Vermilion Energy Inc.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our third quarter 2012 financial and operating results.

I'm Lorenzo Donadeo, President and CEO of Vermilion. Joining me today are Tony Marino, Executive Vice President and Chief Operating Officer; Curtis Hicks, Executive Vice President and CFO; and Dean Morrison, our Director of Investor Relations.

Earlier this morning, we released our third quarter 2012 financial and operating results reporting production of 36,546 BOE a day. As was planned, production volumes were lower than in the previous quarter due to the shut-in of some of our Canadian dry gas production, lower Cardium-related activity levels due to wet ground conditions after breakup and approximately 2 weeks of planned downtime in Australia to accommodate platform maintenance activities.

Year-to-date, production has grown by more than 10% over the same 9-month period in 2011. This strong growth has been largely driven by a significant increase in Canadian oil volumes from our Cardium development in addition to a 22% increase in France oil volumes, largely attributable to our highly accretive acquisition of approximately 2,200 BOEs per day in France, which we completed in January of 2012.

With our continued focus on predominantly crude-based production growth, we have successfully grown our oil and liquids exposure to approximately 2/3 of consolidated production. Most notably in Canada, where oil and liquids now account for about 60% of our production, as compared to 45% in the third quarter of 2011.

In addition to our strong oil and liquids rating approximately 15% of our production is comprised of royalty-free, high netback natural gas in the Netherlands.

Fund flows from operations for the third quarter were $137 million or $1.39 per share as compared to $128 million or $1.30 per share in the prior quarter and $116 million or $1.29 per share in the third quarter of 2011. The increase in fund flows over the second quarter 2012 resulted from increased crude oil sales in both France and Australia.

This higher Brent-based oil volumes more than offset lower production in Canada, where most of the decreased production was from low netback natural gas.

Vermilion regularly carries an inventory of crude oil in France and Australia as a result of timing differences between production and sales. During the quarter, sales volumes exceeded production in both France and Australia by 24,806 barrels and 158,029 barrels, respectively, resulting in a drawdown in inventory in both regions.

Net debt at the end of the third quarter was $549 million reflecting the inclusion of the USD 135 million final payment for Corrib due in December as a current liability. Net debt to annualized year-to-date fund flows from operations is less than 1x.

Our balance sheet remains strong in support of our growth initiatives with approximately $670 million of borrowing capacity remaining at the end of the third quarter.

Vermilion continues to experience a strong operational performance in all of its operating regions. This provides us with significant flexibility to manage the composition of our produced volumes to maximize profitability, while achieving production in the upper part of our guidance range of 37,000 to 38,000 BOE per day.

Going forward, we plan to manage our Canadian-based dry natural gas production to reduce our exposure to weak North American natural gas pricing and we'll bring back on or cycle this production as appropriate to meet lessee obligations and to take advantage of higher seasonal pricing that may develop.

In addition to our strong operations, we continue to benefit from significant exposure to Brent-based crude oil and European natural gas production. Our Brent-based crude volumes currently represent approximately 43% of consolidated production or 68% of total crude production and attract a premium on average to the Dated Brent reference price.

Given the challenged market for Canadian-based crude so far in 2012, our exposure to Brent-based crude has provided Vermilion with an average USD 25 to USD 40 per barrel advantage relative to our peers. Our European natural gas markets have also remained strong with Netherlands natural gas production having received an average price of $9.58 per mcf to date in 2012.

This compares quite favorably to average AECO index pricing for Canadian-based natural gas production of $2.11 per mcf during the first 9 months of 2012.

Current strip pricing points to a continued premium for Brent-based crudes relative to WTI of somewhere between USD 10 to USD 15 per barrel into 2013, reflecting current infrastructure and demand constraints in the North American market. This positions Vermilion strongly relative to our Canadian peers who are faced with significant exposure both to weak North American natural gas prices and to a continuing discount for Canadian-based crude products relative to WTI.

As part of today's release, we announced the results of our very successful 2012 2-well drilling program in the Netherlands, the Eernewoude-2 development well in which we carry a 93% working interest was drilled during the third quarter and has tested at an initial rate of 25 million cubic feet a day, combining rates from individual tests of 3 zones. We also reported test rates from our Vinkega-2 development well in which we carry a 42% working interest.

The well was drilled during the second quarter and tested in the third quarter at a rate of approximately 30 million cubic feet per day, combining rates from individual tests of 2 zones. Vermilion plans to tie in both wells at restricted rates during 2013.

In Canada, we participate in the drilling of 16 gross wells or 11.5 net during the third quarter. These wells included 14 gross or 10.7 net operated Cardium horizontal wells and 2 gross or 0.8 net non-operated Cardium wells.

At the end of the third quarter, 83 gross operated or 73.2 net Cardium wells were on production and 52 gross or 17.6 net non-operated wells were on production.

Drilling and completion activities picked up late in the third quarter following wet ground conditions in July and August that had hampered the movement of equipment. During the remainder of 2012, our Canadian investment activities will continue to focus primarily on the development of our Cardium light oil play, which reached average volumes of approximately 7,700 BOE per day during the third quarter.

Our well performance remains consistent and continues to outpace that of other operators in the West Pembina region.

We remain on target to achieve average costs of between $3.5 million and $3.7 million per well and have exceeded this target on a per section basis after accounting for several longer reach wells drilled in 2012. Transportation costs also continue to decrease as we tie in and process greater volumes through our newly constructed oil processing facility.

At the end of the third quarter, we had drilled or participated in approximately 102.8 net wells, 90.8 of which were on production.

At a current drilling rate of 40 to 50 wells per year, we currently hold an inventory of economic prospects in the West Pembina region that is expected to last at least 6 years. That inventory may grow as we continue to achieve improvements in cost and productivity in this resource play and seek to consolidate existing land positions within the West Pembina region.

Also, we have currently identified a further inventory of approximately 120 prospects in our legacy acreage that are viewed as having marginal economics in the current environment. This could change in future years if technological improvements, costs or commodity prices change sufficiently to improve their economics to warrant drilling of these prospects.

In France, we completed our first workover program in the Vic Bihl Field since taking over operatorship following our acquisition in January. The program was very successful, with the first 5 workovers generating an initial incremental rate of over 500 barrels per day.

We have now identified numerous areas in the acquired assets where we can reduce the current cost structure and increase production over time through optimized production operations, water flood management and exploitation of infill drilling or development opportunities.

In Australia, we continued preparations and permitting activities in anticipation of initiating our drilling campaign in late 2012. We anticipated rig arrival late in Q4 and production additions from the drilling program to begin in early 2013.

Vermilion also completed annual platform maintenance in the third quarter of 2012 that resulted in approximately 2 weeks of planned downtime. We currently believe we can sustain annual average production at between 6,000 and 8,000 BOE per day over the next several years, with 2 to 3 well drilling campaigns conducted approximately every other year.

Wandoo remains a key asset for our company, with strong free cash flow-generating characteristics. Production at Wandoo currently attracts pricing at a meaningful premium to the Dated Brent index for crude oil with no transportation cost as a result of production being inventoried and sold directly into tankers from the platform.

It's also been a transformative year for our core project in Ireland with the partners now in receipt of all key regulatory approvals required for construction of the onshore pipeline and all open periods for appeal of the regulatory approvals now expired with no open appeals outstanding. On October 16, the tunnel boring machine was delivered on site at the Aughoose facility where it will be assembled in preparation for tunneling activities to begin prior to year end.

The tunneling and commissioning of the onshore pipeline and related facilities and equipment is anticipated to take approximately 2 years from initiation of tunneling, with initial production at Corrib expected to occur in late 2014.

During the quarter, Vermilion announced that we had invested a total of $84 million since early 2011 to acquire 408.5 net sections of undeveloped land in Canada with exposure to emerging resource plays. These lands include 227 net sections in the Duvernay trend.

This is in the liquids-rich window of the Duvernay trend. And to date, we drilled core and completed a Diagnostic Fracture Injection Test, or DFIT, on one vertical well in the Duvernay with encouraging results.

In continuing our appraisal of the play, we currently plan to core, log and DFIT an additional 2 Duvernay wells with drilling activities on the first of these wells occurring prior to year end 2012.

By design, a significant portion of our Duvernay rights are located across 2 large continuous land blocks in the Grayton [ph] Drayton Valley area and lie directly beneath our Cardium development. Should our Duvernay position ultimately prove suitable for full-scale commercial development, this co-location of assets will enable us to utilize our extensive oil and gas processing infrastructure in the region, bestowing significant timing, operational and infrastructure advantages.

In addition to our Cardium and Duvernay rights in the region, we also hold a significant inventory of more conventional, Manville-based liquids-rich gas development opportunities, including the Ellerslie, Notikewin and Fahler. With the addition of the Duvernay, we now have significant exposure to 3 distinct development opportunities in this core operating region that has potential to deliver growth well into the second half of the decade.

As we move forward, we will continue to balance our spending to drive near-term growth with an appropriate level of incremental capital to capture large organic resource opportunities in Canada, the European area and Australia that will be key to our positioning for longer term growth. We currently anticipate full-year capital expenditures for 2012 of approximately $465 million subject to variability with respect to the timing of the company's Australian drilling activities.

We're currently ramping up our 2013 budget process and anticipate providing investors with initial 2013 production and capital guidance at mid-2000 -- or pardon me, at mid-November.

Our company remains positioned to deliver strong operational and financial performance over the next several years. We anticipate growing production by approximately 35% to 50,000 BOE per day in 2015 to the continued development of our significant portfolio of organic growth opportunities.

Combined with an anticipated 50% growth in fund flows from operations over that same time based on current commodity prices, we remain confident of our ability to maintain a stable dividend for investors with the potential for dividend growth over time. Near-term development will continue to focus on our high netback oil and European natural gas opportunities, including light oil production growth from the Cardium play in Western Canada and a continued development of our high netback natural gas prospects in the Netherlands.

We anticipate Corrib will provide strong production and cash flow growth for the company in 2015.

Beyond 2015, our growth is anticipated to come from the development of new and emerging resource plays in Canada and Europe supported by relatively stable production in Australia, France and Ireland that is expected to deliver the fund flows for investments in these new growth opportunities.

So far in 2012, we have generated a positive total return to investors of positive 9.4% versus a peer average of negative 12.9%. Despite considerable uncertainties in the current market, we remain committed to not only providing shareholders with a stable and reliable dividend, but also to increase our dividend over time as our production and cash flow continue to grow.

Our management, directors and employees remain well aligned with and strongly invested alongside our shareholders, with ownership of approximately 8% of the outstanding shares. We remain committed to delivering superior rewards to all stakeholders and believe we are on the right track as our company continues to be recognized for excellence in its business practices.

In the first quarter of 2012, we achieved the hat trick by being recognized for the third consecutive year by the Great Place to Work Institute in both Canada and France as 1 of the 25 best workplaces in each country. We are honored by this recognition, which is a reflection of the strong corporate culture and positive working environment at Vermilion.

These attributes are key contributors to our highly engaged and motivated workforce and play an important part in our ability to attract and retain top talent. In a capital-intensive and competitive business environment, our highly effective and motivated workforce will continue to be a key component of our ongoing success.

We remain excited about the prospects for the future and look forward to delivering strong rewards for all of our stakeholders. With that, I will conclude my formal remarks.

Operator, please open the floor for questions.

A couple of questions. First, in your Canadian operations, just could you maybe provide us a little bit more color on that DFIT test?

Like what specifically kinds of information do you get out of that test that give you what you say are really encouraging results? What sort of things do you see?

Okay, Gord. That's a good question there.

First of all, we did take a core in the well and we liked the way the core looked. We did perform a DFIT.

That stands for Diagnostic Fracture Injection Test. It's a test that -- it's just an injection test that pressures over the frac gradient.

The most encouraging aspect of the test is that we calculated a permeability from that, that was the top end of the range that we had previously estimated. We also got a reasonable frac gradient on the well, which I think bodes well for our ability to effectively fracture horizontal wells in the future.

Okay, so those 2 pieces of information indicates good permeability plus the propensity for fracture?

Yes.

Okay. And then I think you mentioned or Lorenzo mentioned that you might you drill one well in the Duvernay before the end of the year.

Is that right? I was just wondering what sort of cost, what kind of cost you'd budget for that well?

Yes. What we would -- what we're planning on doing is to drill a couple more vertical strat tests over the acreage block to go with the one that we already have at Edison.

And again, the evaluation program there is beyond just logging with the coring and a DFIT. The cost on one of those wells is in the range, with that degree of evaluation, is in the range of about $4 million.

We do plan to get the first one in this year and the second one probably in the early part of next year. There could be some operations that we'd begin on the second one before the end of the year.

All right. And just one last question.

Your Netherlands...

Also let me just add that beyond this vertical drilling program that I just talked about, we then intend to watch the industry activity. You're probably aware that there have been announced plans to drill about 100 horizontal wells from Kaybob to Williston Green.

And of course, we sit with our land right between those 2 areas. So we're going to look at those industry results.

We're going to look at the way the industry drills and fracs the wells and frac those horizontal wells with the objective being to take advantage of all that industry capital that's going to go in, be able to kind of move down the very steep, initial more expensive part of the learning curve using the rest of the industry's investment. And then after that, I think probably in 2014, we'd be prepared to begin our own horizontal -- first horizontal wells and achieve the same kind of continuous improvement from that point forward that we had achieved earlier in the Cardium program.

Okay. And then just a question on your Netherlands wells.

I mean, you're getting very good results in those Netherlands gas wells. Is there a prospect?

Are you able to -- for increasing the pace of development there or do you face regulatory hurdles, infrastructure hurdles?

There are always some significant lead times in drilling wells in the Netherlands. They've got a very detailed and effective regulatory process there that we follow.

And what we're shooting for at this point is a ratable program, kind of consistent levels of drilling activity. It's possible that a few years down the line, we might pick up that pace of drilling, but at present, I think our 2- to 3-well programs that we've had each year in the Netherlands is probably a reasonable pace to proceed.

The infrastructure constraints exist in certain cases and where it's appropriate, we'll seek to expand the capacity to allow a little bit more production.

Are you expecting any more natural gas wells to be brought online this year or early next year that you've drilled previously?

Well, in the Netherlands, we would be seeking basically between the end of this year and the summer of 2013 to bring on both of the wells that we've recently drilled, the Vinkega, the Eernewoude. Both would be producing at restricted rates as compared to the production test.

Okay, but you're not expecting to bring on anything else any other wells during that time period?

In, that would be what we intend to bring on in the Netherlands. I mean, we have our -- we have some of our shut-in production in Canada that we would be returning depending on prices and depending on our lease obligations.

Just one quick question with respect to France. Obviously, encouraging workover results in the country.

Would you expect the capital expenditures in France to increase in 2013 as a result?

Well, we haven't established our capital guidance for next year yet, but I do think that we have quite a large number of development opportunities in France, and I would expect our capital investment there to rise over the next few years.

And what's the ability to access services to do workovers and infill drilling in the country?

I think it's got adequate service infrastructure. It takes more planning in the -- to execute well operations in Europe than it does in Canada.

I think we're pretty used to that. And I do think that we'll be able to access all the services that we need for the size of programs that we're envisioning.

And sorry, one follow-up. It looks like there's a slight increase to the CapEx budget for the remainder of the year.

And can you give any color around that?

Sure, Cristina. It's just a function of a couple of things.

We had increased the budget earlier this year to accommodate some of the land purchases that we had made on the resource opportunities that we're pursuing. We increased the Cardium spending.

We saw some strength in crude prices. We felt comfortable adding to that budget.

And then we've got our Australia drill program that we had budgeted for and we had included in that program 3 wells, and we'll drill either 2 or 3 depending on the circumstances including timing of the rig. So those kind of high-level reason for changes to the program.

Great. Well, thank you, operator, and thank you, everyone, for participating in our conference call today.

Thank you very much.