windfall tax regime. So the velocity, the pace, the scope of this legislation I don't know if it's unprecedented, but it has been extremely rapid. And as you introduce new legislation that's going to impact 27 member states. There's just a lot of moving parts in terms of what that ultimately is going to look like within each of the countries that adopt it. So we're monitoring it as the rest of folks are in terms of what's available in the public domain. But I just want to emphasize that this is legislation. This is a new tax that has evolved very quickly here. What we felt was important was to provide some disclosure here in terms of what the impact could be over that two-year period, and we'll look to update that disclosure here as we go forward and as we get certainty kind of going into the end of the year here.

Thanks, Lars. And with respect to capital...

I mean I think we understand that. But is there -- if you took the status quo and expected this to kind of roll for another couple of years, do you think that would impact the capital decisions in the region, or is the bottom line there just too large of a number to position capital to avoid, or not avoid, I won't use that word, but to mitigate some of the tax impact in the short term.

Thanks, Travis. I'll pass it back to Lars to talk about capital allocation and how we're thinking about that.

Yes. Travis, we -- as Dion mentioned earlier, we've been navigating operations in Europe for 25 years here. I think, it has been a very good place to do business. Absolutely, we're going to have to factor in any kind of windfall tax that would go beyond 2023 into our capital allocation decisions. I think what you heard from Dion as well as Darcy today is, we do have an incentive to allocate more capital to Europe just in terms of we want to be part of the energy security supply response, and we think that we do have a role to play into that. We'll obviously have to make sure that we factor in anything here. At this point, it is a temporary windfall tax, the scope of it has been limited to 2022 and 2023. If we were to extend beyond that, we'd have to factor that into our decisions. But we're in Europe for the long term.

Thanks, Lars.

Thanks, guys.

Thanks, Travis.

[Operator Instructions] We will take our next question from Nilay Mehta [ph] from Hudson Bay. Please go…

Hey, guys. Can you hear me?

Yes.

Hey. Thank you. So, yes, I just want to revisit the windfall tax, I know that's getting a lot of questions this morning. I guess I just wanted to better understand. I know you're saying, obviously, you want to focus on the strength of the balance sheet, first and foremost, and then look to sort of reintroduce the dividend at some point. And I know in the prepared remarks, you guys expect it to end the balance sheet or net debt a little higher than expected. Kind of, I know, it was 1.2% at the year-end, kind of, do you have a better sense of where you think that lands? And then, another way to sort of dig around that too, is just, I think someone asked a little bit earlier, but in a similar manner, if you have a sense of the total magnitude potentially being in that 600 to 700 range or whatever over two years. And then, what was the thought process spending it now, given that we're almost this part in the quarter? Is the tax that retracted for 2022? Is that going to have to be paid like the day of the decision? And therefore, there was a thought that, that would impact the net debt higher, because that's going to be the cash flow from that, like a one-time payment, or is it going to be paid over time for the retroactiveness of 2022? And how does that also get paid for 2023? Is that, as it's earned? Like, what's the mechanism there for the windfall tax payments?

Okay. Okay. Yes. No, I can -- so a couple of things there. Yes, just to clarify, I mean, we suspended the share buybacks. We are paying and continue to pay the dividend. And again, our strategy is to provide ratable increases of the dividend over time. With respect to the mechanics of when the windfall tax would be accrued and paid. I'll pass it back to Lars to talk about that.

Yes. And I'll address that as well as your question around debt balance as well. I think that, the $1.2 billion debt target was going to be a nice landing spot at the end of 2022 in terms of being able to go lower than that in 2023, as well as being able to return capital. Our estimate now that incorporates the windfall tax would be about $1.6 billion of exit 2022 net debt. And that's a segue into the third part of your question in terms of the accounting for the windfall tax. Ultimately, it's going to be subject to when legislation gets finalized. As I mentioned earlier, there is a mandate right now for member states to have legislation in place by the end of this year, assuming that comes to fruition, and that is met, we would expect that to trigger an accrual for the windfall tax 2022 exposure in the fourth quarter of this year. So that will get reflected in 2022. We've embedded that into that $1.6 billion net debt estimate. In terms of when that tax would be payable, that will be variable depending on the country, but I would expect it to range anywhere from early to late first half of 2023.

Thanks Lars.

Thanks. And then just to, sort of, I guess, related a little bit of a follow-up. I think you sounded like a couple of the countries that have come to a policy and outstanding on a couple of other ones. I think mostly at Ireland and Germany. On the countries that have come in so far on their policies or on windfall tax, how is it compared to what you guys were thinking and relative to what EU was implementing? Is it in line with that or better, et cetera? And are there any offsets that you guys have in those countries that may -- are factored into your estimates right now, or are there -- at this point, there are no offsets in the estimates? And then also, just back to the accounting and how it's pay and all that stuff, again, back to like if you're exiting with $1.6 billion this year on net debt, and you're looking at production into 2023, if it's a similar level, I guess, and what people have out there for estimates, it looks like cash flow generation should be fairly robust. And given the total size of the windfall tax is estimated and the net debt exiting this year, does the -- is it still feasible for you to reach your net debt target next year, that's sub-$1 billion and you're back to in that range of free cash flow generation and being able to pay out 50% or so of the free cash flow into 2023 once the buybacks are resumed.

Yeah. I'll just paraphrase the question here. And some of these, again, we can -- eager to meet with you off-line if you can get into some of the more modeling questions. But I'll pass to Lars here around just to comment on maybe some of the offset mechanics of the windfall tax. And just secondly, how we're thinking about debt targets for next year?

Yeah. So just back to the windfall tax, without getting into each of the four countries that will have windfall tax exposure, there are varying degrees there in terms of certainty, in terms of how the framework is going to be employed. I would say at this point, we have factored in all information that we have today into that estimate of $650 million to $750 million. There's quite a bit of nuances once you get into each country, both from a, I'd call it a front office as well as back office perspective in terms of how the calculation is ultimately going to unfold. And then just back to your question -- follow-up question on debt here. So if you start with that $1. 6 billion at the end of 2022, just as a reminder, we have fully burdened that with our estimate for the core of closing cost as well. If that gets pushed to 2023, that's something that will shift between 2022 and 3023. In terms of net debt balance, debt target for 2023, that's something that we'll work through here. A good landing spot could be targeting and undrawn for credit facility revolver, in terms of setting ourselves up strongly for 2024 and then navigating the uncertainties that are there regardless of windfall tax in terms of commodity price uncertainty. But that is the pause [ph] that we wanted to take here in the fourth quarter is just to work through those decisions and what's the right capital allocation. We have a firm belief, that by taking a pause here in the fourth quarter the fact that, that free cash flow it is still going to accrue to shareholders, it will accrue to shareholders through a lower debt balance in terms of where we exit this year, as opposed to a lower share count. And if that puts us in a position to accelerate buybacks in 2023, we think that that's a prudent decision here in the short-term.

Thanks, Lars.

Yeah.

Got it. Yeah. Thank you. And then, I guess, maybe just a final one on that last one. You said obviously accruing to shareholders. I guess a big part of the Vermilion story. And I know it's sort of part of the energy space in general has been sort of the capital return story. And I guess the pause near-term given sort of the windfall tax situation. And I don't know if there's any related on the production or cost side as well, if that any reason there. But how important does the capital returns remain as part of Vermilion's sort of shareholder story in general, just given that the pause is happening here. And obviously, there's going to be a reaction from shareholders to that. So...

Yeah, I can take this one. I mean, I think if you look back on the history of the company, we paid over $40 a share of dividends. Our focus is to have a strong balance sheet. And as debt levels decrease to return increasing amounts of cash flow to our shareholders. And again, over the longer timeframe, we've consistently done that. I think to Lars' point, we were about 25%, 26% of free cash flow return to our shareholders for return of capital in Q3. We hit the pause in Q4. And again, really just that trade-off of near-term, gathering more data as well as prioritizing year-end debt balance. And I think it just positions us to be that much stronger going into 2023. If you look at where our debt level is going to be and where the strip pricing is currently for all commodities, again, we think we're positioned well. The next step for us is to continue to work through this in December. And we look forward to releasing our budget early in the New Year. And that I think then would provide an appropriate time to really get into the details around spending levels, free cash flow levels or thoughts on return on capital. But just to be clear, a pause in Q4 does not, in any way, infer our change our commitment to return capital to our shareholders. Again, we've got a long-term track record of doing that. It was truly for this quarter to pause and gathers additional information and focus on a lower year-end debt target.

Got it, all right. Thank you, guys. I’ll talk later offline. Thanks.

Great. Great questions. Thank you.

It appears there are no further questions at this time. I would like to turn the conference back over to Dion Hatcher for any additional or closing remarks.

I just want to say thank you again, for participating in our Q3 release.

That will conclude today's conference. Have a good day. You may now disconnect.