Vermilion Meets Our Expectations in the Second Quarter, Reiterates Full-Year 2011 Guidance

Vermilion Energy VET delivered steady results in the second quarter, with average production of 35.2 thousand barrels of oil equivalent per day, versus our expectations of 35.1 mboe/d. The company cited a new well in the Netherlands and the lack of cyclone activity in Australia as reason for the 3% average daily production growth during the first quarter. Delving below the surface, we see a mixed bag of items within the report. First, Vermilion's ventures in the Cardium oil region of Alberta are going better than we expected. The firm is on track to double production between now and the end of the year, to roughly 6.0 mboe/d. We had included this growth in our 2011 forecast, but what we did not expect was how quickly the firm would begin shifting from oil to water-based fracs, which we estimate will save the firm roughly CAD 500,000 per well, or more than 10%. Vermilion now expects the majority of Cardium wells drilled in the second half will utilize water-based fracs. On the downside, we note the firm is now indicating that the Corrib gas project in Ireland will not complete construction and begin production until 2014. We suspect the delays are related to the ongoing political wrangling that has plagued the project since its inception, and think the impact at this time is limited to later realization of production. At this time we do not think the delay at Corrib is substantial enough to impact our fair value estimate negatively.