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Press release from CNW Group

Vermilion Energy Inc. Announces Second Quarter Results for the Three and Six Months Ended June 30, 2012

Thursday, August 02, 2012

Vermilion Energy Inc. Announces Second Quarter Results for the Three and Six Months Ended June 30, 201207:00 EDT Thursday, August 02, 2012CALGARY, Aug. 2, 2012 /CNW/ - Vermilion Energy Inc. ("Vermilion" or the "Company") (TSX - VET) is pleased to report interim operating and unaudited financial results for the three and six months ended June 30, 2012.HIGHLIGHTSRecorded average production of 39,168 boe/d during the second quarter of 2012, compared to 39,265 boe/d in the first quarter of 2012 and 35,219 boe/d in the second quarter of 2011.  While production was essentially flat as compared with the previous quarter, it increased more than 11% as compared to the second quarter of 2011.The significant year over year growth in production is due mainly to higher volumes attributable to Vermilion's Canadian-based Cardium development program and additional production associated with Vermilion's acquisition of certain working interests in France in January 2012. With its continued focus on predominately crude-based production growth, the Company has successfully grown its oil and liquids exposure to nearly 67% of consolidated production, most notably in Canada where oil and liquids now account for 57% of average production as compared to 42% in the second quarter of 2011. Combined with its Netherlands natural gas production, which is priced off a basket of primarily Brent-based heating and fuel oil products, Vermilion's production volumes are over 80% weighted to crude-based pricing.Generated fund flows from operations of $127.8 million ($1.30 per share) in the second quarter of 2012, as compared to $151.1 million ($1.56 per share) in the first quarter of 2012 and $119.3 million ($1.32 per share) in the second quarter of 2011. The decrease in fund flows from operations for the second quarter of 2012 as compared to the first quarter 2012 reflects a nearly 12% reduction in Vermilion's weighted average realized price resulting from the approximate 9% decrease in both the West Texas Intermediate and Dated Brent crude reference prices and a 12% decrease in Canadian natural gas reference prices over the quarter. In addition, a significant build in crude oil inventories in both Australia and France during second quarter of 2012 negatively impacted fund flows by an estimated $13.7 million ($0.14 per share). The inventory builds were due to the timing of vessel loadings and will be sold in subsequent quarters. Vermilion's attention to growing its high netback liquids and European natural gas focused operations continues to increase the Company's profitability. As a result, the Company was able to grow fund flows by 7% compared to the second quarter of 2011 despite a nearly 12% decrease in the Company's weighted average realized price.Vermilion continues to experience better than expected operational performance across all of its key operating regions providing the Company with significant flexibility in the management of its operations. As a result, given the current weakness in natural gas prices in Canada, the Company currently plans to temporarily shut-in approximately 6 mmcf/d (1,000 boe/d) of low profitability Canadian natural gas volumes during the second half of 2012, reducing Vermilion's exposure to North American natural gas to approximately 15% of consolidated production. The Company intends to bring this production back on-stream later in the year to meet certain lessee obligations and in anticipation of potentially higher seasonal pricing. Despite the planned shut-in of approximately 15% of the Company's Canadian natural gas production for most of the second half, Vermilion currently anticipates achieving average 2012 production volumes toward the middle or upper end of current guidance of between 37,000 and 38,000 boe/d, while further improving the profitability of the Company.Vermilion continues to benefit from its significant exposure to Brent-based crude oil and European natural gas production.  Vermilion's Brent-based crude volumes represent approximately 43% of consolidated production or 69% of total crude production and currently receive a premium, on average, to the quoted Dated Brent reference price. Given the challenged market for Canadian-based crude production year-to-date in 2012, the Company's exposure to Brent-based crude production has provided Vermilion with an average US$25 to US$40 per barrel advantage relative to the Company's Canadian-based peers. Vermilion's European natural gas pricing has also remained strong with its Netherlands natural gas production, representing approximately 15% of consolidated production, expected to receive pricing of between $9.50 and $10.00 per mcf in 2012. This compares to average AECO index pricing for Canadian-based natural gas production of $2.02 per mcf during the first half of 2012.As part of its focused New Growth initiative, the Company has invested a cumulative $84 million since early 2011 to acquire undeveloped lands in Canada with prospective exposure to emerging shale oil and liquids-rich gas resource opportunities.  Including a recent purchase of crown land subsequent to the second quarter of 2012, Vermilion has actively acquired a total of 408.5 net sections of undeveloped land in Canada to date.  As a result of these acquisitions, the Company now holds several large and contiguous land blocks with prospective exposure to emerging resource plays in Canada including 227 net sections on the Duvernay trend in the Greater Edson area.Continued to grow production in the Company's Cardium light oil play in Western Canada as the Company continues with the long-term development of its extensive and high-quality Cardium assets in the West Pembina field. Vermilion has increased Cardium related production from approximately 1,000 boe/d in 2010 to approximately 7,500 boe/d during the second quarter of 2012.Effective January 22, 2012, all open periods for appeal of the regulatory approvals related to construction of the onshore pipeline portion of Vermilion's Corrib offshore natural gas project in Ireland expired with no open appeals remaining outstanding. The tunnelling site has been handed over to the tunnel contractor who will prepare the site and install the tunnel boring machine, scheduled to arrive in the third quarter of 2012.  Tunneling operations are scheduled to commence during the fourth quarter of 2012.  First gas at Corrib is currently anticipated to occur in late 2014.Conference Call and Audio Webcast DetailsVermilion will discuss these results in a conference call to be held on Thursday, August 2, 2012 at 9:00 AM MST (11:00 AM EST).  To participate, you may call toll free 1-877-407-9205 (North America) or 1-201-689-8054 (International).  The conference call will also be available on replay by calling 1-877-660-6853 (North America) or 1-201-612-7415 (International) using account number 286 and conference ID number 395902.  The replay will be available until midnight eastern time on August 19, 2012.You may also listen to the audio webcast by clicking www.investorcalendar.com/IC/CEPage.asp?ID=168841 or visit Vermilion's website at www.vermilionenergy.com/ir/eventspresentations.cfm.ABBREVIATIONSbbl(s)  barrel(s)mbbls thousand barrelsbbls/d barrels per daymcf  thousand cubic feetmmcf  million cubic feetbcf  billion cubic feetmcf/d  thousand cubic feet per daymmcf/d million cubic feet per dayboe  barrel of oil equivalent of natural gas, natural gas liquids and crude oil on the basis of one boe for six mcf of natural gasmboe  thousand barrel of oil equivalentmmboe million barrel of oil equivalentboe/d  barrel of oil equivalent per dayNGLs  natural gas liquidsWTI  West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma for crude oil of standard gradeAECO  the daily average Alberta natural gas price as traded on the Natural Gas Exchange$M thousand dollars$MM million dollarsPRRT Petroleum Resource Rent Tax, a profit based tax levied on petroleum projects in AustraliaGAAP Canadian Generally Accepted Accounting Principles or, alternatively,IFRS IFRS International Financial Reporting Standards or, alternatively, GAAP   DISCLAIMERCertain statements included or incorporated by reference in this document may constitute forward looking statements under applicable securities legislation.  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 and rates of average annual production growth;exploration plans;development plans;acquisition and disposition plans and the timing thereof;operating and other expenses, including the payment of future dividends;royalty rates;the timing of regulatory proceedings and approvals;the timing of first commercial natural gas from the Corrib field; andestimate 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; andManagement'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.  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 and market demand;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, costs and expenses;potential delays or changes in plans with respect to exploration or development projects or capital expenditures;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;general economic and business conditions;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; andother 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.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.HIGHLIGHTS          ($M except as indicated)Three Months Ended   Six Months Ended June 30,March 31,June 30,   June 30,June 30,Financial 2012 2012 2011    2012 2011 Petroleum and natural gas sales246,544 310,488 278,297    557,032 508,037 Fund flows from operations 1127,775 151,122 119,299    278,897 221,084   Fund flows from operations ($/basic share) 1.30 1.56 1.32    2.87 2.47   Fund flows from operations ($/diluted share) 1.28 1.54 1.30    2.82 2.43 Net earnings37,816 65,094 81,429    102,910 108,622   Net earnings per share ($/basic share) 0.39 0.67 0.90    1.06 1.21 Capital expenditures94,888 94,360 85,334    189,248 203,748 Acquisitions, including acquired working capital deficiencies 1- 110,282 (190)   110,282 38,101 Asset retirement obligations settled2,581 766 9,612    3,347 11,243 Cash dividends ($/share)0.57 0.57 0.57    1.14 1.14 Dividends declared55,962 55,124 51,421    111,086 102,363   Less: Issuance of shares pursuant to the dividend reinvestment plan (18,781)(17,558)(14,084)   (36,339)(27,060)  Net dividends 1 37,181 37,566 37,337    74,747 75,303   % of fund flows from operations, gross 44%36%43%   40%46%  % of fund flows from operations, net 29%25%31%   27%34%Total net dividends, capital expenditures and asset retirement obligationssettled1134,650 132,692 132,283    267,342 290,294   % of fund flows from operations 105%88%111%   96%131%  % of fund flows from operations (excluding the Corrib project) 93%80%90%   86%114%Net debt 1524,610 530,031 434,549    524,610 434,549 OperationalProduction         Crude oil (bbls/d) 24,658 24,492 20,820    24,576 20,671   NGLs (bbls/d) 1,405 1,374 1,408    1,389 1,369   Natural gas (mcf/d) 78,629 80,393 77,952    79,512 76,131   Total (boe/d) 39,168 39,265 35,219    39,217 34,729 Production pricing         % priced with reference to WTI 23%23%15%   23%15%  % priced with reference to AECO 18%18%20%   18%21%  % priced with reference to Dated Brent 59%59%65%   59%64%Average selling price          Crude oil and NGLs ($/bbl) 100.07 113.99 115.04    103.17 106.04   Natural gas ($/mcf) 5.79 5.77 6.43    5.78 6.17 Netbacks ($/boe) 1          Operating netback 53.88 58.45 53.87    54.79 50.58   Fund flows netback 39.40 42.30 37.22    39.85 35.16   Operating expenses 12.41 13.31 12.71    12.54 12.50 Average reference prices         WTI (US $/bbl) 93.49 102.93 102.56    98.21 98.33   Dated Brent (US $/bbl) 108.19 118.49 117.36    113.34 111.16   AECO ($/mcf) 1.90 2.15 3.87    2.02 3.82 Average foreign exchange rates         CDN $/US $ 1.01 1.00 0.97    1.01 0.98   CDN $/Euro 1.30 1.31 1.39    1.30 1.37 Share information ('000s)Shares outstanding         Basic shares outstanding 98,330 96,838 90,322    98,330 90,322   Diluted shares outstanding 1 101,249 99,557 92,438    101,249 92,438 Weighted average shares outstanding         Basic shares outstanding 97,937 96,644 90,135    97,291 89,682   Diluted shares outstanding 99,923 98,191 91,514    99,000 90,902 1  The above table includes non-GAAP measures which may not be comparable to other companies.  Please see the "Non-GAAP Measures" section of Management's Discussion and Analysis.OPERATIONAL REVIEW AND OUTLOOKVermilion's solid performance during the second quarter of 2012 reflects the continued strength of the Company's international operations and the advantages of its global commodity exposure. The Company maintained stable production volumes of 39,168 boe/d in the second quarter of 2012  supported by strong operational performance across all of its key regions. Year over year, Vermilion's production has grown by more than 11%, attributable to continued growth in Canadian-based Cardium light oil production and the addition of approximately 2,200 boe/d in France related to the Company's acquisition of certain working interests in the Paris and Aquitaine basins in January 2012.Vermilion's global commodity exposure continues to set the Company apart from its peers with approximately 43% of year to date production comprised of Brent-based crude and a further 15% comprised of Netherlands natural gas which realized a price of $9.65 per mcf during the first six months of 2012. The Company's strong leverage to global commodity markets, through its diversified international operations, places Vermilion in a strong competitive position relative to its Canadian peers who are faced with significant exposure to soft North American natural gas prices and a continued discount for Canadian-based crude products relative to WTI, which is expected to remain at a significant discount to Brent-based crudes for the foreseeable future.During the second quarter of 2012, Canadian-based Edmonton Sweet crude differentials remained wide while Canadian natural gas prices at AECO softened a further 12% to approximately $1.90 per mcf.  Many of Vermilion's Canadian peers have been significantly impacted and, while Vermilion is not immune to these price effects, the Company's netbacks remain relatively robust as a result of its significant exposure to Brent crude related pricing for its production in France and Australia and the continued strength of natural gas pricing in the Netherlands, which averaged $9.55 per mcf during the second quarter. Whereas Canadian crudes indexed to Edmonton Sweet were priced at an approximate $10.00 per barrel discount to average WTI pricing of $93.49 per barrel, Vermilion continued to see strong relative pricing for its Brent crude which averaged $108.19 per barrel during the quarter, an approximate $25 per barrel advantage versus Edmonton Sweet indexed crudes.Vermilion continues to experience better than expected operational performance across all of its key operating regions providing the Company with significant flexibility in the management of its operations. As a result, with the release of its first quarter 2012 operating and financial results, Vermilion announced an increase to its 2012 planned capital expenditures to approximately $450 million, a 21% increase from its previous budget of $373 million announced in December 2011. The additional capital will target Cardium drilling and completions in the second half of 2012 and effectively increases Vermilion's planned 2012 drilling program to approximately 40 net Cardium wells.  As the majority of this incremental activity is scheduled to take place in the latter part of the year, it is not expected to materially impact anticipated 2012 consolidated production volumes. In addition, given the current weakness in natural gas prices in Canada, the Company plans to temporarily shut-in approximately 6 mmcf/d (1,000 boe/d) of low profitability Canadian natural gas volumes during the second half of 2012. The Company intends to bring this production back on-stream later in the year to meet certain lessee obligations and in anticipation of potentially higher seasonal pricing.  Despite the planned shut-in of approximately 15% of the Company's Canadian natural gas production for most of the second half, Vermilion currently anticipates achieving average 2012 production volumes toward the middle or upper end of current guidance of between 37,000 and 38,000 boe/d, while further improving profitability.The Company's Canadian development activities will continue to focus primarily on the full scale development of the Cardium light oil play.  Vermilion's well performance remains consistent and continues to outpace that of other operators in the West Pembina region. The Company has made significant strides in reducing average per well costs to between $3.5 and $3.7 million per well, and transportation costs continue to decrease as Vermilion ties-in and processes greater volumes through its newly constructed oil processing facility. At the end of the second quarter of 2012, Vermilion drilled or participated in approximately 91.3 net wells, 81.2 of which were on production. With an identified inventory at the beginning of 2012 of approximately 300 additional economic prospects in the West Pembina region, Vermilion has a drilling inventory that is expected to last at least six years at an expected drilling rate of 40 to 60 wells per year.  That inventory may grow as Vermilion achieves continuous improvement in costs and productivity in this resource play, and seeks to consolidate existing land positions within the West Pembina operating region. A further 120 prospects have been identified on Vermilion's legacy acreage; they are viewed as having marginal economics in the current environment but could be drilled in future years if technological improvements, costs or commodity prices change sufficiently to improve the economics of these prospects.Vermilion continues to benefit from strong volumes from three Australian offshore wells brought on production in the fall of 2010 and has identified additional infill drilling opportunities at Wandoo that should enable it to maintain production levels between 6,000 and 8,000 boe/d for the foreseeable future, dependent on the timing of future drilling programs. The Company is currently planning to initiate a two to three well drilling program in late 2012 with related production additions anticipated in early 2013. Wandoo continues to be a strong cash flow generator attracting pricing at a meaningful premium to the Dated Brent index for crude oil with no transportation costs as a result of production being inventoried and sold directly at the platform.In January 2012, Vermilion announced that it had closed the previously announced acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins in France. The assets are expected to average approximately 2,200 boe/d of production in 2012, weighted 86% to high quality Brent-based crude, and add an estimated 6.7 million boe1 of proved plus probable reserves (96% crude oil).  Vermilion paid approximately $106 million at closing of the acquisition reflecting a cost of approximately $48,200 per flowing boe and $15.80 per boe of proved plus probable reserves as evaluated by GLJ and effective December 31, 2011. The acquired assets consist of interests in the Itteville (79%), Vert Le Grand (90%), Vert Le Petit (100%), La Croix Blanche (100%) and Dommartin-Lettrée (56%) fields in the Paris Basin and the Vic Bilh (73%) field in the Aquitaine Basin. Vermilion previously held the remaining non-operated working interests in each of the Itteville, Vert Le Grand and Vic Bilh fields and now holds a 100% operated working interest in each of the acquired fields with the exception of the Dommartin-Lettrée field in the Paris Basin, in which the Company now holds a 56% non-operated interest. The acquisition was a natural addition to Vermilion's existing France asset base and is well aligned with the Company's strategic objective to maintain and consolidate its core operating areas and to increase its operating control where feasible. The acquired assets further strengthen Vermilion's position as the leading oil producer in France, and with a significant weighting toward high quality oil, are expected to provide robust netbacks in the current commodity price environment. Vermilion is in the preliminary stages of evaluating these new properties and believes it has identified numerous areas where it can reduce the current cost structure of these assets and increase production over time through optimized production operations, waterflood management and exploitation of infill development opportunities.During the second quarter, Vermilion drilled the first of two planned wells in the Netherlands for 2012.  The Vinkega-2 development well, located in the Gorredijk concession, is targeting the Rotliegend sandstone and is a follow-up drill to the Company's successful discovery well, Vinkega-1, drilled in 2009. The well was rig-released at the end of June following successful drilling operations which were completed on time and on budget. The Company has commenced testing operations and is currently awaiting final test results and analysis. Vermilion currently plans to commence drilling of a second Netherlands well during the third quarter of 2012. Additionally, production volumes from the 2009 De Hoeve-1 well were brought on production in May 2012, with ongoing planning and permitting activities for tie-in of production volumes from the 2011 drilling campaign in late 2012 or early 2013.  Looking forward, Vermilion intends to maintain a rolling inventory of projects such that each year will involve a combination of new wells and tie-in of prior successes.In Ireland, the Corrib partners have received all key approvals enabling preparation and construction of the tunnelling site for the onshore pipeline.  On January 22, 2012, the period for appeals of the regulatory permits expired with no appeals remaining outstanding, effectively bringing the regulatory approval phase of the project to a close. The Corrib partners have turned over the site to the tunnelling contractor who will prepare the site and install the tunnel boring machine, scheduled to arrive in August 2012, in advance of tunneling operations which are scheduled to commence during the fourth quarter of 2012.  First gas at Corrib is currently anticipated to occur in late 2014.Beginning in late 2010, the Company launched its New Growth Initiative forming two teams of senior technical professionals focused on the identification and capture of positions in Canada and Europe to provide the Company with exposure to new and emerging unconventional shale oil and natural gas development opportunities with the potential to deliver meaningful production and reserves growth over the next five to ten years and beyond. As a result of this initiative, the Company has invested a cumulative $84 million since late 2010 to acquire undeveloped lands in Canada with prospective exposure to one emerging shale oil and two liquids-rich gas resource opportunities.  Including a recent purchase of crown land subsequent to the second quarter of 2012, Vermilion has actively acquired a total of 408.5 net sections of undeveloped land in Canada with unconventional development opportunities.  As a result of these acquisitions, the Company now holds several large and contiguous land blocks with exposure to emerging resource plays in Canada including 227 net sections on the Duvernay trend in the Greater Edson area.  To date, Vermilion has re-entered an existing vertical wellbore on one of the blocks to test the Duvernay resource play and has completed one "mini" fracture operation to analyze the local rock mechanics in the zone of interest.  In the coming months, the Company intends to complete a full scale vertical fracture in the Duvernay zone to evaluate potential reservoir performance, hydrocarbon content and gather additional technical information about the play.  Over the next 12 to 24 months, the Company expects to complete more drilling and testing operations on the Duvernay and other acquired positions in addition to working toward the continued identification and capture of further opportunities in its key operating regions of Canada, Europe and Australia.Vermilion remains positioned to deliver strong operational and financial performance over the next several years.  The Company anticipates growing production by approximately 35% to 50,000 boe/d in 2015 through the continued development of its significant portfolio of organic growth opportunities.  Combined with an anticipated 50% growth in fund flows from operations over that same period, Vermilion remains confident of its ability to maintain a stable dividend for investors with the potential for dividend growth over time.  Near term development will continue to focus on high netback oil and European natural gas opportunities, including light oil production growth from the Cardium play in Western Canada and continued development of high netback natural gas prospects in the Netherlands.  In addition, with the regulatory process now complete, Vermilion and its partners are positioned to complete construction of the onshore pipeline, the final remaining phase of development for the Company's Corrib natural gas project in Ireland.  With five wells currently drilled, tested and ready for production and construction of related pipelines and facilities largely complete, the Corrib project is anticipated to deliver approximately 55 mmcf/d (9,000 boe/d) of net production to Vermilion when it comes on stream in late 2014 providing strong production and cash flow growth for the Company in 2015.  Beyond 2015, growth is anticipated to come from the development of new and emerging resource plays in Canada and Europe supported by relatively stable production in Australia, France and Ireland that is expected to deliver significant cash flows to enable the funding of these new growth opportunities.The Company's conservative fiscal management and limited use of equity to finance its growth objectives should ensure that future growth is realized on a per share basis for investors.  The management and directors of Vermilion continue to control approximately 8% of the outstanding shares and remain committed to delivering superior rewards to all stakeholders.  Further, the Company continues to be recognized for excellence in its business practices.  In the first quarter of 2012, Vermilion was recognized for the third consecutive year by the Great Place to Work® Institute in both Canada and France. Vermilion ranked as the 25th Best Workplace in Canada among more than 230 companies that participated in the study while Vermilion's France office ranked as the 24th Best Workplace in France.1 Estimated proved plus probable reserves attributable to the assets as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ") in a report dated October 14, 2011 with an effective date of December 31, 2011.MANAGEMENT'S DISCUSSION AND ANALYSIS  The following is Management's Discussion and Analysis ("MD&A"), dated August 1, 2012, 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, 2012 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, 2012 and the audited consolidated financial statements for the year ended December 31, 2011 and 2010, 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, 2012 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.  The most directly comparable GAAP measure is cash flows from operating activities."Fund flows from operations (excluding the Corrib project)" represents fund flows from operations excluding transportation expense related to the Corrib project.  Transportation expense related to the Corrib project pertains to a ship or pay agreement and, as there is a ceiling on the total payments due in relation to the associated pipeline, these expenses essentially represent a prepayment for future pipeline transportation services.Cash flows from operating activities as presented in Vermilion's consolidated statements of cash flows are reconciled to fund flows from operations as follows:   Three Months Ended % change  Six Months Ended % change   June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M)20122012 2011 Q1/12Q2/11  2012 2011  2011 Cash flows from operating activities123,485 124,887 61,930      248,372 188,547   Changes in non-cashoperating working capital1,709 25,469 47,757      27,178 21,294   Asset retirement obligations settled2,581 766 9,612      3,347 11,243   Fund flows from operations127,775 151,122 119,299  (15%)7%  278,897 221,084  26%Transportation expenserelated to the Corrib project1,974 2,001 2,270      3,975 4,468   Fund flows from operations(excluding the Corrib project)129,749 153,123 121,569  (15%)7%  282,872 225,552  25%"Acquisitions, including acquired working capital deficiencies" are the sum of "Property acquisitions" as presented in Vermilion'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 acquisition.Property acquisitions as presented in Vermilion's consolidated statements of cash flows are reconciled to acquisitions, including acquired working capital deficiencies as follows:   Three Months Ended % change  Six Months Ended % change   June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M)20122012 2011 Q1/12Q2/11  2012 2011  2011 Property acquisitions- 106,184 (190)     106,184 38,101   Acquired working capital deficiencies- 4,098 -      4,098 -   Acquisitions, including acquired             working capital deficiencies- 110,282 (190) (100%)100%  110,282 38,101  189%              "Net debt" is the sum of long-term debt and working capital as presented in Vermilion's consolidated balance sheets. Net debt is used by management to analyze the financial position and leverage of Vermilion. The most directly comparable GAAP measure is long-term debt.Long-term debt as presented in Vermilion's consolidated balance sheets is reconciled to net debt as follows: As At June 30,Dec 31,($M)2012 2011 Long-term debt452,267 373,436 Current liabilities397,483 491,184 Current assets(325,140)(435,659)Net debt524,610 428,961    "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. Dividends both before and after the dividend reinvestment plan 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 Vermilion is being used to fund dividends. Dividends declared are the most directly comparable GAAP measures to net dividends.Dividends declared as presented in Vermilion's consolidated statements of changes in shareholders' equity are reconciled to net dividends as follows:   Three Months Ended % change  Six Months Ended % change   June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M)201220122011  Q1/12Q2/11  2012 2011  2011 Dividends declared55,962 55,124 51,421      111,086 102,363   Issuance of shares pursuant to the             dividend reinvestment plan(18,781)(17,558)(14,084)     (36,339)(27,060)  Net dividends37,181 37,566 37,337  (1%)-   74,747 75,303  (1%)             "Total net dividends, capital expenditures and asset retirement obligations settled" are "net dividends" plus the following amounts from Vermilion's consolidated statements of cash flows:  "Drilling and development", "Exploration and evaluation", and "Asset retirement obligations settled.""Total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project)" are "total net dividends, capital expenditures and asset retirement obligations settled" excluding drilling and development and asset retirement obligations settled relating to the Corrib project.These measures are reviewed by management and are assessed as a percentage of fund flows from operations and fund flows from operations (excluding the Corrib project) to analyze the amount of cash that is generated by Vermilion that is available to repay debt and fund potential acquisitions.These non-GAAP measures are comprised of the following GAAP measures:   Three Months Ended % change  Six Months Ended % change   June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M)20122012 2011 Q1/12Q2/11  2012 2011  2011 Dividends declared55,962 55,124 51,421      111,086 102,363   Issuance of shares pursuant to thedividend reinvestment plan(18,781)(17,558)(14,084)     (36,339)(27,060)  Drilling and development77,956 87,896 75,584      165,852 192,417   Exploration and evaluation16,932 6,464 9,750      23,396 11,331   Asset retirement obligations settled2,581 766 9,612      3,347 11,243   Total net dividends, capital expendituresand asset retirement obligationssettled134,650 132,692 132,283  1%2%  267,342 290,294  (8%)Capital expenditures and asset retirementobligations settled relatedto the Corrib project(13,928)(9,482)(22,722)     (23,410)(32,705)  Total net dividends, capital expendituresand asset retirement obligationssettled (excluding the Corrib project)120,722 123,210 109,561  (2%)10%  243,932 257,589  (5%)             "Netbacks" are per barrel of oil equivalent and per mcf measures used in operational and capital allocation decisions."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.Shares outstanding is reconciled to diluted shares outstanding as follows: As At June 30,March 31,June 30,('000s of shares)2012 2012 2011 Shares outstanding98,330 96,838 90,322 Potential shares issuable pursuant to the equity based compensation plan2,919 2,719 2,116 Diluted shares outstanding101,249 99,557 92,438     OPERATIONAL ACTIVITIES  CanadaIn Canada, Vermilion participated in the drilling of 10 wells (6.7 net) during the second quarter of 2012.  These wells included six (5.1 net) operated  Cardium horizontal wells and one (0.2 net) non-operated Cardium wells. At the end of the second quarter of 2012, 73 operated (63.9 net) Cardium wells were on production and 53 (17.3 net) non-operated wells were on production. Drilling and completion activities were lower than in the first quarter of 2012 as a result of some activities being deferred until the summer months following spring break-up.FranceIn France, Vermilion continued with an active workover and recompletion program in addition to initiating optimization activities following the assumption of operatorship of the recently acquired working interests in the Paris and Aquitaine basins. Vermilion continues to work toward full integration of the acquired assets and the identification of further future optimization and infill drilling opportunities.NetherlandsIn the Netherlands, second quarter of 2012 operating activities were focused on drilling the Vinkega-2 development well in the Gorredijk concession.  The well targeted the Rotliegend sandstone and is a follow-up drill to Vermilion's successful discovery well, Vinkega-1, drilled in 2009. The well was rig released at the end of June following successful drilling operations which were completed on time and on budget. Vermilion has commenced testing operations and is currently awaiting final test results and analysis. Vermilion also completed construction of facilities to enable production from the fourth and final well of the 2009 drilling campaign, De Hoeve-1, and successfully brought on production at De Hoeve in May of 2012. Additional operating activities were focused on ongoing facility maintenance, site construction for the remainder of the 2012 drilling program and planning and permitting activities in preparation for a 2013 drilling campaign. Vermilion currently plans to commence drilling of a second Netherlands well during the third quarter of 2012. Vermilion also continues to evaluate the results of the 2011 drilling program, including facilities, infrastructure and permitting requirements associated with related production additions currently anticipated in 2013.AustraliaVermilion continued preparations and permitting in anticipation of initiating a two to three well drilling campaign in late 2012.  Due to the anticipated late timing of the 2012 drilling campaign, production from the wells is not currently expected to occur until early 2013.PRODUCTION   Three Months Ended % change     Six Months Ended % change      June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.   2012 2012 2011  Q1/12Q2/11  2012 2011  2011 Canada             Crude oil & NGLs (bbls/d)9,078 8,876 5,209  2%74%  8,977 5,148  74% Natural gas (mmcf/d)41.32 41.83 43.30  (1%)(5%)  41.58 43.30  (4%) Total (boe/d)15,965 15,848 12,426  1%28%  15,906 12,366  29% % of consolidated40%40%35%     41%36%  France             Crude oil (bbls/d)9,931 10,270 8,273  (3%)20%  10,101 8,341  21% Natural gas (mmcf/d)3.57 3.48 0.88  3%306%  3.53 0.95  272% Total (boe/d)10,526 10,850 8,419  (3%)25%  10,689 8,500  26% % of consolidated27%28%24%     27%24%  Netherlands             NGLs (bbls/d)84 72 54  17%56%  78 50  56% Natural gas (mmcf/d)33.74 35.08 33.77  (4%)-   34.41 31.88  8% Total (boe/d)5,707 5,919 5,682  (4%)-   5,813 5,362  8% % of consolidated15%15%16%     15%16%  Australia             Crude oil (bbls/d)6,970 6,648 8,692  5%(20%)  6,809 8,501  (20%) % of consolidated18%17%25%     17%24%  Consolidated             Crude oil & NGLs (bbls/d)26,063 25,866 22,228  1%17%  25,965 22,040  18% % of consolidated67%66%63%     66%63%   Natural gas (mmcf/d)78.63 80.39 77.95  (2%)1%  79.51 76.13  4% % of consolidated33%34%37%     34%37%   Total (boe/d)39,168 39,265 35,219  - 11%  39,217 34,729  13%Average total production in Canada of 15,965 boe/d during the second quarter of 2012 was essentially flat with production of 15,848 boe/d in the first quarter of 2012 and 28% higher than second quarter of 2011 production of 12,426 boe/d.  The year over year increase in Vermilion's Canadian production was mainly attributable to Cardium volumes, which more than doubled over the period, partially offset by a purposeful decline in Vermilion's conventional Canadian natural gas production. Production results to date continue to illustrate the low risk, dependable nature of planned production additions associated with Vermilion's Cardium related drilling and completions program. At the end of the second quarter of 2012, Vermilion's high netback oil and liquids production represented approximately 57% of total Canadian production as compared to 42% at the end of the second quarter of 2011.Production in France averaged 10,526 boe/d in the second quarter of 2012, a modest 3% decline from the first quarter of 2012 production of 10,850 boe/d.  The decrease was attributable to natural production declines that were partially offset by minor optimization activities during the quarter.  On a year over year basis production has grown by more than 25%. The significant increase is largely attributable to incremental production volumes associated with Vermilion's acquisition of certain working interests in the Paris and Aquitaine basins in January 2012. Following the acquisition, Vermilion's France production remains predominantly weighted toward Brent crude at approximately 94%.Average production volumes of 5,707 boe/d in the Netherlands during the second quarter of 2012 were relatively flat as compared to first quarter of 2012 production of 5,919 boe/d and 5,682 boe/d during the second quarter of 2011. Incremental production from the Rotliegend zone of the Vinkega-1 discovery well, brought on production in December 2011, and from De Hoeve-1, on production in May 2012, have largely offset natural production declines in the Netherlands and the termination of production from the Vlieland zone of the Vinkega-1 well in late 2011.Australia production averaged 6,970 boe/d during the second quarter of 2012, compared to 6,648 boe/d in the first quarter of 2012 and 8,692 boe/d in the second quarter of 2011. The increase in production as compared to the first quarter of 2012 reflects the absence of downtime associated with  cyclone related shut downs during the first quarter of 2012. Production volumes during the second quarter of 2011 reflected the strong, flush performance of three wells drilled and brought on production in November 2010. Vermilion expects to sustain annual average production at between 6,000 boe/d and 8,000 boe/d over the next few years with two-to-three well drilling campaigns conducted approximately every other year.  The next planned drilling campaign is scheduled for late 2012.FINANCIAL REVIEWDuring the three months ended June 30, 2012, Vermilion generated fund flows from operations of $127.8 million compared to $151.1 million for the three months ended March 31, 2012 and $119.3 million for the three months ended June 30, 2011.  The decrease in fund flows from operations for the second quarter of 2012 as compared to the first quarter of 2012 was primarily the result of lower commodity prices combined with a build of inventory in France and Australia. The increase in fund flows from operations for the second quarter of 2012 compared to the same period in the prior year was the result of lower current taxes and a reduction in realized losses on Vermilion's commodity hedging contracts.  The reduction in current taxes was the result of generally lower commodity prices and higher capital spending during the second quarter in Australia, which reduced PRRT.  The GAAP measure cash flows from operating activities was relatively consistent quarter over quarter despite the decrease in fund flows from operations, due in part to the collection of accounts receivable related to the draw of inventory in Australia at the end of the previous quarter.During the six months ended June 30, 2012, Vermilion generated fund flows from operations of $278.9 million compared to $221.1 million in 2011.  The year over year increase in fund flows from operations resulted primarily from higher oil production in Canada and France in addition to lower PRRT in Australia.  The GAAP measure cash flows from operating activities increased year over year as a result of the increase in fund flows from operations and reduced asset retirement obligations settled.Vermilion's net debt was $524.6 million at June 30, 2012 (December 31, 2011 - $429.0 million) representing approximately 0.9 times annualized fund flows from operations.  The increase in net debt was the result of a $106.1 million acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins in France. Long-term debt increased to $452.3 million at June 30, 2012 (December 31, 2011 - $373.4 million) as a result of current year to date capital expenditures, including the continued development of the Cardium resource play and the acquisitions of additional undeveloped acreage in Canada, as well as the aforementioned acquisition in France.For the six months ended June 30, 2012, 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 were 86% (June 30, 2011 - 114%).  The year over year decreases in this ratio relates primarily to improved fund flows from operations and lower capital expenditures.COMMODITY PRICES Three Months Ended % change  Six Months Ended % change June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs. 20122012 2011 Q1/12Q2/11  2012 2011  2011 Average reference prices            WTI (US $/bbl)93.49 102.93 102.56  (9%)(9%)  98.21 98.33  0%Edmonton Sweet index (US $/bbl)83.29 92.44 106.91  (10%)(22%)  87.86 98.16  (10%)Dated Brent (US $/bbl)108.19 118.49 117.36  (9%)(8%)  113.34 111.16  2%AECO ($/mcf)1.90 2.15 3.87  (12%)(51%)  2.02 3.82  (47%)Netherlands oil-linked gas price ($/mcf)9.94 10.18 9.14  (2%)9%  10.06 8.68  16%Netherlands oil-linked gas price (€/mcf)7.67 7.75 6.94  (1%)11%  7.71 6.34  22%Average realized prices ($/boe)            Canada51.58 55.84 54.04  (8%)(5%)  53.70 51.66  4%France104.15 104.84 107.90  (1%)(3%)  106.56 104.35  2%Netherlands57.88 59.08 56.91  (2%)2%  58.49 54.19  8%Australia129.94 156.43 132.87  (17%)(2%)  119.16 116.52  2%Consolidated76.04 86.90 86.83  (12%)(12%)  79.57 80.82  (2%)Production mix (% of production)            % priced with reference to WTI23%23%15%     23%15%  % priced with reference to AECO18%18%20%     18%21%  % priced with reference to Dated Brent59%59%65%     59%64%               Reference pricesDuring the three months ended June 30, 2012, the average WTI reference price decreased by 9%, the average Edmonton Sweet index decreased by 10% and the average Dated Brent reference price decreased by 9% as compared to the three months ended March 31, 2012.Overall, crude oil prices were generally lower during the second quarter of 2012 as compared to the first quarter of 2012.  This was a result of the combined effects of forecasted weaker global demand, easing concerns over geopolitical supply risks, and continued strength in global production.  WTI and the Edmonton Sweet index continued to trade at a significant discount to Dated Brent due to increased production in North America and the subsequent pipeline capacity constraints in the U.S. Midwest.The AECO average reference price declined 12% from the first quarter of 2012 to the second quarter of 2012 due in part to the excess supply of natural gas in North America and continued high levels of inventory.The Netherlands realized gas price remained relatively consistent quarter over quarter.Realized pricingThe 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 differentials to product specific 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.The price of Vermilion's natural gas in the Netherlands is based on pricing established by GasTerra, a statutory entity which purchases all natural gas produced by Vermilion in the Netherlands. The oil-linked gas price in the Netherlands is calculated using a trailing average of Dated Brent and the gas prices from European trading hubs.Average realized prices in Vermilion's international 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 impacted by the production mix of crude oil, NGLs and natural gas. The quarter over quarter decrease in average realized prices in Canada was due to a decline in oil prices together with the increased spread between WTI and the Edmonton Sweet index price and a lower AECO reference price for natural gas.On a consolidated basis, for the three months ended June 30, 2012, crude oil and NGL production represented approximately 67% of total production (three months ended June 30, 2011 - 63%).  Production priced with reference to crude oil (WTI and Dated Brent) represented approximately 82% of total production for the three months ended June 30, 2012 (three months ended June 30, 2011, 80%).CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS Three Months Ended  Six Months EndedBy categoryJune 30,March 31,June 30,  June 30,June 30,($M)201220122011  20122011Land31,7136,66712,210  38,38015,205Seismic1,3277992,108  2,1263,873Drilling and completion28,30954,85827,884  83,16790,967Production equipment and facilities26,71824,75532,405  51,47376,156Recompletions1,4032,6455,725  4,04810,991Other5,4184,6365,002  10,0546,556Capital expenditures94,88894,36085,334  189,248203,748Property acquisitions-106,184(190)  106,18438,101Total capital expenditures and acquisitions94,888200,54485,144  295,432241,849         Three Months Ended  Six Months EndedBy classificationJune 30,March 31,June 30,  June 30,June 30,($M)201220122011  20122011Drilling and development77,95687,89675,584  165,852192,417Exploration and evaluation16,9326,4649,750  23,39611,331Capital expenditures94,88894,36085,334  189,248203,748Property acquisitions-106,184(190)  106,18438,101Total capital expenditures and acquisitions94,888200,54485,144  295,432241,849         Three Months Ended  Six Months EndedBy countryJune 30,March 31,June 30,  June 30,June 30,($M)201220122011  20122011Canada55,45671,98240,985  127,438161,313France10,281111,84217,635  122,12336,065Netherlands5,3792,5705,598  7,94911,136Australia9,8674,5444,473  14,4116,899Ireland13,9059,60616,453  23,51126,436        Capital expenditures for the three months ended June 30, 2012 were higher relative to both the three months ended March 31, 2012 and June 30, 2011 while capital expenditures for the six months ended June 30, 2012 were lower relative to the same period in 2011.The slight increase in capital expenditures for the second quarter as compared to the first quarter of 2012 was primarily the result of the increased land purchases that were almost entirely offset by lower expenditures for drilling and completion activity, both primarily in Canada.The increase in capital expenditures for the three months ended June 30, 2012 as compared to the same period in 2011 was primarily the result of increased land purchases in Canada.The increase in property acquisitions in 2012 was primarily due to the January 2012 acquisition of certain working interests in six producing fields located in the Paris and Aquitaine basins in France.  Vermilion paid $106.1 million upon closing of the acquisition.PETROLEUM AND NATURAL GAS SALES Three Months Ended % change  Six Months Ended % changeBy productJune 30,March 31,June 30, Q2/12 vs. Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe and per mcf)201220122011 Q1/12Q2/11  2012 2011  2011Crude oil & NGLs205,126268,291 232,677  (24%)(12%)  473,417 423,045  12%Per boe100.07113.99 115.04  (12%)(13%)  103.17 106.04  (3%)Natural gas41,418 42,197 45,620  (2%)(9%)  83,615 84,992  (2%)Per mcf5.79 5.77 6.43  - (10%)  5.78 6.17  (6%)Petroleum and natural gas sales246,544 310,488 278,297  (21%)(11%)  557,032 508,037  10%Per boe76.04 86.90 86.83  (12%)(12%)  79.57 80.82  (2%)              Three Months Ended % change  Six Months Ended % changeBy countryJune 30,March 31,June 30, Q2/12 vs. Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011Canada74,932 80,526 61,110  (7%)23%  155,458 115,609  34%Per boe51.58 55.84 54.04  (8%)(5%)  53.70 51.66  4%France94,828 103,511 82,664  (8%)15%  198,339 160,538  24%Per boe104.15 104.84 107.90  (1%)(3%)  106.56 104.35  2%Netherlands30,062 31,820 29,426  (6%)2%  61,882 52,591  18%Per boe57.88 59.08 56.91  (2%)2%  58.49 54.19  8%Australia46,722 94,631 105,097  (51%)(56%)  141,353 179,299  (21%)Per boe129.94 156.43 132.87  (17%)(2%)  119.16 116.52  2%             Vermilion's consolidated petroleum and natural gas sales for the three months ended June 30, 2012 decreased relative to the three months ended March 31, 2012 by $63.9 million. This decrease was the result of overall lower commodity prices, partially offset by higher crude oil and NGL sales volumes in Canada.Consolidated petroleum and natural gas sales for the three months ended June 30, 2012 were lower than the comparable period in 2011 by $31.8 million. This decrease was the result of lower Dated Brent, Edmonton Sweet index, WTI and AECO pricing, offset slightly by increases in the Netherlands oil-linked gas price. The impact of lower pricing was partially offset by higher crude oil and NGL sales volumes in Canada and France.Consolidated petroleum and natural gas sales for the six months ended June 30, 2012 were higher than the comparable period in 2011 by $49.0 million. The increase was primarily attributable to higher crude oil and NGL sales volumes in Canada and France and higher natural gas sales volumes in the Netherlands. This increase was partially offset by lower Edmonton Sweet index oil prices and AECO gas prices.CRUDE OIL INVENTORYVermilion carries an inventory of crude oil in France and Australia, which is a result of timing differences between production and sales. Crude oil inventories increased in the second quarter of 2012 versus the first quarter of 2012 due to an increase in both France's and Australia's inventory of  47,380 bbls and  274,670 bbls, respectively.The following table summarizes the changes in Vermilion's crude oil inventory positions: Three Months Ended  Six Months Ended June 30,March 31,June 30,  June 30,June 30,(bbls)2012 2012 2011   2012 2011 France        Opening crude oil inventory223,421 186,955 167,438   186,955 158,229  Crude oil production903,750 934,544 752,813   1,838,294 1,509,786  Crude oil sales(856,370)(898,078)(705,119)  (1,754,448)(1,452,883) Closing crude oil inventory270,801 223,421 215,132   270,801 215,132 Australia        Opening crude oil inventory208 221,898 226,183   221,898 172,199  Crude oil production634,245 604,934 790,968   1,239,179 1,538,766  Crude oil sales(359,575)(826,624)(954,754)  (1,186,199)(1,648,568) Closing crude oil inventory274,878 208 62,397   274,878 62,397 DERIVATIVE INSTRUMENTS  Three Months Ended % change  Six Months Ended % change June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011 Realized loss on derivativeinstruments3,591 5,718 10,437  (37%)(66%)  9,309 14,392  (35%)Per boe1.11 1.60 3.26  (31%)(66%)  1.33 2.29  (42%)The impact of Vermilion's derivative based risk management activities decreased the fund flows netback for the three and six months ended June 30, 2012 by $1.11 and $1.33 per boe, respectively.  This compares to a decrease of $3.26 and $2.29 per boe for the same periods in 2011.  The lower cost of risk management activities in the three and six months ended June 30, 2012 was associated with weaker crude oil prices relative to the ceiling on certain collars pertaining to 2012.The nature of Vermilion's operations results in exposure to fluctuations in commodity prices, interest rates and foreign currency exchange rates.  Vermilion monitors and, when appropriate, uses derivative financial instruments to manage its exposure to these fluctuations.  All transactions of this nature entered into by Vermilion are related to an underlying financial position or to future petroleum and natural gas production. Vermilion does not use derivative financial instruments for speculative purposes.  Vermilion has elected not to designate any of its price risk management activities as accounting hedges and thus accounts for changes in fair value in net earnings at each reporting period.  During the normal course of business, Vermilion may enter into fixed price arrangements to sell a portion of its production or purchase commodities for operational use.  Vermilion does not apply fair value accounting on these contracts as they were entered into and continue to be held for the sale of production or operational use in accordance with the Company's expected requirements.  Vermilion does not obtain collateral or other security to support its financial derivatives as management reviews the creditworthiness of its counterparties prior to entering into derivative contracts.The following table summarizes Vermilion's outstanding financial derivative positions as at June 30, 2012:    Risk ManagementFunded Cost (US $/bbl)bbls/dStrike Price(s) US $/bblCollar - WTI   January 2012 to December 20121.00 25082.00 - 119.45July 2012 to September 20121.00 50082.00 - 125.75July 2012 to September 20121.00 25082.00 - 128.50July 2012 to September 20121.00 50085.00 - 145.75July 2012 to December 20121.00 50078.00 - 104.15July 2012 to December 20121.00 50082.00 -   99.35July 2012 to December 20121.00 50082.00 - 115.10October 2012 - December 20120.50 50085.00 - 138.25Collar - DATED BRENT   January 2012 to December 20121.00 1,00082.00 - 113.40January 2012 to December 20121.00 50082.00 - 115.50January 2012 to December 20121.00 50082.00 - 130.75July 2012 to September 20121.00 50097.00 - 126.50July 2012 to September 20121.00 25092.00 - 127.80July 2012 to December 20121.00 1,00082.00 - 126.05July 2012 to December 20121.00 1,00082.00 - 126.55October 2012 - December 20121.00 50092.00 - 134.25October 2012 - December 20121.00 50097.00 - 132.20Put - DATED BRENT   January 2012 to December 20124.46 60083.00 January 2012 to December 20124.90 60083.00 January 2012 to December 20124.49 60083.00 January 2012 to December 20124.39 60083.00 January 2012 to December 20123.65 50083.00     An up to date listing of Vermilion's outstanding financial derivative positions is available on Vermilion's website at www.vermilionenergy.com/ir/hedging.cfm.ROYALTIES Three Months Ended % change  Six Months Ended % changeBy productJune 30,March 31,June 30, Q2/12 vs. Q2/12 vs.   June 30,June 30, 2012 vs. ($M except per boe and per mcf)201220122011 Q1/12Q2/11  2012 2011  2011Crude oil & NGLs13,242 14,241 12,298  (7%)8%  27,483 24,037  14%Per boe6.46 6.05 6.08  7%6%  5.99 6.03  (1%)Natural gas89 211 242  (58%)(63%)  300 1,710  (82%)Per mcf0.01 0.03 0.03  (67%)(67%)  0.02 0.12  (83%)Royalties13,331 14,452 12,540  (8%)6%  27,783 25,747  8%Per boe4.11 4.04 3.91  2%5%  3.97 4.10  (3%)% of petroleum and natural gas sales5.4%4.7%4.5%     5.0%5.1%                Three Months Ended % change  Six Months Ended % changeBy countryJune 30,March 31,June 30, Q2/12 vs. Q2/12 vs.   June 30,June 30, 2012 vs. ($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011Canada8,216 8,969 7,778  (8%)6%  17,185 16,453  4%Per boe5.66 6.22 6.88  (9%)(18%)  5.94 7.35  (19%)% of petroleum and natural gas sales11.0%11.1%12.7%     11.1%14.2%  France5,115 5,483 4,762  (7%)7%  10,598 9,294  14%Per boe5.62 5.55 6.22  1%(10%)  5.69 6.04  (6%)% of petroleum and natural gas sales5.4%5.3%5.8%     5.3%5.8%               Consolidated royalties per boe for the three and six months ended June 30, 2012 were $4.11 and $3.97, respectively, as compared to $3.91 and $4.10 for the same periods in the prior year. Consolidated royalties per boe for the first quarter of 2012 were $4.04. As a percentage of sales, royalties for the three and six months ended June 30, 2012 were 5.4% and 5.0%, respectively, as compared to 4.5% and 5.1% for the comparative periods in the prior year.In Canada, royalties as a percentage of sales for the three months ended June 30, 2012 was 11.0% as compared to 12.7% for the comparative period of the prior year and 11.1% for the prior quarter. Low natural gas pricing in 2012 has resulted in minimal natural gas royalties. Crude oil and NGL royalties as a percentage of sales decreased for the current quarter to 12.3% from 16.7% for the second quarter of 2011 due to lower royalty rates levied on initial production volumes from Vermilion's horizontal Cardium wells. As Vermilion's production mix has continued to shift towards these types of wells, the Company's crude oil and NGL royalty expense as a percentage of sales has declined. Crude oil and NGL royalties as a percentage of sales remained consistent with the first quarter of 2012.In France, the primary portion of the royalties levied is based on units of production and therefore is not subject to changes in commodity prices. France royalties as a percentage of sales for the second quarter of 2012 was relatively consistent at 5.4% as compared to 5.8% for the same quarter in the previous year and 5.3% for the first quarter of 2012.Production in the Netherlands and Australia is not subject to royalties.OPERATING EXPENSE Three Months Ended % change  Six Months Ended % changeBy productJune 30,March 31,June 30, Q2/12 vs. Q2/12 vs.   June 30,June 30, 2012 vs. ($M except per boe and per mcf)201220122011 Q1/12Q2/11  2012 2011  2011Crude oil & NGLs28,645 36,866 30,633  (22%)(6%)  65,511 58,009  13%Per boe13.97 15.66 15.14  (11%)(8%)  14.28 14.54  (2%)Natural gas11,580 10,687 10,102  8%15%  22,267 20,574  8%Per mcf1.62 1.46 1.42  11%14%  1.54 1.49  3%Operating40,225 47,553 40,735  (15%)(1%)  87,778 78,583  12%Per boe12.41 13.31 12.71  (7%)(2%)  12.54 12.50  0%              Three Months Ended % change  Six Months Ended % changeBy countryJune 30,March 31,June 30, Q2/12 vs. Q2/12 vs.   June 30,June 30, 2012 vs. ($M except per boe)201220122011 Q1/12Q2/11  2012 2011 2011Canada13,217 14,267 13,448  (7%)(2%)  27,484 26,030  6%Per boe9.10 9.89 11.89  (8%)(23%)  9.49 11.63  (18%)France13,755 15,102 11,536  (9%)19%  28,857 21,260  36%Per boe15.11 15.30 15.06  (1%)-   15.50 13.82  12%Netherlands5,457 4,109 3,954  33%38%  9,566 8,355  14%Per boe10.51 7.63 7.65  38%37%  9.04 8.61  5%Australia7,796 14,075 11,797  (45%)(34%)  21,871 22,938  (5%)Per boe21.68 23.27 14.91  (7%)45%  18.44 14.91  24%             Consolidated operating expense was $40.2 million or $12.41 per boe for the three months ended June 30, 2012 as compared to $47.6 million or $13.31 per boe for the first quarter of 2012. Consolidated operating expense for the second quarter of 2011 was $40.7 million or $12.71 per boe. For the six months ended June 30, 2012 consolidated operating expense was $87.8 million or $12.54 per boe as compared to $78.6 million or $12.50 per boe for the same period in the prior year.In Canada, second quarter operating expense of $13.2 million was lower than the $14.3 million for the first quarter of 2012 and consistent with the $13.4 million for the second quarter of 2011. The decrease quarter over quarter resulted from lower facility maintenance costs. On a year to date basis, Canadian operating expense increased to $27.5 million for the six months ended June 30, 2012 from $26.0 million for the same period in the prior year due to higher volumes. On a per boe basis, quarter over quarter operating expenses decreased due to the lower costs and slightly increased volumes. Operating costs per boe for the three months ended June 30, 2012, as compared to the same period in the prior year, decreased by $2.79 as a result of higher Canadian volumes driven by the Cardium program. Similarly, for the year to date period ended June 30, 2012, operating costs per boe decreased by $2.14 despite slightly higher costs due to significantly higher Canadian volumes.In France, second quarter operating expense of $13.8 million was lower than the first quarter expense of $15.1 million due to the timing of downhole intervention work. Despite slightly lower volumes, lower expenditures resulted in decreased costs on a per boe basis quarter over quarter. France operating expense for the second quarter of 2012 was higher than the same period in the prior year due to the incremental operating costs associated with a January 2012 acquisition of producing assets. For the same reason, operating costs for the six months ended June 30, 2012 were higher than the costs for the same period of the prior year. Despite the incremental expenses associated with the 2012 acquisition, operating expense remained consistent on a per boe basis for the three month period ended June 30, 2012 as compared to the same period in the prior year due to higher volumes. For the six month period ended June 30, 2012 operating costs per boe increased as additional spending more than offset the favourable impact of higher volumes.In the Netherlands, operating expense for the three and six months ended June 30, 2012 of $5.5 million and $9.6 million, respectively, was higher than the expense of $4.0 million and $8.4 million for the comparative periods of the prior year. Operating expense for the first quarter of 2012 was $4.1 million.  The increase in expense for the current periods is associated with a scheduled $1.3 million maintenance program at the Harlingen natural gas treatment centre that occurred during the second quarter of 2012.In Australia, second quarter operating expense decreased to $7.8 million from the previous quarter's expense of $14.1 million due to an increase in crude oil inventory associated with shipment timing. An increase in crude oil inventory results in the cost of production being carried temporarily on the balance sheet until the product is sold. Operating costs were further reduced quarter over quarter as the platform ran on diesel for less days during the second quarter as compared to the first quarter. Increased volumes quarter over quarter associated with reduced downtime further contributed to the quarter over quarter decrease in operating expense per boe.  For the three and six month periods ended June 30, 2012 operating expense per boe was higher than in the same periods of the prior year due to increased labour costs coupled with a decrease in volumes.TRANSPORTATION EXPENSE Three Months Ended % change  Six Months Ended % changeBy countryJune 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011 Canada2,350 2,044 1,471  15%60%  4,394 2,986  47%Per boe1.62 1.42 1.30  14%25%  1.52 1.33  14%France1,894 2,648 2,225  (28%)(15%)  4,542 4,596  (1%)Per boe2.08 2.68 2.90  (22%)(28%)  2.44 2.99  (18%)Ireland1,974 2,001 2,270  (1%)(13%)  3,975 4,468  (11%)Transportation6,218 6,693 5,966  (7%)4%  12,911 12,050  7%Per boe1.92 1.87 1.86  3%3%  1.84 1.92  (4%)             Consolidated transportation expense for the three months ended June 30, 2012 was lower than the three months ended March 31, 2012.  This decrease was the result of a reduced number of Aquitaine shipments in France, due to the usage of higher volume cargo vessels. This decrease was offset partially by higher transportation costs in Canada, due to higher volumes and increased trucking costs as a result of pipeline downtime.Consolidated transportation expense for the three and six months ended June 30, 2012 was higher than for the same period in the prior year. This increase was primarily the result of higher expenditures in Canada as a result of higher production volumes.Transportation expense for Ireland pertains to the amount due under a ship or pay agreement related to the Corrib project. However, as there is a ceiling on the total payments due in relation to the associated pipeline, these expenses essentially represent a prepayment for future pipeline transportation services.OTHER EXPENSE  Three Months Ended % change  Six Months Ended % change June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011 Other expense585 7,983 804  (93%)(27%)  8,568 1,156  641%Per boe0.18 2.24 0.25  (92%)(28%)  1.22 0.18  578%             For the six months ended June 30, 2012, other expense was comprised primarily of $8.5 million relating to transfer taxes paid to regulatory authorities in France pursuant to the acquisition, in the first quarter of 2012, of certain working interests in six producing fields located in the Paris and Aquitaine basins in France.GENERAL AND ADMINISTRATION EXPENSE  Three Months Ended % change  Six Months Ended % change June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011 General and administration12,068 10,148 11,348  19%6%  22,216 23,455  (5%)Per boe3.72 2.84 3.54  31%5%  3.17 3.73  (15%)             General and administration expense of $12.1 million for the second quarter of 2012 was higher than the expense of $11.3 million for the second quarter of 2011 and $10.1 million for the prior quarter largely due to increased levels of staffing. For the six months ended June 30, 2012, general and administration expense decreased to $22.2 million from $23.5 million in the prior year due to more employee costs being allocated to specific capital and operating expense projects.EQUITY BASED COMPENSATION EXPENSE  Three Months Ended % change  Six Months Ended % change June 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011 Equity based compensation9,861 10,055 6,682  (2%)48%  19,916 14,908  34%Per boe3.04 2.81 2.08  8%46%  2.84 2.37  20%             Equity based compensation expense relates to non-cash compensation expense attributable to long-term incentives granted to directors, officers and employees under the Vermilion Incentive Plan ("VIP"). The expense is recognized over the vesting period of the award based on the grant date fair value of awards, adjusted for the ultimate number of awards that actually vest as determined by the Company's achievement of a number of performance conditions.Equity based compensation expense for the three months ended June 30, 2012 was lower than the preceeding quarter due to an overall decrease in outstanding awards. The expense for the six months ended June 30, 2012 was higher than the expense for the same period in 2011 as the 2012 expense reflected the revision of performance condition assumptions in the fourth quarter of 2011.INTEREST EXPENSE  Three Months Ended % change  Six Months Ended % change($M except per boe)June 30,2012March 31,2012June 30,2011 Q2/12 vs.Q1/12Q2/12 vs.Q2/11  June 30,2012 June 30,2011 2012 vs.2011Interest expense6,600 6,101 6,569  8%-   12,701 11,943  6%Per boe2.04 1.71 2.05  19%-   1.81 1.90  (5%)           Interest expense increased during the three months ended June 30, 2012 as compared to the three months ended March 31, 2012, primarily due to increased borrowings under Vermilion's revolving credit facility as a result of continued capital expenditures for the Cardium resource play and the afformentioned France acquisition. Interest expense increased during the six months ended June 30, 2012 as compared to same period in the prior year primarily due to the 6.5% senior unsecured notes, issued in February of 2011, being outstanding for all of 2012.DEPLETION AND DEPRECIATION, ACCRETION, IMPAIRMENTS AND GAIN ON ACQUISITION  Three Months Ended % change  Six Months Ended % change($M except per boe)June 30, 2012March 31,2012June 30,2011 Q2/12 vs.Q1/12Q2/12 vs. Q2/11  June 30,2012June 30, 2011 2012 vs.2011Depletion and depreciation76,512 75,848 59,583  1%28%  152,360 111,297  37%Per boe23.60 21.23 18.59  11%27%  21.76 17.71  23%Accretion5,792 5,238 4,403  11%32%  11,030 10,718  3%Per boe1.79 1.47 1.37  22%31%  1.58 1.71  (8%)Impairments- 65,800 -  (100%)-   65,800 -  100%Per boe- 18.42 -  (100%)-   9.40 -  100%Gain on acquisition- (45,309)-  100%-   (45,309)-  (100%)Per boe- (12.68)-  100%-   (6.47)-  (100%)             Depletion and depreciation expense on a per boe basis for the three and six months ended June 30, 2012 increased as compared to the same period in 2011. The higher expenses are primarily due to the result of higher finding, development and acquisition costs incurred, which resulted from increased liquids development in Canada, and the acquisition of six producing fields in France in 2012.Accretion expense on a per boe basis has increased in the three months ended June 30, 2012 as compared to both the three months ended March 31, 2012 and June 30, 2011. The higher accretion expense was due to an increase in asset retirement obligations resulting from additional obligations recognized on newly drilled and acquired wells and a decrease in the discount rates used to calculate asset retirement obligations in the jurisdictions in which Vermilion operates.The impairment losses in the six months ended June 30, 2012 relate to impairment losses recorded on Vermilion's conventional deep gas and shallow coal bed methane natural gas plays. These impairment charges were the result of significant declines in the forward pricing assumptions for natural gas in Canada.Gain on acquisition in the six months ended June 30, 2012 relates to Vermilion's acquisition of certain working interests in the Paris and Aquitaine basins in France. The gain arose as a result of the increase in the fair value of the acquired petroleum and natural gas reserves from the time when the acquisition was negotiated to the acquisition date. The increase resulted from a change in the underlying commodity price forecasts used to determine the fair value of the acquired reserves.TAXES  Three Months Ended % change  Six Months Ended % changeBy classificationJune 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011 Current taxes before PRRT29,225 32,364 35,668  (10%)(18%)  61,589 61,974  (1%)Per boe9.01 9.06 11.13  (1%)(19%)  8.80 9.86  (11%)PRRT8,460 27,269 35,960  (69%)(76%)  35,729 59,253  (40%)Per boe2.61 7.63 11.22  (66%)(77%)  5.10 9.43  (46%)Current taxes37,685 59,633 71,628  (37%)(47%)  97,318 121,227  (20%)Per boe11.62 16.69 22.35  (30%)(48%)  13.90 19.29  (28%)              Three Months Ended % change  Six Months Ended % changeBy countryJune 30,March 31,June 30, Q2/12 vs.Q2/12 vs.  June 30,June 30, 2012 vs.($M except per boe)201220122011 Q1/12Q2/11  2012 2011  2011 Canada845 442 495  91%71%  1,287 824  56%Per boe0.58 0.31 0.44  87%32%  0.44 0.37  19%France15,725 12,895 18,548  22%(15%)  28,620 34,530  (17%)Per boe17.27 13.06 24.21  32%(29%)  15.38 22.44  (31%)Netherlands5,875 9,057 6,390  (35%)(8%)  14,932 9,147  63%Per boe11.31 16.82 12.36  (33%)(8%)  14.11 9.42  50%Australia15,240 37,239 46,195  (59%)(67%)  52,479 76,726  (32%)Per boe42.38 61.56 58.40  (31%)(27%)  44.24 49.87  (11%)             Vermilion pays current taxes in France, the Netherlands and Australia. Corporate income taxes in France and the Netherlands apply to taxable income after eligible deductions at a rate of approximately 34% and 45%, respectively.In Australia, current taxes include both corporate income taxes and PRRT. Corporate income taxes are applied at a rate of approximately 30% on taxable income after eligible deductions, which include PRRT. PRRT is a profit based tax applied at a rate of 40% on revenues less eligible expenditures, which includes operating expenses and capital expenditures.Current taxes before PRRT for the three and six months ended June 30, 2012 were lower as compared to the same period in the prior year. These year over year decreases are attributable to lower taxable income associated with generally weaker commodity prices.PRRT decreased in the three months ended June 30, 2012 as compared to both the three months ended March 31, 2012 and June 30, 2011. These decreases were primarily the result of lower crude oil prices in the second quarter of 2012 as compared to both the first quarter of 2012 and the second quarter of 2011. PRRT as a percentage of operating income for the Australia segment for the six months ended June 30, 2012 was 30% as compared to 40% for the six months ended June 30, 2011. This decrease was primarily the result of higher capital expenditures in the current year versus the prior year.As a function of the impact of Vermilion's Canadian tax pools, the Company does not presently pay current taxes in Canada. The Canadian segment includes holding companies that pay current taxes in foreign jurisdictions.FOREIGN EXCHANGE  Three Months Ended  Six Months Ended June 30,March 31,June 30,  June 30,June 30,($M except per boe)201220122011  2012 2011 Unrealized foreign exchange loss (gain)16,730 (5,247)(2,108)  11,483 (15,212)Per boe5.16 (1.47)(0.66)  1.64 (2.42)Realized foreign exchange (gain) loss(755)820 (262)  65 (442)Per boe(0.23)0.23 (0.08)  0.01 (0.07)Foreign exchange loss (gain)15,975 (4,427)(2,370)  11,548 (15,654)Per boe4.93 (1.24)(0.74)  1.65 (2.49)Foreign exchange gains and losses are comprised of both unrealized and realized gains and losses. Unrealized foreign exchange gains and losses are the result of translating monetary assets and liabilities held in non-functional currencies to the respective functional currencies of Vermilion and its subsidiaries. Realized gains and losses are the result of foreign exchange fluctuations on transactions conducted in non-functional currencies.As a result of Vermilion's international operations, Vermilion conducts business in currencies other than the Canadian dollar and has monetary assets and liabilities (including cash, receivables, payables, derivative assets and liabilities, and intercompany loans) denominated in such currencies.  Vermilion's exposure to foreign currencies include the U.S. Dollar, the Euro and the Australian Dollar.In the three months ended June 30, 2012, the unrealized foreign exchange loss primarily resulted from the impact of the appreciation of the Canadian dollar against the Euro and the resultant impact on Euro denominated loans made by Vermilion to its subsidiaries and the impact of the depreciation of the Canadian dollar against the U.S. Dollar on the U.S. Dollar denominated amount due pursuant to the Corrib acquisition.Changes quarter over quarter and year over year in realized foreign exchange gains and losses are the result of changes in the volumes of transactions and daily fluctuations in foreign currencies.NET EARNINGSFor the three and six months ended June 30, 2012, Vermilion had net earnings of $37.8 million or $0.39 per share and $102.9 million or $1.06, respectively (three and six months ended June 30, 2011, net earnings of $81.4 million or $0.90 per share and $108.6 million or $1.21 per share, respectively).The decrease in net earnings for the three months ended June 30, 2012 as compared to the same period in the prior year was the result of lower commodity prices, higher depletion and depreciation and foreign exchange losses. These unfavorable variances were partially offset by lower current taxes and higher sold volumes in Canada and France.The decrease in net earnings for the second quarter of 2012 as compared to the first quarter of 2012 was the result of lower commodity prices, foreign exchange losses and the absence of a gain on asset acquisition in France, which occurred in the first quarter of 2012. The decrease was partially offset by mark to market gains recorded on Vermilion's commodity hedging program in the second quarter of 2012 and the absence of impairment charges recorded in the first quarter of 2012.Net earnings for the six months ended June 30, 2012 were consistent with the same period in the prior year.SUMMARY OF RESULTS    Three Months Ended   Jun 30,Mar 31,Dec 31,Sept 30,Jun 30,Mar 31,Dec 31,Sept 30,($M except per share)2012 2012 2011 2011 2011 2011 2010 2010 Petroleum and natural gas sales246,544 310,488 275,172 248,361 278,297 229,740 216,426 172,253 Net earnings (loss)37,816 65,094 (30,243)64,442 81,429 27,193 (21,809)24,576 Net earnings (loss) per share         Basic0.39 0.67 (0.32)0.71 0.90 0.30 (0.25)0.29  Diluted0.38 0.66 (0.32)0.70 0.89 0.30 (0.25)0.29           The fluctuations in Vermilion's petroleum and natural gas sales and net earnings (loss) from quarter to quarter are primarily caused by variations in sales volumes, petroleum and natural gas prices and the impact of royalties and tax legislation in the jurisdictions in which Vermilion operates.  In addition, petroleum and natural gas prices may impact gains and losses on derivative instruments and may result in impairment charges or the reversal of impairment charges incurred in previous periods.LIQUIDITY AND CAPITAL RESOURCESVermilion's net debt as at June 30, 2012 was $524.6 million compared to $429.0 million as at December 31, 2011.Long-term debt was comprised of the following balances as at June 30, 2012 and December 31, 2011: As At June 30,Dec 31,($M)2012 2011 Revolving credit facility230,473 152,086 Senior unsecured notes221,794 221,350 Total long-term debt452,267 373,436 Revolving Credit Facility At June 30, 2012, Vermilion had in place a bank revolving credit facility totalling $950 million, of which approximately $230.5 million is drawn.  The facility, which matures in May 2015, is fully revolving up to the date of maturity.  The amount available to Vermilion under this facility is reduced by outstanding letters of credit associated with Vermilion's operations totalling $7.4 million as at June 30, 2012 (December 31, 2011 - $3.7 million).As at June 30, 2012, Vermilion was in compliance with its financial covenants.Senior Unsecured Notes On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par.  The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016.  As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date.  Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date.  The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.ASSET RETIREMENT OBLIGATIONSAs at June 30, 2012, Vermilion's asset retirement obligations were $359.0 million compared to $310.5 million as at December 31, 2011.The increase in asset retirement obligations is largely attributable to accretion, an overall decrease in the discount rates applied to the obligations, additions from wells drilled in 2012 and liabilities acquired pursuant to the acquisition in France during the first quarter of 2012.DIVIDENDS Three Months Ended  Six Months EndedYear Ended June 30,  June 30,Dec 31,($M)2012   2012 2011 Cash flows from operating activities123,485   248,372 447,092 Net earnings37,816   102,910 142,821 Dividends declared55,962   111,086 207,846 Excess of cash flows from operating activities over dividends declared67,523   137,286 239,246 (Shortfall) of net earnings over dividends declared(18,146)  (8,176)(65,025)      Vermilion maintained monthly dividends at $0.19 per share and declared dividends totalling $111.1 million for the six months ended June 30, 2012.Excess cash flows from operating activities over dividends declared are used to fund capital expenditures, asset retirement obligations and debt repayments.Vermilion's policy with respect to dividends is to be conservative and retain a low ratio of dividends to fund flows from operations.  During low price commodity cycles, Vermilion will initially maintain dividends and allow the ratio to rise. Should low commodity price cycles remain for an extended period of time, Vermilion will evaluate the necessity to change the level of dividends, taking into consideration capital development requirements, debt levels and acquisition opportunities.Since Vermilion's conversion to a trust in January 2003, the distribution remained at $0.17 per unit per month until it was increased to $0.19 per unit per month in December 2007. Effective September 1, 2010, Vermilion converted to a dividend paying corporation and dividends have remained at $0.19 per share per month.Over the next three years, the Corrib, Cardium and other exploration and development activities will require a significant capital investment by Vermilion.  Although Vermilion currently expects to be able to maintain its current dividend, Vermilion's fund flows from operations may not be sufficient during this period to fund cash dividends, capital expenditures and asset retirement obligations.  Vermilion will evaluate its ability to finance any shortfalls with debt, an issuance of equity or by reducing some or all categories of expenditures to ensure that total expenditures do not exceed available funds.SHAREHOLDERS' EQUITYDuring the six months ended June 30, 2012, Vermilion issued 1,899,914 shares pursuant to the dividend reinvestment plan and Vermilion's equity based compensation programs.  Shareholders' capital increased by $77.4 million as a result of the issuance of those shares.As at June 30, 2012, there were 98,330,049 shares outstanding.  As at August 1, 2012, there were 98,455,923 shares outstanding.CORRIB PROJECTVermilion holds an 18.5% non-operating interest in the offshore Corrib gas field located off the northwest coast of Ireland.  Production from Corrib is expected to increase Vermilion's volumes by approximately 55 mmcf/d (9,000 boe/d) once the field reaches peak production.  Vermilion acquired its 18.5% working interest in the project on July 30, 2009.  The project comprises seven offshore wells, both offshore and onshore pipeline segments as well as a significant natural gas processing facility.  At the time of the acquisition most of the key components of the project, with the exception of the onshore pipeline, were either complete or in the latter stages of development.  Vermilion's interest was acquired for cash consideration of $136.8 million with subsequent capital expenditures to June 30, 2012 of $267.3 million, primarily related to completion of the natural gas processing facility, sub-surface well work, and permitting and preparations for construction of the onshore pipeline.  Furthermore, pursuant to the terms of the acquisition agreement, Vermilion will make an additional payment to the vendor of US$135 million at the end of 2012.  In 2011, approvals and permissions were granted for the onshore gas pipeline and construction has commenced with tunnelling expected to begin in the fourth quarter of 2012.  Vermilion expects to continue significant capital investment on this project over the next two years and currently expects to achieve initial gas production from this field in late 2014.RISK MANAGEMENTVermilion is exposed to various market and operational risks.For a detailed discussion of these risks, please see Vermilion's Annual Report for the year ended December 31, 2011, which is available on SEDAR at www.sedar.com or on the Company's website at www.vermilionenergy.com.CRITICAL ACCOUNTING ESTIMATES Vermilion's financial and operating results contain estimates made by management in the following areas:i.     Capital expenditures are based on estimates of projects in various stages of completion;ii.     Revenues, royalties, operating expenses, and current taxes include accruals based on estimates of management;iii.     Fair value of derivative instruments are based on estimates that are subject to the fluctuation of commodity prices and foreign exchange rates;iv.     Depletion, depreciation and accretion are based on estimates of oil and gas reserves that Vermilion expects to recover in the future;v.     Asset retirement obligations are based on estimates of future costs and the timing of expenditures;vi.     The future recoverable value of capital assets and exploration and evaluation assets are based on estimates that Vermilion expects to realize; andvii.     Equity based compensation expense is determined using accepted fair value approaches which rely on historical data and certain estimates made by management.OFF BALANCE SHEET ARRANGEMENTS Vermilion has certain lease agreements that are entered into in the normal course of operations.  All leases are operating leases and accordingly no asset or liability value has been assigned in the balance sheet as of June 30, 2012.Vermilion has not entered into any guarantee or off balance sheet arrangements that would materially impact Vermilion's financial position or results of operations.INTERNAL CONTROL OVER FINANCIAL REPORTINGThere was no change in Vermilion's internal control over financial reporting that occurred during the period covered by this MD&A that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTEDUnless otherwise noted, as of January 1, 2013, Vermilion will be required to adopt the following standards and amendments as issued by the IASB.  The adoption of the following standards is not expected to have a material impact on Vermilion's consolidated financial statements:IFRS 9 "Financial Instruments"As of January 1, 2015, Vermilion will be required to adopt IFRS 9, as part of the first phase of the IASB's project to replace IAS 39, "Financial Instruments: Recognition and Measurement". The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value.IFRS 10 "Consolidated Financial Statements"IFRS 10 replaces Standing Interpretations Committee 12, "Consolidation - Special Purpose Entities" and the consolidation requirements of IAS 27 "Consolidated and Separate Financial Statements".  The new standard replaces the existing risk and rewards based approaches and establishes control as the determining factor when determining whether an interest in another entity should be included in the consolidated financial statements.IFRS 12 "Disclosure of Interests in Other Entities"IFRS 12 provides comprehensive disclosure requirements on interests in other entities, including joint arrangements, associates, and special purpose vehicles.  The new disclosures require information that will assist financial statement users in evaluating the nature, risks and financial effects of an entity's interest in subsidiaries and joint arrangements.Vermilion is currently assessing the impact of the adoption of the following standards on the consolidated financial statements:IFRS 11 "Joint Arrangements"IFRS 11 replaces IAS 31 "Interests in Joint Ventures".  The new standard focuses on the rights and obligations of an arrangement, rather than its legal form.  The standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to be equity accounted.IFRS 13 "Fair Value Measurement"IFRS 13 provides a common definition of fair value within IFRS.  The new standard provides measurement and disclosure guidance and applies when another IFRS requires or permits an item to be measured at fair value, with limited exceptions.NETBACKSThe following table includes segmented financial statement information on a per unit basis.  Natural gas sales volumes have been converted on a basis of six thousand cubic feet of natural gas to one barrel of oil equivalent. Three Months Ended June 30, 2012 Six Months Ended June 30, 2012  Three Months Ended June 30, 2011 Six Months Ended June 30, 2011 Oil & NGLsNatural GasTotal Oil & NGLsNatural GasTotal  Total Total $/bbl$/mcf$/boe $/bbl$/mcf$/boe  $/boe $/boeCanada            Price81.03 2.13 51.58  85.25 2.14 53.70   54.04  51.66 Realized hedging loss(0.51)- (0.29) (0.65)- (0.37)  (0.63) (0.46)Royalties(9.94)- (5.66) (10.43)(0.02)(5.94)  (6.88) (7.35)Transportation(2.13)(0.16)(1.62) (1.94)(0.16)(1.52)  (1.30) (1.33)Operating(9.22)(1.49)(9.10) (9.82)(1.51)(9.49)  (11.89) (11.63)Operating netback59.23 0.48 34.91  62.41 0.45 36.38   33.34  30.89 France            Price105.96 12.60 104.15  109.07 10.88 106.56   107.90  104.35 Realized hedging loss(3.50)- (3.30) (4.51)- (4.25)  (6.03) (3.99)Royalties(5.87)(0.26)(5.62) (5.95)(0.24)(5.69)  (6.22) (6.04)Transportation(2.21)- (2.08) (2.59)- (2.44)  (2.90) (2.99)Operating(15.45)(1.61)(15.11) (15.73)(1.97)(15.50)  (15.06) (13.82)Operating netback78.93 10.73 78.04  80.29 8.67 78.68   77.69  77.51 Netherlands            Price94.74 9.55 57.88  100.95 9.65 58.49   56.91  54.19 Operating- (1.78)(10.51) - (1.53)(9.04)  (7.65) (8.61)Operating netback94.74 7.77 47.37  100.95 8.12 49.45   49.26  45.58 Australia            Price129.94 - 129.94  119.16 - 119.16   132.87  116.52 Realized hedging loss(0.47)- (0.47) (0.28)- (0.28)  (6.46) (4.70)Operating(21.68)- (21.68) (18.44)- (18.44)  (14.91) (14.91)PRRT 1(23.53)- (23.53) (30.12)- (30.12)  (45.46) (38.51)Operating netback84.26 - 84.26  70.32 - 70.32   66.04  58.40 Total Company            Price100.07 5.79 76.04  103.17 5.78 79.57   86.83  80.82 Realized hedging loss(1.75)- (1.11) (2.03)- (1.33)  (3.26) (2.29)Royalties(6.46)(0.01)(4.11) (5.99)(0.02)(3.97)  (3.91) (4.10)Transportation(1.78)(0.36)(1.92) (1.68)(0.36)(1.84)  (1.86) (1.92)Operating(13.97)(1.62)(12.41) (14.28)(1.54)(12.54)  (12.71) (12.50)PRRT 1(4.13)- (2.61) (7.79)- (5.10)  (11.22) (9.43)Operating netback71.98 3.80 53.88  71.40 3.86 54.79   53.87  50.58 General and administration  (3.72)   (3.17)  (3.54) (3.73)Interest expense  (2.04)   (1.81)  (2.05) (1.90)Realized foreign exchange gain (loss)0.23    (0.01)  0.08  0.07 Other income (expense)0.06    (1.15)  (0.01) - Current income taxes 1  (9.01)   (8.80)  (11.13) (9.86)Fund flows netback  39.40    39.85   37.22  35.16 Accretion  (1.79)   (1.58)  (1.37) (1.71)Depletion and depreciation  (23.60)   (21.76)  (18.59) (17.71)Impairments  -    (9.40)  -  - Gain on acquisition  -    6.47   -  - Deferred taxes  (0.09)   4.02   1.56  4.92 Unrealized other expense(0.24)   (0.07)  (0.24) (0.18)Unrealized foreign exchange (loss) gain(5.16)   (1.64)  0.66  2.42 Unrealized gain (loss) on derivative instruments6.17    1.67   8.25  (3.26)Equity based compensation  (3.04)   (2.84)  (2.08) (2.37)Earnings netback  11.65    14.72   25.41  17.27 1 Vermilion considers Australian PRRT to be an operating item and accordingly has included PRRT in the calculation of operating netbacks.  Current income taxes presented above excludes PRRT.CONSOLIDATED BALANCE SHEETS (THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)  June 30,December 31, Note 2012  2011 ASSETS     Current     Cash and cash equivalents  157,473  234,507 Accounts receivable  136,307  176,820 Crude oil inventory  19,293  13,885 Derivative instruments  1,706  186 Prepaid expenses  10,361  10,261    325,140  435,659       Deferred taxes  190,484  175,545 Exploration and evaluation assets4 113,351  92,301 Capital assets3 2,187,158  2,031,682    2,816,133  2,735,187       LIABILITIES     Current     Accounts payable and accrued liabilities  214,122  297,756 Dividends payable7 18,683  18,322 Derivative instruments  2,179  11,568 Income taxes payable  30,014  36,407 Amount due pursuant to acquisition  132,485  127,131    397,483  491,184       Derivative instruments  -  767 Long-term debt6 452,267  373,436 Asset retirement obligations5 359,049  310,531 Deferred taxes  236,684  227,668    1,445,483  1,403,586       SHAREHOLDERS' EQUITY     Shareholders' capital7 1,445,592  1,368,145 Contributed surplus  42,392  56,468 Accumulated other comprehensive loss  (42,417) (33,387)Deficit  (74,917) (59,625)   1,370,650  1,331,601    2,816,133  2,735,187 CONSOLIDATED STATEMENTS OF NET EARNINGS AND COMPREHENSIVE INCOME (THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)   Three Months Ended Six Months Ended   June 30, June 30, June 30, June 30, Note 2012  2011  2012  2011 REVENUE         Petroleum and natural gas sales  246,544  278,297  557,032  508,037 Royalties  (13,331) (12,540) (27,783) (25,747)Petroleum and natural gas revenue  233,213  265,757  529,249  482,290           EXPENSES          Operating  40,225  40,735  87,778  78,583 Transportation  6,218  5,966  12,911  12,050 Equity based compensation8 9,861  6,682  19,916  14,908 (Gain) loss on derivative instruments  (16,424) (16,004) (2,367) 34,914 Interest expense  6,600  6,569  12,701  11,943 General and administration  12,068  11,348  22,216  23,455 Foreign exchange loss (gain)  15,975  (2,370) 11,548  (15,654)Other expense2 585  804  8,568  1,156 Accretion5 5,792  4,403  11,030  10,718 Depletion and depreciation3, 4 76,512  59,583  152,360  111,297 Impairments3 -  -  65,800  - Gain on acquisition2 -  -  (45,309) -    157,412  117,716  357,152  283,370 EARNINGS BEFORE INCOME TAXES  75,801  148,041  172,097  198,920           INCOME TAXES         Deferred  300  (5,016) (28,131) (30,929)Current  37,685  71,628  97,318  121,227    37,985  66,612  69,187  90,298           NET EARNINGS  37,816  81,429  102,910  108,622           OTHER COMPREHENSIVE (LOSS) INCOME         Currency translation adjustments  (16,411) 11,154  (9,030) 21,751 COMPREHENSIVE INCOME  21,405  92,583  93,880  130,373           NET EARNINGS PER SHARE         Basic      0.39  0.90  1.06  1.21 Diluted  0.38  0.89  1.04  1.19           WEIGHTED AVERAGE SHARES OUTSTANDING ('000s)         Basic  97,937  90,135  97,291  89,682 Diluted  99,923  91,514  99,000  90,902 CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)   Three Months Ended Six Months Ended   June 30, June 30, June 30, June 30, Note 2012  2011  2012  2011 OPERATING         Net earnings  37,816  81,429  102,910  108,622 Adjustments:          Accretion5 5,792  4,403  11,030  10,718  Depletion and depreciation3, 4 76,512  59,583  152,360  111,297  Impairments3 -  -  65,800  -  Gain on acquisition2 -  -  (45,309) -  Unrealized (gain) loss on derivative instruments  (20,015) (26,441) (11,676) 20,522  Equity based compensation8 9,861  6,682  19,916  14,908  Unrealized foreign exchange loss (gain)  16,730  (2,108) 11,483  (15,212) Unrealized other expense  779  767  514  1,158  Deferred taxes  300  (5,016) (28,131) (30,929)Asset retirement obligations settled5 (2,581) (9,612) (3,347) (11,243)Changes in non-cash operating working capital  (1,709) (47,757) (27,178) (21,294)Cash flows from operating activities  123,485  61,930  248,372  188,547           INVESTING         Drilling and development3 (77,956) (75,584) (165,852) (192,417)Exploration and evaluation4 (16,932) (9,750) (23,396) (11,331)Property acquisitions2, 3 -  190  (106,184) (38,101)Changes in non-cash investing working capital  (23,030) (42,721) (29,784) (13,401)Cash flows used in investing activities  (117,918) (127,865) (325,216) (255,250)          FINANCING         Increase (decrease) in long-term debt  76,774  (6,687) 76,774  65,906 Issuance of shares pursuant to the dividend reinvestment plan7 18,781  14,084  36,339  27,060 Cash dividends  (55,678) (51,333) (110,725) (102,112)Cash flows from (used in) financing activities  39,877  (43,936) 2,388  (9,146)Foreign exchange (loss) gain on cash held in foreign currencies  (2,608) 542  (2,578) 2,711           Net change in cash and cash equivalents  42,836  (109,329) (77,034) (73,138)Cash and cash equivalents, beginning of period  114,637  196,946  234,507  160,755 Cash and cash equivalents, end of period  157,473  87,617  157,473  87,617           Supplementary information for operating activities - cash payments          Interest paid  4,419  4,129  13,926  6,495  Income taxes paid  84,012  100,076  103,711  107,620 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)        Accumulated              Other Total  Shareholders'ContributedComprehensiveRetainedShareholders' NoteCapitalSurplus  LossEarningsEquityBalances as at January 1, 2011   1,025,77040,726(31,577)  10,983  1,045,902Net earnings   ---  108,622  108,622Currency translation adjustments   --21,751  -  21,751Equity based compensation expense   -14,122-  -  14,122Dividends declared   ---  (102,363)  (102,363)Issuance of shares pursuant to the                 dividend reinvestment plan7  27,060---  27,060Vesting of equity based awards7, 8  22,050(22,050)--  -Share-settled dividends                 on vested equity based awards7, 8  5,555--(5,555)  -Shares issued for bonus plan7  786---  786Balances as at June 30, 2011   1,081,22132,798(9,826)11,687  1,115,880                         Accumulated            Other Total  Shareholders'ContributedComprehensive Shareholders' NoteCapitalSurplus  Loss  DeficitEquityBalances as at January 1, 2012   1,368,14556,468  (33,387)  (59,625)  1,331,601Net earnings   --  -  102,910  102,910Currency translation adjustments   --  (9,030)  -  (9,030)Equity based compensation expense   -19,280  -  -  19,280Dividends declared7  --   -  (111,086)  (111,086)Issuance of shares pursuant to the                 dividend reinvestment plan7  36,339-  -  -  36,339Vesting of equity based awards7, 8  33,356(33,356)  -  -  -Share-settled dividends                 on vested equity based awards7, 8  7,116-   -   (7,116)  -Shares issued for bonus plan7  636-  -  -  636Balances as at June 30, 2012   1,445,59242,392  (42,417)  (74,917)  1,370,650DESCRIPTION OF EQUITY RESERVES Shareholders' capitalRepresents the recognized amount for common shares when issued, net of equity issuance costs and deferred taxes.Contributed surplusRepresents the recognized value of employee awards which are settled in shares. Once vested, the value of the awards is transferred to shareholders' capital.Accumulated other comprehensive lossRepresents the cumulative income and expenses which are not recorded immediately in net earnings and are accumulated until an event triggers recognition in net earnings. The current balance consists of currency translation adjustments resulting from translating financial statements of subsidiaries with a foreign functional currency to Canadian dollars at period end rates.Retained earnings (deficit) Represents consolidated net earnings less distributed earnings of Vermilion Energy Inc.NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)1. BASIS OF PRESENTATIONVermilion Energy Inc. (the "Company" or "Vermilion") is a corporation governed by the laws of the Province of Alberta and is actively engaged in the business of crude oil and natural gas exploration, development, acquisition and production.These condensed consolidated interim financial statements are in compliance with IAS 34, "Interim financial reporting" and have been prepared using the same accounting policies and methods of computation as Vermilion's consolidated financial statements for the year ended December 31, 2011.  Accounting pronouncements that have been issued but have not yet been adopted are discussed in Note 3 of Vermilion's consolidated financial statements for the year ended December 31, 2011. These condensed consolidated interim financial statements should be read in conjunction with Vermilion's consolidated financial statements for the year ended December 31, 2011, which are contained within Vermilion's Annual Report for the year ended December 31, 2011 and are available on SEDAR at www.sedar.com or on Vermilion's website at www.vermilionenergy.com.These condensed consolidated interim financial statements were approved and authorized for issuance by the Board of Directors of Vermilion on August 1, 2012.2. BUSINESS COMBINATIONOn January 19, 2012, Vermilion acquired, through its wholly owned subsidiaries, working interests in six producing fields located in the Paris and Aquitaine basins in France, for total consideration of $106.1 million before closing adjustments. The acquired working interests expanded Vermilion's existing interests and was a natural addition to the previous France asset base and is well aligned with Vermilion's strategic objective to maintain and consolidate the Company's core operating areas to own and operate 100% of its assets.The acquired assets include land, wells, facilities, and inventory located in the Company's core producing fields in France. The fair value of the acquired identifiable assets and liabilities assumed at the date of acquisition was $151.4 million. A gain of $45.3 million was recognized as a result of an increase in the fair value of the acquired petroleum and natural gas reserves from the time when the acquisition was negotiated to the acquisition date.  The increase resulted from a change in the underlying commodity price forecasts used to determine the fair value of the acquired reserves.The acquisition has been accounted for as a business combination with the fair value of the assets acquired and liabilities assumed at the date of acquisition summarized as follows:($M)ConsiderationCash paid to vendor 106,115 Total consideration 106,115    ($M)Allocation of ConsiderationPetroleum and natural gas assets 206,191 Asset retirement obligations assumed (27,518)Deferred tax liabilities (23,151)Acquired working capital deficiencies (4,098)Net assets acquired 151,424 Gain on acquisition (45,309)Net assets acquired, net of gain on acquisition 106,115    Transfer taxes associated with this acquisition totalling $8.5 million have been excluded from the consideration and have been recognized as an expense in the six months ended June 30, 2012, within "Other expense" in the consolidated statements of net earnings and comprehensive income.The results of operations from the assets acquired have been included in Vermilion's condensed consolidated interim financial statements beginning January 19, 2012, which contributed revenues of $49.2 million and operating income of $43.7 million for the six months ended June 30, 2012. Had the acquisition occurred on January 1, 2012, management estimates that consolidated revenues would have increased by an additional $6.6 million and consolidated operating income would have increased by $4.8 million for the six months ended June 30, 2012. In determining the pro-forma amounts, management has assumed that the fair value adjustments, determined provisionally, that arose at the date of acquisition would have been the same if the acquisition had occurred on January 1, 2012. It is impracticable to derive all amounts necessary to determine the increase to net earnings from the acquired working interests as operations were immediately merged with Vermilion's operations.3. CAPITAL ASSETSThe following table reconciles the change in Vermilion's capital assets: Petroleum and Furniture and Total($M)Natural Gas AssetsOffice Equipment Capital AssetsBalance at January 1, 2011 1,802,422  17,130  1,819,552 Additions 408,810  2,417  411,227 Property acquisitions 50,878  -  50,878 Borrowing costs capitalized 9,923  -  9,923 Changes in estimate for asset retirement obligations 45,267  -  45,267 Depletion and depreciation (228,562) (4,414) (232,976)Impairments (64,400) -  (64,400)Effect of movements in foreign exchange rates (7,727) (62) (7,789)Balance at December 31, 2011 2,016,611  15,071  2,031,682 Additions 263,790  2,138  265,928 Property acquisitions 106,184  -  106,184 Borrowing costs capitalized 5,028  -  5,028 Changes in estimate for asset retirement obligations 16,885  -  16,885 Depletion and depreciation (147,750) (2,841) (150,591)Impairments (65,800) -  (65,800)Effect of movements in foreign exchange rates (22,088) (70) (22,158)Balance at June 30, 2012 2,172,860  14,298  2,187,158        Vermilion has not identified indicators of impairment or impairment reversal for any CGU's for the three months ended June 30, 2012 and therefore has not performed impairment testing calculations.At March 31, 2012 and December 31, 2011, Vermilion performed assessments as to whether any cash generating units ("CGU") had indicators of impairment.  When indicators of impairment are identified, Vermilion assesses the recoverable amount of each CGU based on the estimated fair value less costs to sell as at the reporting date.  The estimated fair value takes into account the most recent commodity price forecasts, expected production and estimated costs of development. For the three months ended March 31, 2012, Vermilion recorded an impairment charge of $65.8 million related to conventional deep gas and shallow coal bed methane natural gas plays. The impairment charges were as a result of declines in the price forecasts for natural gas in Canada which decreased the expected cash flows from the CGU's.Benchmark prices used in the March 31, 2012 calculations of recoverable amounts were determined by multiplying the mix of oil, natural gas and NGLs inherent in the reserves of the conventional deep natural gas and shallow coal bed methane CGUs by the price forecasts for each year.  The blended price per barrel of oil equivalent (BOE) was:Canada   $/BOE2012    27.01 2013    33.46 2014    35.78 2015    38.23 2016    40.68 2017    43.13 2018    45.61 2019    46.53 2020    47.51 2021    48.44 Average increase thereafter   2.0%4. EXPLORATION AND EVALUATION ASSETS The following table reconciles the change in Vermilion's exploration and evaluation assets:($M)Exploration and Evaluation AssetsBalance at January 1, 2011 17,157 Additions 79,553 Depreciation (3,732)Effect of movements in foreign exchange rates (677)Balance at December 31, 2011 92,301 Additions 23,396 Depreciation (1,769)Effect of movements in foreign exchange rates (577)Balance at June 30, 2012 113,351 5. ASSET RETIREMENT OBLIGATIONS The following table reconciles the change in Vermilion's asset retirement obligations:($M)Asset Retirement ObligationsBalance at January 1, 2011    267,389 Additional obligations recognized    8,612 Changes in estimates for existing obligations    (4,364)Obligations settled    (23,071)Accretion    21,889 Changes in discount rates    41,019 Effect of movements in foreign exchange rates    (943)Balance at December 31, 2011    310,531 Additional obligations recognized    29,618 Obligations settled    (3,347)Accretion    11,030 Changes in discount rates    14,785 Effect of movements in foreign exchange rates    (3,568)Balance at June 30, 2012    359,049 6. LONG-TERM DEBT The following table summarizes Vermilion's outstanding long-term debt:      As At($M)June 30, 2012Dec 31, 2011Revolving credit facility 230,473  152,086 Senior unsecured notes 221,794  221,350 Total long-term debt 452,267  373,436 Revolving Credit Facility At June 30, 2012, Vermilion had in place a bank revolving credit facility totalling $950 million.  The facility, which matures in May 2015, is fully revolving up to the date of maturity.  The amount available to Vermilion under this facility is reduced by outstanding letters of credit associated with Vermilion's operations totalling $7.4 million as at June 30, 2012 (December 31, 2011 - $3.7 million).7. SHAREHOLDERS' CAPITALThe following tables reconcile the change in Vermilion's shareholders' capital:Shareholders' CapitalNumber of Shares Amount ($M)Balance as at January 1, 2011 88,998,242  1,025,770 Issuance of shares, net of deferred taxes 5,370,000  254,786 Issuance of shares pursuant to the dividend reinvestment plan 1,323,482  59,081 Vesting of equity based awards 608,073  22,139 Share-settled dividends on vested equity based awards 114,487  5,583 Shares issued for bonus plan 15,851  786 Balance as at December 31, 2011 96,430,135  1,368,145 Issuance of shares pursuant to the dividend reinvestment plan 830,020  36,339 Vesting of equity based awards 900,340  33,356 Share-settled dividends on vested equity based awards 156,387  7,116 Shares issued for bonus plan 13,167  636 Balance as at June 30, 2012 98,330,049  1,445,592      Dividends declared to shareholders for the six months ended June 30, 2012 were $111.1 million.Subsequent to the end of the period and prior to the condensed consolidated interim financial statements being authorized for issue on August 1, 2012, Vermilion declared dividends totalling $18.7 million or $0.19 per share.8. EQUITY BASED COMPENSATION PLANThe following table summarizes the number of awards outstanding under the Vermilion Incentive Plan ("VIP"):Number of Awards2012  2011 Opening balance1,750,055  1,683,776 Granted528,326  566,425 Vested(593,843) (434,150)Forfeited(86,348) (65,996)Closing balance1,598,190  1,750,055     The fair value of a VIP award is determined on the grant date at the closing price of Vermilion's common shares on the Toronto Stock Exchange, adjusted by the estimated performance factor that will ultimately be achieved. Dividends, which notionally accrue to the awards during the vesting period, are not included in the determination of grant date fair values. For the six months ended June 30, 2012, the awards granted had a weighted average fair value of $58.04 (2011 - $47.05).9. SEGMENTED INFORMATIONThe following amounts include transactions between segments, which are recorded at fair value at the date of recognition. Three Months Ended June 30, 2012($M)Canada France Netherlands Australia Ireland TotalDrilling and development38,476  10,281  5,427  9,867  13,905  77,956 Exploration and evaluation16,980  -  (48) -  -  16,932             Operating Income (Loss)            Oil and gas sales to external customers74,932  94,828  30,062  46,722  -  246,544 Royalties(8,216) (5,115) -  -  -  (13,331)Revenue from external customers66,716  89,713  30,062  46,722  -  233,213 Realized loss on derivative instruments(423) (3,000) -  (168) -  (3,591)Transportation expense(2,350) (1,894) -  -  (1,974) (6,218)Operating expense(13,217) (13,755) (5,457) (7,796) -  (40,225)Operating income (loss)50,726  71,064  24,605  38,758  (1,974) 183,179             Corporate income taxes845  15,725  5,875  6,780  -  29,225 PRRT-  -  -  8,460  -  8,460 Current income taxes845  15,725  5,875  15,240  -  37,685              Three Months Ended June 30, 2011($M)Canada France Netherlands Australia Ireland TotalDrilling and development33,415  15,645  5,598  4,473  16,453  75,584 Exploration and evaluation7,760  1,990  -  -  -  9,750             Operating Income (Loss)            Oil and gas sales to external customers61,110  82,664  29,426  105,097  -  278,297 Royalties(7,778) (4,762) -  -  -  (12,540)Revenue from external customers53,332  77,902  29,426  105,097  -  265,757 Realized loss on derivative instruments(710) (4,617) -  (5,110) -  (10,437)Transportation expense(1,471) (2,225) -  -  (2,270) (5,966)Operating expense(13,448) (11,536) (3,954) (11,797) -  (40,735)Operating income (loss)37,703  59,524  25,472  88,190  (2,270) 208,619             Corporate income taxes495  18,548  6,390  10,235  -  35,668 PRRT-  -  -  35,960  -  35,960 Current income taxes495  18,548  6,390  46,195  -  71,628    Six Months Ended June 30, 2012($M)CanadaFranceNetherlandsAustraliaIrelandTotalTotal assets1,170,481  701,189  142,612  285,474  516,377  2,816,133 Drilling and development104,022  16,008  7,900  14,411  23,511  165,852 Exploration and evaluation23,347  -  49  -  -  23,396               Operating Income (Loss)            Oil and gas sales to external customers155,458  198,339  61,882  141,353  -  557,032 Royalties(17,185) (10,598) -  -  -  (27,783)Revenue from external customers138,273  187,741  61,882  141,353  -  529,249 Realized loss on derivative instruments(1,061) (7,914) -  (334) -  (9,309)Transportation expense(4,394) (4,542) -  -  (3,975) (12,911)Operating expense(27,484) (28,857) (9,566) (21,871) -  (87,778)Operating income (loss)105,334  146,428  52,316  119,148  (3,975) 419,251             Corporate income taxes1,287  28,620  14,932  16,750  -  61,589 PRRT-  -  -  35,729  -  35,729 Current income taxes1,287  28,620  14,932  52,479  -  97,318                Six Months Ended June 30, 2011($M)CanadaFranceNetherlandsAustraliaIrelandTotalTotal assets1,041,809  550,407  126,524  262,188  474,245  2,455,173 Drilling and development115,452  32,494  11,136  6,899  26,436  192,417 Exploration and evaluation7,760  3,571  -  -  -  11,331             Operating Income (Loss)            Oil and gas sales to external customers115,609  160,538  52,591  179,299  -  508,037 Royalties(16,453) (9,294) -  -  -  (25,747)Revenue from external customers99,156  151,244  52,591  179,299  -  482,290 Realized loss on derivative instruments(1,021) (6,145) -  (7,226) -  (14,392)Transportation expense(2,986) (4,596) -  -  (4,468) (12,050)Operating expense(26,030) (21,260) (8,355) (22,938) -  (78,583)Operating income (loss)69,119  119,243  44,236  149,135  (4,468) 377,265             Corporate income taxes824  34,530  9,147  17,473  -  61,974 PRRT-  -  -  59,253  -  59,253 Current income taxes824  34,530  9,147  76,726  -  121,227 Reconciliation of operating income to net earnings               Three Months Ended Six Months Ended($M)June 30, 2012June 30, 2011 June 30, 2012June 30, 2011Operating income183,179 208,619  419,251 377,265Equity based compensation  (9,861)(6,682) (19,916)(14,908)Unrealized gain (loss) on derivative instruments20,015 26,441  11,676 (20,522)Interest expense(6,600)(6,569) (12,701)(11,943)General and administration(12,068)(11,348) (22,216)(23,455)Foreign exchange (loss) gain(15,975)2,370  (11,548)15,654Other expense(585)(804) (8,568)(1,156)Accretion(5,792)(4,403) (11,030)(10,718)Depletion and depreciation(76,512)(59,583) (152,360)(111,297)Impairments- -  (65,800)- Gain on acquisition- -  45,309 - Earnings before income taxes75,801 148,041  172,097 198,920Income taxes(37,985)(66,612) (69,187)(90,298)Net earnings37,816 81,429  102,910 108,622 10. CAPITAL DISCLOSURESThe following table calculates Vermilion's ratio of net debt to annualized fund flows from operations: Three Months Ended Six Months Ended($M except as indicated)June 30, 2012June 30, 2011 June 30, 2012June 30, 2011Long-term debt452,267367,923 452,267367,923Current liabilities397,483332,364 397,483332,364Current assets(325,140)(265,738) (325,140)(265,738)Net debt [1]524,610434,549 524,610434,549      Cash flows from operating activities123,48561,930 248,372188,547Changes in non-cash operating working capital1,70947,757 27,17821,294Asset retirement obligations settled2,5819,612 3,34711,243Fund flows from operations127,775119,299 278,897221,084Annualized fund flows from operations [2]511,100477,196 557,794442,168      Ratio of net debt to annualized fund flows from operations ([1] ÷ [2])1.00.9 0.91.0      For the three and six months ended June 30, 2012, the ratio of net debt to annualized fund flows from operations was 1.0 and 0.9, respectively.  This ratio was higher in the three months ended June 30, 2012 compared to the same period in 2011 as a result of increased net debt.  The increase in debt levels resulted from the 2012 capital program and acquisitions.Vermilion is subject to certain externally imposed capital requirements under its revolving credit facility.  During the periods covered by these condensed consolidated interim financial statements, Vermilion continued to comply with these requirements.11. FINANCIAL INSTRUMENTSMarket risk:Vermilion's financial instruments are exposed to currency risk related to changes in foreign currency denominated financial instruments and commodity price risk related to outstanding derivative positions.  The following table summarizes what the impact on comprehensive income before tax would be for the six months ended June 30, 2012 given changes in the relevant risk variables that Vermilion considers were reasonably possible at the balance sheet date.  The impact on comprehensive income before tax associated with changes in these risk variables for assets and liabilities that are not considered financial instruments are excluded from this analysis.  This analysis does not attempt to reflect any interdependencies between the relevant risk variables.June 30, 2012Before tax effect on comprehensive incomeRisk ($M)Description of change in risk variableIncrease (decrease)Currency risk - Euro to CanadianIncrease in strength of the Canadian dollar against the (6,154) Euro by 5% over the relevant closing rates on June 30, 2012   Decrease in strength of the Canadian dollar against the 6,154  Euro by 5% over the relevant closing rates on June 30, 2012  Currency risk - US $ to CanadianIncrease in strength of the Canadian dollar against the 4,170  US$ by 5% over the relevant closing rates on June 30, 2012   Decrease in strength of the Canadian dollar against the (4,170) US$ by 5% over the relevant closing rates on June 30, 2012  Currency risk - AUD $ to CanadianIncrease in strength of the Canadian dollar against the (1,085) AUD$ by 5% over the relevant closing rates on June 30, 2012   Decrease in strength of the Canadian dollar against the 1,085 AUD$ by 5% over the relevant closing rates on June 30, 2012  Commodity price riskIncrease in relevant oil reference price within option pricing models used to (2,143) determine the fair value of financial derivative positions by US$5.00/bbl at June 30, 2012   Decrease in relevant oil reference price within option pricing models used to 2,953  determine the fair value of financial derivative positions by US$5.00/bbl at June 30, 2012  Reasonably possible changes in interest rates and natural gas prices would not have had a material impact on comprehensive income for the six months ended June 30, 2012.       SOURCE: Vermilion Energy Inc.For further information: Lorenzo Donadeo, President & CEO; Curtis W. Hicks, C.A., Executive VP & CFO; and/or Dean Morrison, Director Investor Relations TEL (403) 269-4884 IR TOLL FREE 1-866-895-8101 investor_relations@vermilionenergy.com www.vermilionenergy.com