Vermilion Energy Trust - Third Quarter Results for the Three and Nine Month Periods Ended September 30, 2008

Mon. November 10, 2008; Posted: 07:00 AM

CALGARY, Nov. 10, 2008 (Canada NewsWire via COMTEX) -- VETMF | Quote | Chart | News | PowerRating -- Vermilion Energy Trust ("Vermilion" or the "Trust") (TSX - VET.UN) is pleased to report interim operating and unaudited financial results for the three and nine month periods ended September 30, 2008.

<< Third Quarter Highlights: - Recorded production of 31,927 boe/d in the third quarter of 2008 as compared to 33,743 boe/d in the second quarter of 2008. Previously announced shut-in production in the Netherlands, combined with scheduled downtime in Australia were the primary drivers behind the production decline. Production was relatively flat as compared to 32,172 boe/d recorded in the third quarter of 2007, and is expected to remain stable over the balance of the year. Vermilion had projected softer production levels in the second half of 2008 and has maintained its 2008 production guidance unchanged between 32,000 and 33,000 boe/d. - Generated fund flows from operations of $131.8 million ($1.73 per unit) in the third quarter of 2008 compared to $190.3 million ($2.50 per unit) in the second quarter of 2008. A significant draw on crude oil inventories in the second quarter of 2008 was the principal reason for the higher cash flow in the second quarter, as compared to the third quarter of 2008. As only two shipments of crude occurred in each of Australia and the Aquitaine Basin in France, Vermilion's crude oil inventory levels increased to 390,000 barrels at the end of the third quarter compared to 114,000 barrels at the end of the second quarter. - Vermilion distributed $0.57 per unit in the quarter, equivalent to 30% of fund flows from operations, representing the lowest cash payout ratio in its peer group of oil and gas income trusts. Since converting to a trust in January 2003, Vermilion has distributed more than 100% of the initial unit price at the time of conversion and has never decreased its distribution payments. - Total payout comprising of net distributions, capital expenditures, reclamation fund contributions and asset retirement costs incurred was 68% of fund flows from operations in the third quarter of 2008 and 50% year to date in 2008. - Vermilion further reduced its net debt from the second quarter by approximately $63 million to $222 million, equivalent to approximately 0.4 times annualized third quarter 2008 fund flows from operations. Vermilion's existing line of credit of $675 million is expected to be an important tactical advantage as Vermilion continues to pursue acquisitions. - Vermilion drilled 14 Drayton Valley and central Alberta wells in the third quarter of 2008, and continued its workover and recompletion programs in Canada and France. On October 22, 2008, Vermilion began drilling the first of two wells at its Wandoo Field in Australia. The plan is to drill both wells concurrently and Vermilion expects both wells will be drilled, completed and tied-in before year-end. - On September 8, 2008, Verenex Energy Inc., in which Vermilion holds approximately 18.8 million shares representing a 42.4% equity interest, announced that it has initiated a process to identify, examine and consider a range of strategic alternatives available to Verenex to maximize shareholder value. - Vermilion is well positioned to weather a prolonged global economic downturn and believes the distressed markets may provide the opportunity to acquire producing properties at attractive metrics. The Trust's conservative business model and low payout ratio are expected to provide a significant cushion in a low commodity price environment, which should enable Vermilion to maintain its current distribution levels for the foreseeable future. >>

Conference Call and Webcast Details:

Vermilion will discuss these results in a conference call to be held on Monday, November 10, 2008. The conference call will begin at 9:00 AM MST (11:00 AM EST). To participate, you may call toll free 1.800.732.9303 or 416.644.3414 (Toronto area). The conference call will also be available on replay by calling 1.877.289.8525 or 416.640.1917 (Toronto area) using pass code 21286517 followed by the pound key. The replay will be available until midnight eastern time on November 24, 2008. You may also listen to the webcast by clicking http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2320560

<< HIGHLIGHTS Financial ($000's CDN Three Months Ended Nine Months Ended except unit and per unit Sept 30, Sept 30, Sept 30, Sept 30, amounts) 2008 2007 2008 2007 ------------------------------------------------------------------------- Petroleum and natural gas revenue $ 245,712 $ 187,939 $ 816,576 $ 501,609 Fund flows from operations 131,834 98,757 441,577 259,796 Per unit, basic(1) 1.73 1.36 5.78 3.58 Capital expenditures 37,402 51,720 105,971 123,518 Acquisitions, including acquired working capital deficiency 959 14 46,387 129,239 Net debt 222,185 454,712 Reclamation fund contributions and asset retirement costs incurred 12,697 1,221 14,988 2,438 Cash distributions per unit 0.57 0.51 1.71 1.53 Distributions declared 39,810 33,949 118,652 100,825 Less DRIP - 9,501 18,453 26,185 Net distributions 39,810 24,448 100,199 74,640 % of fund flows from operations distributed, gross 30% 34% 27% 39% % of fund flows from operations distributed, net 30% 25% 23% 29% Total net distributions, capital expenditures, reclamation fund contributions and asset retirement costs incurred $ 89,909 $ 77,389 $ 221,158 $ 200,596 % of fund flows from operations 68% 78% 50% 77% Trust units outstanding(1) Adjusted basic 76,904,192 73,584,337 Diluted 79,149,782 76,675,661 Weighted average trust units outstanding(1) Adjusted basic 76,387,515 72,668,093 Diluted 78,114,281 75,222,465 Unit trading High $ 45.50 $ 39.25 Low $ 31.00 $ 30.33 Close $ 34.06 $ 36.40 ------------------------------------------------------------------------- Operations ------------------------------------------------------------------------- Production Crude oil (bbls/d) 17,479 18,222 17,848 16,775 Natural gas liquids (bbls/d) 1,563 1,643 1,590 1,482 Natural gas (mcf/d) 77,305 73,835 80,834 74,875 Boe/d (6:1) 31,927 32,172 32,910 30,737 Average reference price WTI ($US/bbl) $ 117.98 $ 75.38 $ 113.29 $ 66.23 Brent ($US/bbl) 114.78 74.87 111.02 67.13 AECO ($CDN/mcf) 7.74 5.18 8.62 6.55 Netherlands reference (Euro/GJ) 8.06 5.03 7.24 5.18 Foreign exchange rate ($US/$CDN) 0.96 0.96 0.98 0.91 Foreign exchange rate (Euro/$CDN) 0.64 0.70 0.65 0.67 Average selling price Crude oil and natural gas liquids ($CDN/bbl) 100.83 79.27 112.93 71.24 Natural gas ($CDN/mcf) 9.71 6.34 9.71 7.17 Netbacks per boe (6:1) Operating netback 56.31 41.04 61.69 39.52 Fund flows netback 44.86 33.37 48.97 30.97 Operating costs $ 12.10 $ 10.16 $ 11.31 $ 10.15 ------------------------------------------------------------------------- (1) Includes trust units issuable for outstanding exchangeable shares based on the period end exchange ratio >>

The above table includes non-GAAP measures which may not be comparable to other companies. Please see "Non-GAAP Measures" under MD&A section for further discussion.

OUTLOOK

Vermilion expects fourth quarter production volumes will remain stable near 32,000 boe/d. Normal production declines in Canada, France and the Netherlands will be offset by slightly higher Australian volumes as no significant downtime is planned at Wandoo in the fourth quarter. Accordingly, Vermilion is maintaining production guidance between 32,000 and 33,000 boe/d for 2008. New production from the two wells that are currently drilling at Wandoo is expected to be tied-in near the end of 2008 and will not have a significant impact on fourth quarter 2008 volumes. Production from each of these wells is expected at approximately 1,000 boe/d.

Capital expenditures in the fourth quarter are projected at approximately $85 million, with roughly half of that amount aimed at the Wandoo drilling program. Vermilion expects year-end net debt to approach $260 million, representing less than six months trailing cash flow.

Vermilion anticipates a capital expenditure program of between $175 million and $250 million for 2009. The Trust believes one of its primary responsibilities is to maintain a stable stream of distributions for unitholders, and Vermilion does not anticipate any change in distributions in 2009. Management also believes that the Trust's strong balance sheet provides a good opportunity to pursue acquisitions in a more favourable 'buyer's market' for property transactions.

In 2009, Vermilion is projecting record activity levels in France and the Netherlands and a slight slowdown in western Canadian activity. Australian capital spending in 2009 will be limited to maintenance capital spending as the trust assesses the performance of the 2008 drilling activity. Approximately one-third of Vermilion's 2009 capital expenditure program is geared towards non-reserve-additive activities, including long term studies related to the waterflood and enhanced oil recovery programs, seismic and land expenditures and subsurface and facilities maintenance. This portion of the capital program is focused on the potentially significant expansion and long-term sustenance of Vermilion's existing reservoirs.

Approximately 40% to 45% of Vermilion's 2009 capital program will be focused in France, where Vermilion anticipates drilling six to ten wells in its most active program in France since 1998. Besides new wells in the Champotran/La Torche field, drilling plans include a water injection well at Les Mimosas to support oil production from that field. New drilling in the Parentis field is being temporarily deferred until commodity prices rebound. Vermilion will continue with a robust workover and recompletion program in the Chaunoy, Cazaux and Parentis fields.

Approximately 25% to 30% of the capital program is earmarked for Canada, where Vermilion will maintain its successful natural gas drilling, workover and recompletion program in Drayton Valley and a smaller coalbed methane and shallow gas program in Central Alberta.

In the Netherlands, subsidence concerns led Vermilion to shut in approximately 1,000 boe/d of production in July 2008. Vermilion has applied to re-instate 150 boe/d and is reviewing new reservoir data, but has not made any decision regarding the balance of this production. Approximately one quarter of the 2009 capital program is aimed at the Netherlands, where Vermilion hopes to drill four to five wells in 2009. None of the drilling will be in the area affected by subsidence concerns. Potential additional production volumes from this drilling program are excluded from Vermilion's 2009 guidance figures, as drilling is not expected to begin until the third quarter of 2009 with tie-in expected at year-end.

Preliminary production estimates reflect average volumes in 2009 of between 31,500 and 33,000 boe/d.

Verenex Energy Inc., in which Vermilion holds approximately 18.8 million shares representing a 42.4% equity interest, announced that it has initiated a process to identify, examine and consider a range of strategic alternatives available to Verenex to maximize shareholder value. The company continues to achieve positive drilling results in Libya. On November 6, 2008 Verenex announced that its two most recent wells have also encountered hydrocarbons in the target zones. To date, Verenex has drilled sixteen wells, all of which encountered hydrocarbons. Eleven of these wells, which include nine new field exploration wells and two appraisal wells have been tested at combined rates of 98,000 boe/d of production. The company is developing a commerciality application that contemplates an initial production phase of up to 50,000 boe/d.

On November 3, 2008, Verenex reported that DeGolyer and McNaughton ("D&M"), an independent engineering firm, provided an updated assessment of oil and gas resources in Verenex's discoveries and portfolio of exploration prospects in Area 47. In summary, the aggregate of D&M's updated September 30, 2008 best estimate of gross contingent resources and risked mean estimate of gross prospective resources, on an oil equivalent basis, has increased by 36% to approximately 2.15 billion barrels.

Verenex is a Canada-based, international oil and gas exploration and production company with a world-class discovered resource base and exploration portfolio in the Ghadames Basin in Libya. Under the EPSA terms for Area 47, Verenex is the operator and holds a 50% working interest in the initial 5-year Exploration Period which reduces to 25% for any commercial developments retained in a subsequent 25-year Exploitation Period. These working interest levels reflect the Company's required share of capital funding during the periods. In any commercial development scheme, Verenex would fund 25% of capital expenditures and 6.85% of operating costs and receive an initial production allocation (free of all taxes and royalties) of 6.85%.

Vermilion is well positioned to survive a prolonged global economic downturn. The Trust's strong financial position could prove advantageous as Vermilion continues to pursue acquisition opportunities. A robust capital program is scheduled for 2009 to take advantage of a significant portfolio of organic growth opportunities. Vermilion does not anticipate any change to its distribution levels in 2009, even under a low commodity price scenario. The interests of Management and the Board of Directors are aligned with unitholders through the ownership of approximately 9% of the issued and outstanding Vermilion units (including exchangeable shares).

MANAGEMENT'S DISCUSSION AND ANALYSIS

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The following is Management's Discussion and Analysis (MD&A) dated November 6, 2008 of Vermilion's operating and financial results as at and for the three and nine month periods ended September 30, 2008 compared with the corresponding periods in the prior year. This discussion should be read in conjunction with the unaudited interim consolidated financial statements for the period ended September 30, 2008 and the Trust's audited consolidated financial statements for the years ended December 31, 2007 and 2006, together with accompanying notes, as contained in the Trust's 2007 Annual Report.

NON-GAAP MEASURES

This report includes non-GAAP ("Generally Accepted Accounting Principles") measures as further described herein. These measures do not have standardized meanings prescribed by 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 costs incurred. Management considers fund flows from operations and per unit calculations of fund flows from operations (see discussion relating to per unit calculations below) to be key measures as they demonstrate the Trust's ability to generate the cash necessary to pay distributions, repay debt, fund asset retirement costs 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 the Trust's ability to generate cash that is not subject to short-term movements in operating working capital. As fund flows from operations also excludes asset retirement costs incurred, it assists management in assessing the ability of the Trust to fund current and future asset retirement costs. The most directly comparable GAAP measure is cash flows from operating activities. Fund flows from operations is reconciled to cash flows from operating activities below:

<< ($000's) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash flows from operating activities $ 168,251 $ 112,920 $ 517,152 $ 298,153 Changes in non-cash operating working capital (39,403) (15,384) (80,852) (40,795) Asset retirement costs incurred 2,986 1,221 5,277 2,438 ------------------------------------------------------------------------- Fund flows from operations $ 131,834 $ 98,757 $ 441,577 $ 259,796 ------------------------------------------------------------------------- "Acquisitions, including acquired working capital deficiency" is the sum of "Acquisition of petroleum and natural gas properties" and "Corporate acquisition, net of cash acquired" as presented in the Trust's consolidated statements of cash flows plus any working capital deficiencies acquired as a result of those acquisitions. Management considers acquired working capital deficiencies to be an important element of a property or corporate acquisition. Acquisitions, including acquired working capital deficiency, is reconciled below: ($000's) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Acquisition of petroleum and natural gas properties from consolidated statements of cash flows $ 959 $ 14 $ 46,387 $ 120,928 Corporate acquisition, net of cash acquired from consolidated statements of cash flows - - - - Working capital deficiencies acquired from investments and acquisitions (see financial statement notes for relevant period) - - - 8,311 ------------------------------------------------------------------------- Acquisitions, including acquired working capital deficiency $ 959 $ 14 $ 46,387 $ 129,239 ------------------------------------------------------------------------- "Net debt" is the sum of long-term debt and working capital and is used by management to analyze the financial position and leverage of the Trust. Net debt is reconciled below to long-term debt which is the most directly comparable GAAP measure: As at As at As at Sept 30, December 31, Sept 30, ($000's) 2008 2007 2007 ------------------------------------------------------------------------- Long-term debt $ 282,711 $ 452,490 $ 490,405 Current liabilities 214,903 150,620 184,780 Current assets (275,429) (186,252) (220,473) ------------------------------------------------------------------------- Net debt $ 222,185 $ 416,858 $ 454,712 ------------------------------------------------------------------------- "Cash distributions per unit" represents actual cash distributions paid per unit by the Trust during the relevant periods. "Net distributions" is calculated as distributions declared for a given period less proceeds received by the Trust pursuant to the Distribution Reinvestment Plan ("DRIP"). Distributions both before and after DRIP are reviewed by management and are also assessed as a percentage of fund flows from operations to analyze how much of the cash that is generated by the Trust is being used to fund distributions. Net distributions is reconciled below to distributions declared, the most directly comparable GAAP measure: ($000's) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Distributions declared $ 39,810 $ 33,949 $ 118,652 $ 100,825 Issue of trust units pursuant to the distribution reinvestment plan - (9,501) (18,453) (26,185) ------------------------------------------------------------------------- Net distributions $ 39,810 $ 24,448 $ 100,199 $ 74,640 ------------------------------------------------------------------------- "Total net distributions, capital expenditures, reclamation fund contributions and asset retirement costs incurred" is calculated as the addition of net cash distributions as determined above plus the following amounts for the relevant periods from the Trust's consolidated statements of cash flows: "Drilling and development of petroleum and natural gas properties", "Contributions to reclamation fund" and "Asset retirement costs incurred." This measure is reviewed by management and is also assessed as a percentage of fund flows from operations to analyze the amount of cash that is generated by the Trust that is available to repay debt and fund potential acquisitions. This measure is reconciled to the relevant GAAP measures below: ($000's) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Distributions declared $ 39,810 $ 33,949 $ 118,652 $ 100,825 Issue of trust units pursuant to the distribution reinvestment plan - (9,501) (18,453) (26,185) Drilling and development of petroleum and natural gas properties 37,402 51,720 105,971 123,518 Contributions to reclamation fund 9,711 - 9,711 - Asset retirement costs incurred 2,986 1,221 5,277 2,438 ------------------------------------------------------------------------- $ 89,909 $ 77,389 $ 221,158 $ 200,596 ------------------------------------------------------------------------- >>

"Netbacks" are per-unit of production measures used in operational and capital allocation decisions.

"Adjusted basic trust units outstanding" and "Adjusted basic weighted average trust units outstanding" are used in the per unit calculations on the Highlights schedule of this document and are different from the most directly comparable GAAP figures in that they include amounts related to outstanding exchangeable shares at the period end exchange ratio. As the exchangeable shares will eventually be converted into units of the Trust, management believes that their inclusion in the calculation of basic rather than only diluted per unit statistics provides meaningful information. "Diluted trust units outstanding" is the sum of "Adjusted basic trust units outstanding" plus outstanding awards under the Trust's Unit Rights Incentive Plan and the Trust Unit Award Incentive Plan, based on current performance factor estimates. These measures are reconciled to the relevant GAAP measures below:

<< As at As at Sept 30, Sept 30, 2008 2007 ------------------------------------------------------------------------- Trust units outstanding 69,845,521 66,745,459 Trust units issuable pursuant to exchangeable shares outstanding 7,058,671 6,838,878 ------------------------------------------------------------------------- Adjusted basic trust units outstanding 76,904,192 73,584,337 ------------------------------------------------------------------------- Potential trust units issuable pursuant to unit compensation plans 2,245,590 3,091,324 ------------------------------------------------------------------------- Diluted trust units outstanding 79,149,782 76,675,661 ------------------------------------------------------------------------- As at As at Sept 30, Sept 30, 2008 2007 ------------------------------------------------------------------------- Basic weighted average trust units outstanding 69,322,375 65,829,215 Trust units issuable pursuant to exchangeable shares outstanding 7,065,140 6,838,878 ------------------------------------------------------------------------- Adjusted basic weighted average trust units outstanding 76,387,515 72,668,093 ------------------------------------------------------------------------- >>

FORWARD-LOOKING INFORMATION

This document contains forward-looking financial and operational information as to the Trust's internal projections and expectations relating to future events or performance. In some cases, forward-looking information can be identified by terminology such as "may", "will", "should", "expects", "projects", "anticipates" and similar expressions. These statements represent management's expectations concerning future operating results or the economic performance of the Trust and are subject to a number of risks and uncertainties that could materially affect results. These risks include, but are not limited to future commodity prices, exchange rates, interest rates, geological risk, reserves risk, political risk, product demand and transportation restrictions, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed by such forward-looking statements. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted.

OPERATIONAL ACTIVITIES

Canada

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In Canada, Vermilion drilled 14 wells (7.66 net) in the quarter in Drayton Valley and central Alberta, resulting in 4 gas wells (3.38 net) and 10 standing wells (4.28 net) waiting completion and tie-in. Drilling activities are expected to resume in the Drayton Valley region in December.

France

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A number of well workovers were completed in the third quarter, increasing production by approximately 300 boe/d over second quarter 2008 levels. A similar level of activity is anticipated for the fourth quarter of 2008.

Reconstruction of the storage tanks at the Ambès terminal continues with a full re-start of the terminal expected in the first quarter of 2009. Vermilion is reviewing the opportunity to assume operatorship of its portion of the Ambès loading and storage terminal, which would provide greater control over shipping, inventory and safety.

Netherlands

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Permitting for the 2009 drilling program remains on schedule, and all permits are expected to be received before the end of the first quarter. Subject to receipt of all approvals, Vermilion hopes to drill 4 to 5 wells in the Netherlands next year beginning in the third quarter. The Trust continues to work towards the determination of the source of unexpected subsidence in the Harlingen area, but has not been able to make a significant determination at this point. Vermilion is applying to have one of the Harlingen wells re-instated as this well appears to be isolated from the main pool. This well accounts for approximately 150 boe/d of the 1,000 boe/d production that was shut in. No production will be resumed until regulatory approval is received from the appropriate authorities.

Australia

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Australia operations were focused on completing preparations for drilling. Seadrill's 'Western Atlas' jack-up rig arrived on location on October 20, 2008 and the Wandoo B14 commenced drilling on October 22, 2008. The drilling and completion of the two wells is anticipated to be completed before year-end.

PRODUCTION

Average production in Canada during the third quarter of 2008 was 4,113 bbls/d of oil and NGLs and 51.5 mmcf/d of natural gas (12,693 boe/d) compared to 4,368 bbls/d of oil and NGLs and 51.3 mmcf/d of natural gas (12,915 boe/d) in the second quarter of 2008. Canadian production is expected to experience normal declines in the fourth quarter of 2008, partly offset by ongoing completions and tie-ins.

Production in France averaged 8,872 boe/d in the third quarter of 2008, 336 boe/d higher than the 8,536 boe/d produced in the second quarter of 2008 driven by increasing workover activities. Production should remain stable over the balance of 2008.

Production in the Netherlands averaged 4,142 boe/d in the third quarter of 2008, sharply lower than second quarter 2008 production of 4,980 boe/d. Approximately 1,000 boe/d of production was shut in at Harlingen in mid-July and will remain shut in until a new production permit is obtained from regulators. Accordingly, fourth quarter 2008 production is estimated to remain around 4,000 boe/d, reflecting the impact of the shut-in.

Australia production averaged 6,220 boe/d in the third quarter of 2008 as compared to 7,312 boe/d in the second quarter of 2008. Third quarter production was reduced as a result of a scheduled platform turnaround that took longer than expected and some downtime related to drilling preparations. Fourth quarter 2008 volumes are expected to recover to approximately 6,700 boe/d.

<< ------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, 2008 September 30, 2008 Oil Natural Oil Natural & NGLs Gas Total & NGLs Gas Total (bbls/d) (mmcf/d) (boe/d) % (bbls/d) (mmcf/d) (boe/d) % ------------------------------------------------------------------------- Canada 4,113 51.48 12,693 40 4,215 51.38 12,778 39 France 8,682 1.14 8,872 28 8,541 1.17 8,737 27 Netherlands 27 24.69 4,142 13 24 28.28 4,737 14 Australia 6,220 - 6,220 19 6,658 - 6,658 20 ------------------------------------------------------------------------- Total Produc- tion 19,042 77.31 31,927 100 19,438 80.83 32,910 100 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, 2007 September 30, 2007 Oil Natural Oil Natural & NGLs Gas Total & NGLs Gas Total (bbls/d) (mmcf/d) (boe/d) % (bbls/d) (mmcf/d) (boe/d) % ------------------------------------------------------------------------- Canada 4,084 45.61 11,686 36 4,093 47.62 12,030 39 France 8,804 1.19 9,002 28 8,568 1.17 8,763 29 Netherlands 22 27.04 4,529 14 46 26.09 4,394 14 Australia 6,955 - 6,955 22 5,550 - 5,550 18 ------------------------------------------------------------------------- Total Produc- tion 19,865 73.84 32,172 100 18,257 74.88 30,737 100 ------------------------------------------------------------------------- >>

FINANCIAL OVERVIEW

During the three and nine month periods ended September 30, 2008 the Trust generated fund flows from operations of $131.8 million and $441.6 million, respectively. For the same periods in 2007 the Trust generated fund flows from operations of $98.8 million and $259.8 million, respectively. The increase in fund flows from operations of $33.0 million and $181.8 million for the three and nine month periods ended September 30, 2008 versus the corresponding periods in the prior year is largely the result of the year over year increase in commodity prices. The GAAP measure, cash flows from operating activities similarly increased year over year to $168.3 million and $517.2 million for the three and nine month periods ended September 30, 2008 versus $112.9 million and $298.2 million for the same periods in 2007.

Increased year over year fund flows from operations have allowed Vermilion to further strengthen its financial position and at September 30, 2008 the Trust's net debt was $222.2 million which represents a decrease of 46.7% from the net debt of $416.9 million at December 31, 2007. The Trust's long-term debt has decreased to $282.7 million at September 30, 2008 from $452.5 million at December 31, 2007. At September 30, 2008 Vermilion's net debt represented less than half of annualized fund flows from operations.

For the nine months ended September 30, 2008 total net distributions, capital expenditures, reclamation fund contributions and asset retirement costs incurred as a percentage of fund flows from operations was 50% versus 77% for the corresponding period in the prior year. The year over year decrease in this metric relates to the significant increase in fund flows from operations associated with higher commodity prices through September 30, 2008.

CAPITAL EXPENDITURES

Total capital spending, including acquisitions for the three and nine month periods ended September 30, 2008 was $38.4 million and $152.4 million, respectively (three and nine month periods ended September 30, 2007, $51.7 million and $244.4 million, respectively). On a year to date basis, non-acquisition capital spending decreased largely as a result of the costs incurred in 2007 to drill the Orca offshore well in France combined with higher levels of drilling in Canada in 2007 versus 2008. Acquisition related capital decreased on a year to date basis from the prior year as a result of the 2007 acquisition of the remaining 40% interest in the Wandoo field, offshore Australia for $117.9 million partially offset by the purchase in the first quarter of 2008 of $44.1 million of producing properties in the Drayton Valley area.

REVENUE

Revenue for the three and nine month periods ended September 30, 2008 was $245.7 million and $816.6 million, respectively (three and nine month periods ended September 30, 2007, $187.9 million and $501.6 million, respectively).

Vermilion's combined crude oil and NGL price was $100.83 per boe in the third quarter of 2008, an increase of 27% over the $79.27 per boe reported in the third quarter of 2007. The natural gas price realized was $9.71 per mcf in the third quarter of 2008 compared to $6.34 per mcf in the third quarter of 2007, a 53% increase year over year. The prices realized in 2008 reflect the year over year increase in oil and gas reference prices and resulted in higher revenue year over year.

<< ($000's except per boe and per mcf) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Crude oil & NGLs $ 176,643 $ 144,871 $ 601,463 $ 355,107 Per boe $ 100.83 $ 79.27 $ 112.93 $ 71.24 Natural gas 69,069 43,068 215,113 146,502 Per mcf $ 9.71 $ 6.34 $ 9.71 $ 7.17 ------------------------------------------------------------------------- Petroleum and natural gas revenue $ 245,712 $ 187,939 $ 816,576 $ 501,609 ------------------------------------------------------------------------- Per boe $ 83.65 $ 63.50 $ 90.56 $ 59.78 ------------------------------------------------------------------------- >>

DERIVATIVE INSTRUMENTS

Vermilion manages a component of its risk exposure through prudent commodity and currency economic hedging strategies. The extent of Vermilion's hedging activities is driven, in part, by the state of the Trust's balance sheet. With current net debt levels being lower resulting in a very strong balance sheet, the Trust's hedging activities have been minimal. Vermilion has the following financial derivatives in place at September 30, 2008:

<< Risk Management: Oil Funded Cost bbls/d US$/bbl ------------------------------------------------------------------------- Collar - WTI Q4 2008 US$0.50/bbl 250 $ 69.00 - $ 90.00 Collar - BRENT Q4 2008 - 500 $ 68.20 - $ 81.00 2009 US$1.00/bbl 500 $100.50 - $200.00 Call Spread - BRENT 2009 - 2011 US$5.73/bbl 700 $ 65.00 - $ 85.00 ------------------------------------------------------------------------- Risk Management: Natural Gas Funded Cost GJ/d C$/GJ ------------------------------------------------------------------------- Put - AECO July - October 2008 $0.35/GJ 2,500 $ 9.30 July - October 2008 $0.32/GJ 2,500 $ 9.55 ------------------------------------------------------------------------- The impact of Vermilion's economic hedging program through the third quarter of 2008 decreased fund flows netbacks by $1.39 per boe ($1.51 per boe in the quarter) as the price of oil exceeded the ceiling on the majority of the Trust's collars. This compares to a hedging gain of $0.06 per boe in the first nine months of 2007 ($0.01 per boe gain in the quarter). ROYALTIES Royalties for the three and nine month periods ended September 30, 2008 were $12.03 per boe and $14.24 per boe, respectively (three and nine month periods ended September 30, 2007, $10.18 per boe and $8.15 per boe, respectively). As a percent of sales for the three and nine months ended September 30, 2008, royalties were 14% and 16%, respectively (three and nine months ended September 30, 2007, 16% and 14% respectively). Third quarter royalties as a percent of revenue remained relatively consistent in Canada and France compared to the third quarter of 2007. In Australia royalties are reduced by capital investment in the country and third quarter royalties as a percent of revenue decreased as compared to the prior year as a result of higher levels of capital spending. Vermilion is not subject to royalties in the Netherlands. ($000's except per boe and per mcf) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Crude oil & NGLs $ 25,975 $ 25,856 $ 101,075 $ 50,714 Per boe $ 14.83 $ 14.15 $ 18.98 $ 10.17 Natural gas 9,365 4,270 27,288 17,702 Per mcf $ 1.32 $ 0.63 $ 1.23 $ 0.87 ------------------------------------------------------------------------- Royalties $ 35,340 $ 30,126 $ 128,363 $ 68,416 ------------------------------------------------------------------------- Per boe $ 12.03 $ 10.18 $ 14.24 $ 8.15 ------------------------------------------------------------------------- >>

OPERATING COSTS

Operating costs per boe for the three and nine month periods ended September 30, 2008 were $12.10 and $11.31, respectively (three and nine month periods ended September 30, 2007, $10.16 and $10.15, respectively). Canadian operating costs have remained at a relatively consistent level on a per boe basis for the quarter compared to the same period in the prior year, and increased for the nine months ended September 30, 2008 as a result of a favorable adjustment to equalization provisions that was realized during the second quarter of 2007 which reduced operating costs in that comparative period. Canadian operating costs per boe have increased versus the second quarter of 2008 due to higher levels of spending related to well intervention work. Operating costs per boe in France have increased for the quarter and year to date periods versus the same periods in the prior year and have remained at relatively consistent levels since the fourth quarter of 2007. Australian operating costs have increased for the quarter and year to date periods compared to the prior year as a result of increased levels of diesel and power consumption in the third quarter of 2008 coupled with lower production due to reservoir testing in July and scheduled shutdown events in September. In the Netherlands, operating costs on a per boe basis have increased for the three and nine months ended September 30, 2008 due to higher power and salary costs. In addition, operating costs per boe in the third quarter of 2008 were higher as a result of the shut-in of production at Harlingen in mid-July as a result of subsidence concerns.

<< ($000's except per boe and per mcf) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Crude oil & NGLs $ 22,050 $ 17,675 $ 61,831 $ 52,523 Per boe $ 12.59 $ 9.67 $ 11.61 $ 10.54 Natural gas 13,489 12,392 40,160 32,676 Per mcf $ 1.90 $ 1.82 $ 1.81 $ 1.60 ------------------------------------------------------------------------- Operating $ 35,539 $ 30,067 $ 101,991 $ 85,199 ------------------------------------------------------------------------- Per boe $ 12.10 $ 10.16 $ 11.31 $ 10.15 ------------------------------------------------------------------------- >>

TRANSPORTATION

Transportation costs are a function of the point of legal transfer of the product and are dependent upon where the product is sold, product split, location of properties as well as industry transportation rates that are driven by supply and demand of available transport capacity. For Canadian gas production, legal title transfers at the intersection of major pipelines (referred to as "the Hub") whereas the majority of Vermilion's Canadian oil production is sold at the wellhead. In France, the majority of Vermilion's transportation costs are comprised of shipping charges incurred in the Aquitaine Basin where oil production is transported by tanker from the Ambès terminal in Bordeaux to the refinery. In Australia, oil is sold at the Wandoo B Platform and in the Netherlands, gas is sold at the plant gate, resulting in no transportation costs relating to Vermilion's production in these countries.

Transportation costs in France continue to be higher than historic levels as a result of the oil spill at the Ambès Terminal that occurred in January 2007. In early March 2008, Vermilion resumed transporting crude to the Ambès terminal via pipeline and all trucking operations ceased. As a result of the limited capacity of the storage tank rented at the terminal, a vessel has been retained on a full-time basis and serves as a temporary storage tank when not transporting product to the refinery. Transportation costs in France are relatively consistent year over year and will continue to be higher than pre-January 2007 levels until full resumption of terminal operations occurs.

<< ($000's except per boe) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Transportation $ 4,980 $ 6,304 $ 17,380 $ 16,919 ------------------------------------------------------------------------- Per boe $ 1.70 $ 2.13 $ 1.93 $ 2.02 ------------------------------------------------------------------------- GENERAL AND ADMINISTRATION EXPENSES General and administration expenses per boe for the three and nine month periods ended September 30, 2008 were $2.57 and $2.18, respectively (three and nine month periods ended September 30, 2007, $1.55 and $1.78, respectively). The increase per boe from 2007 is associated with increased staffing levels and employee retention costs combined with a reduction in costs allocated to specific projects. ($000's except per boe) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- General and administration $ 7,541 $ 4,584 $ 19,627 $ 14,967 ------------------------------------------------------------------------- Per boe $ 2.57 $ 1.55 $ 2.18 $ 1.78 ------------------------------------------------------------------------- UNIT BASED COMPENSATION EXPENSE Non-cash unit based compensation expense for the three and nine month periods ended September 30, 2008 was $4.5 million and $13.7 million, respectively (three and nine month periods ended September 30, 2007, $3.7 million and $13.1 million, respectively). For 2008, this expense relates to the value attributable to long-term incentives granted to officers, directors and employees under the Trust Unit Award Incentive Plan. The 2007 figures also include expense associated with the Trust Unit Rights Incentive Plan, the value of which had been fully amortized by December 31, 2007 resulting in no expense for this plan being recognized in 2008. Total unit based compensation expense has remained relatively consistent on a year to date basis compared with the prior year. ($000's except per boe) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Unit based compensation $ 4,454 $ 3,704 $ 13,704 $ 13,120 ------------------------------------------------------------------------- Per boe $ 1.52 $ 1.25 $ 1.52 $ 1.56 ------------------------------------------------------------------------- INTEREST EXPENSE Interest expense for the three and nine month periods ended September 30, 2008 was $2.7 million and $13.9 million, respectively (three and nine month periods ended September 30, 2007, $6.3 million and $15.7 million, respectively). The decrease in interest expense for the quarter and year to date periods in 2008 versus 2007 is a result of lower debt levels. ($000's except per boe) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Interest $ 2,674 $ 6,345 $ 13,948 $ 15,693 ------------------------------------------------------------------------- Per boe $ 0.91 $ 2.14 $ 1.55 $ 1.87 ------------------------------------------------------------------------- DEPLETION, DEPRECIATION AND ACCRETION EXPENSES Depletion, depreciation and accretion expenses per boe for the three and nine month periods ended September 30, 2008 were $21.69 and $21.22, respectively (three and nine month periods ended September 30, 2007, $18.07 and $18.08, respectively). Depletion, depreciation and accretion rates for the quarter and year to date periods in 2008 have increased from the rates per boe for the same periods in 2007 due primarily to higher finding, development and acquisition costs incurred by the Trust. ($000's except per boe) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Depletion, depreciation and accretion $ 63,697 $ 53,475 $ 191,334 $ 151,699 ------------------------------------------------------------------------- Per boe $ 21.69 $ 18.07 $ 21.22 $ 18.08 ------------------------------------------------------------------------- TAXES Current taxes per boe for the three and nine month periods ended September 30, 2008 were $6.77 and $9.14, respectively (three and nine month periods ended September 30, 2007, $3.44 and $3.97, respectively). The increase relates to additional taxes owing on higher revenues realized with the strengthening of commodity prices. ($000's except per boe) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Current taxes $ 19,874 $ 10,186 $ 82,442 $ 33,332 ------------------------------------------------------------------------- Per boe $ 6.77 $ 3.44 $ 9.14 $ 3.97 ------------------------------------------------------------------------- FOREIGN EXCHANGE During the nine month period ended September 30, 2008, a combined realized and unrealized foreign exchange loss of $6.0 million was recorded (nine month period ended September 30, 2007, gain of $14.3 million). The combined loss through September 30, 2008 is comprised of a realized gain of $1.3 million and an unrealized non-cash loss of $7.3 million. The year to date unrealized loss is related to the translation to Canadian dollars of foreign currency denominated future income taxes and asset retirement obligations. Since December 31, 2007, the Canadian dollar weakened against the Euro resulting in this unrealized loss. ($000's except per boe) ------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Foreign exchange (gain) loss $ (19,204) $ (2,634) $ 6,045 $ (14,310) ------------------------------------------------------------------------- Per boe $ (6.54) $ (0.89) $ 0.67 $ (1.71) ------------------------------------------------------------------------- >>

EARNINGS

Net earnings for the three and nine month periods ended September 30, 2008 were $86.9 million or $1.24 per unit and $215.4 million or $3.11 per unit, respectively (three and nine month periods ended September 30, 2007, $48.6 million or $0.73 per unit and $121.0 million or $1.84 per unit, respectively). The increase in earnings is associated with higher commodity price levels in 2008 compared to the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Vermilion's net debt as at September 30, 2008 was $222.2 million compared to $416.9 million as at December 31, 2007.

As at September 30, 2008, the Trust had an unsecured covenant-based credit facility allowing for maximum borrowings of $675 million. The revolving period under the facility is expected to expire in June 2009 and may be extended for an additional period of up to 364 days at the option of the lenders. If the lenders convert the revolving credit facility to a non-revolving credit facility, the amounts outstanding under the facility become repayable 24 months after the end of the revolving period. Various borrowing options are available under the facility including prime rate based advances and bankers' acceptance loans.

Vermilion purchased shares in Verenex Energy Inc. ("Verenex") in the first quarter of 2008 for total consideration of $0.6 million. After reflecting these additional shares, Vermilion owns 18.8 million shares representing 42.4% of the outstanding shares of Verenex.

On May 14, 2008, Vermilion suspended the distribution reinvestment plan. This suspension was effective June 16, 2008 and was the result of continued high commodity prices resulting in fund flows from operations that are in excess of the level needed to sustain the Trust's business model. Cash flows from financing activities for the three and nine month periods ended September 30, 2008 included cash flows related to the issuance of trust units pursuant to the distribution reinvestment plan of nil and $18.5 million, respectively.

RECLAMATION FUND

Vermilion has established a reclamation fund for the ultimate payment of environmental and site restoration costs on its asset base. The reclamation fund is funded by Vermilion Resources Ltd. and its operating subsidiaries. Contribution levels to the reclamation fund are reviewed on a regular basis and are adjusted when necessary to ensure that reclamation obligations associated with the Trust's assets will be substantially funded when the costs are expected to be incurred.

ASSET RETIREMENT OBLIGATION

At September 30, 2008, Vermilion's asset retirement obligation was $181.2 million compared to $163.4 million as at December 31, 2007. The increase is due mostly to the impact of accretion as well as the effect of foreign exchange rate changes on non-Canadian dollar denominated obligations. When appropriate, the Trust engages external third party consultants with relevant experience in reclamation activities in the regions in which Vermilion has operations to assist in estimating its asset retirement obligations.

DISTRIBUTIONS

Vermilion maintained monthly distributions at $0.19 per unit for the nine months ended September 30, 2008 and declared distributions totalling $118.7 million compared to $100.8 million for the same period in 2007.

Since inception, the Trust has declared $733.4 million in distributions to unitholders as compared to unitholders' capital of $432.5 million at September 30, 2008.

<< Sustainability of Distributions -------------------------------- ($000's) ------------------------------------------------------------------------- Three Nine Months Months Year Year Ended Ended Ended Ended September September Dec 31, Dec 31, 30, 2008 30, 2008 2007 2006 ------------------------------------------------------------------------- Cash flows from operating activities $ 168,251 $ 517,152 $ 349,890 $ 306,033 Net earnings $ 86,949 $ 215,434 $ 164,286 $ 146,923 Distributions declared $ 39,810 $ 118,652 $ 136,389 $ 130,638 Excess of cash flows from operating activities over cash dis

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