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Vermilion Breaks Onto U.S. Stage, Mulls Drilling Options for 2015

Two months after acquiring acreage in the Powder River Basin in Wyoming -- and breaking into the U.S. for the first time -- Vermilion Energy Inc. said it believes it can significantly reduce drilling costs there but is so far undecided over where it will invest on capital expenditures (capex) in 2015.

Meanwhile, the Calgary-based company said it has completed its first of two horizontal appraisal wells targeting the Duvernay Shale in Alberta, while expanding its position in the Williston Basin in the neighboring province of Saskatchewan.

Vermilion entered the Powder River Basin in September, after acquiring 68,000 acres in northeast Wyoming from an undisclosed seller for C$11.1 million (US$9.8 million). The deal includes current working interest production of about 200 b/d (100% oil), 2P reserves of about 2.2 million boe (82% oil), and contingent resources of 10.0 million boe (82% oil). The acreage is 98% undeveloped.

During a conference call Monday to discuss 3Q2014, COO Tony Marino said the acquired acreage includes a tight oil project in the Turner Sands, one of the top plays the company had reconnoitered in the U.S.

"We like it because it is shallow -- it's about 5,000 feet [deep]," Marino said. "That will definitely make it cheaper [to drill] than a lot of the tight oil plays. We like it because it is a clastic reservoir, and like a lot of clastics it actually has okay permeability for a tight rock. And we like the fact that we also have this contiguous land base there, adjacent to existing producing fields."

Marino said Vermilion was lucky that at the time the Power River deal closed, a single horizontal well was just being placed into production. He said the well, which had an initial cost of about $4.5 million, hit a peak production rate of about 220 b/d during its fourth month of production.

"It's only a three-quarter mile-long well," Marino said. "We think we could do better in the future with [a] longer well. We think it had a good modern completion, but I am sure there are ways we can optimize on that. That's really pretty encouraging productivity for a reservoir that occurs at such a shallower depth."

Marino added that the company believes it can bring the well costs down to $3-3.5 million per well. "Our hope and intent over time is that if we take this play slowly that we could do considerably better than the current well, in terms of productivity, and bring those well costs down in the range that we think is appropriate for a shallow play like that," he said.

During the third quarter, Vermilion completed its first test appraisal targeting the Duvernay along a shared lease line in the Pembina block. After 16 days of production, the well -- in which the company has a 35% working interest (WI) -- had a raw gas average production rate of 2.2 MMcf/d with an estimated liquid hydrocarbon rate of about 180 b/d, approximately 60% pentanes plus. Vermilion said it expects the sales rate to actually amount to 1.8 MMcf/d.

A second appraisal well (100% WI), located in the Edson block, is expected to be brought into production in late 4Q2014.

CEO Lorenzo Donadeo said the company was still reviewing its capex budget for 2015, and expected to make an announcement in early December.

"While it remains under review, we currently anticipate our 2015 capital budget will be less than 2014 capital expenditure levels," Donadeo said Monday. "However, we do not currently anticipate this will impact our expectation for 2015 production levels in the 55,000-57,000 boe/d range, which has been reflected in our corporate presentation since March of this year."

Marino added that the decision over whether to drill additional wells in the Duvernay is not being driven by any near-term expiring leases.

"We do have the option of continuing to watch the industry activity, continuing to learn from the industry on ways to bring down the well costs and improve the productivity," Marino said. "We've certainly benefited from that already, and that's had an impact on our ability to do pretty well in the initial efforts in the Pembina area."

Last April, Vermilion expanded in the Williston Basin after acquiring privately-held Elkhorn Resources Inc. for C$427 million (see Shale DailyMay 16). The deal included about 190 net future drilling locations on 57,000 net acres -- on an approximate 90% working interest (WI) -- in southeast Saskatchewan, prospective to the Mississippian Midale and Frobisher formations, and the Devonian Bakken Shale and Three Forks formation. Vermilion also acquired 16.5 million in 2P (proved and probable) reserves.

Since acquiring Elkhorn, Vermilion has added an additional 15,000 net acres (100% WI) with about 60 net future drilling locations. The new additions complement Vermilion's 15,000 net acre position in southwest Manitoba, which targets the Mississippian.

Vermilion is also invested in European oil and gas. It is the top oil producer in France -- producing about 11,100 boe/d (100% oil) there in 3Q2014 -- and holds about 820,000 net undeveloped acres over a significant gas basin in the Netherlands. In Germany, the company holds a 25% contractual participation interest on 204,000 gross acres that includes four producing gas fields.

In offshore Ireland, Vermilion holds an 18.5% stake in the development of the Corrib gas field, along with partners Royal Dutch Shell plc (45.5%) and Statoil (36.0%). Shell is the operator at Corrib.

Also in the offshore, Vermilion is invested in the Wandoo oil field off the coast of Australia. A two-well drilling program was completed in 1Q2013. Production averaged about 6,600 boe/d in 3Q2014.

Vermilion reported average production of 49,920 boe/d in 3Q2014, up 20% from 41,510 boe/d in 3Q2013. Generated fund flows from operations in 3Q2014 totaled C$197.9 million (C$1.85/share), compared to C$165.6 million (C$1.63/ share) in 3Q2013.

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