2014

Vermilion Energy Inc. Announces Results for the Three and Nine Months Ended September 30, 2013

CALGARY, Nov. 7, 2013 /PRNewswire/ - Vermilion Energy Inc. ("Vermilion", "We", "Our", "Us" or the "Company") (TSX, NYSE: VET) is pleased to report interim operating and unaudited financial results for the three and nine months ended September 30, 2013.

HIGHLIGHTS

  • Recorded average production of 41,510 boe/d during the third quarter of 2013, compared to 42,813 boe/d in the prior quarter and 36,546 boe/d in the third quarter of 2012.  The modest decrease in quarter-over-quarter production was attributable to seasonal changes in Canadian drilling and tie-in activity, turnaround activity in the Netherlands and management of available well deliverability in Australia, Canada and the Netherlands to achieve corporate production growth targets.  Year-over-year production growth of 14% was achieved through continued development of the Cardium and Mannville in Canada, and strong production additions from the 2013 drilling programs in France and Australia.

  • Generated fund flows from operations of $165.6 million ($1.63/share) in the third quarter of 2013, as compared to $174.6 million ($1.73/share) in the prior quarter and $137.1 million ($1.39/share) in the third quarter of 2012.  Fund flows from operations decreased 5% as compared to the prior quarter due to increased taxes in France and foreign exchange impacts, but increased 21% on a year-over-year basis.

  • We continue to benefit from our exposure to Brent-based crude oil, WTI-based crude oil, and European natural gas pricing.  Our Brent-based crude production represents approximately 45% of total production and 65% of total crude oil and liquids production.  Our Brent-based production continues to attract a consolidated premium of more than $4.00/bbl to the quoted Dated Brent reference price, which increased to US$110.37/bbl during the third quarter.  Our Canadian-based crude production also benefited as it is indirectly priced off the WTI reference price, which increased by US$11.60/bbl to US$105.82/bbl during the quarter.  Vermilion's natural gas production in the Netherlands received an average price of $10.18/mcf during the third quarter, compared to $2.43/mcf for AECO.

  • Strong operational performance across all of our operating regions continues to provide us with flexibility to manage the composition of produced volumes while exceeding our annual production targets.  With the contribution of production associated with our Netherlands acquisition, which closed October 10, 2013, we now expect to achieve average annual production volumes at the upper end of our current guidance range of 40,500 to 41,000 boe/d.  Our original 2013 guidance of 39,000 to 40,500 boe/d was previously increased following both the first and second quarters due to better-than-expected results from our capital program.  We expect to achieve organic production growth in all four of our business units in 2013 as compared to 2012.

  • Continued development of our extensive position in the high-quality West Pembina region of the Cardium light oil play.  During the third quarter, we drilled 16 (14.1 net) Cardium wells and brought 11 (10.6 net) Cardium wells on production.  The third quarter drilling program included five 1.5-mile and two 2-mile wells.  Based on strong results year-to-date, the remainder of the 2013 Cardium drilling program will comprise a higher percentage of 1.5-mile, 1.75-mile and 2-mile wells.

  • Drilled and completed our fifth operated Mannville well in 2013 and brought one well on production during the third quarter.  Average rate from the five operated wells to date is currently 2.3 mmcf/d sales gas and 340 bbls/d of condensate and NGLs (77% condensate), with the average well in its third month of production.

  • We continued to appraise our significant position in the Duvernay liquids-rich natural gas resource play where we have amassed a total land position of 321 net sections as of the end of the third quarter. Our land position, which spans the liquids-rich gas fairway in three contiguous blocks, has been assembled for approximately $76 million dollars ($375/acre). We currently anticipate spud of our first horizontal Duvernay well prior to year-end 2013, with completion planned for early 2014.

  • In Ireland, tunneling operations re-started on November 3, 2013.  Tunneling operations had been suspended following an industrial accident, which resulted in a fatality at the project worksite on September 8, 2013.  Onshore pipelining, offshore umbilical-laying, seismic acquisition and workover activities for our Corrib project were not impacted by the suspension.  The effective impact of the delay in tunneling operations is not fully determinable at this time, as a portion of the tunneling delay may be recouped through accelerated completion of other project activities.  However, based on an early review of our deterministic schedule for remaining construction and commissioning activities, we believe it is prudent to revise our expectations for timing of first gas to mid-2015 from earlier expectations for start-up at the end of 2014 or early 2015.  Following successful subsea well operations conducted on one of the production wells during the third quarter of 2013, we are increasing our peak production estimate at Corrib from 54 mmcf/d (9,000 boe/d) to approximately 58 mmcf/d (approximately 9,700 boe/d) net to Vermilion.

  • Subsequent to the third quarter, we announced the acquisition of interests in nine concessions in the Netherlands from Northern Petroleum PLC.  The acquisition closed on October 10, 2013, and is expected to add average production of approximately 400 boe/d in 2014 (taking into account working interest adjustments expected to occur upon reaching anticipated payout of certain license agreements).  The acquisition also adds 2.3 million boe of proved plus probable reserves(1) and 298,500 net acres of land, of which approximately 98% is currently undeveloped.

  • On November 6, 2013, we announced an agreement to acquire a 25% contractual participation interest in a four partner consortium in Germany from GDF Suez S.A. ("GDF").  The acquisition will enable us to participate in the exploration and development, production and transportation of natural gas from the assets which include four gas producing fields across eleven production licenses. The assets are estimated to produce at a company-interest average rate of approximately 18 mmcf/d (3,000 boe/d) in 2013 and have estimated proved plus probable reserves of 10.1 mmboe(2) net as of year-end 2013.  The assets are characterized by a low effective decline rate of approximately 16% annually and have an estimated reserve life index of approximately 9.2 years. In addition to the production licenses, a surrounding exploration license will also be acquired pursuant to the acquisition.  The exploration and production licenses comprise 204,000 gross acres, of which 85% is in the exploration license. The acquisition is well aligned with our European focus, and will increase our exposure to the strong fundamentals and pricing of European natural gas markets.  We believe that our experience with conventional and unconventional oil and gas development, coupled with new access to proprietary technical data, positions us for future development and expansion opportunities in both Germany and the greater European region.
(1) Estimated proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd ("GLJ") in a report dated September 16, 2013, with an effective date of December 31, 2012.
(2)   Estimated proved plus probable reserves attributable to the assets as evaluated by GLJ in a report dated November 5, 2013, with an effective date of December 31, 2013, using the GLJ (2013-10) price forecast.

Conference Call and Audio Webcast Details
Vermilion will discuss these results in a conference call to be held on Thursday, November 7, 2013 at 9:00 AM MST (11:00 AM EST).  To participate, you may call 1-888-231-8191 (Canada and US Toll Free) or 1-647-427-7450 (International and Toronto Area).  The conference call will also be available on replay by calling 1-855-859-2056 using conference ID number 68315493.  The replay will be available until midnight eastern time on November 14, 2013.

You may also listen to the audio webcast by clicking  http://event.on24.com/r.htm?e=688125&s=1&k=E3FCF72FABA97FDA33D6CABBBE208AFF or visit Vermilion's website at www.vermilionenergy.com/ir/eventspresentations.cfm.

ABBREVIATIONS

bbl(s)  barrel(s)
mbbls  thousand barrels
bbls/d  barrels per day
mcf  thousand cubic feet
mmcf  million cubic feet
bcf  billion cubic feet
mcf/d  thousand cubic feet per day
mmcf/d  million cubic feet per day
GJ  gigajoules
MWh  megawatt hour
boe  barrel of oil equivalent, including: crude oil, natural gas liquids and natural gas (converted on the basis of one boe for
six mcf of natural gas)
mboe  thousand barrel of oil equivalent
mmboe million barrel of oil equivalent
boe/d  barrel of oil equivalent per day
NGLs  natural gas liquids
WTI  West Texas Intermediate, the reference price paid for crude oil of standard grade in U.S. dollars at Cushing, Oklahoma
AECO  the daily average benchmark price for natural gas at the AECO 'C' hub in southeast Alberta
TTF  the price for natural gas in the Netherlands, quoted in MWh of natural gas per hour per day, at the Title Transfer
Facility Virtual Trading Point operated by Dutch TSO Gas Transport Services
$M  thousand dollars
$MM  million dollars
PRRT  Petroleum Resource Rent Tax, a profit based tax levied on petroleum projects in Australia

DISCLAIMER

Certain statements included or incorporated by reference in this document may constitute forward looking statements or financial outlooks under applicable securities legislation.  Such forward looking statements or information typically contain statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", or similar words suggesting future outcomes or statements regarding an outlook.  Forward looking statements or information in this document may include, but are not limited to:

  • capital expenditures;
  • business strategies and objectives;
  • reserve quantities and the discounted present value of future net cash flows from such reserves;
  • petroleum and natural gas sales;
  • future production levels (including the timing thereof) and rates of average annual production growth;
  • exploration and development plans;
  • acquisition and disposition plans and the timing thereof;
  • operating and other expenses, including the payment of future dividends;
  • royalty and income tax rates;
  • the timing of regulatory proceedings and approvals; and
  • the timing of first commercial natural gas; and the estimate of Vermilion's share of the expected natural gas production from the Corrib field.

Such forward looking statements or information are based on a number of assumptions all or any of which may prove to be incorrect.  In addition to any other assumptions identified in this document, assumptions have been made regarding, among other things:

  • the ability of Vermilion to obtain equipment, services and supplies in a timely manner to carry out its activities in Canada and internationally;
  • the ability of Vermilion to market crude oil, natural gas liquids and natural gas successfully to current and new customers;
  • the timing and costs of pipeline and storage facility construction and expansion and the ability to secure adequate product transportation;
  • the timely receipt of required regulatory approvals;
  • the ability of Vermilion to obtain financing on acceptable terms;
  • foreign currency exchange rates and interest rates;
  • future crude oil, natural gas liquids and natural gas prices; and
  • Management's expectations relating to the timing and results of exploration and development activities.

Although Vermilion believes that the expectations reflected in such forward looking statements or information are reasonable, undue reliance should not be placed on forward looking statements because Vermilion can give no assurance that such expectations will prove to be correct.  Financial outlooks are provided for the purpose of understanding Vermilion's financial strength and business objectives and the information may not be appropriate for other purposes.  Forward looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by Vermilion and described in the forward looking statements or information.  These risks and uncertainties include but are not limited to:

  • the ability of management to execute its business plan;
  • the risks of the oil and gas industry, both domestically and internationally, such as operational risks in exploring for, developing and producing crude oil, natural gas liquids and natural gas;
  • risks and uncertainties involving geology of crude oil, natural gas liquids and natural gas deposits;
  • risks inherent in Vermilion's marketing operations, including credit risk;
  • the uncertainty of reserves estimates and reserves life;
  • the uncertainty of estimates and projections relating to production and associated expenditures;
  • potential delays or changes in plans with respect to exploration or development projects
  • Vermilion's ability to enter into or renew leases on acceptable terms;
  • fluctuations in crude oil, natural gas liquids and natural gas prices, foreign currency exchange rates and interest rates;
  • health, safety and environmental risks;
  • uncertainties as to the availability and cost of financing;
  • the ability of Vermilion to add production and reserves through exploration and development activities;
  • the possibility that government policies or laws may change or governmental approvals may be delayed or withheld;
  • uncertainty in amounts and timing of royalty payments;
  • risks associated with existing and potential future law suits and regulatory actions against Vermilion; and
  • other risks and uncertainties described elsewhere in this document or in Vermilion's other filings with Canadian securities regulatory authorities.

The forward looking statements or information contained in this document are made as of the date hereof and Vermilion undertakes no obligation to update publicly or revise any forward looking statements or information, whether as a result of new information, future events or otherwise, unless required by applicable securities laws.

In accordance with National Instruments 51-101, natural gas volumes have been converted on the basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.  Barrels of oil equivalent (boe) may be misleading, particularly if used in isolation.  A boe conversion ratio of six thousand cubic feet to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Financial data contained within this document are reported in Canadian dollars, unless otherwise stated.

HIGHLIGHTS              
 
  Three Months Ended     Nine Months Ended
($M except as indicated) Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
Financial 2013 2013 2012     2013 2012
Petroleum and natural gas sales 327,185 311,966 284,838     948,727 841,870
Fund flows from operations 1 165,645 174,592 137,094     503,866 415,991
  Fund flows from operations ($/basic share) 1.63 1.73 1.39     5.01 4.26
  Fund flows from operations ($/diluted share) 1.61 1.71 1.37     4.94 4.21
Net earnings 67,796 106,198 30,798     226,131 133,708
  Net earnings per share ($/basic share) 0.67 1.05 0.31     2.25 1.37
Capital expenditures 135,661 78,118 106,255     394,248 295,503
Acquisitions 7,586 - -     7,586 106,184
Asset retirement obligations settled 2,738 2,370 1,968     6,496 5,315
Cash dividends ($/share) 0.60 0.60 0.57     1.80 1.71
Dividends declared 61,003 60,776 56,196     181,391 167,282
Net dividends 1 41,649 42,146 38,945     127,875 113,692
  % of fund flows from operations, gross 37% 35% 41%     36% 40%
  % of fund flows from operations, net 25% 24% 28%     25% 27%
Total net dividends, capital expenditures and asset retirement obligations              
  settled 180,048 122,634 147,168     528,619 414,510
  % of fund flows from operations 109% 70% 107%     105% 100%
  % of fund flows from operations (excluding the Corrib project) 87% 55% 93%     89% 88%
Net debt 1 700,286 674,368 549,491     700,286 549,491
Operational
Production              
  Crude oil (bbls/d) 26,664 26,638 23,047     25,640 24,062
  NGLs (bbls/d) 1,945 1,775 1,245     1,719 1,341
  Natural gas (mmcf/d) 77.41 86.40 73.52     81.97 77.50
  Total (boe/d) 41,510 42,813 36,546     41,020 38,320
Average realized prices              
  Crude oil and NGLs ($/bbl) 108.87 98.95 100.70     103.95 102.32
  Natural gas ($/mcf) 6.00 7.22 6.12     6.68 5.89
Production mix (% of production)              
  % priced with reference to WTI 24% 25% 23%     24% 23%
  % priced with reference to AECO 17% 17% 16%     17% 17%
  % priced with reference to European gas 14% 17% 17%     16% 17%
  % priced with reference to Dated Brent 45% 41% 44%     43% 43%
Netbacks ($/boe) 1              
  Operating netback 61.91 59.30 55.02     60.12 54.87
  Fund flows netback 43.60 44.90 38.66     44.13 39.44
  Operating expenses 12.17 12.36 13.27     12.87 12.78
Average reference prices              
  WTI (US $/bbl) 105.82 94.22 92.22     98.14 96.21
  Edmonton Sweet index (US $/bbl) 101.10 90.56 85.01     93.03 86.94
  Dated Brent (US $/bbl) 110.37 102.44 109.61     108.45 112.10
  AECO ($/GJ) 2.31 3.35 2.17     2.89 2.00
  Netherlands gas price ($/GJ) 9.94 10.14 9.06     10.17 9.38
Share information ('000s)
Shares outstanding - basic 101,787 101,418 98,729     101,787 98,729
Shares outstanding - diluted 1 104,195 103,735 101,149     104,195 101,149
Weighted average shares outstanding - basic 101,613 100,964 98,523     100,634 97,704
Weighted average shares outstanding - diluted 102,763 102,223 99,748     102,083 98,848
   
  The above table includes non-GAAP measures which may not be comparable to other companies.  Please see the "Non-GAAP Measures" section of Management's Discussion and Analysis.

OPERATIONAL REVIEW AND OUTLOOK

Vermilion's strong performance year-to-date illustrates our consistent operational execution and the advantages of our global diversification strategy. To the end of the third quarter of 2013, we have achieved organic growth across all four of our operating regions.  In addition, subsequent to the third quarter of 2013, we announced two strategic acquisitions that further expand our European presence.

On October 1, 2013, we announced our agreement to acquire additional operating interests in nine operated onshore concessions (six in production or development and three exploration) and a non-operated interest in one offshore concession in the Netherlands for $27.5 million.  Four of the onshore concessions are located in the northeastern part of the Netherlands, in close proximity to our existing concessions.  The remaining onshore licenses provide new opportunity for Vermilion in the central region of the Netherlands.  We closed the acquisition on October 10, 2013.  Production from the acquired assets is expected to average approximately 400 boe/d in 2014 (after working interest adjustments expected to occur upon reaching anticipated payout of certain license agreements).  The production is comprised of 99% natural gas that is expected to produce an operating netback in-line with our current operating netback for natural gas in the Netherlands.  The acquisition also adds 2.3 mmboe of proved plus probable reserves(1) and 298,500 net acres of land, of which approximately 98% is currently undeveloped.  The acquisition increases our undeveloped land base in the Netherlands to more than 780,000 net acres.  We have identified several development opportunities on the assets that increase our already significant inventory of investment projects on our existing Netherlands land base.  The acquisition enhances our position as the second largest onshore natural gas producer in the Netherlands, and offers a strong fit with our current operations.

On November 6, 2013, we announced an agreement to acquire a 25% contractual participation interest in a four-partner consortium in Germany from GDF Suez S.A. ("GDF"), for a cash cost of approximately $170 million.  The consortium was formed in 1956 between industry leaders ExxonMobil Corporation ("ExxonMobil"), Wintershall Holding GmbH ("Wintershall"), BEB Erdgas und Erdöl GmbH ("BEB", a joint venture between ExxonMobil and Deutsche Shell AG.) and GDF.  The acquisition, which is expected to be completed prior to the end of January, 2014, will enable us to participate in the exploration and development, production and transportation of natural gas from the assets held by the consortium.  The assets are comprised of four gas producing fields across eleven production licenses.  Vermilion will also receive a 0.4% equity interest in Ergas Munster GmbH ("EGM"), a joint venture created in 1959 to jointly transport, process, and market gas in northwest Germany.  EGM partners include ExxonMobil, Wintershall, BEB, RWE Dea AG., and GDF.  The transportation interest will allow for our proportionate share of produced volumes to be processed, blended, and transported to designated gas consumers through the EGM network of approximately 2,000 kilometres of pipeline.  The assets are estimated to produce at a company-interest average rate of approximately 18 mmcf/d (3,000 boe/d) in 2013, and have net estimated year-end 2013 proved plus probable reserves of 10.1 mmboe(2).  The assets are further characterized by a low effective decline rate of approximately 16% annually and an estimated reserve life index of 9.2 years.  In addition to the production licenses, a surrounding exploration license will also be acquired pursuant to the acquisition.  The exploration and production licenses comprise 204,000 gross acres, of which 85% is in the exploration license.  Realized pricing for production from the assets is expected to be derived from the TTF price, less certain gas quality adjustments and marketing fees.  The Germany acquisition is also expected to be highly accretive for all pertinent metrics.  Assuming estimated 2013 net average daily production of 18 mmcf/d (3,000 boe/d) and a cash cost of $170 million, the acquisition metrics reflect a cash cost of approximately $57,000 per boe/d and $18.70/boe of estimated year-end 2013 proved plus probable reserves, including future development capital.  The acquisition represents Vermilion's entry into the German exploration and production business, a producing region with a long history of oil and gas development activity, low political risk, and strong marketing fundamentals.  Germany currently produces approximately 165 thousand barrels per day of oil and natural gas liquids(3) and 1.1 bcf per day of natural gas(3).  The acquisition represents a key entry opportunity into this sizable market, in the form of free cash flow(4) generating, low-decline assets with near-term development inventory in addition to longer-term, low-permeability gas prospectivity.  The acquisition is well aligned with our European focus, and will increase our exposure to the strong fundamentals and pricing of European natural gas markets.  The assets are located 300 kilometres to the east of our Netherlands assets, and share similar subsurface characteristics.  We believe that our experience with conventional and unconventional oil and gas development, coupled with new access to proprietary technical data, positions us for future development and expansion opportunities in both Germany and the greater European region.

We continue to benefit from our diversified product mix and growing exposure to European gas markets.  In the third quarter, 2013, our natural gas production in the Netherlands received an average price of $10.18/mcf.  This compares to $2.43/mcf for AECO, and US$3.56/mcf for NYMEX, affording us a significant competitive pricing advantage compared to North American natural gas producers.  We also continue to benefit from our strong exposure to Brent-based crude oil.  Brent-based crude production currently represents approximately 45% of our total production and 65% of our total crude oil and liquids production and continues to attract a consolidated premium of more than $4.00/bbl to the quoted Dated Brent reference price, which increased to US$110.37/bbl during the third quarter.  Our strong exposure to Brent-based crude production provides us a further pricing advantage compared to North American-focused producers.  While our relative pricing advantage remains a strong differentiator, the diversified nature of our production mix means we were also able to participate in, and benefit from, the strengthening of North American crude prices during the third quarter.  Our Canadian-based crude production, approximately 24% of our total production, receives pricing based on the Edmonton Sweet Index ("ESI").  The ESI averaged US$101.10/bbl during the third quarter, an increase of US$10.54/bbl versus the prior quarter.  Year-over-year, the ESI has increased more than US$16.00/bbl.  On balance, our exposure to diversified commodity markets reduces the volatility of our cash flows and lowers our risk profile.

The majority of our Canadian development activities during the third quarter continued to focus on our Cardium light oil play.  Well performance remains consistently strong, reflective of the high quality nature of the reservoir underlying our land position in the West Pembina region.  Since entering the play in 2009, we have drilled or participated in 219 (155.3 net) wells in the Cardium and increased production to over 9,000 boe/d. We continue to optimize completion technology and well design, and remain a leader in the utilization of long reach wells (greater than one mile in length) in development of the Cardium in West Pembina.  We have been able to demonstrate consistent production improvement and a significant reduction in per-section development costs through the use of long-reach 1.5-mile horizontal wells.  During the third quarter, we drilled five 1.5-mile, 1.75-mile and two 2-mile wells.  The remainder of the 2013 Cardium drilling program is expected to comprise an even higher percentage of 1.5-mile and 2-mile pilot wells.  The optimization of frac design and fluids, multi-well pads and drilling longer horizontal wells has enabled us to reduce well costs from more than $5 million per section at the outset of development in 2009 to approximately $3 million per section today.  Furthermore, in pursuit of ongoing well cost reduction and enhanced environmental stewardship, we have been testing several alternative processes for the recycling of frac flowback water.  During the third quarter we successfully treated frac flowback water, using a chemical treatment process, at rates equivalent to the highest frac flowback rate we typically experience.  Results to date indicate the potential for significant savings while also decreasing the environmental impact of our operations.  We have also initiated a water injection pilot to test applicability of water-flooding to this reservoir. Our per unit operating costs remain less than $6/boe for our operated Cardium production, resulting in strong operating netbacks of approximately $65/boe during the third quarter.

In addition to the Cardium, we have also begun development of our significant inventory of Mannville condensate-rich natural gas targets in the Drayton Valley area.  Year-to-date, we have drilled or participated in a total of eight (4.2 net) Mannville wells targeting the Ellerslie formation, with one (0.5 net) additional operated well and two (0.8 net) non-operated wells planned during the fourth quarter of 2013.  The average per well rate from our five-well operated program to-date in 2013 is currently 2.3 mmcf/d sales gas and 340 bbls/d of condensate and NGLs (77% condensate), with the average well in its third month of production.  We have achieved 100% success on the placement of the frac stages on all five wells.

We continue to appraise our position in the Duvernay liquids-rich natural gas resource play, where we have amassed 321 net sections at a cost of approximately $76 million ($375/acre).  Our position spans the breadth of the liquids-rich natural gas fairway, and comprises three largely contiguous blocks in the Edson, Drayton Valley and Niton areas.  To date, we have drilled three vertical stratigraphic test wells, and plan to spud our first horizontal well prior to the end of 2013, with completion anticipated to occur in 2014.  Our Duvernay rights generally underlie our Cardium and Mannville liquids-rich gas positions, allowing for potential infrastructure, operational, and timing advantages in full field development of the Duvernay.  Combined, our Cardium, Mannville, and Duvernay positions provide us with exploration and development opportunities in our core Canadian operating region that have the potential to deliver strong production and reserve growth into the latter half of the decade.

Capital expenditures in Australia during the third quarter of 2013 were mainly for repairs and maintenance activity.  During the first half of 2013, we drilled two sidetracks off existing wells in Australia.  The program included the drilling of a 3,400 metre horizontal leg, the longest horizontal section drilled to-date at Wandoo. The 2013 drilling program has been our most successful effort yet in Australia.  Both sidetracks were brought on production at restricted rates in April, demonstrating productive capacities in excess of 6,000 bbls/d and 3,000 bbls/d, respectively.  To meet current marketing agreements and provide long-term certainty to our customers, our current plan is to maintain production levels within our prior guidance of between 6,000 bbls/d and 8,000 bbls/d.  We anticipate maintaining these production levels in Australia for the foreseeable future with drilling programs approximately every two years. Wandoo's oil garners a premium of approximately US$7.00 to the Dated Brent index and incurs no transportation cost as production is sold directly at the platform, leading to very high netbacks.

Also during the first half of 2013, we concluded a five-well drilling program in the Champotran field in France.  All five of the wells were successful, with on-stream production rates in excess of 300 bbls/d per well and low water cuts.  In 2012, we completed two acquisitions that were natural additions to our asset base in France and further secured our position as the leading oil producer in the country.  We continue to integrate these assets and to identify further opportunities to increase production through seismic data acquisition, workovers, optimized water-flood management and development drilling.  Our French business is now an organic growth asset, featuring low base decline rates, high netbacks from Brent-indexed production, strong cash flow generation and high capital efficiencies on development projects.  We are increasing our France-based technical staffing to identify and execute additional investment opportunities in these large, complex, conventional light oil fields in both the Paris and Aquitaine Basins.

In the Netherlands, in addition to activities related to our acquisition of additional interests completed in October, 2013, we continued drilling preparations for a three-well drilling campaign to be initiated in December 2013.  Our Garijp debottlenecking project was completed in the first quarter of 2013, enabling incremental production from two wells previously drilled at Vinkega.  Surface facilities for the multi-zone Langezwaag-1 well (42% working interest) were completed and commissioned mid-way through the second quarter.  Netherlands production during the third quarter was curtailed to facilitate a turnaround at the Garijp Treatment Centre and the retrofitting of our Middenmeer Treatment Centre.  We intend to increase activity in the Netherlands each year to maintain a rolling inventory of projects so that each year's capital program will involve a combination of drilling new wells and the tie-in of previous successes.  Like our French Business Unit, we now consider our Netherlands Business Unit to be an organic growth business, and we are increasing our technical staffing in the Netherlands to turn our substantial inventory of prospect leads into drillable projects.

In Ireland, tunneling operations re-started effective November 3, 2013.  Tunneling operations had been suspended following an industrial accident, which resulted in a fatality at the project worksite, on September 8, 2013.  Onshore pipelining, offshore umbilical-laying, seismic acquisition and workover activities for our Corrib project were not impacted by the suspension.  The effective impact of the delay in tunneling operations is not fully determinable at this time, as a portion of the tunneling delay may be recouped through accelerated completion of other project activities.  However, based on an early review of our deterministic schedule for remaining construction and commissioning activities, we believe it is prudent to revise our expectations for timing of first gas to mid-2015 from earlier expectations for start-up at the end of 2014 or early 2015.  Following successful subsea well operations conducted during the third quarter of 2013, we are increasing our peak production estimate at Corrib from 54 mmcf/d (9,000 boe/d) to approximately 58 mmcf/d (approximately 9,700 boe/d) net to Vermilion.

Strong operational performance across all of our operating regions continues to provide us with flexibility to manage the composition of produced volumes while exceeding our initial annual production targets.  With the contribution of production associated with our Netherlands acquisition, completed in October 2013, we now expect to achieve average annual production volumes at the upper end of our guidance range of 40,500 to 41,000 boe/d.  Our original 2013 guidance of 39,000 to 40,500 boe/d was previously increased following both the first and second quarters due to better-than-expected results from our capital program.

Development capital for 2013 is currently estimated at $530 million, an increase of approximately $45 million from our original guidance of $485 million.  The increase is attributable primarily to the impact of a weaker Canadian dollar as compared to foreign exchange rates at the time of our original guidance, a delay in the timing of rig arrival for our Australian drill program (originally anticipated to occur in late 2012) which shifted expenditures into 2013, and minor additions to our capital work scope during 2013 (such as the addition of the Champotran southern extension well in France).  The Australian drilling program occurred in the first half of 2013, a period during which the Canadian dollar weakened significantly against the Australian dollar, reaching near all-time lows in March and April 2013.  The Canadian dollar has also experienced significant weakness versus the Euro, particularly during the second half of 2013, translating into higher Canadian dollar-denominated capital expenditures than originally planned.  Conversely, though the weaker Canadian dollar has driven up capital spending, it has also resulted in higher Canadian dollar-denominated fund flows from operations(4) from our foreign jurisdictions, through the translation of foreign currency-denominated revenues into Canadian dollars.  Our operations continue to perform strongly, generating organic production growth across all four operating regions in a capital-efficient manner.  Assuming commodity prices remain near current levels for the remainder of this year, we anticipate that we will fully fund our net dividends(4) and development capital expenditures (excluding capital investment at Corrib) with fund flows from operations(4) during 2013.

In the first quarter of 2013 Vermilion shares began trading on the New York Stock Exchange under the ticker symbol "VET".  As an international oil and gas producer, we believe the secondary listing will assist in broadening our investor base and increasing trading liquidity.

We believe we remain positioned to deliver strong operational and financial performance over the next several years.  We continue to target annual organic production growth of approximately 5% along with providing reliable and growing dividends.  Near term growth and cash flow are expected to be driven by continued Cardium and Mannville development in Canada, oil development activities in France, and high-netback natural gas drilling in the Netherlands.  A significant increment of production growth and free cash flow growth is expected from Corrib beginning mid- 2015 with the first full year of production from the project in 2016.  Our Australian Business Unit is expected to provide steady production as well as significant free cash flow.

We increased our monthly dividend by 5.3% in the first quarter of 2013, from $0.19 to $0.20 per share.  The increase became effective for the January 2013 dividend paid February 15, 2013.  With the anticipated growth of fund flows from operations, the continued strength of our operations, and our expansive opportunity base (including our recently announced acquisition in the Netherlands and our proposed acquisition in Germany), we are confident we can achieve our future growth objectives and continue to provide a reliable and growing dividend stream to investors.  We believe our balance sheet remains well positioned to execute its capital-efficient growth-and-income model and fund Corrib development through to first gas while remaining within an acceptable net debt-to-fund flows from operations(4) ratio.  Corrib is expected to provide a further significant increase to our projected free cash flow upon first gas production.

Our conservative fiscal management and capital discipline leaves us well positioned to execute our growth-and-income model and provide growth to investors on a per share basis.  The management and directors of Vermilion continue to hold approximately 8% of the outstanding shares and remain committed to delivering superior rewards to all stakeholders.  Continuing to be acknowledged for excellence in our business practices, Vermilion was recognized for the fourth consecutive year by the Great Place to Work® Institute in both Canada and France.  We ranked as the 22nd Best Workplace in Canada among more than 315 companies. Our French unit ranked as the 27th Best Workplace in the country.

(1)   Estimated proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd ("GLJ") in a report dated September 16, 2013, with an effective date of December 31, 2012.
(2)   Estimated proved plus probable reserves attributable to the assets as evaluated by GLJ in a report dated November 5, 2013, with an effective date of December 31, 2013, using the GLJ (2013-10) price forecast.
(3)   U.S. Energy Information Administration website (www.eia.gov); quoted 2012 total oil supply and 2012 dry natural gas production.
(4)   See non-GAAP measures disclosures in the Management's Discussion and Analysis for the three and nine months ended September 30, 2013.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is Management's Discussion and Analysis ("MD&A"), dated November 6, 2013, of Vermilion Energy Inc.'s ("Vermilion", "We", "Our", "Us" or the "Company") operating and financial results as at and for the three and nine months ended September 30, 2013 as compared with the corresponding periods in the prior year.

This discussion should be read in conjunction with the unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2013 and the audited consolidated financial statements for the year ended December 31, 2012 and 2011, together with accompanying notes.  Additional information relating to Vermilion, including its Annual Information Form, is available on SEDAR at www.sedar.com or on Vermilion's website at www.vermilionenergy.com.

The unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2013 and comparative information have been prepared in Canadian dollars, except where another currency has been indicated, and in accordance with IAS 34, "Interim financial reporting", as issued by the International Accounting Standards Board.

NON-GAAP MEASURES

This report includes non-GAAP measures as further described herein.  These non-GAAP measures do not have standardized meanings prescribed by International Financial Reporting Standards ("IFRS" or, alternatively, "GAAP") and therefore may not be comparable with the calculations of similar measures for other entities.

"Fund flows from operations" represents cash flows from operating activities before changes in non-cash operating working capital and asset retirement obligations settled.  Management considers fund flows from operations and fund flows from operations per share to be key measures as they demonstrate Vermilion's ability to generate the cash necessary to pay dividends, repay debt, fund asset retirement obligations and make capital investments.  Management believes that by excluding the temporary impact of changes in non-cash operating working capital, fund flows from operations provides a useful measure of Vermilion's ability to generate cash that is not subject to short-term movements in non-cash operating working capital.

"Fund flows from operations (excluding the Corrib project)" represents fund flows from operations excluding expenses related to the Corrib project.  Management believes that by excluding expenses related to the Corrib project, fund flows from operations (excluding the Corrib project) provides a useful measure of Vermilion's ability to generate cash from its current producing assets.

The most directly comparable GAAP measure to fund flows from operations and fund flows from operations (excluding the Corrib project) is cash flows from operating activities.

Cash flows from operating activities as presented in Vermilion's consolidated statements of cash flows are reconciled to fund flows from operations and fund flows from operations (excluding the Corrib project) as follows:

    Three Months Ended     Nine Months Ended
    Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2013 2013 2012     2013 2012
Cash flows from operating activities 158,236 179,074 148,301     528,022 396,673
Changes in non-cash operating working capital 4,671 (6,852) (13,175)     (30,652) 14,003
Asset retirement obligations settled 2,738 2,370 1,968     6,496 5,315
Fund flows from operations 165,645 174,592 137,094     503,866 415,991
Expenses related to the Corrib project 876 2,036 2,171     4,767 6,879
Fund flows from operations (excluding the Corrib project) 166,521 176,628 139,265     508,633 422,870

"Free cash flow" represents fund flows from operations in excess of capital expenditures.  Management considers free cash flow to be a key measure as it is used to determine the funding available for investing and financing activities, including payment of dividends, repayment of long-term debt, reallocation to existing business units, and deployment into new ventures.

"Cash dividends per share" represents cash dividends declared per share by Vermilion.

"Net dividends" are dividends declared less proceeds received by Vermilion for the issuance of shares pursuant to the dividend reinvestment plan, both as presented in Vermilion's consolidated statements of changes in shareholders' equity.  Dividends both before and after the dividend reinvestment plan are reviewed by management and are assessed as a percentage of fund flows from operations to analyze the amount of cash that is generated by Vermilion which is being used to fund dividends.  Dividends declared is the most directly comparable GAAP measure to net dividends.

"Total net dividends, capital expenditures and asset retirement obligations settled" are net dividends plus the following amounts from Vermilion's consolidated statements of cash flows: drilling and development, exploration and evaluation, dispositions and asset retirement obligations settled.

"Total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project)" are total net dividends, capital expenditures and asset retirement obligations settled excluding drilling and development and asset retirement obligations settled relating to the Corrib project.

Total net dividends, capital expenditures and asset retirement obligations settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reviewed by management and are assessed as a percentage of fund flows from operations and fund flows from operations (excluding the Corrib project) to analyze the amount of cash that is generated by Vermilion that is available to repay debt and fund potential future acquisitions and capital expenditures.

Dividends declared, total net dividends, capital expenditures and asset retirement obligations settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reconciled to their most directly comparable GAAP measures as follows:

    Three Months Ended     Nine Months Ended
    Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2013 2013 2012     2013 2012
Dividends declared 61,003 60,776 56,196     181,391 167,282
Issuance of shares pursuant to the dividend reinvestment plan (19,354) (18,630) (17,251)     (53,516) (53,590)
Net dividends 41,649 42,146 38,945     127,875 113,692
Drilling and development 135,110 75,005 96,212     389,635 262,064
Dispositions - - -     (8,627) -
Exploration and evaluation 551 3,113 10,043     13,240 33,439
Asset retirement obligations settled 2,738 2,370 1,968     6,496 5,315
Total net dividends, capital expenditures and asset retirement obligations settled 180,048 122,634 147,168     528,619 414,510
Capital expenditures and asset retirement obligations settled              
   related to the Corrib project (35,028) (24,878) (17,164)     (76,426) (40,574)
Total net dividends, capital expenditures and asset retirement obligations settled              
   (excluding the Corrib project) 145,020 97,756 130,004     452,193 373,936

"Net debt" is the sum of long-term debt and working capital as presented in Vermilion's consolidated balance sheets.  Net debt is used by management to analyze the financial position and leverage of Vermilion.  The most directly comparable GAAP measure is long-term debt.

Long-term debt as presented in Vermilion's consolidated balance sheets is reconciled to net debt as follows:

          As At
          Sept 30, Dec 31,
($M)         2013 2012
Long-term debt         781,074 642,022
Current liabilities         389,757 355,711
Current assets         (470,545) (320,502)
Net debt         700,286 677,231

"Netbacks" are per boe and per mcf measures used in the analysis of operational activities and as a basis for decisions on capital allocation.

"Diluted shares outstanding" is the sum of shares outstanding at the period-end plus outstanding awards under Vermilion's equity based compensation plan, based on current estimates of future performance factors and forfeitures. The most directly comparable GAAP measure is shares outstanding.

Shares outstanding is reconciled to diluted shares outstanding as follows:

  As At
  Sept 30, June 30, Sept 30,
('000s of shares) 2013 2013 2012
Shares outstanding 101,787 101,418 98,729
Potential shares issuable pursuant to the equity based compensation plan 2,408 2,317 2,420
Diluted shares outstanding 104,195 103,735 101,149

OPERATIONAL ACTIVITIES  

Canada

Vermilion drilled 21 (16.3 net) wells during the third quarter of 2013. In the Cardium, the Company drilled 17 (14.3 net) wells and brought 11 gross operated wells on production. In the Mannville, Vermilion drilled four (2.0 net) wells and brought one well on production. Of the wells drilled in the third quarter, seven were long reach wells, including two 2-mile long wells.

France

Vermilion completed 3D seismic and subsurface studies in the Vic Bihl region that were begun late in the second quarter. The Company also completed a number of workovers in both the Paris and Aquitaine Basins, along with preparations for the Company's 2014 capital program.

Netherlands

Operating activities in the third quarter focused on facility maintenance and site construction, including retrofitting the Middenmeer Treatment Centre. The upgrades to this facility will ensure reliability and capacity to support upcoming planned drilling programs in the Slootdorp and Opmeer concessions. Vermilion is currently planning and preparing for a three well drilling program in the Netherlands, beginning in late-2013.

Australia

In Australia, efforts were focused on minor facilities repairs and engineering studies. Wandoo A received a five-year platform recertification during the third quarter of 2013.

PRODUCTION                  
                   
    Three Months Ended   % change       Nine Months Ended   % change
    Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
    2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Canada                        
  Crude oil & NGLs (bbls/d) 9,866 10,610 8,526   (7%) 16%     9,928 8,825   12%
  Natural gas (mmcf/d) 43.40 43.69 35.54   (1%) 22%     42.72 39.55   8%
  Total (boe/d) 17,099 17,892 14,449   (4%) 18%     17,047 15,417   11%
  % of consolidated 41% 42% 40%           42% 40%    
France                        
  Crude oil (bbls/d) 11,625 10,390 9,767   12% 19%     10,786 9,989   8%
  Natural gas (mmcf/d) 5.23 4.19 3.39   25% 54%     4.54 3.48   30%
  Total (boe/d) 12,496 11,088 10,333   13% 21%     11,544 10,569   9%
  % of consolidated 30% 26% 28%           28% 28%    
Netherlands                        
  NGLs (bbls/d) 48 50 41   (4%) 17%     65 66   (2%)
  Natural gas (mmcf/d) 28.78 38.52 34.59   (25%) (17%)     34.71 34.47   1%
  Total (boe/d) 4,845 6,470 5,806   (25%) (17%)     5,849 5,811   1%
  % of consolidated 12% 15% 16%           14% 15%    
Australia                        
  Crude oil (bbls/d) 7,070 7,363 5,958   (4%) 19%     6,580 6,523   1%
  % of consolidated 17% 17% 16%           16% 17%    
Consolidated                        
  Crude oil & NGLs (bbls/d) 28,609 28,413 24,292   1% 18%     27,359 25,403   8%
  % of consolidated 69% 66% 66%           67% 66%    
  Natural gas (mmcf/d) 77.41 86.40 73.52   (10%) 5%     81.97 77.50   6%
  % of consolidated 31% 34% 34%           33% 34%    
  Total (boe/d) 41,510 42,813 36,546   (3%) 14%     41,020 38,320   7%

Canadian production of 17,099 boe/d during the third quarter of 2013 represented a modest decrease compared to 17,892 boe/d in the second quarter, but an increase compared to 14,449 boe/d in the third quarter of the prior year. The slight quarter-over-quarter decrease is mainly attributable to declines given lack of activity during break-up.  The 18% year-over-year increase in production is largely attributable to continued development in the Cardium, supplemented by Mannville wells brought on during the year. Vermilion continues to focus on high netback oil and liquids, representing approximately 58% of Canadian production in the third quarter of 2013.

Production in France averaged 12,496 boe/d in the third quarter of 2013, an increase of 13% compared to production of 11,088 boe/d in the second quarter of 2013. On a year-over-year basis, production has grown by 21%. This increase in volume is mainly attributable to production from the five-well drilling program in Champotran which was brought on late in the second quarter of 2013.  In France, Vermilion remains predominantly weighted to Brent crude at approximately 93% of production in the third quarter of 2013.

Production volumes averaged 4,845 boe/d in the Netherlands during the third quarter of 2013, a 25% decrease compared to 6,470 boe/d in the prior quarter and a 17% decrease compared to 5,806 boe/d in the third quarter of 2012. The decrease in production is mainly attributable to downtime and retrofitting the Garijp and Middenmeer Treatment Centre.

Production in Australia averaged 7,070 boe/d during the third quarter of 2013, which represented a 4% decrease compared to the second quarter of 2013, but a year-over-year increase of 19% compared to 5,958 boe/d in the third quarter of 2012. Production volumes continue to reflect the strong drilling results achieved from the two-well program completed earlier in 2013 in which the new wells were brought on production at restricted rates.

FINANCIAL REVIEW                
                 
  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Net earnings 67,796 106,198 30,798   (36%) 120%     226,131 133,708   69%
Fund flows from operations 165,645 174,592 137,094   (5%) 21%     503,866 415,991   21%
Cash flow from operating activities 158,236 179,074 148,301   (12%) 7%     528,022 396,673   33%
Net debt 700,286 674,368 549,491   4% 27%     700,286 549,491   27%
Long-term debt 781,074 780,470 492,669   59%     781,074 492,669   59%
Ratio of net debt to annualized fund flows                        
   from operations 1.1 1.0 1.0   10% 10%     1.0 1.0  
Total net dividends, capital expenditures                        
   and asset retirement obligations settled                        
   % of fund flows from operations 109% 70% 107%           105% 100%    
   % of fund flows from operations                        
      (excluding the Corrib project) 87% 55% 93%           89% 88%    

Net earnings for the third quarter of 2013 decreased as compared to the second quarter of 2013 primarily as a result of increases in unrealized losses on derivative instruments and reduced unrealized foreign exchange gains.  The unrealized foreign exchange gain of $4.2 million recorded in the third quarter of 2013 primarily resulted from the impact of the appreciation of the Euro against the Canadian dollar and the resultant impact on Vermilion's financial balances.  The decrease in net earnings quarter-over-quarter was partially offset by stronger commodity pricing for crude oil.

Net earnings for the three and nine months ended September 30, 2013 increased as compared to the same periods in 2012 due to the increases in operating income resulting from production growth in Canada, France and Australia coupled with increases in the AECO and WTI reference prices for both periods and Dated Brent crude oil price quarter-over-quarter.  Additionally, net earnings increased due to unrealized foreign exchange gains recorded in the current periods and decreases in unrealized losses on derivative instruments.  The unrealized foreign exchange gain of $29.7 million recorded in nine months ended September 30, 2013 primarily resulted from the appreciation of the Euro against the Canadian dollar and the resultant impact on Vermilion's financial balances.  The increase in net earnings year-over-year was partially offset by increases in operating expense in France as result of an inventory draw in the current year versus a build in the nine months ended September 30, 2012.

Fund flows from operations for the third quarter of 2013 was 5% lower ($8.9 million) than the second quarter.  This decrease was largely due to increased current taxes in France as well as consolidated realized foreign exchange and derivative losses of $1.2 million and $4.8 million, respectively, during the quarter.  In addition, stronger WTI and Dated Brent crude pricing also contributed favourably to fund flows from operations, more than offsetting the impact of weaker AECO prices for Canadian natural gas quarter-over-quarter.

Fund flows from operations for the three and nine months ended September 30, 2013 was 21% higher for both periods in 2013 as compared to the same periods in 2012.  The increases were largely the result of quarter-over-quarter production growth in Canada, France and Australia coupled with the stronger commodity pricing.  On a year-to-date basis, ending inventory decreased by 213,000 bbls in 2013 versus a decrease of 46,000 bbls in 2012, which resulted in increased sold volumes.  The increase in sold volumes coupled with higher base production growth led to higher fund flows from operations year-over-year.  While the Dated Brent reference price declined by 3% from 2012, the impact of the decline was entirely offset by increased realized prices for Vermilion's production in Canada and the Netherlands.

Cash flow from operating activities for the third quarter of 2013 decreased as compared to the second quarter of 2013 due to the impact of timing differences pertaining to working capital.  Cash flow from operating activities for the three and nine months ended September 30, 2013 increased as compared to the same periods in 2012 due to the aforementioned increase in fund flows from operations.  In addition, timing differences pertaining to working capital for the nine month period ended September 30, 2013 also contributed to the increase year-over-year.

Vermilion continues to maintain a strong balance sheet, with a net debt to annualized fund flows from operations of 1.0.  Long-term debt as at September 30, 2013 increased to $781.1 million from $642.0 million as at December 31, 2012 as a result of increased borrowings on the revolving credit facility to fund development capital expenditures in Canada and Ireland.  Canadian development activities continue to be focused on the development of the Cardium light oil play.  In Ireland, development activities related to tunnelling, onshore pipelining, offshore umbilical-laying and offshore seismic acquisition activities.  2013 capital spending also included drilling programs in Australia and France.  As capital expenditures and dividends paid exceeded fund flows from operations, Vermilion ended the third quarter with net debt of $700.3 million, an increase from $674.4 million as at June 30, 2013 and $677.2 million as at December 31, 2012.

COMMODITY PRICES                
                 
  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
  2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Average reference prices                        
WTI (US $/bbl) 105.82 94.22 92.22   12% 15%     98.14 96.21   2%
Edmonton Sweet index (US $/bbl) 101.10 90.56 85.01   12% 19%     93.03 86.94   7%
Dated Brent (US $/bbl) 110.37 102.44 109.61   8% 1%     108.45 112.10   (3%)
AECO ($/GJ) 2.31 3.35 2.17   (31%) 6%     2.89 2.00   45%
Netherlands gas price ($/GJ) 9.94 10.14 9.06   (2%) 10%     10.17 9.38   8%
Netherlands gas price (€/GJ) 7.20 7.57 7.28   (5%) (1%)     7.53 7.30   3%
Average realized prices ($/boe)                        
Canada 63.56 62.00 53.61   3% 19%     61.16 53.67   14%
France 107.08 98.04 104.95   9% 2%     104.29 106.00   (2%)
Netherlands 61.44 65.08 56.88   (6%) 8%     62.70 57.95   8%
Australia 120.95 111.54 114.44   8% 6%     117.65 117.40  
Consolidated 86.10 80.21 80.35   7% 7%     83.10 79.83   4%
Production mix (% of production)                        
% priced with reference to WTI 24% 25% 23%           24% 23%    
% priced with reference to AECO 17% 17% 16%           17% 17%    
% priced with reference to European gas 14% 17% 17%           16% 17%    
% priced with reference to Dated Brent 45% 41% 44%           43% 43%    

Reference prices

During the third quarter of 2013, Dated Brent increased 8% while WTI increased by 12% as compared to the second quarter.  This increase in crude oil prices was a result of supply disruptions in Libya and intensified concerns over the conflict in Syria.  Western Canadian supply issues and increased rail capacity resulted in a further narrowing of the differential for both WTI and the Edmonton Sweet index versus Dated Brent (US$4.55 and US$9.27 per bbl, respectively, for the second quarter of 2013 as compared to US$8.22 and US$11.88 per bbl, respectively, for the second quarter of 2013).

The AECO reference price for the third quarter of 2013 decreased 31% as compared to the second quarter of 2013.  The significant quarter-over-quarter decline occurred as a result of increased short-term toll prices, which led to higher natural gas storage levels.

Realized pricing

The realized price of Vermilion's crude oil in Canada is directly linked to WTI but is subject to market conditions in Western Canada.  These market conditions can result in fluctuations in the pricing differential, as reflected by the Edmonton Sweet index price.  The realized price of Vermilion's NGLs in Canada is based on product specific differentials pertaining to trading hubs in the U.S.  The realized price of Vermilion's natural gas in Canada is based on the AECO spot price in Alberta.

Vermilion's crude oil in France and Australia is priced with reference to Dated Brent.

As of January 1, 2013, the price of Vermilion's natural gas in the Netherlands is now based on the TTF day-ahead index, as determined on the Title Transfer Facility Virtual Trading Point operated by Dutch TSO Gas Transport Services, plus various fees.  GasTerra, a state owned entity, continues to purchase all natural gas produced by Vermilion in the Netherlands.  Prior to 2013, the natural gas price received by Vermilion in the Netherlands was calculated using a trailing average of Dated Brent and the natural gas prices from European trading hubs.

Vermilion's average realized prices will differ from their corresponding average reference prices due to a number of factors, including the timing of the sale of production, differences in the quality of production and point of settlement.  In Canada, average realized prices are also impacted by the production mix of crude oil, NGLs and natural gas.

CAPITAL EXPENDITURES AND ACQUISITIONS        
         
  Three Months Ended     Nine Months Ended
By classification Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2013 2013 2012     2013 2012
Drilling and development 135,110 75,005 96,212     389,635 262,064
Dispositions - - -     (8,627) -
Exploration and evaluation 551 3,113 10,043     13,240 33,439
Capital expenditures 135,661 78,118 106,255     394,248 295,503
               
Property acquisition 7,586 - -     7,586 106,184
Acquisitions 7,586 - -     7,586 106,184
               
  Three Months Ended     Nine Months Ended
By category Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2013 2013 2012     2013 2012
Land (net of dispositions) (4,450) 2,307 7,666     (7,641) 46,046
Seismic 5,284 5,569 2,653     14,666 4,779
Drilling and completion 63,590 20,235 55,320     210,010 138,487
Production equipment and facilities 47,665 40,819 34,691     138,426 86,164
Recompletions 15,650 4,510 2,956     24,291 7,004
Other 7,922 4,678 2,969     14,496 13,023
Capital expenditures 135,661 78,118 106,255     394,248 295,503
Acquisitions 7,586 - -     7,586 106,184
Total capital expenditures and acquisitions 143,247 78,118 106,255     401,834 401,687
               
  Three Months Ended     Nine Months Ended
By country Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M) 2013 2013 2012     2013 2012
Canada 70,359 17,578 63,701     174,573 191,139
France 23,664 23,223 10,416     68,479 132,539
Netherlands 8,316 4,157 5,257     12,845 13,206
Australia 5,880 8,282 9,721     69,511 24,132
Ireland 35,028 24,878 17,160     76,426 40,671

Capital expenditures for the third quarter of 2013 were higher than both the second quarter of 2013 and the third quarter of 2012.   The increase was the result of higher drilling activity in Canada, and increased activities related to tunnelling, onshore pipelining, offshore umbilical-laying, offshore seismic acquisition and workover activities in Ireland.  These increases were partially offset by reduced land purchases in Canada in the third quarter of 2013 compared to the same period in 2012.  In Canada, Vermilion participated in the drilling of 21 (16.3 net) wells during the third quarter of 2013 as compared to three (1.9 net) wells during the second quarter and 16 (11.5 net) wells during the third quarter of 2012.

Capital expenditures for the nine months ended September 30, 2013 were higher than the same period in 2012 largely due to the aforementioned increase quarter-over-quarter coupled with 2013 drilling activity in France and Australia.  In France, Vermilion participated in the drilling of five (5.0 net) wells for 2013, while in the same period in 2012, France had focused on its annual workover and recompletion activities as well as integrating its 2012 acquisitions.  In Australia, Vermilion participated in the drilling of a two-well (2.0 net) sidetrack program during the first half of 2013.  During the same period in 2012 Australia had focused on preparations and permitting activities pertaining to the sidetrack program in 2013.

PETROLEUM AND NATURAL GAS SALES                
                 
  Three Months Ended   % change     Nine Months Ended   % change
By product Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe and per mcf) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Crude oil & NGLs 284,484 255,183 243,471   11% 17%     799,165 716,888   11%
Per boe 108.87 98.95 100.70   10% 8%     103.95 102.32   2%
Natural gas 42,701 56,783 41,367   (25%) 3%     149,562 124,982   20%
Per mcf 6.00 7.22 6.12   (17%) (2%)     6.68 5.89   13%
Petroleum and natural gas sales 327,185 311,966 284,838   5% 15%     948,727 841,870   13%
Per boe 86.10 80.21 80.35   7% 7%     83.10 79.83   4%
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Canada 100,000 100,950 71,268   (1%) 40%     284,638 226,726   26%
Per boe 63.56 62.00 53.61   3% 19%     61.16 53.67   14%
France 120,574 100,418 102,369   20% 18%     342,558 300,708   14%
Per boe 107.08 98.04 104.95   9% 2%     104.29 106.00   (2%)
Netherlands 27,382 38,316 30,386   (29%) (10%)     100,119 92,268   9%
Per boe 61.44 65.08 56.88   (6%) 8%     62.70 57.95   8%
Australia 79,229 72,282 80,815   10% (2%)     221,412 222,168   -
Per boe 120.95 111.54 114.44   8% 6%     117.65 117.40   -

Vermilion's consolidated petroleum and natural gas sales for the third quarter of 2013 were higher than second quarter of 2013 as a result of increased crude oil sales volumes in France and higher realized pricing for crude oil.  Higher crude oil sales were offset by a decrease in natural gas sales as a result of lower natural gas production and lower AECO pricing.  Petroleum and natural gas sales for the third quarter of 2013 were higher than the same period in 2012 as a result of increased sales volumes and favourable commodity prices.

Vermilion's consolidated petroleum and natural gas sales for the nine months ended September 30, 2013 were higher than the same period in 2012.  This increase was the result of increased sales volumes in all of Vermilion's jurisdictions, higher North American commodity prices, partially offset by lower Dated Brent pricing year-over-year.

CRUDE OIL INVENTORY

Vermilion carries an inventory of crude oil in France and Australia, which is a result of timing differences between production and sales.

The following table summarizes the changes in Vermilion's crude oil inventory positions:

  Three Months Ended     Nine Months Ended
  Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
(mbbls) 2013 2013 2012     2013 2012
France              
   Opening crude oil inventory 202 218 271     354 187
   Adjustments - - -     5 -
   Crude oil production 1,069 945 899     2,945 2,737
   Crude oil sales (1,045) (961) (924)     (3,078) (2,678)
   Closing crude oil inventory 226 202 246     226 246
Australia              
   Opening crude oil inventory 187 165 275     268 222
   Crude oil production 650 670 548     1,796 1,787
   Crude oil sales (654) (648) (706)     (1,881) (1,892)
   Closing crude oil inventory 183 187 117     183 117

Inventory held on the balance sheet as at September 30, 2013 was comprised of the following components:

($M)         France Australia Total
Operating expense         3,813 4,482 8,295
Royalties         1,332 - 1,332
Depletion         4,796 3,736 8,532
          9,941 8,218 18,159

DERIVATIVE INSTRUMENTS                
                 
  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Realized loss (gain) on                        
   derivative instruments 4,765 (1,770) 1,869   (369%) 155%     5,782 11,178   (48%)
Per boe 1.25 (0.46) 0.53   (372%) 136%     0.51 1.06   (52%)

The realized loss on derivative instruments for the third quarter of 2013 resulted from payments made on our crude oil derivative instruments as the reference prices exceeded the ceiling and swap prices on those instruments.  This realized loss was partially offset by a $1.0 million gain on our natural gas derivative instruments.

The realized loss for the nine months ended September 30, 2013 was lower than the realized loss for the same period in 2012 due to the gains realized in the second quarter of 2013 and the absence of premiums paid in 2012 on funded derivatives.

The following tables summarize Vermilion's outstanding risk management positions as at September 30, 2013:

  Note Daily Volume Strike Price(s)
Crude Oil      
WTI - Collar      
January 2014 - March 2014   1,000 bbl/d 97.50 - 104.69 USD $
WTI - Swap      
January 2013 - December 2013   2,000 bbl/d 93.04 USD $
July 2013 - December 2013   500 bbl/d 94.98 USD $
October 2013 - December 2013   500 bbl/d 101.00 CAD $
October 2013 - December 2013   1,300 bbl/d 100.50 USD $
January 2014 - March 2014   500 bbl/d 101.22 USD $
January 2014 - March 2014 1 250 bbl/d 105.45 USD $
January 2014 - June 2014   250 bbl/d 100.05 USD $
January 2014 - June 2014 2 250 bbl/d 103.27 USD $
Dated Brent - Collar      
January 2013 - December 2013   3,500 bbl/d 96.14 - 107.34 USD $
July 2013 - December 2013   1,000 bbl/d 97.50 - 109.10 USD $
October 2013 - December 2013   3,750 bbl/d 102.73 - 110.56 USD $
January 2014 - March 2014   1,500 bbl/d 103.33 - 110.00 USD $
Dated Brent - Swap      
January 2014 - March 2014   1,250 bbl/d 107.51 USD $
January 2014 - June 2014   500 bbl/d 107.89 USD $
MSW - Fixed Price Differential (Physical)      
January 2013 - December 2013   2,000 bbl/d WTI less 4.50 USD $
October 2013 - December 2013   500 bbl/d WTI less 8.50 USD $
MSW - Fixed Price Sale (Physical)      
January 2014 - March 2014   500 bbl/d 92.03 CAD $
       
Canadian Natural Gas      
AECO - Collar      
April 2013 - October 2013   3,500 GJ/d 3.05 - 3.66 CAD $
April 2013 - December 2013   5,000 GJ/d 2.93 - 3.52 CAD $
October 2013 - December 2013   2,500 GJ/d 2.85 - 3.56 CAD $
January 2014 - December 2014   2,500 GJ/d 3.15 - 3.86 CAD $
AECO - Swap      
May 2013 - December 2013   2,500 GJ/d 3.65 CAD $
AECO - Collar (Physical) 3    
April 2012 - March 2014   5,500 GJ/d 2.60 - 3.78 CAD $
June 2012 - March 2014   3,000 GJ/d 2.30 - 3.75 CAD $
       
European Natural Gas      
TTF - Swap      
May 2013 - December 2013   3,600 GJ/d 7.41 EUR €
June 2013 - December 2013   14,400 GJ/d 7.44 EUR €
October 2013 - December 2013   1,800 GJ/d 7.53 EUR €

Prior to the expiration of this swap, the counterparty has the option to extend the swap to June 30, 2014 at the contracted volume and price.
2  Prior to the expiration of this swap, the counterparty has the option to extend the swap to December 31, 2014 at the contracted volume and price.
3  Physical AECO collars have a funded cost of $0.10/GJ.

From time to time Vermilion enters into new risk management positions.  Up-to-date information regarding outstanding risk management positions is available on Vermilion's website at www.vermilionenergy.com/ir/hedging.cfm.

ROYALTIES                
                 
  Three Months Ended   % change     Nine Months Ended   % change
By product Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe and per mcf) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Crude oil & NGLs 17,919 15,353 12,087   17% 48%     48,082 39,570   22%
Per boe 6.86 5.95 5.00   15% 37%     6.25 5.65   11%
Natural gas 811 447 276   81% 194%     2,238 576   289%
Per mcf 0.11 0.06 0.04   83% 175%     0.10 0.03   233%
Royalties 18,730 15,800 12,363   19% 52%     50,320 40,146   25%
Per boe 4.93 4.06 3.49   21% 41%     4.41 3.81   16%
% of petroleum and natural gas sales 5.7% 5.1% 4.3%           5.3% 4.8%    
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Canada 11,156 9,707 7,081   15% 58%     29,852 24,266   23%
Per boe 7.09 5.96 5.33   19% 33%     6.41 5.74   12%
% of petroleum and natural gas sales 11.2% 9.6% 9.9%           10.5% 10.7%    
France 7,574 6,093 5,282   24% 43%     20,468 15,880   29%
Per boe 6.73 5.95 5.42   13% 24%     6.23 5.60   11%
% of petroleum and natural gas sales 6.3% 6.1% 5.2%           6.0% 5.3%    

In Canada, royalties as a percentage of sales for the third quarter of 2013 increased to 11.2% as compared to 9.6% for the second quarter of 2013 and 9.9% for the third quarter of 2012.  The slightly higher percentage in the current quarter is associated with the timing of placing Cardium wells on production due to the associated royalty incentive on initial production volumes.  On a year-over-year basis, royalties as a percentage of sales remained consistent.

In France, royalties as a percentage of sales for the third quarter of 2013 remained relatively consistent with the prior quarter.  As compared to the same periods of the prior year, royalties as a percentage of sales for the three and nine months ended September 30, 2013 increased due to a higher proportion of R31 royalty associated with incremental production from a 2012 French acquisition as well as new wells that have come on production in 2013.  Although the RCDM component of the royalties levied in France is based on units of production and is not subject to changes in commodity prices, certain wells are also subject to the R31 royalty which is based on revenue.

Production in the Netherlands and Australia is not subject to royalties.

OPERATING EXPENSE                
                 
  Three Months Ended   % change     Nine Months Ended   % change
By product Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe and per mcf) 2013 2013 2012   Q2/13 Q3/12     2013 2012 2012
Crude oil & NGLs 34,275 35,682 36,889   (4%) (7%)     111,812 102,400   9%
Per boe 13.12 13.84 15.26   (5%) (14%)     14.54 14.62   (1%)
Natural gas 11,971 12,400 10,141   (3%) 18%     35,091 32,408   8%
Per mcf 1.68 1.58 1.50   6% 12%     1.57 1.53   3%
Operating 46,246 48,082 47,030   (4%) (2%)     146,903 134,808   9%
Per boe 12.17 12.36 13.27   (2%) (8%)     12.87 12.78   1%
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012 2012
Canada 12,770 15,975 13,420   (20%) (5%)     42,586 40,904   4%
Per boe 8.12 9.81 10.10   (17%) (20%)     9.15 9.68   (5%)
France 14,599 16,935 12,351   (14%) 18%     51,473 41,208   25%
Per boe 12.97 16.53 12.66   (22%) 2%     15.67 14.53   8%
Netherlands 5,209 5,260 3,870   (1%) 35%     14,438 13,436   7%
Per boe 11.69 8.93 7.24   31% 61%     9.04 8.44   7%
Australia 13,668 9,912 17,389   38% (21%)     38,406 39,260   (2%)
Per boe 20.86 15.30 24.62   36% (15%)     20.41 20.75   (2%)

In Canada, third quarter operating expense of $12.8 million was lower than the previous quarter's $16.0 million due to lower electricity costs, less emulsion trucking and reduced lease mat rentals.  This resulted in a decrease to $8.12 per boe for the current quarter versus $9.81 per boe for the prior quarter.  Operating expense for the third quarter of 2013 was relatively consistent with the $13.4 million for the same quarter of the previous year.  The year-over-year increase in operating expense from $40.9 million to $42.6 million was related to higher fuel and electricity costs and gas gathering fees as well as increased preventative maintenance work.  Operating expense per boe decreased for the three and nine months ended September 30, 2013 as compared to the same periods of the prior year due to higher current year volumes.

In the Netherlands, operating expense for the three and nine months ended September 30, 2013 increased against the comparable prior year periods due to the timing of maintenance activity.  The higher level of expense resulted in an increase in operating expense per boe for the current year as compared to the same periods of 2012.  Operating expense per boe increased for the third quarter of 2013 as compared to the second quarter despite a similar level of expense due to lower quarter-over-quarter volumes.

As a result of shipment timing, Vermilion carries an inventory of crude oil in France and Australia.  When crude oil is inventoried, the related costs of production are deferred and carried on the balance sheet.  When the inventory is subsequently sold, those costs are expensed in the period of sale.  As a result, the timing of inventory builds and draws results in fluctuations in the amount of operating expense recognized for a given period.

In France, the quarter-over-quarter decrease in operating expense was primarily the result of reduced maintenance activity.  The increase in operating expense for the three and nine months ended September 30, 2013 as compared to the same periods of the prior year is associated with incremental costs related to a December 2012 acquisition as well as additional repair and maintenance activities year-over-year. Higher operating expense resulted in an increase on a per boe basis for the three and nine months ended September 30, 2013 despite significantly higher volumes.

In Australia, operating expense for the third quarter of 2013 increased as compared to the previous quarter due primarily to increased repairs and maintenance activity.  Operating expense for the third quarter of 2013 decreased as compared to the third quarter of 2012 due to a crude oil inventory draw in the prior year.  Operating expense for the nine months ended September 30, 2013 remained relatively consistent with the same period of the prior year.  The variance in expense per boe for the third quarter of 2013 as compared to the prior quarter and the third quarter of 2012 is largely due to the timing of major project work.  On a year-to-date basis, operating expense per boe in 2013 remained relatively consistent with the prior year.

TRANSPORTATION EXPENSE                
                 
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Canada 3,272 2,611 2,005   25% 63%     8,152 6,399   27%
Per boe 2.08 1.60 1.51   30% 38%     1.75 1.51   16%
France 2,713 2,416 1,840   12% 47%     7,883 6,382   24%
Per boe 2.41 2.36 1.89   2% 28%     2.40 2.25   7%
Ireland 564 1,626 1,899   (65%) (70%)     3,808 5,874   (35%)
Transportation 6,549 6,653 5,744   (2%) 14%     19,843 18,655   6%
Per boe 1.72 1.71 1.62   1% 6%     1.74 1.77   (2%)

Transportation expense in Canada and France for the three and nine months ended September 30, 2013 was higher compared to the expense for the same periods in 2012 and the second quarter of 2013.  These increases resulted from higher sales volumes in France and increased crude oil production subject to transportation costs in Canada.

On a consolidated basis, the increases in transportation expense in Canada and France were offset by lower payments under the ship or pay agreement related to the Corrib project.

GENERAL AND ADMINISTRATION EXPENSE                
                 
  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
General and administration 12,033 11,313 12,669   6% (5%)     35,956 34,885   3%
Per boe 3.17 2.91 3.57   9% (11%)     3.15 3.31   (5%)

The minor variance in general administration expense for the third quarter of 2013 versus the comparative quarter and year-over-year is due to the timing of corporate expenditures.  For the nine months ended September 30, 2013, general and administration expense was slightly higher than the corresponding period in 2012 as a result of increased staffing levels required to support Vermilion's operational activities.

EQUITY BASED COMPENSATION EXPENSE                
                 
  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Equity based compensation 12,779 10,724 8,704   19% 47%     39,639 28,620   39%
Per boe 3.36 2.76 2.46   22% 37%     3.47 2.71   28%

Equity based compensation expense relates to non-cash compensation expense attributable to long-term incentives granted to directors, officers and employees under the Vermilion Incentive Plan ("VIP"). The expense is recognized over the vesting period based on the grant date fair value of awards, adjusted for the ultimate number of awards that actually vest as determined by the Company's achievement of performance conditions.

Equity based compensation expense for the three and nine months ended September 30, 2013 was higher than the same periods in 2012.  The year-over-year increases resulted from the revision of future performance condition assumptions starting in the fourth quarter of 2012 and higher staffing levels required to support Vermilion's operating activities.

INTEREST EXPENSE                
                 
  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Interest expense 10,109 9,336 7,229   8% 40%     28,134 19,930   41%
Per boe 2.66 2.40 2.04   11% 30%     2.46 1.89   30%

Interest expense for the three and nine months ended September 30, 2013 increased versus the comparable periods due to increased borrowings under Vermilion's revolving credit facility.

DEPLETION AND DEPRECIATION, ACCRETION, IMPAIRMENTS AND GAIN ON ACQUISITION
                 
  Three Months Ended   % change     Nine Months Ended   % change
  Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Depletion and depreciation 78,826 78,418 76,941   1% 2%     238,692 229,301   4%
Per boe 20.74 20.16 21.70   3% (4%)     20.91 21.74   (4%)
Accretion 6,214 6,000 5,891   4% 5%     18,038 16,921   7%
Per boe 1.64 1.54 1.66   6% (1%)     1.58 1.60   (1%)
Impairments - - -   - -     - 65,800   (100%)
Per boe - - -   - -     - 6.24   (100%)
Gain on acquisition - - -   - -     - (45,309)   (100%)
Per boe - - -   - -     - (4.30)   (100%)

Depletion and depreciation expense for the third quarter of 2013 was relatively consistent with both the second quarter of 2013 and the third quarter of 2012.  Depletion and depreciation expense for the nine months ended September 30, 2013 was 4% higher than the same period in 2012 primarily due to increased production year-over-year.

Accretion expense for the third quarter of 2013 was relatively consistent with both the second quarter of 2013 and the third quarter of 2012.  Accretion expense was higher for the nine months ended September 30, 2013 as compared to the same period in 2012 as a result of additional accretion expense pertaining to asset retirement obligations recorded on new wells drilled during the year and an acquisition in France late in 2012.

The impairment losses for the nine months ended September 30, 2012 pertained to impairment losses recorded on Vermilion's conventional deep gas and shallow coal bed methane natural gas plays.  These impairment charges were the result of significant declines in the forward pricing assumptions for natural gas in Canada.

The gain on acquisition for the nine months ended September 30, 2012 related to Vermilion's acquisition of certain working interests in the Paris and Aquitaine basins.  The gain arose as a result of the increase in the fair value of the acquired petroleum and natural gas reserves from the time when the acquisition was negotiated to the acquisition date.  The increase resulted from a change in the underlying commodity price forecasts used to determine the fair value of the acquired reserves.

TAXES                
                 
  Three Months Ended   % change     Nine Months Ended   % change
By classification Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Current taxes before PRRT 46,453 36,719 38,784   27% 20%     118,729 100,373   18%
Per boe 12.22 9.44 10.94   29% 12%     10.40 9.52   9%
PRRT 15,649 12,590 22,743   24% (31%)     39,392 58,472   (33%)
Per boe 4.12 3.24 6.42   27% (36%)     3.45 5.54   (38%)
Current taxes 62,102 49,309 61,527   26% 1%     158,121 158,845   0%
Per boe 16.34 12.68 17.36   29% (6%)     13.85 15.06   (8%)
                         
  Three Months Ended   % change     Nine Months Ended   % change
By country Sept 30, June 30, Sept 30,   Q3/13 vs. Q3/13 vs.     Sept 30, Sept 30,   2013 vs.
($M except per boe) 2013 2013 2012   Q2/13 Q3/12     2013 2012   2012
Canada 260 328 36   (21%) 622%     839 1,323   (37%)
Per boe 0.17 0.20 0.03   (15%) 467%     0.18 0.31   (42%)
France 31,717 16,124 21,051   97% 51%     66,500 49,671   34%
Per boe 28.17 15.74 21.58   79% 31%     20.25 17.51   16%
Netherlands 6,810 9,621 9,614   (29%) (29%)     25,865 24,546   5%
Per boe 15.28 16.34 18.00   (6%) (15%)     16.20 15.42   5%
Australia 23,315 23,236 30,826   - (24%)     64,917 83,305   (22%)
Per boe 35.59 35.86 43.66   (1%) (18%)     34.49 44.02   (22%)

Vermilion pays current taxes in France, the Netherlands and Australia.  Corporate income taxes in France and the Netherlands apply to taxable income after eligible deductions.  In France, taxable income is taxed at a rate of approximately 34.4%, plus an additional temporary surtax tax of 5% levied until 2014 for companies which have annual revenue in excess of €250 million.  Vermilion is therefore taxable in France at a statutory rate of 36.1% until 2014. In the Netherlands, taxable income is taxed at a rate of approximately 46%.  As a function of the impact of Vermilion's Canadian tax pools, the Company does not presently pay current taxes in Canada. The Canadian segment includes holding companies that pay current taxes in foreign jurisdictions.

During the second half of 2013, the France government proposed changes to corporate tax legislation that could lead to increases in current tax for companies operating in France.  One of the proposals includes an increase in the temporary surtax from 5% currently to 10.7% (with the surtax levied as a percent of base corporate income tax payable). The new surtax rate would be applicable for companies which have annual revenue in excess of €250 million and would effectively increase the statutory rate applicable to Vermilion's French operations from the 36.1% to 38.0%, with retrospective application to January 1, 2013.

Another proposal adds a new test to the existing rules governing interest deductions for related party financing.  Under the proposed rule, interest deductions would be allowed only if the French borrower demonstrates that the lender is subject to corporate tax on interest income that equals 25% or more of the corporate tax that would otherwise be due under French tax rules.  This proposal, among other proposed changes, may reduce the effectiveness of Vermilion's existing international corporate financing structures and could result in a reduction of certain eligible deductions in our French operating companies. 

The Company has been in receipt of tax assessments in France for certain prior periods.  A provision for the assessments has been recorded and the Company has entered into discussions with the tax authorities in France regarding the assessments.

In Australia, current taxes include both corporate income taxes and PRRT.  Corporate income taxes are applied at a rate of approximately 30% on taxable income after eligible deductions, which include PRRT.  PRRT is a profit based tax applied at a rate of 40% on sales less eligible expenditures, including operating expenses and capital expenditures.

Current taxes for the third quarter of 2013 were higher than the second quarter of 2013 and the same period in 2012 due in part to higher taxes in France as a result of prior periods assessments from the French tax authority as well as higher petroleum and natural gas sales. Partially offsetting the impact of higher sales was the use of tax pools in Canada, which will remain non-taxable for a number of years.

Current taxes for the three and nine months ended September 30, 2013 was consistent with the same period in 2012 despite higher petroleum and natural gas sales and current taxes in France due to higher capital expenditures during the first half of 2013 in Australia, which resulted in decreased PRRT.

OTHER EXPENSE (INCOME)        
         
  Three Months Ended     Nine Months Ended
  Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M except per boe) 2013 2013 2012     2013 2012
Other expense (income) 55 271 (277)     259 8,291
Per boe 0.01 0.07 (0.08)     0.02 0.79

Other expense for the nine months ended September 30, 2012 was comprised primarily of $8.5 million relating to transfer taxes paid to regulatory authorities in France pursuant to the first quarter of 2012 acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins.

FOREIGN EXCHANGE        
         
  Three Months Ended     Nine Months Ended
  Sept 30, June 30, Sept 30,     Sept 30, Sept 30,
($M except per boe) 2013 2013 2012     2013 2012
Unrealized foreign exchange (gain) loss (4,232) (28,025) 6,740     (29,738) 18,223
Per boe (1.11) (7.21) 1.89     (2.60) 1.73
Realized foreign exchange loss (gain) 1,227 (1,272) (410)     572 (345)
Per boe 0.32 (0.33) (0.11)     0.05 (0.03)
Foreign exchange (gain) loss (3,005) (29,297) 6,330     (29,166) 17,878
Per boe (0.79) (7.54) 1.78     (2.55) 1.70

As a result of Vermilion's international operations, Vermilion conducts business in currencies other than the Canadian dollar and has monetary assets and liabilities (including cash, receivables, payables, derivative assets and liabilities, and intercompany loans) denominated in such currencies.  Vermilion's exposure to foreign currencies includes the U.S. Dollar, the Euro and the Australian Dollar.

Foreign exchange gains and losses are comprised of both unrealized and realized amounts.  Unrealized foreign exchange gains and losses are the result of translating monetary assets and liabilities held in non-functional currencies to the respective functional currencies of Vermilion and its subsidiaries.  Realized gains and losses are the result of foreign exchange fluctuations and the timing of payments on transactions conducted in non-functional currencies and as such are subject to fluctuations.

For the three and nine months ended September 30, 2013, the unrealized foreign exchange gain primarily resulted from the impact of the appreciation of the Euro against the Canadian dollar and the resultant impact on Vermilion's financial balances.

SUMMARY OF RESULTS    
     
    Three Months Ended
    Sept 30, Jun 30, Mar 31, Dec 31, Sept 30, Jun 30, Mar 31, Dec 31,
($M except per share) 2013 2013 2013 2012 2012 2012 2012 2011
Petroleum and natural gas sales 327,185 311,966 309,576 241,233 284,838 246,544 310,488 275,172
Net earnings (loss) 67,796 106,198 52,137 56,914 30,798 37,816 65,094 (30,243)
Net earnings (loss) per share                
  Basic 0.67 1.05 0.53 0.58 0.31 0.39 0.67 (0.32)
  Diluted 0.66 1.04 0.51 0.57 0.31 0.38 0.66 (0.32)

The fluctuations in Vermilion's petroleum and natural gas sales and net earnings (loss) from quarter-to-quarter are primarily caused by variations in sales volumes, crude oil and natural gas prices and the impact of royalties and tax legislation in the jurisdictions in which Vermilion operates.  In addition, changes in foreign exchange rates may result in unrealized gains and losses on Vermilion's financial balances held in foreign currencies while changes in petroleum and natural gas prices may impact gains and losses on derivative instruments and may result in impairment charges or the reversal of impairment charges incurred in previous periods.

LIQUIDITY AND CAPITAL RESOURCES

Vermilion's net debt as at September 30, 2013 was $700.3 million compared to $677.2 million as at December 31, 2012.

Long-term debt was comprised of the following:

  Annualized Interest Rate     As At
  Sept 30, Dec 31,     Sept 30, Dec 31,
($M) 2013 2012     2013 2012
Revolving credit facility 3.3% 3.3%     558,171 419,784
Senior unsecured notes 6.5% 6.5%     222,903 222,238
Long-term debt 4.3% 4.7%     781,074 642,022

Revolving Credit Facility

At September 30, 2013, Vermilion had in place a bank revolving credit facility totalling $1.2 billion, of which approximately $558.2 million was drawn.  The facility, which matures on May 31, 2016, is fully revolving up to the date of maturity.

The facility is extendable from time to time, but not more than once per year, for a period not longer than three years, at the option of the lenders and upon notice from Vermilion.  If no extension is granted by the lenders, the amounts owing pursuant to the facility are repayable on the maturity date.  This facility bears interest at a rate applicable to demand loans plus applicable margins.

The amount available to Vermilion under this facility is reduced by certain outstanding letters of credit associated with Vermilion's operations totalling $11.5 million as at September 30, 2013 (December 31, 2012 - $49.2 million).

The facility is secured by various fixed and floating charges against the subsidiaries of Vermilion.  Under the terms of the facility, Vermilion must maintain a ratio of total bank borrowings (defined as consolidated total debt), to consolidated net earnings before interest, income taxes, depreciation, accretion and other certain non-cash items (defined as consolidated EBITDA) of not greater than 4.0.  In addition, Vermilion must maintain a ratio of consolidated total senior debt (defined as consolidated total debt excluding unsecured and subordinated debt) to consolidated EBITDA of not greater than 3.0.

As at September 30, 2013, Vermilion was in compliance with its financial covenants.

Senior Unsecured Notes

On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par.  The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016.  As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.

Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date.  Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date.  The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.

ASSET RETIREMENT OBLIGATIONS          
           
          As At
          Sept 30, Dec 31,
($M)         2013 2012
Asset retirement obligations         362,537 371,063

The decrease in asset retirement obligations was primarily the result of an overall increase in the discount rates applied to the obligations.  This decrease was partially offset by the appreciation of the Euro against the Canadian dollar and the resulting impact of translating the asset retirement obligations that are denominated in Euros to Canadian dollars.

DIVIDENDS          
           
  Three Months Ended     Nine Months Ended Year Ended
($M) Sept 30, 2013     Sept 30, 2013 Dec 31, 2012
Cash flows from operating activities 158,236     528,022 496,580
Net earnings 67,796     226,131 190,622
Dividends declared 61,003     181,391 223,717
Excess of cash flows from operating activities over dividends declared 97,233     346,631 272,863
Excess (shortfall) of net earnings over dividends declared 6,793     44,740 (33,095)

During the nine months ended September 30, 2013, Vermilion maintained monthly dividends at $0.20 per share and declared dividends totalling $181.4 million.

Excess cash flows from operating activities over dividends declared are used to fund capital expenditures, asset retirement obligations and debt repayments.

Following Vermilion's conversion to a trust in January 2003, the distribution remained at $0.17 per unit per month until it was increased to $0.19 per unit per month in December 2007.  Effective September 1, 2010, Vermilion converted to a dividend paying corporation and dividends remained at $0.19 per share per month until increased to $0.20 per share per month in January 2013.  The January 2013 increase was announced on November 14, 2012 and resulted in an increase in the monthly cash dividends by 5.3% to $0.20 per share per month beginning with the January 2013 dividend (paid on February 15, 2013).

Vermilion's policy with respect to dividends is to be conservative and maintain a low ratio of dividends to fund flows from operations.  During low price commodity cycles, Vermilion will initially maintain dividends and allow the ratio to rise.  Should low commodity price cycles remain for an extended period of time, Vermilion will evaluate the necessity of changing the level of dividends, taking into consideration capital development requirements, debt levels and acquisition opportunities.

Over the next two years, Vermilion anticipates that Corrib, Cardium and other exploration and development activities will require a significant capital investment by Vermilion.  Although Vermilion currently expects to be able to maintain its current dividend, Vermilion's fund flows from operations may not be sufficient during this period to fund cash dividends, capital expenditures and asset retirement obligations.  Vermilion will evaluate its ability to finance any shortfalls with debt, issuances of equity or by reducing some or all categories of expenditures to ensure that total expenditures do not exceed available funds.

SHAREHOLDERS' EQUITY

During the nine months ended September 30, 2013, Vermilion issued 2.7 million common shares pursuant to the dividend reinvestment plan and Vermilion's equity based compensation programs.  Shareholders' capital increased by $118.3 million as a result of the issuance of those shares.

As at September 30, 2013, there were 101.8 million shares outstanding.  As at November 6, 2013, there were 101.9 million shares outstanding.

CORRIB PROJECT

Vermilion holds an 18.5% non-operating interest in the offshore Corrib gas field located off the northwest coast of Ireland.  Production from Corrib is expected to increase Vermilion's volumes by approximately 58 mmcf/d (9,700 boe/d) once the field reaches peak production.  Vermilion acquired its 18.5% working interest in the project on July 30, 2009.  The project comprises six offshore wells, both offshore and onshore pipeline segments as well as a natural gas processing facility.  At the time of the acquisition most of the key components of the project, with the exception of the onshore pipeline, were either complete or in the latter stages of development.  Vermilion's interest was acquired for cash consideration of $136.8 million with subsequent capital expenditures to September 30, 2013 of $379.0 million, primarily related to completion of the natural gas processing facility, sub-surface well work, and permitting, preparations and construction of the onshore pipeline.  Furthermore, pursuant to the terms of the acquisition agreement, Vermilion made an additional payment to the vendor of $134.3 million (US$135 million) at the end of 2012.  In 2011, approvals and permissions were granted for the onshore gas pipeline and tunneling activities commenced in December of 2012.  Vermilion expects to continue significant capital investment on this project over the next two years and currently expects to achieve initial gas production from this field in mid-2015.

RISK MANAGEMENT

Vermilion is exposed to various market and operational risks.  For a detailed discussion of these risks, please see Vermilion's Annual Report and Annual Information Form, each for the year ended December 31, 2012.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect reported assets, liabilities, revenues and expenses, gains and losses, and disclosures of any possible contingencies.  These estimates and assumptions are developed based on the best available information which management believed to be reasonable at the time such estimates and assumptions were made.  As such, these assumptions are uncertain at the time estimates are made and could change, resulting in a material impact on Vermilion's consolidated financial statements.  Estimates are reviewed by management on an ongoing basis and as a result may change from period to period due to the availability of new information. Additionally, as a result of the unique circumstances of each jurisdiction that Vermilion operates in, the critical accounting estimates may affect one or more jurisdictions.

The following outlines what management believes to be the most critical accounting policies involving the use of estimates and assumptions:

i.      Depletion and depreciation charges are based on estimates of total proven and probable reserves that Vermilion expects to recover in the future.
ii.      Asset retirement obligations are based on past experience and current economic factors which management believes are reasonable.
iii.      Impairment tests are performed at the cash generating unit (CGU) level, which is determined based on management's judgment.  The calculation of the recoverable amount of a CGU is based on market factors as well as estimates of PNG reserves and future costs required to develop reserves.
iv.      Deferred tax amounts recognized in the consolidated financial statements are based on management's assessment of the tax positions at the end of each reporting period.

OFF BALANCE SHEET ARRANGEMENTS

Vermilion has certain lease agreements that are entered into in the normal course of operations, all of which are operating leases and accordingly no asset or liability value has been assigned to the consolidated balance sheet as at September 30, 2013.

Vermilion has not entered into any guarantee or off balance sheet arrangements that would materially impact Vermilion's financial position or results of operations.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change in Vermilion's internal control over financial reporting that occurred during the period covered by this MD&A that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

As of January 1, 2013, Vermilion adopted the following pronouncements as issued by the IASB.  The adoption of these standards did not have a material impact on Vermilion's consolidated financial statements. 

IFRS 10 "Consolidated Financial Statements"
IFRS 10 replaced Standing Interpretations Committee 12, "Consolidation - Special Purpose Entities" and the consolidation requirements of IAS 27 "Consolidated and Separate Financial Statements".  The new standard replaces the existing risk and rewards based approaches and establishes control as the determining factor when determining whether an interest in another entity should be included in the consolidated financial statements. 

IFRS 11 "Joint Arrangements"
IFRS 11 replaced IAS 31 "Interests in Joint Ventures".  The new standard focuses on the rights and obligations of an arrangement, rather than its legal form.  The standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to be equity accounted. 

IFRS 12 "Disclosure of Interests in Other Entities"
IFRS 12 provides comprehensive disclosure requirements for interests in other entities, including joint arrangements, associates, and special purpose entities.  The new disclosures are intended to assist financial statement users in evaluating the nature, risks and financial effects of an entity's interest in subsidiaries and joint arrangements. 

IFRS 13 "Fair Value Measurement"
IFRS 13 provides a common definition of fair value within IFRS.  The new standard provides measurement and disclosure guidance and applies when another IFRS requires or permits an item to be measured at fair value, with limited exceptions.

IAS 34 "Interim Financial Reporting"
Amendments to IAS 34 require specific disclosures on the fair value of financial instruments for interim reporting.

ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

The adoption of the following pronouncements is not expected to have a material impact on Vermilion's consolidated financial statements:

IFRS 9 "Financial Instruments"
As of January 1, 2015, Vermilion will be required to adopt IFRS 9, as part of the first phase of the IASB's project to replace IAS 39, "Financial Instruments: Recognition and Measurement". The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value.

NETBACKS

The following table includes segmented financial information on a per unit basis.  Natural gas sales volumes have been converted on a basis of six thousand cubic feet of natural gas to one barrel of oil equivalent.

  Three Months Ended Sept 30, 2013   Nine Months Ended Sept 30, 2013     Three Months
Ended Sept 30,
2012
  Nine Months
Ended Sept 30,
2012
  Oil & NGLs Natural Gas Total   Oil & NGLs Natural Gas Total     Total   Total
  $/bbl $/mcf $/boe   $/bbl $/mcf $/boe     $/boe   $/boe
Canada                        
Price 98.14 2.73 63.56   90.81 3.30 61.16     53.61   53.67
Realized hedging (loss) gain (4.10) 0.14 (2.02)   (1.16) 0.05 (0.55)     (0.21)   (0.32)
Royalties (11.56) (0.17) (7.09)   (10.32) (0.16) (6.41)     (5.33)   (5.74)
Transportation (2.92) (0.16) (2.08)   (2.31) (0.16) (1.75)     (1.51)   (1.51)
Operating (7.35) (1.53) (8.12)   (8.79) (1.61) (9.15)     (10.10)   (9.68)
Operating netback 72.21 1.01 44.25   68.23 1.42 43.30     36.46   36.42
France                        
Price 110.65 10.08 107.08   107.19 10.20 104.29     104.95   106.00
Realized hedging loss (1.32) (1.23)   (0.65) (0.61)     (1.39)   (3.27)
Royalties (7.10) (0.30) (6.73)   (6.53) (0.30) (6.23)     (5.42)   (5.60)
Transportation (2.59) (2.41)   (2.56) (2.40)     (1.89)   (2.25)
Operating (13.33) (1.38) (12.97)   (16.11) (1.52) (15.67)     (12.66)   (14.53)
Operating netback 86.31 8.40 83.74   81.34 8.38 79.38     83.59   80.35
Netherlands                        
Price 98.86 10.18 61.44   97.06 10.39 62.70     56.88   57.95
Realized hedging (loss) gain - 0.19 1.15   - 0.05 0.32     -   -
Operating - (1.97) (11.69)   - (1.52) (9.04)     (7.24)   (8.44)
Operating netback 98.86 8.40 50.90   97.06 8.92 53.98     49.64   49.51
Australia                        
Price 120.95 - 120.95   117.65 - 117.65     114.44   117.40
Realized hedging loss (1.11) (1.11)   (0.92) (0.92)     (0.33)   (0.30)
Operating (20.86) (20.86)   (20.41) (20.41)     (24.62)   (20.75)
PRRT 1 (23.89) (23.89)   (20.93) (20.93)     (32.21)   (30.90)
Operating netback 75.09 75.09   75.39 75.39     57.28   65.45
Total Company                        
Price 108.87 6.00 86.10   103.95 6.68 83.10     80.35   79.83
Realized hedging (loss) gain (2.23) 0.15 (1.25)   (0.89) 0.05 (0.51)     (0.53)   (1.06)
Royalties (6.86) (0.11) (4.93)   (6.25) (0.10) (4.41)     (3.49)   (3.81)
Transportation (2.05) (0.17) (1.72)   (1.84) (0.25) (1.74)     (1.62)   (1.77)
Operating (13.12) (1.68) (12.17)   (14.54) (1.57) (12.87)     (13.27)   (12.78)
PRRT 1 (5.99) - (4.12)   (5.12) - (3.45)     (6.42)   (5.54)
Operating netback 78.62 4.19 61.91   75.31 4.81 60.12     55.02   54.87
General and administration     (3.17)       (3.15)     (3.57)   (3.31)
Interest expense     (2.66)       (2.46)     (2.04)   (1.89)
Realized foreign exchange (loss) gain (0.32)       (0.05)     0.11   0.03
Other income (expense) 0.06       0.07     0.08   (0.74)
Current income taxes 1     (12.22)       (10.40)     (10.94)   (9.52)
Fund flows netback     43.60       44.13     38.66   39.44
Accretion     (1.64)       (1.58)     (1.66)   (1.60)
Depletion and depreciation     (20.74)       (20.91)     (21.70)   (21.74)
Impairments     -       -     -   (6.24)
Gain on acquisition     -       -     -   4.30
Deferred taxes     (0.08)       (1.22)     0.76   2.92
Unrealized other expense (0.07)       (0.09)     -   (0.05)
Unrealized foreign exchange gain (loss) 1.11       2.60     (1.89)   (1.73)
Unrealized (loss) gain on derivative instruments (0.97)       0.34     (3.02)   0.09
Equity based compensation     (3.36)       (3.47)     (2.46)   (2.71)
Earnings netback     17.85       19.80     8.69   12.68

  Vermilion considers Australian PRRT to be an operating item and accordingly has included PRRT in the calculation of operating netbacks.  Current income taxes presented above excludes PRRT.

CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)

    September 30, December 31,
  Note   2013   2012
ASSETS          
Current          
Cash and cash equivalents     256,135   102,125
Accounts receivable     178,662   180,064
Crude oil inventory     18,159   25,719
Derivative instruments     2,372   2,086
Prepaid expenses     15,217   10,508
      470,545   320,502
           
Deferred taxes     194,448   193,354
Exploration and evaluation assets 4   135,982   117,161
Capital assets 3   2,623,450   2,445,240
      3,424,425   3,076,257
           
LIABILITIES          
Current          
Accounts payable and accrued liabilities     281,112   300,682
Dividends payable 7   20,357   18,836
Derivative instruments     4,931   8,484
Income taxes payable     83,357   27,709
      389,757   355,711
           
Long-term debt 6   781,074   642,022
Asset retirement obligations 5   362,537   371,063
Deferred taxes     302,272   288,815
      1,835,640   1,657,611
           
SHAREHOLDERS' EQUITY          
Shareholders' capital 7   1,599,668   1,481,345
Contributed surplus     54,221   69,581
Accumulated other comprehensive loss     (165)   (32,409)
Deficit     (64,939)   (99,871)
      1,588,785   1,418,646
      3,424,425   3,076,257

CONSOLIDATED STATEMENTS OF NET EARNINGS AND COMPREHENSIVE INCOME
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)

      Three Months Ended   Nine Months Ended
      Sept 30,   Sept 30,   Sept 30,   Sept 30,
  Note   2013   2012   2013   2012
REVENUE                  
Petroleum and natural gas sales     327,185   284,838   948,727   841,870
Royalties     (18,730)   (12,363)   (50,320)   (40,146)
Petroleum and natural gas revenue     308,455   272,475   898,407   801,724
                   
EXPENSES                  
Operating     46,246   47,030   146,903   134,808
Transportation     6,549   5,744   19,843   18,655
Equity based compensation 8   12,779   8,704   39,639   28,620
Loss on derivative instruments     8,464   12,590   1,943   10,223
Interest expense     10,109   7,229   28,134   19,930
General and administration     12,033   12,669   35,956   34,885
Foreign exchange (gain) loss     (3,005)   6,330   (29,166)   17,878
Other expense (income)     55   (277)   259   8,291
Accretion 5   6,214   5,891   18,038   16,921
Depletion and depreciation 3, 4   78,826   76,941   238,692   229,301
Impairments 3   -   -   -   65,800
Gain on acquisition     -   -   -   (45,309)
      178,270   182,851   500,241   540,003
EARNINGS BEFORE INCOME TAXES     130,185   89,624   398,166   261,721
                   
INCOME TAXES                  
Deferred     287   (2,701)   13,914   (30,832)
Current     62,102   61,527   158,121   158,845
      62,389   58,826   172,035   128,013
                   
NET EARNINGS     67,796   30,798   226,131   133,708
                   
OTHER COMPREHENSIVE INCOME (LOSS)                  
Currency translation adjustments     14,621   (12,753)   32,244   (21,783)
COMPREHENSIVE INCOME     82,417   18,045   258,375   111,925
                   
NET EARNINGS PER SHARE                  
Basic         0.67   0.31   2.25   1.37
Diluted     0.66   0.31   2.22   1.35
                   
WEIGHTED AVERAGE SHARES OUTSTANDING ('000s)                  
Basic     101,613   98,523   100,634   97,704
Diluted     102,763   99,748   102,083   98,848

CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)

      Three Months Ended   Nine Months Ended
      Sept 30,   Sept 30,   Sept 30,   Sept 30,
  Note   2013   2012   2013   2012
OPERATING                  
Net earnings     67,796   30,798   226,131   133,708
Adjustments:                  
      Accretion 5   6,214   5,891   18,038   16,921
      Depletion and depreciation 3, 4   78,826   76,941   238,692   229,301
      Impairments 3   -   -   -   65,800
      Gain on acquisition     -   -   -   (45,309)
      Unrealized loss (gain) on derivative instruments     3,699   10,721   (3,839)   (955)
      Equity based compensation 8   12,779   8,704   39,639   28,620
      Unrealized foreign exchange (gain) loss     (4,232)   6,740   (29,738)   18,223
      Unrealized other expense     276   -   1,029   514
      Deferred taxes     287   (2,701)   13,914   (30,832)
Asset retirement obligations settled 5   (2,738)   (1,968)   (6,496)   (5,315)
Changes in non-cash operating working capital     (4,671)   13,175   30,652   (14,003)
Cash flows from operating activities     158,236   148,301   528,022   396,673
                   
INVESTING                  
Drilling and development 3   (135,110)   (96,212)   (389,635)   (262,064)
Exploration and evaluation 4   (551)   (10,043)   (13,240)   (33,439)
Property acquisitions 3, 4   (7,586)   -   (7,586)   (106,184)
Dispositions 3   -   -   8,627   -
Changes in non-cash investing working capital     44,876   28,376   7,473   (1,408)
Cash flows used in investing activities     (98,371)   (77,879)   (394,361)   (403,095)
                   
FINANCING                  
Increase in long-term debt       40,350   139,429   117,124
Issuance of shares pursuant to the dividend reinvestment plan     -   -   -   36,339
Cash dividends     (41,576)   (38,869)   (126,354)   (149,594)
Cash flows (used in) from financing activities     (41,576)   1,481   13,075   3,869
Foreign exchange gain (loss) on cash held in foreign currencies     2,248   (5,931)   7,274   (8,509)
                   
Net change in cash and cash equivalents     20,537   65,972   154,010   (11,062)
Cash and cash equivalents, beginning of period     235,598   157,473   102,125   234,507
Cash and cash equivalents, end of period     256,135   223,445   256,135   223,445
                   
Supplementary information for operating activities - cash payments                  
   Interest paid     13,544   11,775   34,053   25,701
   Income taxes paid     50,203   38,871   101,507   142,582

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)

            Accumulated      
              Other   Total
    Shareholders' Contributed Comprehensive   Shareholders'
  Note Capital Surplus   Loss Deficit Equity
Balances as at January 1, 2012     1,368,145   56,468   (33,387)   (59,625)   1,331,601
Net earnings     -   -   -   133,708   133,708
Currency translation adjustments     -   -   (21,783)   -   (21,783)
Equity based compensation expense     -   27,984   -   -   27,984
Dividends declared 7   -   -   -   (167,282)   (167,282)
Issuance of shares pursuant to the                      
   dividend reinvestment plan 7   53,590   -   -   -   53,590
Vesting of equity based awards 7, 8   33,356   (33,356)   -   -   -
Share-settled dividends                      
   on vested equity based awards 7, 8   7,151   -   -   (7,151)   -
Shares issued pursuant to the bonus plan 7   636   -   -   -   636
Balances as at September 30, 2012     1,462,878   51,096   (55,170)   (100,350)   1,358,454
                       
            Accumulated      
              Other   Total
    Shareholders' Contributed Comprehensive   Shareholders'
  Note Capital Surplus   Loss Deficit Equity
Balances as at January 1, 2013     1,481,345   69,581   (32,409)   (99,871)   1,418,646
Net earnings     -   -   -   226,131   226,131
Currency translation adjustments     -   -   32,244   -   32,244
Equity based compensation expense     -   39,010   -   -   39,010
Dividends declared 7   -   -   -   (181,391)   (181,391)
Issuance of shares pursuant to the                      
   dividend reinvestment plan 7   53,516   -   -   -   53,516
Vesting of equity based awards 7, 8   54,370   (54,370)   -   -   -
Share-settled dividends                      
   on vested equity based awards 7, 8   9,808   -   -   (9,808)   -
Shares issued pursuant to the bonus plan 7   629   -   -   -   629
Balances as at September 30, 2013     1,599,668   54,221   (165)   (64,939)   1,588,785

DESCRIPTION OF EQUITY RESERVES

Shareholders' capital
Represents the recognized amount for common shares when issued, net of equity issuance costs and deferred taxes.

Contributed surplus
Represents the recognized value of employee awards which are settled in shares. Once vested, the value of the awards is transferred to shareholders' capital.

Accumulated other comprehensive loss
Represents the cumulative income and expenses which are not recorded immediately in net earnings and are accumulated until an event triggers recognition in net earnings. The current balance consists of currency translation adjustments resulting from translating financial statements of subsidiaries with a foreign functional currency to Canadian dollars at period-end rates.

Retained earnings (deficit)
Represents the cumulative net earnings less distributed earnings of Vermilion Energy Inc.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)

1. BASIS OF PRESENTATION

Vermilion Energy Inc. (the "Company" or "Vermilion") is a corporation governed by the laws of the Province of Alberta and is actively engaged in the business of crude oil and natural gas exploration, development, acquisition and production.

These condensed consolidated interim financial statements are in compliance with IAS 34, "Interim financial reporting" and have been prepared using the same accounting policies and methods of computation as Vermilion's consolidated financial statements for the year ended December 31, 2012, except as discussed in Note 2.

These condensed consolidated interim financial statements should be read in conjunction with Vermilion's consolidated financial statements for the year ended December 31, 2012, which are contained within Vermilion's Annual Report for the year ended December 31, 2012 and are available on SEDAR at www.sedar.com or on Vermilion's website at www.vermilionenergy.com.

These condensed consolidated interim financial statements were approved and authorized for issuance by the Board of Directors of Vermilion on November 6, 2013.

2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

On January 1, 2013, Vermilion adopted the following pronouncements as issued by the IASB.  The adoption of these standards did not have a material impact on Vermilion's consolidated financial statements. 

IFRS 10 "Consolidated Financial Statements"
IFRS 10 replaced Standing Interpretations Committee 12, "Consolidation - Special Purpose Entities" and the consolidation requirements of IAS 27 "Consolidated and Separate Financial Statements".  The new standard replaces the existing risk and rewards based approaches and establishes control as the determining factor when determining whether an interest in another entity should be included in the consolidated financial statements. 

IFRS 11 "Joint Arrangements"
IFRS 11 replaced IAS 31 "Interests in Joint Ventures".  The new standard focuses on the rights and obligations of an arrangement, rather than its legal form.  The standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to be equity accounted. 

IFRS 12 "Disclosure of Interests in Other Entities"
IFRS 12 provides comprehensive disclosure requirements for interests in other entities, including joint arrangements, associates, and special purpose entities.  The new disclosures are intended to assist financial statement users in evaluating the nature, risks and financial effects of an entity's interest in subsidiaries and joint arrangements. 

IFRS 13 "Fair Value Measurement"
IFRS 13 provides a common definition of fair value within IFRS.  The new standard provides measurement and disclosure guidance and applies when another IFRS requires or permits an item to be measured at fair value, with limited exceptions.

IAS 34 "Interim Financial Reporting"
Amendments to IAS 34 require specific disclosure on the fair value of financial instruments for interim reporting.  These disclosures are included in Note 11.

3. CAPITAL ASSETS

The following table reconciles the change in Vermilion's capital assets:

  Petroleum and Furniture and   Total
($M) Natural Gas Assets Office Equipment   Capital Assets
Balance at January 1, 2012   2,016,611   15,071   2,031,682
Additions   407,973   5,248   413,221
Transfers from exploration and evaluation assets   10,528   -   10,528
Property acquisitions   206,260   -   206,260
Corporate acquisitions   136,297   -   136,297
Borrowing costs capitalized   9,994   -   9,994
Changes in estimate for asset retirement obligations   1,334   -   1,334
Depletion and depreciation   (289,194)   (5,165)   (294,359)
Impairments   (65,800)   -   (65,800)
Effect of movements in foreign exchange rates   (3,882)   (35)   (3,917)
Balance at December 31, 2012   2,430,121   15,119   2,445,240
Additions   386,313   3,322   389,635
Dispositions   (8,627)   -   (8,627)
Changes in estimate for asset retirement obligations   (29,747)   -   (29,747)
Depletion and depreciation   (229,955)   (4,365)   (234,320)
Effect of movements in foreign exchange rates   61,114   155   61,269
Balance at September 30, 2013   2,609,219   14,231   2,623,450

4. EXPLORATION AND EVALUATION ASSETS 

The following table reconciles the change in Vermilion's exploration and evaluation assets:

($M) Exploration and Evaluation Assets
Balance at January 1, 2012   92,301
Additions   39,317
Transfers to petroleum and natural gas assets   (10,528)
Depreciation   (3,485)
Effect of movements in foreign exchange rates   (444)
Balance at December 31, 2012   117,161
Additions   13,240
Property acquisitions   7,586
Depreciation   (2,743)
Effect of movements in foreign exchange rates   738
Balance at September 30, 2013   135,982


5. ASSET RETIREMENT OBLIGATIONS

The following table reconciles the change in Vermilion's asset retirement obligations:

($M) Asset Retirement Obligations
Balance at January 1, 2012     310,531
Additional obligations recognized     55,228
Changes in estimates for existing obligations     (26,560)
Obligations settled     (13,739)
Accretion     23,040
Changes in discount rates     22,807
Effect of movements in foreign exchange rates     (244)
Balance at December 31, 2012     371,063
Additional obligations recognized     2,114
Obligations settled     (6,496)
Accretion     18,038
Changes in discount rates     (31,861)
Effect of movements in foreign exchange rates     9,679
Balance at September 30, 2013     362,537

6. LONG-TERM DEBT

The following table summarizes Vermilion's outstanding long-term debt:

  As At
($M) Sept 30, 2013 Dec 31, 2012
Revolving credit facility   558,171   419,784
Senior unsecured notes   222,903   222,238
Long-term debt   781,074   642,022

Revolving Credit Facility

At September 30, 2013, Vermilion had in place a bank revolving credit facility totalling $1.2 billion, of which approximately $558.2 million was drawn.  The facility, which matures on May 31, 2016, is fully revolving up to the date of maturity.

The facility is extendable from time to time, but not more than once per year, for a period not longer than three years, at the option of the lenders and upon notice from Vermilion.  If no extension is granted by the lenders, the amounts owing pursuant to the facility are repayable on the maturity date.  This facility bears interest at a rate applicable to demand loans plus applicable margins.

The amount available to Vermilion under this facility is reduced by certain outstanding letters of credit associated with Vermilion's operations totalling $11.5 million as at September 30, 2013 (December 31, 2012 - $49.2 million).

The facility is secured by various fixed and floating charges against the subsidiaries of Vermilion.  Under the terms of the facility, Vermilion must maintain a ratio of total bank borrowings (defined as consolidated total debt), to consolidated net earnings before interest, income taxes, depreciation, accretion and other certain non-cash items (defined as consolidated EBITDA) of not greater than 4.0.  In addition, Vermilion must maintain a ratio of consolidated total senior debt (defined as consolidated total debt excluding unsecured and subordinated debt) to consolidated EBITDA of not greater than 3.0.

As at September 30, 2013, Vermilion was in compliance with its financial covenants.

Senior Unsecured Notes

On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par.  The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016.  As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.

Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date.  Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date.  The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.

7. SHAREHOLDERS' CAPITAL

The following tables reconcile the change in Vermilion's shareholders' capital:

Shareholders' Capital Number of Shares ('000s)   Amount ($M)
Balance as at January 1, 2012   96,430   1,368,145
Issuance of shares pursuant to the dividend reinvestment plan   1,631   72,058
Vesting of equity based awards   904   33,355
Share-settled dividends on vested equity based awards   157   7,151
Shares issued pursuant to the bonus plan   13   636
Balance as at December 31, 2012   99,135   1,481,345
Issuance of shares pursuant to the dividend reinvestment plan   1,066   53,516
Vesting of equity based awards   1,372   54,370
Share-settled dividends on vested equity based awards   202   9,808
Shares issued pursuant to the bonus plan   12   629
Balance as at September 30, 2013   101,787   1,599,668

Dividends declared to shareholders for the nine months ended September 30, 2013 were $181.4 million.

Subsequent to the end of the period and prior to the condensed consolidated interim financial statements being authorized for issue on November 6, 2013, Vermilion declared dividends totalling $20.4 million or $0.20 per share.

8. EQUITY BASED COMPENSATION

The following table summarizes the number of awards outstanding under the Vermilion Incentive Plan ("VIP"):

Number of Awards ('000s)         2013    2012 
Opening balance         1,690   1,750
Granted         774   681
Vested         (749)   (596)
Forfeited         (89)   (145)
Closing balance         1,626   1,690

The fair value of a VIP award is determined on the grant date at the closing price of Vermilion's common shares on the Toronto Stock Exchange, adjusted by the estimated performance factor that will ultimately be achieved.  Dividends, which notionally accrue to the awards during the vesting period, are not included in the determination of grant date fair values.

9. SEGMENTED INFORMATION

The following segment information has been prepared by segregating the results into the geographic areas in which Vermilion operates.  The following amounts include transactions between segments, which are recorded at fair value at the date of recognition.

  Three Months Ended September 30, 2013
($M) Canada   France   Netherlands   Australia   Ireland   Total
Drilling and development 62,222   23,664   8,316   5,880   35,028   135,110
Exploration and evaluation 551   -   -   -   -   551
                       
Operating Income (Loss)                      
Oil and gas sales to external customers 100,000   120,574   27,382   79,229   -   327,185
Royalties (11,156)   (7,574)   -   -   -   (18,730)
Revenue from external customers 88,844   113,000   27,382   79,229   -   308,455
Realized (loss) gain on derivative instruments (3,169)   (1,382)   510   (724)   -   (4,765)
Transportation expense (3,272)   (2,713)   -   -   (564)   (6,549)
Operating expense (12,770)   (14,599)   (5,209)   (13,668)   -   (46,246)
Operating income (loss) 69,633   94,306   22,683   64,837   (564)   250,895
                       
Corporate income taxes 260   31,717   6,810   7,666   -   46,453
PRRT -   -   -   15,649   -   15,649
Current income taxes 260   31,717   6,810   23,315   -   62,102

  Three Months Ended September 30, 2012
($M) Canada   France   Netherlands   Australia   Ireland   Total
Drilling and development 53,658   10,416   5,257   9,721   17,160   96,212
Exploration and evaluation 10,043   -   -   -   -   10,043
                       
Operating Income (Loss)                      
Oil and gas sales to external customers 71,268   102,369   30,386   80,815   -   284,838
Royalties (7,081)   (5,282)   -   -   -   (12,363)
Revenue from external customers 64,187   97,087   30,386   80,815   -   272,475
Realized loss on derivative instruments (274)   (1,360)   -   (235)   -   (1,869)
Transportation expense (2,005)   (1,840)   -   -   (1,899)   (5,744)
Operating expense (13,420)   (12,351)   (3,870)   (17,389)   -   (47,030)
Operating income (loss) 48,488   81,536   26,516   63,191   (1,899)   217,832
                       
Corporate income taxes 36   21,051   9,614   8,083   -   38,784
PRRT -   -   -   22,743   -   22,743
Current income taxes 36   21,051   9,614   30,826   -   61,527

    Nine Months Ended September 30, 2013
($M) Canada France Netherlands Australia Ireland Total
Total assets 1,350,574   930,568   144,813   301,350   697,120   3,424,425
Drilling and development 160,747   68,479   14,472   69,511   76,426   389,635
Exploration and evaluation 13,240   -   -   -   -   13,240
                         
Operating Income (Loss)                      
Oil and gas sales to external customers 284,638   342,558   100,119   221,412   -   948,727
Royalties (29,852)   (20,468)   -   -   -   (50,320)
Revenue from external customers 254,786   322,090   100,119   221,412   -   898,407
Realized (loss) gain on derivative instruments (2,572)   (1,990)   509   (1,729)   -   (5,782)
Transportation expense (8,152)   (7,883)   -   -   (3,808)   (19,843)
Operating expense (42,586)   (51,473)   (14,438)   (38,406)   -   (146,903)
Operating income (loss) 201,476   260,744   86,190   181,277   (3,808)   725,879
                       
Corporate income taxes 839   66,500   25,865   25,525   -   118,729
PRRT -   -   -   39,392   -   39,392
Current income taxes 839   66,500   25,865   64,917   -   158,121

    Nine Months Ended September 30, 2012
($M) Canada France Netherlands Australia Ireland Total
Total assets 1,270,547   674,355   138,630   286,960   528,925   2,899,417
Drilling and development 157,680   26,424   13,157   24,132   40,671   262,064
Exploration and evaluation 33,390   -   49   -   -   33,439
                       
Operating Income (Loss)                      
Oil and gas sales to external customers 226,726   300,708   92,268   222,168   -   841,870
Royalties (24,266)   (15,880)   -   -   -   (40,146)
Revenue from external customers 202,460   284,828   92,268   222,168   -   801,724
Realized loss on derivative instruments (1,335)   (9,274)   -   (569)   -   (11,178)
Transportation expense (6,399)   (6,382)   -   -   (5,874)   (18,655)
Operating expense (40,904)   (41,208)   (13,436)   (39,260)   -   (134,808)
Operating income (loss) 153,822   227,964   78,832   182,339   (5,874)   637,083
                       
Corporate income taxes 1,323   49,671   24,546   24,833   -   100,373
PRRT -   -   -   58,472   -   58,472
Current income taxes 1,323   49,671   24,546   83,305   -   158,845

Reconciliation of operating income to net earnings

  Three Months Ended   Nine Months Ended
($M) Sept 30, 2013 Sept 30, 2012   Sept 30, 2013 Sept 30, 2012
Operating income 250,895 217,832   725,879 637,083
Equity based compensation   (12,779) (8,704)   (39,639) (28,620)
Unrealized (loss) gain on derivative instruments (3,699) (10,721)   3,839 955
Interest expense (10,109) (7,229)   (28,134) (19,930)
General and administration (12,033) (12,669)   (35,956) (34,885)
Foreign exchange gain (loss) 3,005 (6,330)   29,166 (17,878)
Other (expense) income (55) 277   (259) (8,291)
Accretion (6,214) (5,891)   (18,038) (16,921)
Depletion and depreciation (78,826) (76,941)   (238,692) (229,301)
Impairments - -   - (65,800)
Gain on acquisition - -   - 45,309
Earnings before income taxes 130,185 89,624   398,166 261,721
Income taxes (62,389) (58,826)   (172,035) (128,013)
Net earnings 67,796 30,798   226,131 133,708

10. CAPITAL DISCLOSURES

  Three Months Ended   Nine Months Ended
($M except as indicated) Sept 30, 2013 Sept 30, 2012   Sept 30, 2013 Sept 30, 2012
Long-term debt 781,074 492,669   781,074 492,669
Current liabilities 389,757 442,376   389,757 442,376
Current assets (470,545) (385,554)   (470,545) (385,554)
Net debt [1] 700,286 549,491   700,286 549,491
           
Cash flows from operating activities 158,236 148,301   528,022 396,673
Changes in non-cash operating working capital 4,671 (13,175)   (30,652) 14,003
Asset retirement obligations settled 2,738 1,968   6,496 5,315
Fund flows from operations 165,645 137,094   503,866 415,991
Annualized fund flows from operations [2] 662,580 548,376   671,821 554,655
           
Ratio of net debt to annualized fund flows from operations ([1] ÷ [2]) 1.1 1.0   1.0 1.0

The ratio of net debt to annualized fund flows from operations for the three and nine months ended September 30, 2013 was relatively consistent with same periods in 2012 as fund flows from operations increased proportionately with net debt.  The increase in net debt was the result of the second of two acquisitions that occurred in France during 2012 and capital expenditures pertaining to the Ireland assets, which are currently under development.

Vermilion is subject to certain externally imposed capital requirements under its revolving credit facility.  During the periods covered by these consolidated financial statements, Vermilion continued to comply with these requirements.

11. FINANCIAL INSTRUMENTS

Classification of Financial Instruments

The following table summarizes information relating to Vermilion's financial instruments as at September 30, 2013 and December 31, 2012:

              As at Sep 30, 2013     As at Dec 31, 2012      
Class of financial
instrument
Consolidated balance
sheet caption
Accounting
designation
Related caption on Statement of Net
Earnings
    Carrying
value ($M)
  Fair value
($M)
    Carrying
value ($M)
  Fair value
($M)
    Fair value
measurement
hierarchy
Cash Cash and cash
equivalents
HFT Gains and losses on foreign exchange
are included in foreign exchange (gain)
loss
    256,135   256,135     102,125   102,125     Level 1
Receivables Accounts receivable LAR Gains and losses on foreign exchange
are included in foreign exchange (gain)
loss and impairments are recognized as
general and administration expense
    178,662   178,662     180,064   180,064     Not applicable
Derivative assets Derivative instruments HFT Gain on derivative instruments     2,372   2,372     2,086   2,086     Level 2
Derivative liabilities Derivative instruments HFT Gain on derivative instruments     (4,931)   (4,931)     (8,484)   (8,484)     Level 2
Payables Accounts payable and
accrued liabilities
OTH Gains and losses on foreign exchange
are included in foreign exchange (gain)
loss
    (301,469)   (301,469)     (319,518)   (319,518)     Not applicable
    Dividends payable                              
Long-term debt Long-term debt OTH Interest expense     (781,074)   (791,653)     (642,022)   (656,315)     Not applicable

The accounting designations used in the above table refer to the following:

HFT - Classified as "Held for trading" in accordance with International Accounting Standard 39 "Financial Instruments: Recognition and Measurement".  These financial assets and liabilities are carried at fair value on the consolidated balance sheets with associated gains and losses reflected in net earnings.

LAR - "Loans and receivables" are initially recognized at fair value and are subsequently measured at amortized cost.  Impairments and foreign exchange gains and losses are recognized in net earnings.

OTH - "Other financial liabilities" are initially recognized at fair value net of transaction costs directly attributable to the issuance of the instrument and subsequently are measured at amortized cost.  Interest is recognized in net earnings using the effective interest method.  Foreign exchange gains and losses are recognized in net earnings.

Level 1 - Fair value measurement is determined by reference to unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Fair value measurement is determined based on inputs other than unadjusted quoted prices that are observable, either directly or indirectly.

Level 3 - Fair value measurement is based on inputs for the asset or liability that are not based on observable market data.

Determination of Fair Values

The level in the fair value hierarchy into which the fair value measurements are categorized is determined on the basis of the lowest level input that is significant to the fair value measurement.  Transfers between levels on the fair value hierarchy are deemed to have occurred at the end of the reporting period.

Fair values for derivative assets and derivative liabilities are determined using pricing models incorporating future prices that are based on assumptions which are supported by prices from observable market transactions and are adjusted for credit risk.

The carrying value of receivables approximate their fair value due to their short maturities.

The carrying value of long-term debt outstanding on the revolving credit facility approximates its fair value due to the use of short-term borrowing instruments at market rates of interest.

The fair value of the senior unsecured notes changes in response to changes in the market rates of interest payable on similar instruments and was determined with reference to prevailing market rates for such instruments.

Nature and Extent of Risks Arising from Financial Instruments

Market risk:
Vermilion's financial instruments are exposed to currency risk related to changes in foreign currency denominated financial instruments and commodity price risk related to outstanding derivative positions.  The following table summarizes what the impact on comprehensive income before tax would be for the nine months ended September 30, 2013 given changes in the relevant risk variables that Vermilion considers were reasonably possible at the balance sheet date.  The impact on comprehensive income before tax associated with changes in these risk variables for assets and liabilities that are not considered financial instruments are excluded from this analysis.  This analysis does not attempt to reflect any interdependencies between the relevant risk variables.

  September 30, 2013
  Before tax effect on comprehensive income
Risk ($M) Description of change in risk variable Increase (decrease)
Currency risk - Euro to Canadian Increase in strength of the Canadian dollar against the   (5,671)
  Euro by 5% over the relevant closing rates on September 30, 2013    
  Decrease in strength of the Canadian dollar against the   5,671
  Euro by 5% over the relevant closing rates on September 30, 2013    
Currency risk - US $ to Canadian Increase in strength of the Canadian dollar against the   (5,954)
  US$ by 5% over the relevant closing rates on September 30, 2013    
  Decrease in strength of the Canadian dollar against the   5,954
  US$ by 5% over the relevant closing rates on September 30, 2013    
Commodity price risk Increase in relevant oil reference price within option pricing models used to   (7,388)
  determine the fair value of financial derivative positions by US$5.00/bbl at September 30, 2013    
  Decrease in relevant oil reference price within option pricing models used to   6,886
  determine the fair value of financial derivative positions by US$5.00/bbl at September 30, 2013    
Interest rate risk Increase in average Canadian prime interest rate   (3,655)
  by 100 basis points during the nine months ended September 30, 2013      
  Decrease in average Canadian prime interest rate   3,655
  by 100 basis points during the nine months ended September 30, 2013      


12. SUBSEQUENT EVENTS

Northern Petroleum Nederland B.V.

On October 10, 2013, Vermilion acquired, through its wholly-owned subsidiary, 100% of the shares of Northern Petroleum Nederland B.V., a subsidiary of UK-based Northern Petroleum Plc. ("Northern"). The acquisition is a complementary addition to the existing Netherlands asset base, including interests in six onshore licences in production or development, three onshore exploration licenses, and one offshore production license in the Netherlands.  Taking into consideration an effective date of January 1, 2013 and customary closing adjustments, Vermilion paid approximately $27.5 million cash at closing. Vermilion funded this acquisition from cash on hand. Vermilion also granted Northern minority net profit participation rights on select license interests included in the acquisition.

Given the recent timing of the acquisition, the Company has not yet completed the accounting for the acquisition and accordingly not all relevant disclosures are available for the business combination. The Company will report the purchase price allocation in the Company's consolidated financial statements for the year ended December 31, 2013.

Purchase and Sale Agreement with GDF Suez E&P Deutschland GmbH

On November 6, 2013, Vermilion announced that it entered into a definitive purchase and sale agreement with GDF Suez E&P Deutschland GmbH ("GDF") whereby Vermilion, through its wholly-owned subsidiary, will acquire GDF's 25% interest in four producing natural gas fields and a surrounding exploration license located in northwest Germany.  GDF is an affiliate of GDF Suez S.A., a publicly traded, French multinational utility.  In addition, the acquisition also includes the purchase of 0.4% of the equity of Ergas Munster GmbH ("EGM"), a joint venture created in 1959 to jointly transport, process, and market gas in northwest Germany.  The acquisition represents Vermilion's entry into the German exploration and production business, a producing region with a long history of oil and gas development activity, low political risk and strong marketing fundamentals.  The acquisition is well aligned with Vermilion's European focus, and will increase its exposure to the strong fundamentals and pricing of the European natural gas markets.  The estimated cash cost to close is approximately $170 million, subject to final closing adjustments.  The acquisition will be funded with existing credit facilities and is expected to close prior to the end of January, 2014.

 

 

 

 

SOURCE Vermilion Energy Inc.



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