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Press release from CNW Group

Vermilion Energy Inc. Announces Third Quarter Results for the Three and Nine Months Ended September 30, 2012

Thursday, November 01, 2012

Vermilion Energy Inc. Announces Third Quarter Results for the Three and Nine Months Ended September 30, 201206:55 EDT Thursday, November 01, 2012CALGARY, Nov. 1, 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 nine months ended September 30, 2012.HIGHLIGHTSRecorded average production of 36,546 boe/d during the third quarter of 2012, compared to 39,168 boe/d in the second quarter of 2012 and 34,676 boe/d in the third quarter of 2011.  Year-over-year production growth of five percent was attributable to higher volumes from Vermilion's Canadian-based Cardium development program and Vermilion's acquisition of certain working interests in France in January 2012.  Quarter-over-quarter declines resulted from lower Cardium related activity levels due to breakup, the shut-in of some of our Canadian dry gas production and approximately two weeks of planned downtime in Australia to accommodate platform maintenance activities.  With the Company's continued focus on predominately crude-based production growth, Vermilion's consolidated production is now approximately two-thirds weighted to oil and liquids with the largest gains occurring in Canada where oil and liquids now account for 59% of average production as compared to 45% in the third quarter of 2011. In addition to this oil and liquids weighting, approximately 15% of our production is royalty free, high netback gas in the Netherlands.Generated fund flows from operations of $137.1 million ($1.39 per share) in the third quarter of 2012, as compared to $127.8 million ($1.30 per share) in the second quarter of 2012 and $116.4 million ($1.29 per share) in the third quarter of 2011.  The increase in fund flows from operations for the third quarter of 2012 as compared to both the second quarter of 2012 and the third quarter of 2011 was primarily the result of an increase in crude oil sales in both France and Australia as well as continued strength in Vermilion's realized pricing.Vermilion continues to experience strong operational performance in all of its operating regions, providing the Company with flexibility to manage the composition of its produced volumes to maximize profitability while achieving annualized production in the upper part of our guidance range of 37,000 to 38,000 boe/d.  As a result, Vermilion plans to manage its Canadian-based dry natural gas production to reduce exposure to weak North American natural gas pricing. The Company currently intends to bring on or cycle this production, as appropriate, to meet lessee obligations and to take advantage of higher seasonal pricing that may develop.Vermilion currently anticipates full year capital expenditures for 2012 of approximately $465 million, subject to variability with respect to timing of the Company's Australian drilling activities.  The Company currently expects to provide initial 2013 planned production and capital guidance in mid-November.Vermilion continues to benefit from its exposure to Brent-based crude oil and European natural gas production.  Vermilion's Brent-based crude volumes represent approximately 43% of consolidated production or 68% of total crude production and currently receives a premium, on average, to the quoted Dated Brent reference price. Given the challenged market for Canadian-based crude production 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 Netherlands natural gas production, which is approximately 15% of our oil-equivalent production, having received an average price of $9.58 per mcf to date in 2012.  This compares to average AECO index pricing for Canadian-based natural gas production of $2.11 per mcf during the first nine months of 2012.Vermilion's strong record of drilling success continued with results from two wells in the Netherlands.  The Eernewoude-2 development well (93% working interest) was drilled and tested during the third quarter at an initial test rate of 25 mmcf/d1, combining rates from individual tests of three zones. The Company also completed testing of the Vinkega-2 development well (42% working interest), which was drilled in the second quarter and has now tested at approximately 30 mmcf/d2, combining rates from individual tests of two zones. Vermilion plans to tie-in both wells during 2013.Continued to grow production in the Company's Cardium light oil play as we continue with long-term development of our 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 7,700 boe/d during the third quarter of 2012.During the third quarter of 2012, Vermilion announced that the Company had invested a total of $84 million since early 2011 to acquire 408.5 net sections of undeveloped lands in Canada with exposure to emerging resource plays. These lands include 227 net sections in the Duvernay trend. To date, Vermilion has drilled, cored and completed a Diagnostic Fracture Injection Test (DFIT) on one vertical appraisal well in the Duvernay with encouraging results. The Company currently plans to core, log and DFIT an additional two Duvernay vertical wells, with drilling activities on the first of these prior to year end 2012. A significant portion of Vermilion's Duvernay rights are located across two large contiguous land blocks in the greater Drayton Valley region and lie directly beneath the Company's current Cardium development. Should Vermilion's Duvernay position ultimately prove suitable for full scale commercial development, this co-location of assets will enable the utilization of Vermilion's extensive oil and gas processing infrastructure in the region bestowing significant timing, operational and infrastructure advantages.  In addition to its Cardium and Duvernay rights in the region, the Company also has a large inventory of more conventional, Manville based liquids-rich gas development opportunities including the Ellerslie, Notikewin and Fahler. With the addition of the Duvernay, Vermilion now has significant exposure to three distinct development opportunities in this core operating region that have potential to deliver growth for the Company well into the second half of the decade.On October 16, 2012, the tunnel boring machine that will be used to drill beneath Sruwaddacon Bay for installation of the onshore gas pipeline at  Corrib was delivered to the Aughoose launch site. The Company currently expects tunneling operations to commence prior to the end of 2012 with first gas at Corrib anticipated to occur in late 2014.1    Eernewoude-2 test rate reflects combined production test results from three separate producing zones including: Slochteren Sandstone which tested at an average rate of approximately 8,950 mcf/d over four hours on a 24/64 choke and a flowing well head pressure of approximately 199 Bar; Ten Boer Sandstone was tested at (28/64)/(32/64)/(36/64) chokes with average rates of approximately 9,880/11,820/13,465 mcf/d/ over separate three hour periods at flowing well head pressures of approximately 159/147/133 Bar, respectively; Akkrum Sandstone was tested using 24/64 and 36/64 chokes resulting in average rates of approximately 3,770 and 4,475 mcf/d over separate three hour periods at flowing well head pressures of approximately 80 and 40 Bar, respectively. Test results are not necessarily indicative of long-term performance or of ultimate recovery.  2       Vinkega-2 test rate reflects combined production test results from two separate producing zones including: Slochtgeren Sandstone which tested at an average rate of approximately 22,380 mcf/d over four hours on a 40/64 choke and a flowing well head pressure of approximately 163 Bar; Vlieland Sandstone which tested at an average rate of approximately 4,850 mcf/d over six hours on a 36/64 choke and a flowing well head pressure of approximately 49 Bar. Test results are not necessarily indicative of long-term performance or of ultimate recovery.Conference Call and Audio Webcast DetailsVermilion will discuss these results in a conference call to be held on Thursday, November 1, 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 conference ID number 400685.  The replay will be available until midnight eastern time on November 8, 2012.You may also listen to the audio webcast by clicking www.investorcalendar.com/IC/CEPage.asp?ID=169764 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 for crude oil of standard grade in U.S. dollars at Cushing, OklahomaAECO the daily average benchmark price for natural gas at the AECO 'C' hub in southeast Alberta$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, IFRSIFRS International Financial Reporting Standards or, alternatively, GAAPDISCLAIMERCertain statements included or incorporated by reference in this document may constitute forward looking statements or financial outlooks under applicable securities legislation.  Such forward looking statements or information typically contain statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", or similar words suggesting future outcomes or statements regarding an outlook.  Forward looking statements or information in this document may include, but are not limited to:capital expenditures;business strategies and objectives;reserve quantities and the discounted present value of future net cash flows from such reserves;petroleum and natural gas sales;future production levels (including the timing thereof) and rates of average annual production growth;exploration 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.  Financial outlooks are provided for the purpose of understanding Vermilion's financial strength and business objectives and the information may not be appropriate for other purposes. Forward looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by Vermilion and described in the forward looking statements or information.  These risks and uncertainties include but are not limited to:the ability of management to execute its business plan;the risks of the oil and gas industry, both domestically and internationally, such as operational risks in exploring for, developing and producing crude oil, natural gas liquids and natural gas;risks and uncertainties involving geology of crude oil, natural gas liquids and natural gas deposits;risks inherent in Vermilion's marketing operations, including credit risk;the uncertainty of reserves estimates and reserves life;the uncertainty of estimates and projections relating to production and associated expenditures;potential delays or changes in plans with respect to exploration or development projects 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  Nine Months Ended Sept 30,June 30,Sept 30,  Sept 30,Sept 30,Financial 2012 2012 2011   2012 2011 Petroleum and natural gas sales284,838 246,544 248,361   841,870 756,398 Fund flows from operations 1137,094 127,775 116,369   415,991 337,453  Fund flows from operations ($/basic share)1.39 1.30 1.29   4.26 3.75  Fund flows from operations ($/diluted share)1.37 1.28 1.27   4.21 3.70 Net earnings30,798 37,816 64,442   133,708 173,064  Net earnings per share ($/basic share)0.31 0.39 0.71   1.37 1.92 Capital expenditures106,255 94,888 134,781   295,503 338,529 Acquisitions, including acquired working capital deficiencies 1- - -   110,282 38,101 Asset retirement obligations settled1,968 2,581 4,269   5,315 15,512 Cash dividends ($/share)0.57 0.57 0.57   1.71 1.71 Dividends declared56,196 55,962 51,612   167,282 153,975  Less: Issuance of shares pursuant to the dividend reinvestment plan(17,251)(18,781)(15,219)  (53,590)(42,279) Net dividends 138,945 37,181 36,393   113,692 111,696  % of fund flows from operations, gross41%44%44%  40%46% % of fund flows from operations, net28%29%31%  27%33%Total net dividends, capital expenditures and asset retirement obligations147,168 134,650 175,443   414,510 465,737 settled 1        % of fund flows from operations107%105%151%  100%138% % of fund flows from operations (excluding the Corrib project)94%93%130%  89%120%Net debt 1549,491 524,610 467,367   549,491 467,367 OperationalProduction        Crude oil (bbls/d)23,047 24,658 20,464   24,062 20,602  NGLs (bbls/d)1,245 1,405 1,369   1,341 1,369  Natural gas (mcf/d)73,524 78,629 77,056   77,502 76,442  Total (boe/d)36,546 39,168 34,676   38,320 34,711 Production pricing        % priced with reference to WTI23%23%17%  23%15% % priced with reference to AECO16%18%21%  17%21% % priced with reference to Dated Brent61%59%62%  60%64%Average selling price        Crude oil and NGLs ($/bbl)100.70 100.07 100.71   102.32 104.26  Natural gas ($/mcf)6.12 5.79 6.50   5.89 6.28 Netbacks ($/boe) 1        Operating netback55.02 53.88 49.85   54.87 50.35  Fund flows netback38.66 39.40 36.46   39.44 35.62  Operating expenses13.27 12.41 13.57   12.78 12.86 Average reference prices        WTI (US$/bbl)92.22 93.49 89.76   96.21 95.48  Dated Brent (US$/bbl)109.61 108.19 113.46   112.10 111.93  AECO ($/mcf)2.28 1.90 3.66   2.11 3.76 Average foreign currency exchange rates        CDN $/US $0.99 1.01 0.98   1.00 0.98  CDN $/Euro1.25 1.30 1.39   1.28 1.37 Share information ('000s)Shares outstanding        Basic shares outstanding98,729 98,330 90,675   98,729 90,675  Diluted shares outstanding 1101,149 101,249 92,815   101,149 92,815 Weighted average shares outstanding        Basic shares outstanding98,523 97,937 90,492   97,704 89,955  Diluted shares outstanding99,748 99,923 91,710   98,848 91,241 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 operations continued to perform above expectations during the third quarter of 2012. Furthermore, the Company's strong relative realized pricing, resulting from its global commodity exposure and oil leveraged production bias, continues to support consistently strong fund flows from operations.  Even after shutting-in some of our Canadian dry gas production and downtime in Australia due to planned maintenance activities, Vermilion's year-to-date production remains 10% above production volumes during the same nine month period in 2011.Vermilion's global commodity exposure continues to distinguish the Company from other North American producers with approximately 43% of year-to-date production comprised of Brent-based crude and a further 15% comprised of high netback, royalty free Netherlands natural gas production which has realized a price of $9.58 per mcf during the first nine months of 2012.  The Company's leverage to global commodity markets, through its diversified international operations, places Vermilion in a strong competitive position relative to North America based producers who are faced with significantly higher exposure to volatile differentials and increasing price uncertainty with respect to their North American natural gas and crude production.  Vermilion expects realized pricing for North American natural gas and crude production will remain at significant discounts to pricing the Company receives for its international production for the foreseeable future.  During the third quarter of 2012, Canadian-based crude differentials remained relatively wide with Edmonton Sweet crude pricing at US$7.21 below the average price for West Texas Intermediate (WTI) of US$92.22, which itself was priced at an average discount to Dated Brent of more than US$17 during the quarter.  On the positive side, the AECO natural gas reference price improved by approximately 20% during the quarter to $2.28 per mcf, however it remained significantly below Vermilion's average price for European based natural gas production of nearly $9.50 per mcf. These pricing dynamics have impacted many of Vermilion's Canadian peers and although Vermilion is not immune to these price effects, the Company's netbacks remain robust as a result of its exposure to Dated Brent-based pricing for its production in France and Australia and the continued strength of natural gas pricing in Europe. Vermilion continues to experience strong operational performance in all of its operating regions. This provides the Company with flexibility to manage the composition of its produced volumes to maximize profitability while achieving annualized production in the upper part of our guidance range of 37,000 to 38,000 boe/d.  As a result, Vermilion plans to manage its Canadian-based dry natural gas production to reduce exposure to weak North American natural gas pricing. The Company currently intends to bring on or cycle this production, as appropriate, to meet lessee obligations and to take advantage of higher seasonal pricing that may develop.Vermilion currently anticipates full year capital expenditures for 2012 of approximately $465 million, subject to variability with respect to timing of the Company's Australian drilling activities.  The Company currently expects to provide initial 2013 planned production and capital guidance in mid-November.During the remainder of 2012, the Company's Canadian investment activities will continue to focus primarily on 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 remains on target to achieve average costs of between $3.5 and $3.7 million per well and has exceeded this target on a 'per section' basis after accounting for several longer reach wells drilled in 2012.  Transportation costs also continue to decrease as Vermilion ties-in and processes greater volumes through its newly constructed oil processing facility.  At the end of the third quarter of 2012, Vermilion had drilled or participated in approximately 102.8 net wells, 90.8 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 which 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 experienced lower volumes in Australia during the third quarter of 2012 resulting from approximately two weeks of planned downtime for annual maintenance. Vermilion plans to sustain annual average production at between 6,000 and 8,000 boe/d over the next few years with two-to-three well drilling campaigns conducted approximately every other year. Wandoo remains a key asset for Vermilion generating strong fund flows from operations.  Production at Wandoo attracts 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 into tankers from 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, resulting in a cost of approximately $48,000 per flowing boe and $15.80 per boe of proved plus probable reserves as evaluated by GLJ.  The acquisition added 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 weighting toward high quality oil, are expected to continue to provide robust netbacks in the current commodity price environment. During the third quarter, Vermilion initiated its first workover program in the Vic Bihl field since taking over operatorship after the acquisition, with the first five workovers generating an initial incremental rate of over 500 bbls/d. The Company has identified numerous other areas in the acquired assets where we can reduce the current cost structure and increase production over time through optimized production operations, waterflood management and exploitation of infill development opportunities.Vermilion's strong record of drilling success continued with results from two wells in the Netherlands.  The Eernewoude-2 development well (93% working interest) was drilled and tested during the third quarter at an initial test rate of 25 mmcf/d2, combining rates from individual tests of three zones. The Company also completed testing of the Vinkega-2 development well (42% working interest), which was drilled in the second quarter and has now tested at approximately 30 mmcf/d3, combining rates from individual tests of two zones. Vermilion plans to tie-in both wells during 2013.  Vermilion also continues to evaluate facilities, infrastructure and permitting requirements associated with potential production additions in 2013 from the Langezwaag-1 (42% working interest) well which was drilled during the 2011 drilling campaign. Looking forward, Vermilion intends to maintain a rolling inventory of projects such that each year will involve a combination of new wells and the 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 related to the project expired with no appeals remaining outstanding. This effectively brought the regulatory approval phase of the project to a close and enabled the start of the construction phase.  On October 16, 2012, the tunnel boring machine (TBM) was delivered to the Aughoose launch site.  The TBM will be used to drill beneath Sruwaddacon Bay for installation of the onshore gas pipeline at Corrib. Shell E&P Ireland Ltd., the project operator, is expected to initiate tunneling operations prior to the end of 2012. 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 ultimately deliver approximately 55 mmcf/d (9,000 boe/d) of net production at high netbacks. First gas production is currently projected for late 2014 based on a deterministic project schedule.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 exposure to unconventional shale oil and natural gas opportunities.  To date, the Company has invested $84 million to acquire a total of 408.5 net sections of undeveloped lands in Canada with exposure to emerging resource opportunities.  As a result of these acquisitions, the Company now holds several large and contiguous land blocks on Canadian resource plays, including two contiguous positions on the Duvernay totalling 190 net sections.  During the second and third quarters of 2012, Vermilion re-entered, cored, logged and completed a  Diagnostic Fracture Injection Test (DFIT) on an existing vertical wellbore in one of the blocks to assist in its appraisal of the Duvernay resource play. The Company currently plans to core, log and DFIT an additional two Duvernay vertical wells, with drilling activities on the first of these anticipated prior to year end 2012. A significant portion of Vermilion's Duvernay rights lie directly beneath the Company's current Cardium development in the greater Drayton Valley area. Should Vermilion's Duvernay position ultimately prove suitable for full scale commercial development, this co-location of assets will enable the utilization of Vermilion's extensive oil and gas processing infrastructure in the region bestowing significant timing, operational and infrastructure advantages. In addition to its Cardium and Duvernay rights in the region, the Company also has a large inventory of more conventional, Manville based liquids-rich gas development opportunities including the Ellerslie, Notikewin and Fahler. With the addition of the Duvernay, Vermilion now has significant exposure to three distinct development opportunities in this core operating region that have potential to deliver growth for the Company well into the second half of the decade.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 based on current commodity prices, 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. Vermilion anticipates Corrib will provide 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 the fund flows to fund these new growth opportunities.The Company's conservative fiscal management and limited use of equity to finance its growth objectives should allow future growth on a per share basis. The management and directors of Vermilion continue to control approximately 8% of Vermilion's outstanding shares and remain committed to delivering superior returns to all stakeholders.  Further, the Company continues to be recognized for excellence in its business practices.  In the first quarter of 2012, Vermilion achieved a "hat trick" by being recognized for the third consecutive year by the Great Place to Work® Institute in both Canada and France as one of the 25 best workplaces in each country. In a capital intensive business, we believe that our people are our most leveraging resource and we are honored by this recognition.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, 2011.2 Eernewoude-2 test rate reflects combined production test results from three separate producing zones including: Slochteren Sandstone which tested at an average rate of approximately 8,950 mcf/d over four hours on a 24/64 choke and a flowing well head pressure of approximately 199 Bar; Ten Boer Sandstone was tested at (28/64)/(32/64)/(36/64) chokes with average rates of approximately 9,880/11,820/13,465 mcf/d/ over separate three hour periods at flowing well head pressures of approximately 159/147/133 Bar, respectively; Akkrum Sandstone was tested using 24/64 and 36/64 chokes resulting in average rates of approximately 3,770 and 4,475 mcf/d over separate three hour periods at flowing well head pressures of approximately 80 and 40 Bar, respectively. Test results are not necessarily indicative of long-term performance or of ultimate recovery.3   Vinkega-2 test rate reflects combined production test results from two separate producing zones including: Slochtgeren Sandstone which tested at an average rate of approximately 22,380 mcf/d over four hours on a 40/64 choke and a flowing well head pressure of approximately 163 Bar; Vlieland Sandstone which tested at an average rate of approximately 4,850 mcf/d over six hours on a 36/64 choke and a flowing well head pressure of approximately 49 Bar. Test results are not necessarily indicative of long-term performance or of ultimate recovery.MANAGEMENT'S DISCUSSION AND ANALYSIS  The following is Management's Discussion and Analysis ("MD&A"), dated October 31, 2012, of Vermilion Energy Inc.'s ("Vermilion" or the "Company") operating and financial results as at and for the three and nine months ended September 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 nine months ended September 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 nine months ended September 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."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. 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.  Management believes that by excluding expenses related to the Corrib project, fund flows from operations (excluding the Corrib project) provides a useful measure of Vermilion's ability to generate cash from current production.The most directly comparable GAAP measure to fund flows from operations and fund flows from operations (excluding the Corrib project) is cash flows from operating activities.Cash flows from operating activities as presented in Vermilion's consolidated statements of cash flows are reconciled to fund flows from operations and fund flows from operations (excluding the Corrib project) as follows:  Three Months Ended % change  Nine Months Ended % change  Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M)20122012 2011 Q2/12Q3/11  2012 2011  2011 Cash flows from operating activities148,301 123,485 99,906      396,673 288,453   Changes in non-cash operating working capital(13,175)1,709 12,194      14,003 33,488   Asset retirement obligations settled1,968 2,581 4,269      5,315 15,512   Fund flows from operations137,094 127,775 116,369  7%18%  415,991 337,453  23%Transportation expense related to the Corrib project1,899 1,974 2,253      5,874 6,721   Fund flows from operations(excluding the Corrib project)138,993 129,749 118,622  7%17%  421,865 344,174  23%"Acquisitions, including acquired working capital deficiencies" are 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:    Nine Months Ended    Sept 30,Sept 30,($M)  2012 2011 Property acquisitions  106,184 38,101 Acquired working capital deficiencies  4,098 - Acquisitions, including acquired working capital deficiencies  110,282 38,101 "Cash dividends per share" represents cash dividends declared per share by Vermilion."Net dividends" are dividends declared less proceeds received by Vermilion for the issuance of shares pursuant to the dividend reinvestment plan, both as presented in Vermilion's consolidated statements of changes in shareholders' equity.  Dividends both before and after the dividend reinvestment plan are reviewed by management and are also assessed as a percentage of fund flows from operations to analyze the amount of cash that is generated by Vermilion which is being used to fund dividends.  Dividends declared is the most directly comparable GAAP measure to net dividends."Total net dividends, capital expenditures and asset retirement obligations settled" are net dividends plus the following amounts from Vermilion's consolidated statements of cash flows:  drilling and development, exploration and evaluation, and asset retirement obligations settled."Total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project)" are total net dividends, capital expenditures and asset retirement obligations settled excluding drilling and development and asset retirement obligations settled relating to the Corrib project.Total net dividends, capital expenditures and asset retirement obligation settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reviewed by management and are assessed as a percentage of fund flows from operations and fund flows from operations (excluding the Corrib project) to analyze the amount of cash that is generated by Vermilion that is available to repay debt and fund potential future acquisitions.Dividends declared, total net dividends, capital expenditures and asset retirement obligations settled and total net dividends, capital expenditures and asset retirement obligations settled (excluding the Corrib project) are reconciled to their most directly comparable GAAP measures as follows:  Three Months Ended  Nine Months Ended  Sept 30,June 30,Sept 30,  Sept 30,Sept 30,($M)20122012 2011  2012 2011 Dividends declared56,196 55,962 51,612   167,282 153,975 Issuance of shares pursuant to the dividend reinvestment plan(17,251)(18,781)(15,219)  (53,590)(42,279)Net dividends38,945 37,181 36,393   113,692 111,696 Drilling and development96,212 77,956 89,332   262,064 281,749 Exploration and evaluation10,043 16,932 45,449   33,439 56,780 Asset retirement obligations settled1,968 2,581 4,269   5,315 15,512 Total net dividends, capital expenditures and asset retirement obligations settled147,168 134,650 175,443   414,510 465,737 Capital expenditures and asset retirement obligations settled related to the Corrib project(17,164)(13,928)(21,686)  (40,574)(54,391)Total net dividends, capital expenditures and asset retirement obligations settle (excluding the Corrib project)130,004 120,722 153,757   373,936 411,346 "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 Sept 30,Dec 31,($M)2012 2011 Long-term debt492,669 373,436 Current liabilities442,376 491,184 Current assets(385,554)(435,659)Net debt549,491 428,961 "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. The most directly comparable GAAP measure is shares outstanding.Shares outstanding is reconciled to diluted shares outstanding as follows: As At Sept 30,June 30,Sept 30,('000s of shares)2012 2012 2011 Shares outstanding98,729 98,330 90,675 Potential shares issuable pursuant to the equity based compensation plan2,420 2,919 2,140 Diluted shares outstanding101,149 101,249 92,815 OPERATIONAL ACTIVITIES  CanadaIn Canada, Vermilion participated in the drilling of 16 wells (11.5 net) during the third quarter of 2012.  These wells included 14 (10.7 net) operated  Cardium horizontal wells and two (0.8 net) non-operated Cardium wells.  At the end of the third quarter of 2012, 83 operated (73.2 net) Cardium wells were on production and 54 (17.6 net) non-operated wells were on production.  Drilling and completion activities picked up late in the quarter following wet ground conditions in July and August that hampered the movement of equipment.FranceIn France, Vermilion's third quarter activities were focused on workovers at Vic Bihl, the Company's first workovers in that field since obtaining operatorship as part of the acquisition in January of 2012. The workover program has resulted the first five workovers generating an initial incremental rate of over 500 bbls/d. Vermilion continues to work toward full integration of the acquired assets and realization of further future optimization, workover and infill drilling opportunities.NetherlandsIn the Netherlands, third quarter operating activities included testing of the Vinkega-2 development well (42% working interest), which was drilled during the second quarter of 2012 and has now tested at approximately 30 mmcf/d1, combining results from multiple zones. Further, Vermilion drilled the Eernewoude-2 development well (93% working interest) during the third quarter of 2012 and has achieved an initial test of 25 mmcf/d2, combining results from multiple zones. Both wells are anticipated to be brought on production toward the end of 2013 at restricted rates. Additional operating activities were focused on ongoing facility maintenance and permitting activities in preparation for a 2013 drilling campaign. Vermilion also continues to evaluate facilities, infrastructure and permitting requirements associated with potential production additions in 2013 from the Langezwaag-1 (42% working interest) well which was drilled during the 2011 drilling campaign.1  Vinkega-2 test rate reflects combined production test results from two separate producing zones including: Slochtgeren Sandstone which tested at an average rate of approximately 22,380 mcf/d over four hours on a 40/64 choke and a flowing well head pressure of approximately 163 Bar; Vlieland Sandstone which tested at an average rate of approximately 4,850 mcf/d over six hours on a 36/64 choke and a flowing well head pressure of approximately 49 Bar. Test results are not necessarily indicative of long-term performance or of ultimate recovery.2 Eernewoude-2 test rate reflects combined production test results from three separate producing zones including: Slochteren Sandstone which tested at an average rate of approximately 8,950 mcf/d over four hours on a 24/64 choke and a flowing well head pressure of approximately 199 Bar; Ten Boer Sandstone was tested at (28/64)/(32/64)/(36/64) chokes with average rates of approximately 9,880/11,820/13,465 mcf/d/ over separate three hour periods at flowing well head pressures of approximately 159/147/133 Bar, respectively; Akkrum Sandstone was tested using 24/64 and 36/64 chokes resulting in average rates of approximately 3,770 and 4,475 mcf/d over separate three hour periods at flowing well head pressures of approximately 80 and 40 Bar, respectively. Test results are not necessarily indicative of long-term performance or of ultimate recovery.AustraliaVermilion continued preparations and permitting activities in anticipation of initiating a two to three well drilling campaign in late 2012.  Due to the anticipated timing of the drilling campaign in late 2012, production from the wells is not currently expected to occur until 2013. Vermilion also completed annual platform maintenance in the third quarter of 2012 that resulted in approximately two weeks of planned downtime.PRODUCTION  Three Months Ended % change     Nine Months Ended % change     Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.  2012 2012 2011  Q2/12Q3/11  2012 2011  2011 Canada             Crude oil & NGLs (bbls/d)8,526 9,078 5,831  (6%)46%  8,825 5,378  64% Natural gas (mmcf/d)35.54 41.32 42.94  (14%)(17%)  39.55 43.17  (8%) Total (boe/d)14,449 15,965 12,987  (9%)11%  15,417 12,573  23% % of consolidated40%40%38%     40%36%  France             Crude oil (bbls/d)9,767 9,931 7,946  (2%)23%  9,989 8,208  22% Natural gas (mmcf/d)3.39 3.57 0.97  (5%)249%  3.48 0.96  263% Total (boe/d)10,333 10,526 8,108  (2%)27%  10,569 8,368  26% % of consolidated28%27%23%     28%24%  Netherlands             NGLs (bbls/d)41 84 64  (51%)(36%)  66 55  20% Natural gas (mmcf/d)34.59 33.74 33.15  3%4%  34.47 32.31  7% Total (boe/d)5,806 5,707 5,589  2%4%  5,811 5,440  7% % of consolidated16%15%16%     15%16%  Australia             Crude oil (bbls/d)5,958 6,970 7,992  (15%)(25%)  6,523 8,330  (22%) % of consolidated16%18%23%     17%24%  Consolidated             Crude oil & NGLs (bbls/d)24,292 26,063 21,833  (7%)11%  25,403 21,971  16% % of consolidated66%67%63%     66%63%   Natural gas (mmcf/d)73.52 78.63 77.06  (6%)(5%)  77.50 76.44  1% % of consolidated34%33%37%     34%37%   Total (boe/d)36,546 39,168 34,676  (7%)5%  38,320 34,711  10%Canadian production of 14,449 boe/d during the third quarter of 2012 represented a 9% decrease from production of 15,965 boe/d in the second quarter of 2012, but an increase of 11% over third quarter of 2011 production of 12,987 boe/d.  The year-over-year increase in Vermilion's Canadian production was mainly attributable to Cardium production growth. The quarter-over-quarter decrease resulted from shutting in some dry gas production and reduced Cardium activity due to wet ground conditions which inhibited the movement of equipment in July and August. Production results continue to illustrate the low risk, dependable nature of planned production additions associated with Vermilion's Cardium program. At the end of the third quarter of 2012, Vermilion's high netback oil and liquids production represented approximately 59% of total Canadian production as compared to 45% at the end of the third quarter of 2011.Production in France averaged 10,333 boe/d in the third quarter of 2012, a slight decrease from second quarter of 2012 production of 10,526 boe/d.  The modest decrease was attributable to natural production declines that were partially offset by optimization and workover activities during the quarter.  On a year-over-year basis production has grown by 27%, largely attributable to incremental production volumes associated with Vermilion's acquisition of certain working interests in the Paris and Aquitaine basins in January of 2012. Following the acquisition, Vermilion's France production remains 95% weighted toward Brent crude.Average production volumes of 5,806 boe/d in the Netherlands during the third quarter of 2012 were nearly flat to second quarter of 2012 production of 5,707 boe/d, and third quarter 2011 production of 5,589 boe/d.  Incremental production from the Rotliegend zone of the Vinkega-1 discovery well, brought on production in December 2011, and from De Hoeve-1, brought on in May 2012, have largely offset natural production declines in the Netherlands and the suspension in late 2011 of production from the Vlieland zone of the Vinkega-1 well to facilitate production of the Rotliegend.Australia production averaged 5,958 boe/d during the third quarter of 2012, compared to 6,970 boe/d in the second quarter of 2012 and 7,992 boe/d in the third quarter of 2011.  The quarter-over-quarter decrease in production was largely the result of planned downtime of approximately two weeks for annual platform maintenance. Year-over-year production was lower as a result of natural production declines with no new wells drilled since late 2010.  The Company's next drilling campaign is scheduled to begin in December of 2012 and is expected to result in increased production volumes in the first quarter of 2013.  Vermilion plans to sustain annual average production between 6,000 and 8,000 boe/d over the next few years with two to three well drilling campaigns conducted approximately every other year.FINANCIAL REVIEWDuring the three months ended September 30, 2012, Vermilion generated fund flows from operations of $137.1 million compared to $127.8 million for the three months ended June 30, 2012 and $116.4 million for the three months ended September 30, 2011.  The increase in fund flows from operations for the third quarter of 2012 as compared to both the second quarter of 2012 and the third quarter of 2011 was primarily the result of an increase in crude oil sales volumes in both France and Australia.  Cash flows from operating activities, a GAAP measure, increased for the third quarter of 2012 as compared to the same period in the previous year as a result of the increase in fund flows from operations and timing differences pertaining to working capital.During the nine months ended September 30, 2012, Vermilion generated fund flows from operations of $416.0 million compared to $337.5 million for the same period in 2011.  The year-over-year increase in fund flows from operations resulted primarily from higher average production in Canada, France and the Netherlands, in addition to lower PRRT in Australia.  Cash flows from operating activities increased year-over-year as a result of the increase in fund flows from operations, reduced asset retirement obligations settled, and timing differences pertaining to working capital.Vermilion's net debt was $549.5 million at September 30, 2012 (December 31, 2011 - $429.0 million) representing approximately 1.0 times annualized fund flows from operations.  The increase in net debt was the result of the $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 $492.7 million at September 30, 2012 (December 31, 2011 - $373.4 million) as a result of current year to date capital expenditures, including the continued development of the Cardium resource play and the acquisitions of additional undeveloped acreage in Canada, as well as the aforementioned acquisition in France.For the nine months ended September 30, 2012, total net dividends, capital expenditures and asset retirement obligations settled (excluding capital expenditures and asset retirement obligations settled on the Corrib project) expressed as a percentage of fund flows from operations were 89% (nine months ended September 30, 2011 - 120%).  The year-over-year decrease in this ratio relates primarily to improved fund flows from operations and lower capital expenditures.COMMODITY PRICES Three Months Ended % change  Nine Months Ended % change Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs. 20122012 2011 Q2/12Q3/11  2012 2011  2011 Average reference prices            WTI (US$/bbl)92.22 93.49 89.76  (1%)3%  96.21 95.48  1%Edmonton Sweet index (US$/bbl)85.01 83.29 93.97  2%(10%)  86.94 96.77  (10%)Dated Brent (US$/bbl)109.61 108.19 113.46  1%(3%)  112.10 111.93  - AECO ($/mcf)2.28 1.90 3.66  20%(38%)  2.11 3.76  (44%)Netherlands oil-linked gas price ($/mcf)9.56 9.94 9.78  (4%)(2%)  9.89 9.41  5%Netherlands oil-linked gas price (€/mcf)7.68 7.67 7.07  - 9%  7.70 6.84  13%Average realized prices ($/boe)            Canada53.61 51.58 51.81  4%3%  53.67 51.71  4%France104.95 104.15 108.40  1%(3%)  106.00 105.67  - Netherlands56.88 57.88 58.11  (2%)(2%)  57.95 55.54  4%Australia114.44 129.94 102.98  (12%)11%  117.40 112.14  5%Consolidated80.35 76.04 77.85  6%3%  79.83 79.82  - Production mix (% of production)            % priced with reference to WTI23%23%17%     23%15%  % priced with reference to AECO16%18%21%     17%21%  % priced with reference to Dated Brent61%59%62%     60%64%  Reference pricesOverall, crude oil prices remained relatively consistent during the third quarter of 2012 as compared to the second quarter of 2012.  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 increase in inventories at Cushing, Oklahoma.The AECO reference price increased 20% from the second quarter of 2012 to the third quarter of 2012 due in part to increased demand in natural gas for power generation during the summer.  However, the AECO reference price was 38% lower compared to the same quarter in the previous year 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 natural gas price in the Netherlands is calculated using a trailing average of Dated Brent and the natural 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 increase in the average realized price for Canada was due to an increase in the percentage of crude oil and NGLs production in Canada, from 57% for the second quarter of 2012 to 59% for the third quarter of 2012, coupled with the increase in the AECO reference price for natural gas.On a consolidated basis, for the three months ended September 30, 2012, crude oil and NGL production represented approximately 66% of total production (three months ended September 30, 2011 - 63%).  Production priced with reference to crude oil (WTI and Dated Brent) represented approximately 84% of total production for the three months ended September 30, 2012 (three months ended September 30, 2011, 79%).CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS Three Months Ended  Nine Months EndedBy categorySept 30,June 30,Sept 30,  Sept 30,Sept 30,($M)201220122011  2012 2011 Land7,666 31,713 35,041   46,046 50,246 Seismic2,653 1,327 2,090   4,779 5,963 Drilling and completion55,320 28,309 62,412   138,487 153,379 Production equipment and facilities34,691 26,718 28,049   86,164 104,205 Recompletions2,956 1,403 3,399   7,004 14,390 Other2,969 5,418 3,790   13,023 10,346 Capital expenditures106,255 94,888 134,781   295,503 338,529 Property acquisitions- - -   106,184 38,101 Total capital expenditures and property acquisitions106,255 94,888 134,781   401,687 376,630          Three Months Ended  Nine Months EndedBy classificationSept 30,June 30,Sept 30,  Sept 30,Sept 30,($M)201220122011  2012 2011 Drilling and development96,212 77,956 89,332   262,064 281,749 Exploration and evaluation10,043 16,932 45,449   33,439 56,780 Capital expenditures106,255 94,888 134,781   295,503 338,529 Property acquisitions- - -   106,184 38,101 Total capital expenditures and property acquisitions106,255 94,888 134,781   401,687 376,630          Three Months Ended  Nine Months EndedBy countrySept 30,June 30,Sept 30,  Sept 30,Sept 30,($M)201220122011  2012 2011 Canada63,701 55,456 92,993   191,139 254,306 France10,416 10,281 8,806   132,539 44,871 Netherlands5,257 5,379 8,707   13,206 19,843 Australia9,721 9,867 2,549   24,132 9,448 Ireland17,160 13,905 21,726   40,671 48,162 Capital expenditures for the third quarter of 2012 increased from the second quarter of 2012 primarily as a result of increased activity in Canada and Ireland.  The increase in capital expenditures in Canada resulted mainly from more wells being drilled, completed, and tied-in in the third quarter as compared to the second quarter. Vermilion participated in the drilling of 16 (11.5 net) wells during the third quarter as compared to the drilling of 10 (6.7 net) wells in the second quarter. This increase in Canada was partially offset by a reduction in land acquisitions in the third quarter.  The increase in capital expenditures in Ireland resulted from ocean bottom seismic studies and preliminary tunneling activities.Capital expenditures for the third quarter of 2012 decreased as compared to the same period in the previous year.  This decrease was primarily a result of a reduction in Canadian land acquisitions.On a year to date basis, capital expenditures were lower in 2012 as compared to 2011.  This decrease was primarily the result of reduced expenditures in Canada and Ireland, partially offset by higher expenditures in Australia.  The decrease in expenditures in Canada was primarily the result of lower facilities expenditures, including the absence of costs relating to the construction of a 15,000 bbls/d oil processing facility that occurred in 2011, reduced land acquisitions and well tie-in activity.  The decrease in Ireland was primarily the result of reduced facilities expenditures.  The decreases in Canada and Ireland were partially offset by an increase in capital expenditures in Australia, which resulted primarily from facility maintenance and preliminary spending for the Australian drilling campaign.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 $106.1 million upon closing of the acquisition.PETROLEUM AND NATURAL GAS SALES Three Months Ended % change  Nine Months Ended % changeBy productSept 30,June 30,Sept 30, Q3/12 vs. Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe and per mcf)201220122011 Q2/12Q3/11  2012 2011  2011Crude oil & NGLs243,471 205,126 202,303  19%20%  716,888 625,348  15%Per boe100.70 100.07 100.71  1%-   102.32 104.26  (2%)Natural gas41,367 41,418 46,058  - (10%)  124,982 131,050  (5%)Per mcf6.12 5.79 6.50  6%(6%)  5.89 6.28  (6%)Petroleum and natural gas sales284,838 246,544 248,361  16%15%  841,870 756,398  11%Per boe80.35 76.04 77.85  6%3%  79.83 79.82  -               Three Months Ended % change  Nine Months Ended % changeBy countrySept 30,June 30,Sept 30, Q3/12 vs. Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011Canada71,268 74,932 61,903  (5%)15%  226,726 177,512  28%Per boe53.61 51.58 51.81  4%3%  53.67 51.71  4%France102,369 94,828 80,845  8%27%  300,708 241,383  25%Per boe104.95 104.15 108.40  1%(3%)  106.00 105.67  - Netherlands30,386 30,062 29,883  1%2%  92,268 82,474  12%Per boe56.88 57.88 58.11  (2%)(2%)  57.95 55.54  4%Australia80,815 46,722 75,730  73%7%  222,168 255,029  (13%)Per boe114.44 129.94 102.98  (12%)11%  117.40 112.14  5%Vermilion's consolidated petroleum and natural gas sales for the three months ended September 30, 2012 increased relative to the three months ended June 30, 2012 by $38.3 million.  This increase was primarily the result of higher crude oil sales volumes in Australia and France, partially offset by lower natural gas sales volumes in Canada.Consolidated petroleum and natural gas sales for the three months ended September 30, 2012 were higher than the comparable period in 2011 by $36.5 million.  This increase was primarily the result of overall higher crude oil sales volumes, partially offset by a year-over-year decrease in natural gas sales volumes in Canada and a decrease in the Edmonton Sweet index and Dated Brent reference prices.Consolidated petroleum and natural gas sales for the nine months ended September 30, 2012 were higher than the comparable period in 2011 by $85.5 million.  The increase was primarily attributable to higher crude oil sales volumes, resulting in part from increased Cardium crude oil production in Canada and additional production from Vermilion's January 2012 acquisition in France.  These increases were partially offset by a decrease in both the realized prices for crude oil and natural gas in Canada.CRUDE OIL INVENTORYVermilion carries an inventory of crude oil in France and Australia, which is a result of timing differences between production and sales.  Crude oil inventories decreased in the third quarter of 2012 versus the second quarter of 2012 due to a decrease in both France's and Australia's inventory of 24,806 bbls and 158,029 bbls, respectively.The following table summarizes the changes in Vermilion's crude oil inventory positions: Three Months Ended  Nine Months Ended Sept 30,June 30,Sept 30,  Sept 30,Sept 30,(bbls)2012 2012 2011   2012 2011 France          Opening crude oil inventory270,801 223,421 215,132   186,955 158,229    Crude oil production898,599 903,750 731,009   2,736,893 2,240,796    Crude oil sales(923,405)(856,370)(736,504)  (2,677,853)(2,189,388)   Closing crude oil inventory245,995 270,801 209,637   245,995 209,637 Australia          Opening crude oil inventory274,878 208 62,397   221,898 172,199    Crude oil production548,144 634,245 735,365   1,787,323 2,274,131    Crude oil sales(706,173)(359,575)(626,026)  (1,892,372)(2,274,594)   Closing crude oil inventory116,849 274,878 171,736   116,849 171,736         DERIVATIVE INSTRUMENTS Three Months Ended % change  Nine Months Ended % change Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Realized loss on derivative instruments1,869 3,591 7,793  (48%)(76%)  11,178 22,185  (50%)Per boe0.53 1.11 2.44  (52%)(78%)  1.06 2.34  (55%)The realized loss on derivative instruments was lower in the third quarter of 2012 as compared to both the second quarter of 2012 and the third quarter of 2011 due to weaker crude oil prices relative to the ceiling on certain derivative instruments pertaining to 2012.  In the current quarter, crude oil prices were lower than the ceiling price of Vermilion's derivative instruments and as such the realized loss related entirely to premiums paid on funded collars and put options.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 crude oil 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 September 30, 2012:     Risk ManagementFunded Cost (US $/bbl) bbls/dStrike Price(s) US $/bblCollar - WTI    January 2012 to December 20121.00  250 82.00 - 119.45July 2012 to December 20121.00  500 78.00 - 104.15July 2012 to December 20121.00  500 82.00 -   99.35July 2012 to December 20121.00  500 82.00 - 115.10October 2012 to December 20120.50  500 85.00 - 138.25January 2013 to March 2013-  250 85.00 - 109.52April 2013 to June 2013-  250 88.00 - 109.43Swap - WTI    October 2012 to December 2012-  750 90.84 January 2013 to June 2013 1-  500 100.85 January 2013 to June 2013 1-  500 101.50 Collar - DATED BRENT    January 2012 to December 20121.00  1,000 82.00 - 113.40January 2012 to December 20121.00  500 82.00 - 115.50January 2012 to December 20121.00  500 82.00 - 130.75July 2012 to December 20121.00  1,000 82.00 - 126.05July 2012 to December 20121.00  1,000 82.00 - 126.55October 2012 to December 20121.00  500 92.00 - 134.25October 2012 to December 20121.00  500 97.00 - 132.20January 2013 to March 20131.00  250 95.00 - 132.15January 2013 to March 2013-  300 98.00 - 128.50January 2013 to June 2013-  1,000 90.00 - 103.65January 2013 to June 2013-  1,000 90.00 - 106.90January 2013 to December 2013-  500 95.00 - 107.35January 2013 to December 2013-  500 95.00 - 109.90January 2013 to December 2013-  1,000 97.00 - 107.65January 2013 to December 2013-  500 95.00 - 106.50January 2013 to December 2013-  1,000 97.00 - 106.15July 2013 to December 2013-  500 95.00 - 109.10Put - DATED BRENT    January 2012 to December 20124.46  600 83.00 January 2012 to December 20124.90  600 83.00 January 2012 to December 20124.49  600 83.00 January 2012 to December 20124.39  600 83.00 January 2012 to December 20123.65  500 83.00 SWAP - DATED BRENT    October 2012 to December 2012-  750 103.85 1 The counterparty to the swap has the option on June 28, 2013 to extend the swap to December 31, 2013 at the contracted volume and price.An up to date listing of outstanding financial derivative positions is available on Vermilion's website at www.vermilionenergy.com/ir/hedging.cfm.ROYALTIES Three Months Ended % change  Nine Months Ended % changeBy productSept 30,June 30,Sept 30, Q3/12 vs. Q3/12 vs.   Sept 30,Sept 30, 2012 vs. ($M except per boe and per mcf)201220122011 Q2/12Q3/11  2012 2011  2011Crude oil & NGLs12,087 13,242 12,675  (9%)(5%)  39,570 36,712  8%Per boe5.00 6.46 6.31  (23%)(21%)  5.65 6.12  (8%)Natural gas276 89 808  210%(66%)  576 2,518  (77%)Per mcf0.04 0.01 0.11  300%(64%)  0.03 0.12  (75%)Royalties12,363 13,331 13,483  (7%)(8%)  40,146 39,230  2%Per boe3.49 4.11 4.23  (15%)(17%)  3.81 4.14  (8%)% of petroleum and natural gas sales4.3%5.4%5.4%     4.8%5.2%                Three Months Ended % change  Nine Months Ended % changeBy countrySept 30,June 30,Sept 30, Q3/12 vs. Q3/12 vs.   Sept 30,Sept 30, 2012 vs. ($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011Canada7,081 8,216 8,351  (14%)(15%)  24,266 24,804  (2%)Per boe5.33 5.66 6.99  (6%)(24%)  5.74 7.23  (21%)% of petroleum and natural gas sales9.9%11.0%13.5%     10.7%14.0%  France5,282 5,115 5,132  3%3%  15,880 14,426  10%Per boe5.42 5.62 6.88  (4%)(21%)  5.60 6.32  (11%)% of petroleum and natural gas sales5.2%5.4%6.3%     5.3%6.0%  In Canada, royalties as a percentage of sales for the three months ended September 30, 2012 was 9.9% as compared to 13.5% for the comparative period of the prior year and 11.0% 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 10.9% from 16.4% for the third 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 for the third quarter of 2012 at 10.9% decreased slightly from the prior quarter at 12.3% reflecting additional wells being put on production that benefit from this royalty incentive.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 three and nine months ended September 30, 2012 decreased to 5.2% and 5.3%, respectively, as compared to 6.3% and 6.0% for the same periods of the previous year due to a weakening Euro.  Royalties as a percent of revenue for the third quarter of 2012 were relatively consistent with the rate of 5.4% for the prior quarter.Production in the Netherlands and Australia is not subject to royalties.OPERATING EXPENSE Three Months Ended % change  Nine Months Ended % changeBy productSept 30,June 30,Sept 30, Q3/12 vs. Q3/12 vs.   Sept 30,Sept 30, 2012 vs. ($M except per boe and per mcf)201220122011 Q2/12Q3/11  2012 2011 2011Crude oil & NGLs36,889 28,645 32,190  29%15%  102,400 90,199  14%Per boe15.26 13.97 16.03  9%(5%)  14.62 15.04  (3%)Natural gas10,141 11,580 11,098  (12%)(9%)  32,408 31,672  2%Per mcf1.50 1.62 1.57  (7%)(4%)  1.53 1.52  1%Operating47,030 40,225 43,288  17%9%  134,808 121,871  11%Per boe13.27 12.41 13.57  7%(2%)  12.78 12.86  (1%)              Three Months Ended % change  Nine Months Ended % changeBy countrySept 30,June 30,Sept 30, Q3/12 vs. Q3/12 vs.   Sept 30,Sept 30, 2012 vs. ($M except per boe)201220122011 Q2/12Q3/11  2012 2011 2011Canada13,420 13,217 13,473  2%-   40,904 39,503  4%Per boe10.10 9.10 11.28  11%(10%)  9.68 11.51  (16%)France12,351 13,755 14,281  (10%)(14%)  41,208 35,541  16%Per boe12.66 15.11 19.15  (16%)(34%)  14.53 15.56  (7%)Netherlands3,870 5,457 3,991  (29%)(3%)  13,436 12,346  9%Per boe7.24 10.51 7.76  (31%)(7%)  8.44 8.31  2%Australia17,389 7,796 11,543  123%51%  39,260 34,481  14%Per boe24.62 21.68 15.70  14%57%  20.75 15.16  37%In Canada, third quarter operating expense of $13.4 million was consistent with the $13.2 million for the second quarter of 2012 and the $13.5 million for the third quarter of 2011.  On a year to date basis, Canadian operating expense increased slightly to $40.9 million for the nine months ended September 30, 2012 from $39.5 million for the same period in the prior year due to higher volumes.  On a per boe basis, quarter-over-quarter operating expenses increased due to slightly lower volumes.  Operating costs per boe for the three months ended September 30, 2012, as compared to the same period in the prior year, decreased by $1.18 as a result of higher Canadian volumes driven by the Cardium program.  Similarly, for the year to date period ended September 30, 2012, operating costs per boe decreased by $1.83 due to significantly higher production volumes.In France, third quarter operating expense of $12.4 million was lower than both the second quarter expense of $13.8 million and the third quarter of 2011 expense of $14.3 million due to the timing of downhole intervention work.  Lower expenditures resulted in decreased costs per boe for the current quarter versus the previous quarter and versus the same quarter of the prior year.  For the nine months ended September 30, 2012 operating costs increased to $41.2 million versus $35.5 million for the corresponding period in the prior year due to the acquisition of producing properties in the first quarter of 2012.  The increased volumes associated with this acquisition resulted in operating costs per boe decreasing to $14.53 for the nine months ended September 30, 2012 from $15.56 per boe for the same period in the prior year.In the Netherlands, operating expense for the three months ended September 30, 2012 of $3.9 million decreased from $5.5 million in the prior quarter and was consistent with the $4.0 million for the same quarter of the prior year.  The quarter-over-quarter decrease 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.  For the nine months ended September 30, 2012 operating expense increased to $13.4 million versus $12.3 million for the same period of the prior year primarily as a result of higher electricity usage related to the Vikega-2 well.   Operating expense per boe for the three and nine months ended September 30, 2012 was consistent with the same periods of the prior year.  Quarter-over-quarter operating costs per boe decreased due to lower expenditures and slightly higher production.In Australia, third quarter operating expense increased to $17.4 million from the previous quarter's expense of $7.8 million due to a reduction in crude oil inventory associated with shipment timing.  A decrease in crude oil inventory results in the release of production costs that are carried on the balance sheet until the product is sold.  Operating costs were further increased quarter-over-quarter as the platform ran on diesel for more days during the third quarter as compared to the second quarter.  Decreased production volumes quarter-over-quarter contributed to the quarter-over-quarter increase in operating expense per boe.  For the three and nine month periods ended September 30, 2012 operating expenses on both a spend and on a per boe basis was higher than comparable periods of the prior year due to increased maintenance costs coupled with a decrease in volumes.TRANSPORTATION EXPENSE Three Months Ended % change  Nine Months Ended % changeBy countrySept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Canada2,005 2,350 1,641  (15%)22%  6,399 4,627  38%Per boe1.51 1.62 1.37  (7%)10%  1.51 1.35  12%France1,840 1,894 2,567  (3%)(28%)  6,382 7,163  (11%)Per boe1.89 2.08 3.44  (9%)(45%)  2.25 3.14  (28%)Ireland1,899 1,974 2,253  (4%)(16%)  5,874 6,721  (13%)Transportation5,744 6,218 6,461  (8%)(11%)  18,655 18,511  1%Per boe1.62 1.92 2.03  (16%)(20%)  1.77 1.95  (9%)Consolidated transportation expense for the three months ended September 30, 2012 was lower than the three months ended June 30, 2012.  This decrease was primarily the result of lower transportation costs in Canada due to the absence of pipeline downtime, which increased trucking costs in the second quarter of 2012.Transportation expense for France for the three and nine months ended September 30, 2012 was lower than for the same periods in the prior year primarily as a result of a reduced number of Aquitaine shipments due to the usage of higher volume cargo vessels.  This decrease in expense in France was offset by an increase in transportation expense in Canada for both the three and nine months ended September 30, 2012 as compared to the same periods in the prior year due to higher produced 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  Nine Months Ended % change Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Other (income) expense(277)585 786  (147%)(135%)  8,291 1,942  327%Per boe(0.08)0.18 0.25  (144%)(132%)  0.79 0.20  295%For the nine months ended September 30, 2012, other expense was comprised primarily of $8.5 million relating to transfer taxes paid to regulatory authorities in France pursuant to the acquisition, in the first quarter of 2012, of certain working interests in six producing fields located in the Paris and Aquitaine basins in France.GENERAL AND ADMINISTRATION EXPENSE Three Months Ended % change  Nine Months Ended % change Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 General and administration12,669 12,068 11,375  5%11%  34,885 34,830  - Per boe3.57 3.72 3.57  (4%)-   3.31 3.68  (10%)General and administration expense for the third quarter of 2012 was higher than the expense for both the previous quarter and the third quarter of the prior year largely due to the timing of expenditures.  General and administration expense for the nine months ended September 30, 2012 is consistent with the prior year.EQUITY BASED COMPENSATION EXPENSE Three Months Ended % change  Nine Months Ended % change Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Equity based compensation8,704 9,861 7,609  (12%)14%  28,620 22,517  27%Per boe2.46 3.04 2.39  (19%)3%  2.71 2.38  14%Equity based compensation expense relates to non-cash compensation expense attributable to long-term incentives granted to directors, officers and employees under the Vermilion Incentive Plan (VIP). The expense is recognized over the vesting period based on the grant date fair value of awards, adjusted for the ultimate number of awards that actually vest as determined by the Company's achievement of a number of performance conditions.Equity based compensation expense for the three months ended September 30, 2012 was lower than the prior quarter due to the timing of the forfeiture of awards and the granting of new awards.  The expense for the three and nine months ended September 30, 2012 was higher than the expense for the same periods in 2011 as the expense in the current periods reflected the revision of performance condition assumptions in the fourth quarter of 2011.INTEREST EXPENSE Three Months Ended % change  Nine Months Ended % change Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Interest expense7,229 6,600 6,659  10%9%  19,930 18,602  7%Per boe2.04 2.04 2.09  - (2%)  1.89 1.96  (4%)Interest expense increased during the three months ended September 30, 2012 as compared to both the three months ended June 30, 2012 and September 30, 2011, primarily due to increased borrowings under Vermilion's revolving credit facility.  Interest expense increased during the nine months ended September 30, 2012 as compared to same period in the prior year as the 6.5% senior unsecured notes, issued in February of 2011, were outstanding for all of 2012.DEPLETION AND DEPRECIATION, ACCRETION, IMPAIRMENTS AND GAIN ON ACQUISITION Three Months Ended % change  Nine Months Ended % change Sept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Depletion and depreciation76,941 76,512 60,516  1%27%  229,301 171,813  33%Per boe21.70 23.60 18.97  (8%)14%  21.74 18.13  20%Accretion5,891 5,792 5,378  2%10%  16,921 16,096  5%Per boe1.66 1.79 1.69  (7%)(2%)  1.60 1.70  (6%)Impairments- - -  - -   65,800 -  100%Per boe- - -  - -   6.24 -  100%Gain on acquisition- - -  - -   (45,309)-  (100%)Per boe- - -  - -   (4.30)-  (100%)Depletion and depreciation expense was relatively consistent for the three months ended September 30, 2012 as compared to the three months ended June 30, 2012.  Depletion and depreciation expense was higher in the three and nine months ended September 30, 2012 compared to the same periods in the prior year, 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 increased in the three months ended September 30, 2012 as compared to both the three months ended June 30, 2012 and September 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.The impairment losses in the nine months ended September 30, 2012 relate to impairment losses recorded on Vermilion's conventional deep gas and shallow coal bed methane natural gas plays.  These impairment charges, recorded in the first quarter of 2012, were the result of significant declines in the forward pricing assumptions for natural gas in Canada.Gain on acquisition in the nine months ended September 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  Nine Months Ended % changeBy classificationSept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Current taxes before PRRT38,784 29,225 24,599  33%58%  100,373 86,573  16%Per boe10.94 9.01 7.71  21%42%  9.52 9.14  4%PRRT22,743 8,460 18,281  169%24%  58,472 77,534  (25%)Per boe6.42 2.61 5.73  146%12%  5.54 8.18  (32%)Current taxes61,527 37,685 42,880  63%43%  158,845 164,107  (3%)Per boe17.36 11.62 13.44  49%29%  15.06 17.32  (13%)              Three Months Ended % change  Nine Months Ended % changeBy countrySept 30,June 30,Sept 30, Q3/12 vs.Q3/12 vs.  Sept 30,Sept 30, 2012 vs.($M except per boe)201220122011 Q2/12Q3/11  2012 2011  2011 Canada36 845 467  (96%)(92%)  1,323 1,291  2%Per boe0.03 0.58 0.39  (95%)(92%)  0.31 0.38  (18%)France21,051 15,725 13,696  34%54%  49,671 48,226  3%Per boe21.58 17.27 18.36  25%18%  17.51 21.11  (17%)Netherlands9,614 5,875 2,571  64%274%  24,546 11,718  109%Per boe18.00 11.31 5.00  59%260%  15.42 7.89  95%Australia30,826 15,240 26,146  102%18%  83,305 102,872  (19%)Per boe43.66 42.38 35.56  3%23%  44.02 45.23  (3%)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.  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.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 sales less eligible expenditures, which includes operating expenses and capital expenditures.Current taxes before PRRT for the three and nine months ended September 30, 2012 were higher as compared to the same periods in the prior year.  These year-over-year increases were attributable to higher taxable income associated with generally higher production volumes and an increase in taxes in the Netherlands.  Current taxes were higher in the Netherlands in 2012 as compared to 2011 as a result of the absence of a tax incentive, which allowed Vermilion to accelerate the rate of depreciation on certain assets.PRRT increased in the three months ended September 30, 2012 as compared to both the three months ended June 30, 2012 and September 30, 2011 primarily as a result of higher sales volumes.  PRRT as a percentage of operating income for the Australia segment for the nine months ended September 30, 2012 was 32% as compared to 37% for the nine months ended September 30, 2011.  This decrease was primarily the result of the impact of higher capital expenditures on PRRT in the current year versus the same period in the prior year.FOREIGN EXCHANGE Three Months Ended  Nine Months Ended Sept 30,June 30,Sept 30,  Sept 30,Sept 30,($M except per boe)201220122011  2012 2011 Unrealized foreign exchange loss (gain)6,740 16,730 1,260   18,223 (13,952)Per boe1.89 5.16 0.39   1.73 (1.47)Realized foreign exchange (gain) loss(410)(755)670   (345)228 Per boe(0.11)(0.23)0.21   (0.03)0.02 Foreign exchange loss (gain)6,330 15,975 1,930   17,878 (13,724)Per boe1.78 4.93 0.60   1.70 (1.45)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.Foreign exchange gains and losses are comprised of both unrealized and realized amounts.  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.In the three months ended September 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, offset partially by the impact of the appreciation of the Canadian dollar against the U.S. Dollar on the U.S. Dollar denominated amount due pursuant to the Corrib acquisition.NET EARNINGSFor the three and nine months ended September 30, 2012, Vermilion had net earnings of $30.8 million or $0.31 per share and $133.7 million or $1.37 per share, respectively (three and nine months ended September 30, 2011, net earnings of $64.4 million or $0.71 per share and $173.1 million or $1.92 per share, respectively).The decrease in net earnings for the three months and nine months ended September 30, 2012 as compared to the same periods in the prior year was due to higher foreign exchange losses, other expense and depletion and depreciation.  For the three months ended September 30, 2012, there were additional decreases in net earnings resulting from higher unrealized losses on derivative instruments and current taxes, offset by higher sold volumes in Canada, France and the Netherlands.SUMMARY OF RESULTS  Three Months Ended  Sept 30,Jun 30,Mar 31,Dec 31,Sept 30,Jun 30,Mar 31,Dec 31,($M except per share)2012 2012 2012 2011 2011 2011 2011 2010 Petroleum and natural gas sales284,838 246,544 310,488 275,172 248,361 278,297 229,740 216,426 Net earnings (loss)30,798 37,816 65,094 (30,243)64,442 81,429 27,193 (21,809)Net earnings (loss) per share         Basic0.31 0.39 0.67 (0.32)0.71 0.90 0.30 (0.25) Diluted0.31 0.38 0.66 (0.32)0.70 0.89 0.30 (0.25)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 September 30, 2012 was $549.5 million compared to $429.0 million as at December 31, 2011.  Long-term debt was comprised of the following balances as at September 30, 2012 and December 31, 2011:  As At Sept 30,Dec 31,($M)2012 2011 Revolving credit facility270,653 152,086 Senior unsecured notes222,016 221,350 Total long-term debt492,669 373,436 Revolving Credit Facility At September 30, 2012, Vermilion had in place a bank revolving credit facility totalling $950 million, of which approximately $270.7 million was drawn.  The facility, which matures in May of 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 $10.8 million as at September 30, 2012 (December 31, 2011 - $3.7 million).As at September 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 September 30, 2012, Vermilion's asset retirement obligations were $371.0 million compared to $310.5 million as at December 31, 2011.The increase in asset retirement obligations is largely attributable to accretion, an overall decrease in the discount rates applied to the obligations, additions from wells drilled in 2012 and liabilities acquired pursuant to the acquisition in France during the first quarter of 2012.DIVIDENDS Three Months Ended  Nine Months EndedYear Ended Sept 30,  Sept 30,Dec 31,($M)2012   2012 2011 Cash flows from operating activities148,301   396,673 447,092 Net earnings30,798   133,708 142,821 Dividends declared56,196   167,282 207,846 Excess of cash flows from operating activities over dividends declared92,105   229,391 239,246 (Shortfall) of net earnings over dividends declared(25,398)  (33,574)(65,025)Vermilion maintained monthly dividends at $0.19 per share and declared dividends totalling $167.3 million for the nine months ended September 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.Following 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 nine months ended September 30, 2012, Vermilion issued 2,299,123 shares pursuant to the dividend reinvestment plan and Vermilion's equity based compensation programs.  Shareholders' capital increased by $94.7 million as a result of the issuance of those shares.As at September 30, 2012, there were 98,729,258 shares outstanding.  As at October 31, 2012, there were 98,873,567 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 five ready to produce 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 September 30, 2012 of $284.5 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 prior to the end 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.     Sales, 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 and depreciation are based on estimates of crude oil, natural gas liquids and natural 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 recoverable amount of capital assets and exploration and evaluation assets are based on estimates that Vermilion expects to realize in future periods; 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 to the consolidated balance sheet as at September 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 are 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 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 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 are intended to assist financial statement users in evaluating the nature, risks and financial effects of an entity's interest in subsidiaries and joint arrangements.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 Sept 30, 2012 Nine Months Ended Sept 30, 2012  Three Months Ended Sept 30, 2011 Nine Months Ended Sept 30, 2011 Oil & NGLsNatural GasTotal Oil & NGLsNatural GasTotal  Total Total $/bbl$/mcf$/boe $/bbl$/mcf$/boe  $/boe $/boeCanada            Price80.37 2.52 53.61  83.66 2.25 53.67   51.81  51.71 Realized hedging loss(0.35)- (0.21) (0.55)- (0.32)  (0.16) (0.35)Royalties(8.79)(0.06)(5.33) (9.90)(0.03)(5.74)  (6.99) (7.23)Transportation(1.92)(0.15)(1.51) (1.94)(0.16)(1.51)  (1.37) (1.35)Operating(10.48)(1.59)(10.10) (10.04)(1.53)(9.68)  (11.28) (11.51)Operating netback58.83 0.72 36.46  61.23 0.53 36.42   32.01  31.27 France            Price107.49 9.96 104.95  108.53 10.58 106.00   108.40  105.67 Realized hedging loss(1.47)- (1.39) (3.46)- (3.27)  (4.46) (4.15)Royalties(5.63)(0.28)(5.42) (5.84)(0.25)(5.60)  (6.88) (6.32)Transportation(1.99)- (1.89) (2.38)- (2.25)  (3.44) (3.14)Operating(12.21)(3.44)(12.66) (14.51)(2.45)(14.53)  (19.15) (15.56)Operating netback86.19 6.24 83.59  82.34 7.88 80.35   74.47  76.50 Netherlands            Price94.66 9.44 56.88  99.63 9.58 57.95   58.11  55.54 Operating- (1.22)(7.24) - (1.42)(8.44)  (7.76) (8.31)Operating netback94.66 8.22 49.64  99.63 8.16 49.51   50.35  47.23 Australia            Price114.44 - 114.44  117.40 - 117.40   102.98  112.14 Realized hedging loss(0.33)- (0.33) (0.30)- (0.30)  (5.82) (5.06)Operating(24.62)- (24.62) (20.75)- (20.75)  (15.70) (15.16)PRRT 1(32.21)- (32.21) (30.90)- (30.90)  (24.86) (34.09)Operating netback57.28 - 57.28  65.45 - 65.45   56.60  57.83 Total Company            Price100.70 6.12 80.35  102.32 5.89 79.83   77.85  79.82 Realized hedging loss(0.77)- (0.53) (1.60)- (1.06)  (2.44) (2.34)Royalties(5.00)(0.04)(3.49) (5.65)(0.03)(3.81)  (4.23) (4.14)Transportation(1.38)(0.35)(1.62) (1.58)(0.36)(1.77)  (2.03) (1.95)Operating(15.26)(1.50)(13.27) (14.62)(1.53)(12.78)  (13.57) (12.86)PRRT 1(9.41)- (6.42) (8.35)- (5.54)  (5.73) (8.18)Operating netback68.88 4.23 55.02  70.52 3.97 54.87   49.85  50.35 General and administration  (3.57)   (3.31)  (3.57) (3.68)Interest expense  (2.04)   (1.89)  (2.09) (1.96)Realized foreign exchange gain (loss)0.11    0.03   (0.21) (0.02)Other income (expense)0.08    (0.74)  0.19  0.07 Current income taxes 1  (10.94)   (9.52)  (7.71) (9.14)Fund flows netback  38.66    39.44   36.46  35.62 Accretion  (1.66)   (1.60)  (1.69) (1.70)Depletion and depreciation  (21.70)   (21.74)  (18.97) (18.13)Impairments  -    (6.24)  -  - Gain on acquisition  -    4.30   -  - Deferred taxes  0.76    2.92   (0.94) 2.95 Unrealized other expense-    (0.05)  (0.44) (0.27)Unrealized foreign exchange (loss) gain(1.89)   (1.73)  (0.39) 1.47 Unrealized (loss) gain on derivative instruments(3.02)   0.09   8.54  0.71 Equity based compensation  (2.46)   (2.71)  (2.39) (2.38)Earnings netback  8.69    12.68   20.18  18.27 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)   September 30,December 31, Note 2012  2011 ASSETS     Current     Cash and cash equivalents  223,445  234,507 Accounts receivable  135,771  176,820 Crude oil inventory  12,700  13,885 Derivative instruments  1,104  186 Prepaid expenses  12,534  10,261    385,554  435,659       Deferred taxes  192,414  175,545 Exploration and evaluation assets4 122,018  92,301 Capital assets3 2,199,431  2,031,682    2,899,417  2,735,187       LIABILITIES     Current     Accounts payable and accrued liabilities  230,322  297,756 Dividends payable7 18,759  18,322 Derivative instruments  10,297  11,568 Income taxes payable  52,670  36,407 Amount due pursuant to acquisition  130,328  127,131    442,376  491,184       Derivative instruments  2,001  767 Long-term debt6 492,669  373,436 Asset retirement obligations5 371,023  310,531 Deferred taxes  232,894  227,668    1,540,963  1,403,586       SHAREHOLDERS' EQUITY     Shareholders' capital7 1,462,878  1,368,145 Contributed surplus  51,096  56,468 Accumulated other comprehensive loss  (55,170) (33,387)Deficit  (100,350) (59,625)   1,358,454  1,331,601    2,899,417  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 Nine Months Ended   Sept 30, Sept 30, Sept 30, Sept 30, Note 2012  2011  2012  2011 REVENUE         Petroleum and natural gas sales  284,838  248,361  841,870  756,398 Royalties  (12,363) (13,483) (40,146) (39,230)Petroleum and natural gas revenue  272,475  234,878  801,724  717,168           EXPENSES          Operating  47,030  43,288  134,808  121,871 Transportation  5,744  6,461  18,655  18,511 Equity based compensation8 8,704  7,609  28,620  22,517 Loss (gain) on derivative instruments  12,590  (19,454) 10,223  15,460 Interest expense  7,229  6,659  19,930  18,602 General and administration  12,669  11,375  34,885  34,830 Foreign exchange loss (gain)  6,330  1,930  17,878  (13,724)Other (income) expense2 (277) 786  8,291  1,942 Accretion5 5,891  5,378  16,921  16,096 Depletion and depreciation3, 4 76,941  60,516  229,301  171,813 Impairments3 -  -  65,800  - Gain on acquisition2 -  -  (45,309) -    182,851  124,548  540,003  407,918 EARNINGS BEFORE INCOME TAXES  89,624  110,330  261,721  309,250           INCOME TAXES         Deferred  (2,701) 3,008  (30,832) (27,921)Current  61,527  42,880  158,845  164,107    58,826  45,888  128,013  136,186           NET EARNINGS  30,798  64,442  133,708  173,064           OTHER COMPREHENSIVE (LOSS) INCOME         Currency translation adjustments  (12,753) (4,577) (21,783) 17,174 COMPREHENSIVE INCOME  18,045  59,865  111,925  190,238           NET EARNINGS PER SHARE         Basic      0.31  0.71  1.37  1.92 Diluted  0.31  0.70  1.35  1.90           WEIGHTED AVERAGE SHARES OUTSTANDING ('000s)         Basic  98,523  90,492  97,704  89,955 Diluted  99,748  91,710  98,848  91,241           CONSOLIDATED STATEMENTS OF CASH FLOWS(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)    Three Months Ended Nine Months Ended   Sept 30, Sept 30, Sept 30, Sept 30, Note 2012  2011  2012  2011 OPERATING         Net earnings  30,798  64,442  133,708  173,064 Adjustments:               Accretion5 5,891  5,378  16,921  16,096       Depletion and depreciation3, 4 76,941  60,516  229,301  171,813       Impairments3 -  -  65,800  -       Gain on acquisition2 -  -  (45,309) -       Unrealized loss (gain) on derivative instruments  10,721  (27,247) (955) (6,725)      Equity based compensation8 8,704  7,609  28,620  22,517       Unrealized foreign exchange loss (gain)  6,740  1,260  18,223  (13,952)      Unrealized other expense  -  1,403  514  2,561       Deferred taxes  (2,701) 3,008  (30,832) (27,921)Asset retirement obligations settled5 (1,968) (4,269) (5,315) (15,512)Changes in non-cash operating working capital  13,175  (12,194) (14,003) (33,488)Cash flows from operating activities  148,301  99,906  396,673  288,453           INVESTING         Drilling and development3 (96,212) (89,332) (262,064) (281,749)Exploration and evaluation4 (10,043) (45,449) (33,439) (56,780)Property acquisitions2, 3 -  -  (106,184) (38,101)Changes in non-cash investing working capital  28,376  23,322  (1,408) 9,921 Cash flows used in investing activities  (77,879) (111,459) (403,095) (366,709)          FINANCING         Increase (decrease) in long-term debt  40,350  40,655  117,124  (114,000)Issuance of senior unsecured notes  -  -  -  220,561 Issuance of shares pursuant to the dividend reinvestment plan7 -  15,219  36,339  42,279 Cash dividends  (38,869) (51,545) (149,594) (153,657)Cash flows from (used in) financing activities  1,481  4,329  3,869  (4,817)Foreign exchange (loss) gain on cash held in foreign currencies  (5,931) 2,658  (8,509) 5,369           Net change in cash and cash equivalents  65,972  (4,566) (11,062) (77,704)Cash and cash equivalents, beginning of period  157,473  87,617  234,507  160,755 Cash and cash equivalents, end of period  223,445  83,051  223,445  83,051           Supplementary information for operating activities - cash payments            Interest paid  11,775  10,063  25,701  16,558    Income taxes paid  38,871  61,328  142,582  168,948           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(THOUSANDS OF CANADIAN DOLLARS, UNAUDITED)       Accumulated          Other Total  Shareholders'ContributedComprehensiveRetainedShareholders' NoteCapitalSurplus LossEarningsEquityBalances as at January 1, 2011  1,025,770  40,726  (31,577) 10,983  1,045,902 Net earnings  -  -  -  173,064  173,064 Currency translation adjustments  -  -  17,174  -  17,174 Equity based compensation expense  -  21,731  -  -  21,731 Dividends declared  -  -  -  (153,975) (153,975)Issuance of shares pursuant to the dividend reinvestment plan7 42,279  -  -  -  42,279 Vesting of equity based awards7, 8 22,139  (22,139) -  -  - Share-settled dividends on vested equity based awards7, 8 5,583  -  -  (5,583) - Shares issued for bonus plan7 786  -  -  -  786 Balances as at September 30, 2011  1,096,557  40,318  (14,403) 24,489  1,146,961                   Accumulated          Other Total  Shareholders'ContributedComprehensive Shareholders' NoteCapitalSurplus LossDeficitEquityBalances as at January 1, 2012  1,368,145  56,468  (33,387) (59,625) 1,331,601 Net earnings  -  -  -  133,708  133,708 Currency translation adjustments  -  -  (21,783) -  (21,783)Equity based compensation expense  -  27,984  -  -  27,984 Dividends declared7 -  -  -  (167,282) (167,282)Issuance of shares pursuant to the dividend reinvestment plan7 53,590  -  -  -  53,590 Vesting of equity based awards7, 8 33,356  (33,356) -  -  - Share-settled dividends on vested equity based awards7, 8 7,151  -  -  (7,151) - Shares issued for bonus plan7 636  -  -  -  636 Balances as at September 30, 2012  1,462,878  51,096  (55,170) (100,350) 1,358,454 DESCRIPTION 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 the cumulative net earnings less distributed earnings of Vermilion Energy Inc.NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTSFOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 October 31, 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 nine months ended September 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 $77.1 million and operating income of $68.0 million for the nine months ended September 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 $4.8 million for the nine months ended September 30, 2012.  In determining the pro-forma amounts, management has assumed that the fair value adjustments, determined provisionally, that arose at the date of acquisition would have been the same if the acquisition had occurred on January 1, 2012. It is impracticable to derive all amounts necessary to determine the increase to net earnings from the acquired working interests as operations were immediately merged with Vermilion's operations.3. CAPITAL ASSETSThe following table reconciles the change in Vermilion's capital assets: Petroleum and Furniture and Total($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 359,169  2,971  362,140 Property acquisitions 106,184  -  106,184 Borrowing costs capitalized 7,515  -  7,515 Changes in estimate for asset retirement obligations 30,183  -  30,183 Depletion and depreciation 1 (219,635) (3,492) (223,127)Impairments (65,800) -  (65,800)Effect of movements in foreign exchange rates (49,201) (145) (49,346)Balance at September 30, 2012 2,185,026  14,405  2,199,431 1 Depletion and depreciation above excludes depletion recorded as a component of crude oil inventory.Vermilion has not identified indicators of impairment or impairment reversal for any CGU's for the three months ended September 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 thereafter2.0%4. EXPLORATION AND EVALUATION ASSETS The following table reconciles the change in Vermilion's exploration and evaluation assets:($M)Exploration and Evaluation AssetsBalance at January 1, 2011 17,157 Additions 79,553 Depreciation (3,732)Effect of movements in foreign exchange rates (677)Balance at December 31, 2011 92,301 Additions 33,439 Depreciation (2,613)Effect of movements in foreign exchange rates (1,109)Balance at September 30, 2012 122,018 5. ASSET RETIREMENT OBLIGATIONS The following table reconciles the change in Vermilion's asset retirement obligations:($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  31,874 Obligations settled  (5,315)Accretion  16,921 Changes in discount rates  25,827 Effect of movements in foreign exchange rates  (8,815)Balance at September 30, 2012  371,023 6. LONG-TERM DEBT The following table summarizes Vermilion's outstanding long-term debt: As At($M)Sept 30, 2012Dec 31, 2011Revolving credit facility 270,653  152,086 Senior unsecured notes 222,016  221,350 Total long-term debt 492,669  373,436 Revolving Credit Facility At September 30, 2012, Vermilion had in place a bank revolving credit facility totalling $950 million, of which approximately $270.7 million was drawn.  The facility, which matures in May of 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 $10.8 million as at September 30, 2012 (December 31, 2011 - $3.7 million).As at September 30, 2012, Vermilion was in compliance with its financial covenants.Senior Unsecured Notes On February 10, 2011, Vermilion issued $225.0 million of senior unsecured notes at par.  The notes bear interest at a rate of 6.5% per annum and will mature on February 10, 2016.  As direct senior unsecured obligations of Vermilion, the notes rank pari passu with all other present and future unsecured and unsubordinated indebtedness of the Company.Vermilion may, at its option, prior to February 10, 2014, redeem up to 35% of the notes with net proceeds of equity offerings by the Company at a redemption price equal to 106.5% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date.  Subsequently, Vermilion may, on or after February 10, 2014, redeem all or part of the notes at fixed redemption prices, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date.  The notes were initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using an effective interest rate of 7.1%.7. SHAREHOLDERS' CAPITALThe following tables reconcile the change in Vermilion's shareholders' capital:Shareholders' CapitalNumber of Shares Amount ($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 1,224,609  53,590 Vesting of equity based awards 904,210  33,356 Share-settled dividends on vested equity based awards 157,137  7,151 Shares issued for bonus plan 13,167  636 Balance as at September 30, 2012 98,729,258  1,462,878 Dividends declared to shareholders for the nine months ended September 30, 2012 were $167.3 million.Subsequent to the end of the period and prior to the condensed consolidated interim financial statements being authorized for issue on October 31, 2012, Vermilion declared dividends totalling $18.8 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 Granted649,860  566,425 Vested(596,423) (434,150)Forfeited(140,158) (65,996)Closing balance1,663,334  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 nine months ended September 30, 2012, the awards granted had a weighted average fair value of $60.08 (2011 - $47.05).9. SEGMENTED INFORMATIONVermilion's chief operating decision maker measures financial performance of the business by assessing operating income, a profit or loss measure defined by Vermilion as oil and gas sales to external customers less royalties and production costs, which include realized losses on derivative instruments, transportation expense and operating expense.  Expenses that are assessed by the chief operating decision maker on a consolidated basis are excluded from the determination of operating income.  The following amounts include transactions between segments, which are recorded at fair value at the date of recognition. Three Months Ended Sept 30, 2012($M)Canada France Netherlands Australia Ireland TotalDrilling and development53,658  10,416  5,257  9,721  17,160  96,212 Exploration and evaluation10,043  -  -  -  -  10,043             Operating Income (Loss)            Oil and gas sales to external customers71,268  102,369  30,386  80,815  -  284,838 Royalties(7,081) (5,282) -  -  -  (12,363)Revenue from external customers64,187  97,087  30,386  80,815  -  272,475 Realized loss on derivative instruments(274) (1,360) -  (235) -  (1,869)Transportation expense(2,005) (1,840) -  -  (1,899) (5,744)Operating expense(13,420) (12,351) (3,870) (17,389) -  (47,030)Operating income (loss)48,488  81,536  26,516  63,191  (1,899) 217,832             Corporate income taxes36  21,051  9,614  8,083  -  38,784 PRRT-  -  -  22,743  -  22,743 Current income taxes36  21,051  9,614  30,826  -  61,527                          Three Months Ended Sept 30, 2011($M)Canada France Netherlands Australia Ireland TotalDrilling and development55,838  8,623  596  2,549  21,726  89,332 Exploration and evaluation37,155  183  8,111  -  -  45,449             Operating Income (Loss)            Oil and gas sales to external customers61,903  80,845  29,883  75,730  -  248,361 Royalties(8,351) (5,132) -  -  -  (13,483)Revenue from external customers53,552  75,713  29,883  75,730  -  234,878 Realized loss on derivative instruments(186) (3,327) -  (4,280) -  (7,793)Transportation expense(1,641) (2,567) -  -  (2,253) (6,461)Operating expense(13,473) (14,281) (3,991) (11,543) -  (43,288)Operating income (loss)38,252  55,538  25,892  59,907  (2,253) 177,336             Corporate income taxes467  13,696  2,571  7,865  -  24,599 PRRT-  -  -  18,281  -  18,281 Current income taxes467  13,696  2,571  26,146  -  42,880                           Nine Months Ended September 30, 2012($M)CanadaFranceNetherlandsAustraliaIrelandTotalTotal assets1,270,547  674,355  138,630  286,960  528,925  2,899,417 Drilling and development157,680  26,424  13,157  24,132  40,671  262,064 Exploration and evaluation33,390  -  49  -  -  33,439               Operating Income (Loss)            Oil and gas sales to external customers226,726  300,708  92,268  222,168  -  841,870 Royalties(24,266) (15,880) -  -  -  (40,146)Revenue from external customers202,460  284,828  92,268  222,168  -  801,724 Realized loss on derivative instruments(1,335) (9,274) -  (569) -  (11,178)Transportation expense(6,399) (6,382) -  -  (5,874) (18,655)Operating expense(40,904) (41,208) (13,436) (39,260) -  (134,808)Operating income (loss)153,822  227,964  78,832  182,339  (5,874) 637,083             Corporate income taxes1,323  49,671  24,546  24,833  -  100,373 PRRT-  -  -  58,472  -  58,472 Current income taxes1,323  49,671  24,546  83,305  -  158,845                           Nine Months Ended September 30, 2011($M)CanadaFranceNetherlandsAustraliaIrelandTotalTotal assets1,101,924  555,024  141,667  268,525  500,952  2,568,092 Drilling and development171,290  41,117  11,732  9,448  48,162  281,749 Exploration and evaluation44,915  3,754  8,111  -  -  56,780             Operating Income (Loss)            Oil and gas sales to external customers177,512  241,383  82,474  255,029  -  756,398 Royalties(24,804) (14,426) -  -  -  (39,230)Revenue from external customers152,708  226,957  82,474  255,029  -  717,168 Realized loss on derivative instruments(1,207) (9,472) -  (11,506) -  (22,185)Transportation expense(4,627) (7,163) -  -  (6,721) (18,511)Operating expense(39,503) (35,541) (12,346) (34,481) -  (121,871)Operating income (loss)107,371  174,781  70,128  209,042  (6,721) 554,601             Corporate income taxes1,291  48,226  11,718  25,338  -  86,573 PRRT-  -  -  77,534  -  77,534 Current income taxes1,291  48,226  11,718  102,872  -  164,107                         Reconciliation of operating income to net earnings Three Months Ended Nine Months Ended($M)Sept 30, 2012Sept 30, 2011 Sept 30, 2012Sept 30, 2011Operating income217,832 177,336  637,083 554,601 Equity based compensation  (8,704)(7,609) (28,620)(22,517)Unrealized (loss) gain on derivative instruments(10,721)27,247  955 6,725 Interest expense(7,229)(6,659) (19,930)(18,602)General and administration(12,669)(11,375) (34,885)(34,830)Foreign exchange (loss) gain(6,330)(1,930) (17,878)13,724 Other income (expense)277 (786) (8,291)(1,942)Accretion(5,891)(5,378) (16,921)(16,096)Depletion and depreciation(76,941)(60,516) (229,301)(171,813)Impairments- -  (65,800)- Gain on acquisition- -  45,309 - Earnings before income taxes89,624 110,330  261,721 309,250 Income taxes(58,826)(45,888) (128,013)(136,186)Net earnings30,798 64,442  133,708 173,064 10. CAPITAL DISCLOSURESThe following table calculates Vermilion's ratio of net debt to annualized fund flows from operations: Three Months Ended Nine Months Ended($M except as indicated)Sept 30, 2012Sept 30, 2011 Sept 30, 2012Sept 30, 2011Long-term debt492,669 409,096  492,669 409,096 Current liabilities442,376 333,817  442,376 333,817 Current assets(385,554)(275,546) (385,554)(275,546)Net debt [1]549,491 467,367  549,491 467,367       Cash flows from operating activities148,301 99,906  396,673 288,453 Changes in non-cash operating working capital(13,175)12,194  14,003 33,488 Asset retirement obligations settled1,968 4,269  5,315 15,512 Fund flows from operations137,094 116,369  415,991 337,453 Annualized fund flows from operations [2]548,376 465,476  554,655 449,937       Ratio of net debt to annualized fund flows from operations ([1] ÷ [2])1.0 1.0  1.0 1.0 The ratio of net debt to annualized fund flows from operations was 1.0 for all periods presented.Vermilion is subject to certain externally imposed capital requirements under its revolving credit facility.  During the periods covered by these condensed consolidated interim financial statements, Vermilion continued to comply with these requirements.11. FINANCIAL INSTRUMENTSMarket risk:Vermilion's financial instruments are exposed to currency risk related to changes in foreign currency denominated financial instruments and commodity price risk related to outstanding derivative positions.  The following table summarizes what the impact on comprehensive income before tax would be for the nine months ended September 30, 2012 given changes in the relevant risk variables that Vermilion considers were reasonably possible at the balance sheet date.  The impact on comprehensive income before tax associated with changes in these risk variables for assets and liabilities that are not considered financial instruments are excluded from this analysis.  This analysis does not attempt to reflect any interdependencies between the relevant risk variables.  Risk ($M)Description of change in risk variableSeptember 30, 2012Before tax effect on comprehensive incomeIncrease (decrease)Currency risk - Euro to Canadian Increase in strength of the Canadian dollar against theEuro by 5% over the relevant closing rates on September 30, 2012  (5,751)     Decrease in strength of the Canadian dollar against theEuro by 5% over the relevant closing rates on September 30, 2012  5,751    Currency risk - US $ to Canadian Increase in strength of the Canadian dollar against theUS$ by 5% over the relevant closing rates on September 30, 2012  1,703      Decrease in strength of the Canadian dollar against theUS$ by 5% over the relevant closing rates on September 30, 2012  (1,703)   Currency risk - AUD $ to Canadian Increase in strength of the Canadian dollar against theAUD$ by 5% over the relevant closing rates on September 30, 2012  (1,421)     Decrease in strength of the Canadian dollar against theAUD$ by 5% over the relevant closing rates on September 30, 2012  1,421    Commodity price risk Increase in relevant oil reference price within option pricing models used to determine the fair value of financial derivative positions by US$5.00/bbl at September 30, 2012  (9,497)     Decrease in relevant oil reference price within option pricing models used to determine the fair value of financial derivative positions by US$5.00/bbl at September 30, 2012  9,039    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