Vermilion Energy Inc. Announces Results for the Three and Six Months Ended June 30, 2013

CALGARY, Aug. 1, 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 six months ended June 30, 2013.

HIGHLIGHTS

• We recorded the strongest operating quarter in our history in the second quarter of 2013.  Thus far, our capital program has achieved better than anticipated results, generating production growth in all four of our business units.  The Company previously increased production guidance following the first quarter of 2013. However, in view of our operational performance, we are further increasing our production guidance for 2013 to between 40,500 and 41,000 boe/d, up from previous guidance of 39,500 to 40,500 boe/d and original guidance of 39,000 to 40,500 boe/d.
  
  
• Achieved record average production of 42,813 boe/d during the second quarter of 2013, compared to 38,707 boe/d in the first quarter of 2013 and 39,168 boe/d in the second quarter of 2012. Quarter-over-quarter growth resulted primarily from strong production additions from our Cardium and Mannville drilling in Canada and high productivity from our two-well sidetrack program in Australia.
  
  
• Increased quarter-over-quarter production by 13% to over 9,500 boe/d during the second quarter of 2013 from our Cardium light oil play in Western Canada.
  
  
• Continued our Mannville liquids-rich gas horizontal development program by drilling our third Ellerslie well and bringing on production from the second well which was drilled and completed during the first quarter.  In their third and fourth months of production, the first two wells are averaging approximately 4.0 mmcf/d of sales gas and over 400 bbls/d of natural gas liquids (75% condensate) per well.
  
  
• Completed a two-well sidetrack drilling program in Australia.  The wells were brought on production at restricted rates and have demonstrated productive capacity in excess of 6,000 bbls/d and 3,000 bbls/d, respectively.  These wells are currently being produced intermittently to match production to marketing arrangements and to maintain our long-term Wandoo field production rate at between 6,000 and 8,000 bbls/d.
  
  
• Concluded a five-well drilling program in the Champotran field in France in the second quarter.  Four of the wells were infill wells and the fifth well was an approximately two-kilometer step-out well to test southern extension of the field.  All five of the wells were successful, with the four infill wells completed in June and the extension well completed in July.  All five wells currently have per-well production rates in excess of 300 bbls/d at low water cuts.  In aggregate, current production from the wells is approximately 1,800 bbls/d at a 4% water cut.
  
  
• Generated fund flows from operations of $174.6 million ($1.73 per share) in the second quarter of 2013, as compared to $163.6 million ($1.65 per share) in the first quarter of 2013 and $127.8 million ($1.30 per share) in the second quarter of 2012.  Fund flows from operations for the second quarter of 2013 increased 7% on a quarter-over-quarter basis and 37% on a year-over-year basis.
  
  
• We continue to benefit from strong pricing driven by our significant exposure to Brent-based crude oil, WTI-based crude oil and European gas. Vermilion's Brent-based crude production, representing 41% of total production, averaged $105.25 per bbl in the quarter.  WTI crude, representing 25% of our production, averaged $94.22 per bbl. Vermilion's natural gas production in the Netherlands, representing approximately 15% of production, received an average price of $10.82 per mcf during the second quarter of 2013, a premium of $7.29 per mcf as compared to AECO.
  
  
• Increased our significant position in the Duvernay liquids-rich natural gas resource play with the acquisition of an additional 46 sections since the first quarter, bringing our total land position to 318 net sections. This land position, which spans the breadth of the liquids-rich natural gas fairway in two largely-contiguous blocks, was assembled for approximately $76 million dollars ($375 per acre). We currently anticipate drilling our first horizontal Duvernay well prior to year-end 2013, with completion planned for early 2014.
  
  
• In Ireland, tunneling, onshore pipelining, offshore umbilical-laying, and offshore seismic acquisition activities for our Corrib project continued during the second quarter.  Based on our deterministic schedule for remaining construction and commissioning activities, first gas production is anticipated to occur between the end of 2014 and early 2015.
  
  
• In June 2013, Vermilion's syndicate of lenders agreed to increase the Company's 3-year revolving borrowing base from $950 million to $1.2 billion. At the end of the second quarter, Vermilion had available capacity under the borrowing base of $591 million and a net debt to annualized second quarter fund flows from operations ratio of 0.97 times.

Conference Call and Audio Webcast Details

Vermilion will discuss these results in a conference call to be held on Thursday, August 1, 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 78595598.  The replay will be available until midnight eastern time on August 8, 2013.

You may also listen to the audio webcast by clicking http://event.on24.com/r.htm?e=626589&s=1&k=1A994A34B44915C6630ABBE2027B8AD9 or visit Vermilion's website at www.vermilionenergy.com/ir/eventspresentations.cfm.

ABBREVIATIONS

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.

OPERATIONAL REVIEW AND OUTLOOK

Vermilion's strong performance during the second quarter illustrates our consistent operational execution and the advantages of our global diversification strategy. Thus far in 2013, we have achieved growth across all four of our operating regions resulting in record consolidated three and six-month production volumes of 42,813 and 40,772 boe/d, respectively.

Our diversified product mix continues to afford a significant competitive advantage. In the second quarter, 66% of production volumes were Brent and WTI-based crude oil and liquids and 17% was high-netback European gas. Our Brent-based crude (41% of production) continues to receive a premium to the Dated Brent index, resulting in an average realized price of $105.25 per barrel for the second quarter. In addition, our Netherlands natural gas production received an average price of $10.82 per mcf, a premium of $7.29 per mcf compared to an average second quarter price of $3.53 per mcf for AECO natural gas in Canada. Our consistent production growth and increasing exposure to liquids and European gas enabled fund flows from operations to grow 7% quarter-over-quarter and 37% year-over-year.

The majority of our Canadian development activities continued to be focused on the development of our Cardium light oil play. Well performance continues to outpace that of our peers in the area, demonstrating the quality of our land position in the West Pembina region. Since entering the play in 2009, we have drilled 202 gross wells (141 net) in the Cardium and increased production to over 9,500 boe/d. We continue to optimize completion technology and well designs, and remain one of few companies in our producing area to employ long reach wells (greater than one mile in length). After demonstrating production improvement and a significant reduction in per-section costs by drilling long-reach 1.5-mile horizontal wells, we are now planning on drilling a higher percentage of 1.5-mile wells and several 2.0-mile pilot wells over the remainder of 2013. 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 in the second quarter of 2013. Furthermore, in pursuit of ongoing well cost reduction and enhanced environmental stewardship, we are testing several alternative processes for the recycling of frac flowback water. We also initiated a water injection pilot to test applicability of water-flooding to this reservoir. We anticipate our Cardium drilling inventory will last five to six years at a drilling rate of 40 to 60 wells per year. Our per unit operating costs remain less than $6 per boe for our operated production, resulting in strong operating netbacks of approximately $65 per boe during the second quarter.

In addition to the Cardium, we have also identified a significant inventory of Mannville condensate-rich natural gas targets in the Drayton Valley area. During 2013, our plans are to drill a total of six gross (3.2 net) Mannville wells targeting the Ellerslie formation. During the second quarter, we drilled and completed our third Ellerslie well and brought on production from our second well, which was drilled and completed during the first quarter. In its fourth month of production, the first well is producing at a rate of approximately 3.5 mmcf/d of sales gas with 496 barrels per day condensate and natural gas liquids (79% condensate).  In its third month of production, the second well is producing at approximately 4.5 mmcf/d of sales gas with 322 barrels per day of natural gas liquids (70% condensate).  The third well was brought on production in July and has averaged approximately 1.3 mmcf/d of sales gas with 466 barrels per day of associated natural gas liquids (77% condensate) at an average flowing tubing pressure of 1,125 pounds per square inch during the first two weeks of production.

We continue to expand our position in the Duvernay liquids-rich natural gas resource play with an additional 36.6 net sections acquired in the second quarter and nine net sections acquired subsequent to quarter end. In total, we have amassed 318 net sections in the Edson and Drayton Valley areas spanning the breadth of the liquids-rich natural gas fairway, at a cost of approximately $76 million ($375 per acre).  To date, we have drilled three vertical stratigraphic test wells and plan to drill our first horizontal well late in 2013, with completion 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 should full field development of the Duvernay be pursued.  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.

Our Australian activities during the first half of 2013 were focused on completion of the drilling program at Wandoo. We drilled two sidetracks off existing wells, including the longest horizontal section yet drilled at Wandoo to-date of 3,400 metres. 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 oil garners a premium to the Dated Brent index and incurs no transportation cost as production is sold directly from the platform, leading to very high netbacks.

During the second quarter, we concluded an initial four-well infill drilling program in the Champotran field in France. The program was subsequently expanded to five wells to drill a two-kilometer step-out well to the south of the existing field.  All five of the wells were successful, with the four infill wells completed in June and the extension well completed in July.  All five wells currently have per-well production rates in excess of 300 bbls/d at low water cuts.  In aggregate, current production from the wells is approximately 1,800 bbls/d at a 4% water cut.  Additional activities in France included workovers, recompletions and facilities upgrades in both the Paris and Aquitaine Basins. 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.

We continued permitting and drilling preparations in the Netherlands for a three-well drilling campaign in the second half of 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.  Langezwaag-1 is currently producing from the Vlieland zone at an average rate of 3.0 mmcf/d, net to Vermilion.  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. In March, we were awarded an exploration license for the Akkrum concession, located directly between our existing Gorredijk and Leeuwarden concessions. Covering more than 54,000 acres, the Akkrum concession adds to our significant land position and future potential prospects in the Netherlands. Over the last year, we have more than doubled our undeveloped acreage position in the Netherlands to more than 435,000 net acres.  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 activities related to the completion of the nine kilometer onshore pipeline for Corrib commenced in December, 2012.  Various other onshore and offshore activities have progressed as well over the first half of 2012, including umbilical lays to the offshore wells, onshore pipelining in segments that are not within the tunnel, construction of the tunnel boring machine reception site and gas plant pre-commissioning.  Tunneling, construction, commissioning and start-up activities are anticipated to take approximately 18 months to complete, with first gas anticipated between the end of 2014 and early 2015. Peak production is expected to be reached in mid-2015, with peak production levels of approximately 55 mmcf/d (9,000 boe/d), net to Vermilion.

With respect to current well and facility deliverability, we are not currently producing at full capacity in our Australia and Netherlands business units. Our conservative approach to utilizing available well deliverability is supported by several considerations.  In general, we seek to maximize capital efficiency, which means that in some cases, we do not install facility capacity and well equipment to maximize initial production rates.  In other cases, there are technical or commercial drivers, such as reservoir management or long-term product marketing considerations, that lead us to hold production levels below available deliverability.  Moreover, our capital markets model is based on low-risk, ratable organic growth along with income to our shareholders.  We believe that our conservative approach to production management reduces the risk of execution of our growth and income model in future time periods.

Our objective remains to produce ratable annual growth at the consolidated company level of approximately 5% to 7% per year, before consideration of Corrib's future impact.  With Corrib's anticipated contribution  to our production and cash flow streams, we continue to target overall growth of approximately 30% to 50,000 boe/d from 2012 to 2015, and fund flows from operations growth of approximately 40% over the same period. 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 between the end of 2014 and early 2015, with full production achieved during 2015.  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 increasing certainty for Corrib development timing and the anticipated strength of future cash flows from all of our worldwide businesses, we are committed and believe we are well positioned to provide a reliable and growing dividend stream to investors.

On March 12, 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 increase trading liquidity.

Vermilion's 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. Vermilion 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is Management's Discussion and Analysis ("MD&A"), dated July 31, 2013, of Vermilion Energy Inc.'s ("Vermilion" or the "Company") operating and financial results as at and for the three and six months ended June 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 six months ended June 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 six months ended June 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:

"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:

"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:

"Netbacks" are per boe and per mcf measures used in the analysis of operational activities and are used by management 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:

OPERATIONAL ACTIVITIES  

Canada

Vermilion drilled three (1.9 net) wells during the second quarter of 2013. In the Cardium, Vermilion drilled one (1.0 net) horizontal well and brought twelve gross operated and two non-operated wells on production during the quarter. In the Mannville, Vermilion drilled two (0.9 net) wells and brought one well on production. Drilling and completion activities were lower than in the first quarter of 2013 as a result of some activities being deferred until the summer months following spring break-up.

France

Vermilion completed its five-well Champotran drilling program during the second quarter of 2013. The Company also completed a number of workovers in both the Paris and Aquitaine Basins. Late in the quarter, Vermilion commenced 3D seismic and subsurface studies in the Vic Bilh region that will continue into the latter half of the year.

Netherlands

Operating activities in the second quarter focused on facility maintenance and site construction. Vinkega-2 surface facilities were commissioned for first gas in late June, and Langezwaag-1 surface facilities were commissioned for first gas in mid-May.  Vermilion is currently planning and preparing for a three well drilling program in the Netherlands during the second half of 2013.

Australia

Australian activity in the second quarter focused on completion of a two-well drilling program and demobilization of the rig.  Other activities included minor facility maintenance and repairs.

PRODUCTION

Average total production in Canada of 17,892 boe/d during the second quarter of 2013 represented an increase of 11% compared to 16,140 boe/d in the first quarter of 2013, and 12% as compared to 15,965 boe/d in the second quarter of the prior year. The increased volumes are largely attributable to continued development in the Cardium. Mannville development also contributed with two wells on production during the second quarter.  Vermilion's exposure to oil and liquids represented approximately 59% of Canadian production in the second quarter of 2013 compared to 57% in the second quarter of 2012.

Production in France averaged 11,088 boe/d in the second quarter of 2013, essentially flat with production of 11,032 boe/d in the first quarter of 2013. On a year-over-year basis, production has grown by 5%. This increase is largely attributable to incremental production volumes associated with Vermilion's acquisition completed in December 2012 and continued workover and recompletion activities largely offsetting natural declines. Production from the five-well drilling program started to be brought on late in the second quarter.  In France, Vermilion remains predominantly weighted to Brent crude at approximately 94% of production.

Average production volumes of 6,470 boe/d in the Netherlands during the second quarter of 2013 represented an increase of 4% quarter-over-quarter and 13% year-over-year. Production growth was largely attributable to Vermilion completing debottlenecking activities at Garijp, facilitating increased throughput of production from Vinkega-1.

Australia production averaged 7,363 boe/d during the second quarter of 2013, an increase of 39% compared to 5,287 boe/d in the prior quarter, and 6% compared to 6,970 boe/d in the second quarter of 2012. Production volumes in the second quarter of 2013 reflect the strength of the base production at Wandoo with growth attributable to incremental production from the new wells which were brought on production at restricted rates in April.

FINANCIAL REVIEW

Net earnings for the three and six months ended June 30, 2013 increased as compared to first quarter of 2013 and the same periods in 2012 due to the increases in operating income resulting from production growth coupled with unrealized foreign exchange gains recorded in the current periods.  The unrealized foreign exchange gain of $25.5 million recorded in 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.

Fund flows from operations for the second quarter of 2013 was 7% higher ($11.0 million) than the first quarter.  This increase was driven by record production, including growth across all of Vermilion's operating regions.  Fund flows from operations for the three and six months ended June 30, 2013 was 37% and 21% higher, respectively, than the same periods in 2012.  The significant increases were largely the result of year-over-year production growth, coupled with the absence of the large build in inventory that occurred in 2012.  On a year-to-date basis, inventory decreased by 238,000 bbls in 2013 versus an increase of 137,000 bbls in 2012.  While the Dated Brent reference price declined by 5% from the 2012 periods, the impact of these declines were entirely offset by increased realized prices for Vermilion's production in Canada and the Netherlands.

Cash flow from operating activities for the second quarter of 2013 decreased as compared to the first quarter of the same year despite the increased net earnings due to the impact of unfavorable timing differences pertaining to working capital.  Cash flow from operating activities for the three and six months ended June 30, 2013 increased as compared to the same periods in 2012 due to the aforementioned increase in net earnings coupled with favorable timing differences pertaining to working capital.

Long-term debt as at June 30, 2013 increased to $780.5 million from $642.0 million as at December 31, 2012 as a result of increased borrowings on the revolving credit facility to fund current year development capital expenditures.  As fund flows from operations exceeded dividends paid, Vermilion ended the second quarter with net debt of $674.4 million, a reduction from $744.8 million as at March 31, 2013 and $677.2 million as at December 31, 2012.

The ratio of total net dividends, capital expenditures and asset retirement obligations settled (excluding capital expenditures and asset retirement obligations settled on the Corrib project) expressed as a percentage of fund flows from operations for the second quarter of 2013 decreased compared to both the first quarter of 2013 and the second quarter of 2012.   This decrease was primarily the result of the aforementioned increase in fund flows from operations coupled with reduced capital expenditures in the second quarter of 2013.  The decreases in capital expenditures were due to the absence of expenditures relating to the Australia drilling campaign, which primarily took place in the first quarter of 2013, and higher expenditures during the second quarter of 2012 relating to Duvernay land acquisitions in Canada.

COMMODITY PRICES

Reference prices

During the second quarter of 2013, North American crude oil prices remained relatively consistent with the preceding quarter while Dated Brent crude oil prices decreased 9% quarter-over-quarter.  Western Canadian supply issues and increased rail capacity resulted in a narrowing differential for both WTI and the Edmonton Sweet index versus Dated Brent ($8.22 and $11.88 per bbl, respectively, for the second quarter of 2013 as compared to $18.18 and $25.13 per bbl, respectively, for the first quarter of 2013).

The AECO reference price for the second quarter of 2013 increased 11% as compared to the first quarter of 2013 and is significantly higher when compared to the same period in 2012 as a result of relatively flat North American production coupled with downward trending 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.

Average realized prices in Vermilion's jurisdictions 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

Capital expenditures:

Capital expenditures for the second quarter of 2013 were significantly lower than both the first quarter of 2013 and the second quarter of 2012.   The decrease from the first quarter of 2013 was the result of reduced drilling activity in both Canada and Australia.  The decrease from the second quarter of 2012 was the result of reduced land purchases in Canada for the Duvernay play, partially offset by increased drilling activity in France and tunnelling activity in Ireland.

Capital expenditures for the six months ended June 30, 2013 was higher than the same period in 2012 as a result of increased drilling activity in France and Australia and tunnelling activity in Ireland.  These increases were partially offset by reduced land purchases in Canada for the Duvernay play.

PETROLEUM AND NATURAL GAS SALES

Vermilion's consolidated petroleum and natural gas sales for the second quarter of 2013 was relatively consistent with the first quarter of 2013 as the decrease in Dated Brent prices was offset by increased natural gas production and higher AECO pricing.  Petroleum and natural gas sales for the second quarter of 2013 was higher than the same period in 2012 as a result of increased sales volumes and favorable North American commodity prices.

Vermilion's consolidated petroleum and natural gas sales for the six months ended June 30, 2013 was higher than the same period in 2012.  This increase was the result of increased sales volumes in all of Vermilion's jurisdictions, 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:

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

DERIVATIVE INSTRUMENTS

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

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.

The realized gain on derivative instruments for the second quarter of 2013 is comprised primarily of amounts received on Vermilion's WTI extendable swaps (which matured on June 30, 2013) and Dated Brent costless collars (as the reference price was below the floor price on select instruments for the entirety of the second quarter).  The realized gain for the second quarter of 2013 compares to a realized loss in both the first quarter of 2013, which primarily resulted from Dated Brent reference prices exceeding the ceiling price on the costless collars, and the second quarter of 2012, where the loss related both to premiums and amounts paid for settlement.

The realized loss for the six months ended June 30, 2013 is lower than the realized loss for the same period in 2012 due to the aforementioned realized gain recorded in the second quarter of 2013 and the absence of premiums paid on funded derivatives.

ROYALTIES

Canadian royalties, as a percentage of sales, decreased to 9.6% for the three months ended June 30, 2013 from 10.7% for the prior quarter and 11.0% for the comparative period of the prior year.  For the six months ended June 30, 2013, royalties, as a percentage of sales, decreased to 10.1% from 11.1% for the six months ended June 30, 2012.  These decreases are largely associated with the timing of placing additional Cardium wells on production that benefit from a royalty incentive on initial production volumes.

In France, the primary portion of the royalties levied is based on units of production and that component, therefore, is not subject to changes in commodity prices.  As average Brent-crude oil prices were slightly weaker for the three and six month periods ended June 30, 2013 versus the comparative periods presented, royalties, as a percentage of sales, were higher in the current periods.

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

OPERATING EXPENSE

In Canada, second quarter operating expense of $16.0 million was higher than the $13.8 million for the first quarter of 2013 and the $13.2 million for the second quarter of 2012.  The quarter-over-quarter increase was due to higher fuel and electricity costs, additional expense associated with rig mats as well as additional major project activity.  The increase in operating expense for the three and six months ended June 30, 2013 as compared to the same periods of the prior year is related to higher fuel and electricity costs, higher property tax expense and the timing of major project work.  Despite additional volumes, operating costs per boe for the three months and six months ended June 30, 2013 increased as compared to the comparative periods presented, due to the higher level of expense.

In France, second quarter operating expense of $16.9 million was lower than the expense of $19.9 million for the first quarter of 2013 due to the large inventory draw that occurred in the prior quarter.  When inventoried product is sold, the related costs are expensed in the period of sale.  Operating expense for the three and six months ended June 30, 2013 was higher than the expense for the comparative periods of the prior year due to inventory draws in the current periods as opposed to inventory builds for the comparative periods, additional operating expense associated with a December 2012 acquisition in France as well as the timing of repair and optimization activities.  Operating expense per boe has decreased quarter-over-quarter due to the timing of downhole work.  Operating expense per boe for the three and six months ended June 30, 2013 increased from the comparative periods in the prior year despite higher volumes as a result of additional downhole work and higher salary costs.

In the Netherlands, operating expense for the three months ended June 30, 2013 increased to $5.3 million from $4.0 million in the prior quarter due to the timing of project work.  This resulted in a quarter-over-quarter increase in operating expense per boe.  For the three and six months ended June 30, 2013, operating expense remained relatively consistent with the same periods of the prior year; however, higher volumes resulted in lower operating expense per boe for the current periods.

In Australia, second quarter operating expense decreased to $9.9 million from the previous quarter's expense of $14.8 million due to the prior quarter's crude oil inventory draw.  A decrease in crude oil inventory results in the related production costs being expensed when the product is sold.  Operating expense for the three and six months ended June 30, 2013 increased from the comparative periods in the prior year due to inventory builds in those prior periods which resulted in production costs being temporarily carried on the balance sheet until sale.  Higher production for the current quarter resulted in a decrease in operating expense per boe versus both the prior quarter as well as the second quarter of 2012.

TRANSPORTATION EXPENSE