Vermilion Energy CEO Lorenzo Donadeo proves that playing defense at home and offense abroad is a winning strategy in this downturn
Stay calm and mind the balance sheet. That was Vermilion Energy CEO Lorenzo Donadeo’s philosophy in 2015, as the Calgary-based intermediate weathered an industry downturn that wreaked havoc on corporate bottom lines and resulted in huge layoffs across the sector. “Having been through a couple of these before, you realize you have to stay calm and reassure the rest of the organization that we can work through this together,” says Donadeo, who co-founded the company in 1994. “What we tried to do was focus on things we can control – reducing our cost structure, managing our balance sheet and making sure our debt stayed at a level we were comfortable with.”
Donadeo’s ability to stay cool under pressure, successfully steer Vermilion through a stormy year, still grow production and pull off two significant transactions are key reasons why he was chosen as Alberta Oil’s 2016 CEO of the Year. Downturns aren’t fun, and Donadeo – with 34 years’ experience in the business – knows this intimately. He and the company went through one in 1998, and again in 2008-2009. During those tough times, Vermilion’s top executive put a profitability enhancement program in place. He did it again in 2015. The program is a company-wide mandate to do more with less, and Donadeo says the entire company focused on reducing capital spending, operating costs, general and administrative costs and increasing profitability and revenues where it could.
The program served Vermilion well in 2015. The company estimates it will result in savings of between $70 million and $80 million for the year. “When people worry too much they sometimes take their eye off the ball and lose track of what they are really here to do,” Donadeo says. “The program is a way to keep everyone focused.” In 2015, one of Vermilion’s focuses was on capital spending. In December of 2014, Vermilion set its capital budget guidance at $525 million. But as oil prices plunged early in the year, it cut it to $415 million in February. In August of 2015, Vermilion changed its capital expenditures target once more, increasing it to $485 million. In the end, it spent $40 million less in 2015 than in 2014, yet still achieved record quarterly production of 56,280 boe/d in the third quarter of 2015.
Along the way, Vermilion also made two important acquisitions. In June it was awarded four exploration blocks in northeast Croatia near the Hungarian border. Then in July it signed a farm-in agreement on 19 onshore exploration licenses in northwestern Germany with units of ExxonMobil and Royal Dutch Shell. The moves increase Vermilion’s footprint in Europe, a region few Canadian-based intermediate companies operate in. The company still has a sizeable presence in Western Canada. Its average production during the third quarter of 2015 from assets in Alberta and Saskatchewan was approximately 25,700 boe/d. But Europe is increasingly becoming an important area for Vermilion. It first entered Europe in 1997, and it’s steadily built up its asset base and land position since then – with assets in France, the Netherlands, Germany, Ireland and now Croatia.
But why Europe? Natural gas prices in Europe were about US$6.30 per thousand cubic feet in December, roughly three times what the company was getting for the commodity in North America. Also, oil has been trading at about US$8-$10 more per barrel in Europe than it is in Canada. Because there aren’t many Canadian-based intermediate companies operating in the space, Vermilion faces less competition in the Old Continent than it does in Western Canada. “What these two acquisitions do is position Vermilion for the next five-to-10 years with future growth,” Donadeo says. As for current growth, Vermilion is concentrating on the Corrib offshore natural gas field in Ireland. The company has an 18.5 per cent interest in the field, which is operated by Shell and produced first gas in November. Once Corrib reaches peak production, it will add 9,700 boe/d to Vermilion’s portfolio, one that will be more concentrated in Europe than it will be in Canada.
In the meantime, Donadeo continues to keep a watchful eye on Vermilion’s balance sheet. The company says its capital budget for 2016 will be $350 million, and production will increase to between 63,000 and 65,000 boe/d. But Donadeo has bigger plans for the company than just treading water. He says that with the drilling inventory it has, Vermilion could be producing between 75,000-80,000 boe/d by 2020. “With Corrib coming online, our balance sheet is going to be in great shape and we’ve got a great team here,” Donadeo says. “Vermilion is going to come out stronger than it was going into the downturn. We see pretty steady growth from 2020 and beyond.”
Q + A with our CEO of the Year: Lorenzo Donadeo
What is the most important quality that a senior executive can have?
Being forward-thinking. As the leader of an organization, you have to ensure that short term goals are met, but as importantly, you and your team need to look out five to 10 years and develop a clear long term vision for your company. You also need to identify potential obstacles that may prevent you from achieving the long-term vision and develop strategies to overcome those obstacles. Once the vision is established, you need to articulate the vision in a way that engages and mobilizes the entire workforce and have them all working towards a common goal. This engagement and clarity of purpose is what, in my opinion, creates a high-performing organization.
What is the least important quality that a senior executive can have?
Over-confidence. A good leader has to be confident, but also needs a certain degree of humility. Sometimes you don’t know what you don’t know. A good leader has good listening skills and uses these skills effectively, especially when they’re making major decisions for their company. Good listening skills allow you to seek input from others in a collaborative way to help you avoid getting blindsided by something that you failed to notice. These skills, coupled with good decision-making skills, help you ensure positive outcomes.
What is your greatest fear?
Failure. I have a need to be successful and I strive for excellence in most things I do.
Which living person do you admire most?
My father. He immigrated to Canada and left his family and his beautiful coastal homeland in Southern Italy at a young age in search of a better life for his young family. When he got to Canada, he toiled in the underground coal mines of northwestern Alberta. But together with hard work, perseverance, and a positive can-do attitude, he and my mother went on to live a happy and rewarding life. They taught us the importance of family and how to enjoy the simple things in life: family, friends, good food and good wine. “La dolce de fare niente.”
What is your greatest extravagance?
Organizing family vacations and adventures abroad that include our immediate family as well as our extended family. Our last trip was to Italy where there were 22 of us. We started with a visit to my parents’ homeland in the Puglia region of Italy. When we got there, we organized a family reunion including our relatives from Italy and had 110 people. It resulted in a real emotional and memorable experience. We then went on to rent a yacht for a week and toured the Amalfi coast. We did some cycling, touring and too much eating. It was a great family adventure that created some lifelong memories and some good times.
If you could change one thing about yourself, what would it be?
Sometimes I can be too driven, I constantly strive for perfection.
What do you consider your greatest achievement?
On the personal side, it would be marrying my high school sweetheart. We’ve been together for 42 years (seven of those while dating), and have been blessed with a great life together along with three boys that have grown into grounded, intelligent and caring young men.
On the business side, being a co-founder of Vermilion and generating a 33 per cent compounded annual return over 22 years, which makes Vermilion one of the top-performing companies in our sector. These strong returns, coupled with our longevity, leave a legacy of financial performance that is recognized and appreciated by our staff, our shareholders and the broader investment community. Aside from this, what makes me really proud is the strong corporate culture we have created at Vermilion. This is an organization that cares about its people and gives back to the community, that strives for excellence, but knows how to have some fun along the way. It’s an organization with a good corporate soul. All of these accomplishments are a result of strong team efforts and are a positive reflection of the dedication and commitment of all of our bright and capable people.
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