Exhibit 99.3





|Vermilion
    Energy Inc. | 2016 Financial Statements
|------------------------- | -------------------------



ABBREVIATIONS

|$M     | thousand dollars                                                                                                                                                                                                     
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|$MM    | million dollars                                                                                                                                                                                                      
|AECO   | the daily average
    benchmark price for natural gas at the AECO ‘C’ hub in southeast Alberta                                                                                                                       
|bbl(s) | barrel(s)                                                                                                                                                                                                            
|bbls/d | barrels per
    day                                                                                                                                                                                                  
|bcf    | billion cubic
    feet                                                                                                                                                                                               
|boe    | barrel of oil
    equivalent, including: crude oil, condensate, natural gas liquids, and natural gas (converted on the basis of one boe for
    six mcf of natural gas)                                              
|boe/d  | barrel of oil
    equivalent per day                                                                                                                                                                                 
|btu    | British thermal
    units                                                                                                                                                                                            
|DRIP   | Dividend Reinvestment
    Plan                                                                                                                                                                                       
|GJ     | gigajoules                                                                                                                                                                                                           
|mbbls  | thousand barrels                                                                                                                                                                                                     
|mboe   | thousand barrel
    of oil equivalent                                                                                                                                                                                
|mcf    | thousand cubic
    feet                                                                                                                                                                                              
|mcf/d  | thousand cubic
    feet per day                                                                                                                                                                                      
|mmboe  | million barrel
    of oil equivalent                                                                                                                                                                                 
|mmbtu  | million British
    thermal units                                                                                                                                                                                    
|mmcf   | million cubic
    feet                                                                                                                                                                                               
|mmcf/d | million cubic
    feet per day                                                                                                                                                                                       
|MWh    | megawatt hour                                                                                                                                                                                                        
|NBP    | the reference
    price paid for natural gas in the United Kingdom, quoted in pence per therm, at the National Balancing Point Virtual Trading
    Point.  Our production in Ireland is priced with reference to NBP.
|NGLs   | natural gas
    liquids, which includes butane, propane, and ethane                                                                                                                                                  
|PRRT   | Petroleum Resource
    Rent Tax, a profit based tax levied on petroleum projects in Australia                                                                                                                        
|TTF    | the price for
    natural gas in the Netherlands, quoted in MWh of natural gas, at the Title Transfer Facility                                                                                                       
|       | Virtual Trading
    Point                                                                                                                                                                                            
|WTI    | West Texas Intermediate,
    the reference price paid for crude oil of standard grade in US dollars at Cushing, Oklahoma                                                                                             





1


Vermilion Energy Inc.2016 Financial Statements






DISCLAIMER



Certain statements included or incorporated
by reference in this document may constitute forward looking statements or financial outlooks under applicable securities legislation.
Such forward looking statements or information typically contain statements with words such as "anticipate", "believe",
"expect", "plan", "intend", "estimate", "propose", or similar words suggesting
future outcomes or statements regarding an outlook. Forward looking statements or information in this document may include, but
are not limited to: capital expenditures; business strategies and objectives; operational and financial performance; estimated
reserve quantities and the discounted net present value of future net revenue from such reserves; petroleum and natural gas sales;
future production levels (including the timing thereof) and rates of average annual production growth; exploration and development
plans; acquisition and disposition plans and the timing thereof; operating and other expenses, including the payment and amount
of future dividends; royalty and income tax rates; and the timing of regulatory proceedings and approvals.



Such forward looking statements or information
are based on a number of assumptions, all or any of which may prove to be incorrect. In addition to any other assumptions identified
in this document, assumptions have been made regarding, among other things: the ability of Vermilion to obtain equipment, services
and supplies in a timely manner to carry out its activities in Canada and internationally; the ability of Vermilion to market
crude oil, natural gas liquids, and natural gas successfully to current and new customers; the timing and costs of pipeline and
storage facility construction and expansion and the ability to secure adequate product transportation; the timely receipt of required
regulatory approvals; the ability of Vermilion to obtain financing on acceptable terms; foreign currency exchange rates and interest
rates; future crude oil, natural gas liquids, and natural gas prices; and management’s expectations relating to the timing
and results of exploration and development activities.



Although Vermilion believes that the
expectations reflected in such forward looking statements or information are reasonable, undue reliance should not be placed on
forward looking statements because Vermilion can give no assurance that such expectations will prove to be correct. Financial
outlooks are provided for the purpose of understanding Vermilion’s financial position 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 and estimates
of resources and associated expenditures; the uncertainty of estimates and projections relating to production and associated expenditures;
potential delays or changes in plans with respect to exploration or development projects; Vermilion's ability to enter into or
renew leases on acceptable terms; fluctuations in crude oil, natural gas liquids, and natural gas prices, foreign currency exchange
rates and interest rates; health, safety, and environmental risks; uncertainties as to the availability and cost of financing;
the ability of Vermilion to add production and reserves through exploration and development activities; the possibility that government
policies or laws may change or governmental approvals may be delayed or withheld; uncertainty in amounts and timing of royalty
payments; risks associated with existing and potential future law suits and regulatory actions against Vermilion; and other risks
and uncertainties described elsewhere in this document or in Vermilion's other filings with Canadian securities regulatory authorities.



The forward looking statements or information
contained in this document are made as of the date hereof and Vermilion undertakes no obligation to update publicly or revise
any forward looking statements or information, whether as a result of new information, future events, or otherwise, unless required
by applicable securities laws.



All oil and natural gas reserve information
contained in this document has been prepared and presented in accordance with National Instrument 51-101 Standards of Disclosure
for Oil and Gas Activitiesand the Canadian Oil and Gas Evaluation Handbook. The actual crude oil and natural gas reserves
and future production will be greater than or less than the estimates provided in this document. The estimated future net revenue
from the production of crude oil and natural gas reserves does not represent the fair market value of these reserves.



Natural gas volumes have been converted
on the basis of six thousand cubic feet of natural gas to one barrel of oil equivalent. Barrels of oil equivalent (boe) may be
misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet to one barrel of oil is based
on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at
the wellhead.



Financial data contained within this document are reported
in Canadian dollars, unless otherwise stated.







2


Vermilion Energy Inc.2016 Financial Statements




MANAGEMENT’S REPORT TO SHAREHOLDERS



Management’s Responsibility for Financial Statements



The accompanying consolidated financial statements
of Vermilion Energy Inc. are the responsibility of management and have been approved by the Board of Directors of Vermilion Energy
Inc. The consolidated financial statements have been prepared in accordance with the accounting policies detailed in the notes
to the consolidated financial statements and are prepared in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board. Where necessary, management has made informed judgments and estimates of transactions
that were not yet completed at the balance sheet date. Financial information throughout the Annual Report is consistent with the
consolidated financial statements.



Management ensures the integrity of the consolidated
financial statements by maintaining high-quality systems of internal control. Procedures and policies are designed to provide
reasonable assurance that assets are safeguarded and transactions are properly recorded, and that the financial records are reliable
for preparation of the consolidated financial statements. Deloitte LLP, Vermilion’s Independent Registered Public Accounting
Firm, have conducted an audit of the consolidated financial statements in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board (United States) and have provided their report.



The Board of Directors is responsible for ensuring
that management fulfills its responsibility for financial reporting and internal control. The Board carries out this responsibility
principally through the Audit Committee, which is appointed by the Board and is comprised entirely of independent Directors. The
Committee meets periodically with management and Deloitte LLP to satisfy itself that each party is properly discharging its responsibilities
and to review the consolidated financial statements, the Management’s Discussion and Analysis and the Report of the Independent
Registered Public Accounting Firm before they are presented to the Board of Directors.



Management’s Report on Internal Control Over Financial
Reporting



Management is responsible for establishing
and maintaining an adequate system of internal control over financial reporting. Management conducted an evaluation of the effectiveness
of the system of internal control over financial reporting based on the criteria established in “Internal Control –
Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management has assessed the effectiveness of Vermilion’s internal control over financial reporting as defined
in Rule 13a-15 under the US Securities Exchange Act of 1934 and as defined in Canada by National Instrument 52-109, Certification
of Disclosure in Issuers’ Annual and Interim Filings. Management concluded that Vermilion’s internal control over
financial reporting was effective as of December 31, 2016. The effectiveness of Vermilion’s internal control over financial
reporting as of December 31, 2016 has been audited by Deloitte LLP, the Company’s Independent Registered Public Accounting
Firm, who also audited the Company’s consolidated financial statements for the year ended December 31, 2016.



|(“Anthony Marino”)                  | (“Curtis W. Hicks”)                                   
|----------------------------------- | ------------------------------------------------------
|                                    |                                                       
|Anthony Marino                      | Curtis W. Hicks                                       
|President & Chief Executive Officer | Executive Vice President & Chief Financial
    Officer
|February 24, 2017                   |                                                       



3


Vermilion Energy Inc.2016 Financial Statements




Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholdersof Vermilion Energy Inc.



We have audited the internal control over financial reporting of
Vermilion Energy Inc.and subsidiaries (the “Company”)as of December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.



A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing
similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.



Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error
or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2016 of the Company and our report dated February 24, 2017 expressed an unmodified/unqualified
opinion on those financial statements.



|(“/s/ Deloitte LLP”)               | 
|---------------------------------- | 
|                                   | 
|Chartered Professional Accountants | 
|February 24, 2017                  | 
|Calgary, Canada                    | 



4


Vermilion Energy Inc.2016 Financial Statements




Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholders of Vermilion Energy Inc.



We have audited the accompanying consolidated financial statements
of Vermilion Energy Inc. and subsidiaries (the “Company”), which comprise the consolidated balance sheet as at December
31, 2016 and December 31, 2015, and the consolidated statements of net loss and comprehensive loss, cash flows, and changes in
shareholders’ equity for the years then ended, and a summary of significant accounting policies and other explanatory information.



Management's Responsibility for the Consolidated Financial Statements



Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.



Auditor's Responsibility



Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free from material misstatement.



An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.



We believe that the audit evidence we have obtained in our audits
is sufficient and appropriate to provide a basis for our audit opinion.



Opinion



In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of Vermilion Energy Inc. and subsidiaries as at December 31, 2016 and December
31, 2015, and their financial performance and their cash flows for the years then ended in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.



Other Matter

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December
31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2017 expressed an unqualified opinion
on the Company’s internal control over financial reporting.



(“/s/ Deloitte LLP”)



Chartered Professional Accountants

February 24, 2017

Calgary, Canada



5


Vermilion Energy Inc.2016 Financial Statements




CONSOLIDATED BALANCE SHEET(THOUSANDS OF CANADIAN DOLLARS)



|                                             |      | December
    31, | December
    31,
|-------------------------------------------- | ---- | ---------------- | ----------------
|                                             | Note |                  | 2016            
|ASSETS                                       |      |                  |                 
|Current                                      |      |                  |                 
|Cash
    and cash equivalents                | 20   |                  | 62,775          
|Accounts
    receivable                      |      |                  | 131,719         
|Crude
    oil inventory                      |      |                  | 14,528          
|Derivative
    instruments                   | 9    |                  | 4,336           
|Prepaid
    expenses                         |      |                  | 12,548          
|                                             |      |                  | 225,906         
|                                             |      |                  |                 
|Derivative
    instruments                   | 9    |                  | 1,157           
|Deferred
    taxes                           | 11   |                  | 152,046         
|Exploration
    and evaluation assets        | 7    |                  | 274,830         
|Capital
    assets                           | 6    |                  | 3,433,245       
|                                             |      |                  | 4,087,184       
|                                             |      |                  |                 
|LIABILITIES                                  |      |                  |                 
|Current                                      |      |                  |                 
|Accounts
    payable and accrued liabilities |      |                  | 181,557         
|Current
    portion of long-term debt        | 12   |                  | -               
|Dividends
    payable                        | 13   |                  | 25,426          
|Derivative
    instruments                   | 9    |                  | 47,660          
|Income
    taxes payable                     |      |                  | 36,219          
|                                             |      |                  | 290,862         
|                                             |      |                  |                 
|Derivative
    instruments                   | 9    |                  | 27,484          
|Long-term
    debt                           | 12   |                  | 1,362,192       
|Finance
    lease obligation                 | 10   |                  | 19,628          
|Asset
    retirement obligations             | 8    |                  | 525,022         
|Deferred
    taxes                           | 11   |                  | 283,533         
|                                             |      |                  | 2,508,721       
|                                             |      |                  |                 
|SHAREHOLDERS’
    EQUITY                     |      |                  |                 
|Shareholders’
    capital                    | 13   |                  | 2,452,722       
|Contributed
    surplus                      |      |                  | 101,788         
|Accumulated
    other comprehensive income   |      |                  | 30,339          
|Deficit                                      |      |                  | (1,006,386)     
|                                             |      |                  | 1,578,463       
|                                             |      |                  | 4,087,184       



APPROVED BY THE BOARD



|(Signed “Catherine
    L. Williams”) |  | (Signed “Anthony
    Marino”)
|------------------------------------ |  | -----------------------------
|                                     |  |                              
|Catherine L. Williams, Director      |  | Anthony Marino, Director     



6


Vermilion Energy Inc.2016 Financial Statements




CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS

(THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)



|                                                |          |  | Year
    Ended  
|----------------------------------------------- | -------- |  | ----------------
|                                                |          |  | December
    31,
|                                                | Note     |  | 2016            
|REVENUE                                         |          |  |                 
|Petroleum
    and natural gas sales             |          |  | 882,791         
|Royalties                                       |          |  | (54,284)        
|Petroleum
    and natural gas revenue           |          |  | 828,507         
|                                                |          |  |                 
|EXPENSES                                        |          |  |                 
|Operating                                       | 20       |  | 222,185         
|Transportation                                  |          |  | 39,511          
|Equity
    based compensation                   | 15       |  | 69,235          
|Loss
    (gain) on derivative instruments       | 9        |  | 72,617          
|Interest
    expense                            |          |  | 56,957          
|General
    and administration                  | 20       |  | 52,829          
|Foreign
    exchange gain                       |          |  | (3,249)         
|Other
    income                                | 16       |  | (3,896)         
|Accretion                                       | 8        |  | 24,783          
|Depletion
    and depreciation                  | 6,
    7 |  | 528,002         
|Impairment                                      | 6,
    7 |  | 14,762          
|Gain
    on business combination                | 5        |  | (22,001)        
|                                                |          |  | 1,051,735       
|LOSS
    BEFORE INCOME TAXES                    |          |  | (223,228)       
|                                                |          |  |                 
|TAXES                                           | 11       |  |                 
|Deferred                                        |          |  | (82,855)        
|Current                                         |          |  | 19,678          
|                                                |          |  | (63,177)        
|                                                |          |  |                 
|NET
    LOSS                                    |          |  | (160,051)       
|                                                |          |  |                 
|OTHER
    COMPREHENSIVE (LOSS) INCOME           |          |  |                 
|Currency
    translation adjustments            |          |  | (83,308)        
|COMPREHENSIVE
    LOSS                          |          |  | (243,359)       
|                                                |          |  |                 
|NET
    LOSS PER SHARE                          | 17       |  |                 
|Basic                                           |          |  | (1.38)          
|Diluted                                         |          |  | (1.38)          
|                                                |          |  |                 
|WEIGHTED
    AVERAGE SHARES OUTSTANDING ('000s) | 17       |  |                 
|Basic                                           |          |  | 115,695         
|Diluted                                         |          |  | 115,695         



7


Vermilion Energy Inc.2016 Financial Statements




CONSOLIDATED STATEMENTS OF CASH FLOWS(THOUSANDS OF CANADIAN DOLLARS)



|                                                                       |             |  | Year
    Ended  
|---------------------------------------------------------------------- | ----------- |  | ----------------
|                                                                       |             |  | December
    31,
|                                                                       | Note        |  | 2016            
|OPERATING                                                              |             |  |                 
|Net
    loss                                                           |             |  | (160,051)       
|Adjustments:                                                           |             |  |                 
|Accretion                                                              | 8           |  | 24,783          
|Depletion and depreciation                                             | 6,
    7    |  | 528,002         
|Impairment                                                             | 6,
    7    |  | 14,762          
|Gain on business combination                                           | 5           |  | (22,001)        
|Unrealized loss (gain)
    on derivative instruments                   | 9           |  | 137,993         
|Equity based compensation                                              | 15          |  | 69,235          
|Unrealized foreign
    exchange loss (gain)                            |             |  | 792             
|Unrealized other expense                                               |             |  | 131             
|Deferred taxes                                                         | 11          |  | (82,855)        
|Asset
    retirement obligations settled                               | 8           |  | (9,617)         
|Changes
    in non-cash operating working capital                      | 20          |  | 8,366           
|Cash
    flows from operating activities                               |             |  | 509,540         
|                                                                       |             |  |                 
|INVESTING                                                              |             |  |                 
|Drilling
    and development                                           | 6           |  | (241,545)       
|Exploration
    and evaluation                                         | 7           |  | (863)           
|Property
    acquisitions                                              | 5,
    6, 7 |  | (98,524)        
|Changes
    in non-cash investing working capital                      | 20          |  | (12,298)        
|Cash
    flows used in investing activities                            |             |  | (353,230)       
|                                                                       |             |  |                 
|FINANCING                                                              |             |  |                 
|Increase
    in long-term debt                                         | 12          |  | 202,617         
|Repayment
    of senior unsecured notes                                | 12          |  | (225,000)       
|Decrease
    in finance lease obligation                               | 10          |  | (4,270)         
|Cash
    dividends                                                     | 13          |  | (104,723)       
|Cash
    flows (used in) from financing activities                     |             |  | (131,376)       
|Foreign
    exchange (loss) gain on cash held in foreign currencies    |             |  | (3,835)         
|                                                                       |             |  |                 
|Net
    change in cash and cash equivalents                            |             |  | 21,099          
|Cash
    and cash equivalents, beginning of year                       |             |  | 41,676          
|Cash
    and cash equivalents, end of year                             | 20          |  | 62,775          
|                                                                       |             |  |                 
|Supplementary
    information for cash flows from operating activities |             |  |                 
|Interest paid                                                          |             |  | 60,221          
|Income
    taxes (received) paid                                       |             |  | (10,535)        



8


Vermilion Energy Inc.2016 Financial Statements




CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(THOUSANDS OF CANADIAN DOLLARS)



|                                           |                                                           |            |           | Year
    Ended  
|------------------------------------------ | --------------------------------------------------------- | ---------- | --------- | ----------------
|                                           |                                                           |            |           | December
    31,
|                                           |                                                           | Note       |           | 2016            
|SHAREHOLDERS'
    CAPITAL                  |                                                           |            |           |                 
|                                           | Balance,
    beginning of period                          |            |           | 2,181,089       
|                                           | Shares
    issued for the DRIP(1)                         | 13         |           | 192,998         
|                                           | Vesting
    of equity based awards                        | 13,
    15 |           | 67,146          
|                                           | Equity
    based compensation                             | 13,
    15 |           | 8,247           
|                                           | Share-settled
    dividends on vested equity based awards | 13,
    15 |           | 3,242           
|                                           | Balance,
    end of period                                | 13         |           | 2,452,722       
|CONTRIBUTED
    SURPLUS                    |                                                           |            |           |                 
|                                           | Balance,
    beginning of period                          |            |           | 107,946         
|                                           | Equity
    based compensation                             | 15         |           | 60,988          
|                                           | Vesting
    of equity based awards                        | 13,
    15 |           | (67,146)        
|                                           | Balance,
    end of period                                |            |           | 101,788         
|ACCUMULATED
    OTHER COMPREHENSIVE INCOME |                                                           |            |           |                 
|                                           | Balance,
    beginning of period                          |            |           | 113,647         
|                                           | Currency
    translation adjustments                      |            |           | (83,308)        
|                                           | Balance,
    end of period                                |            |           | 30,339          
|DEFICIT                                    |                                                           |            |           |                 
|                                           | Balance,
    beginning of period                          |            |           | (544,023)       
|                                           | Net
    loss                                              |            |           | (160,051)       
|                                           | Dividends
    declared                                    | 13         |           | (299,070)       
|                                           | Share-settled
    dividends on vested equity based awards | 13,
    15 |           | (3,242)         
|                                           | Balance,
    end of period                                |            |           | (1,006,386)     
|                                           |                                                           |            |           |                 
|TOTAL
    SHAREHOLDERS' EQUITY             |                                                           |            | 1,578,463 |                 



(1) DRIP refers to Vermilion’s
dividend reinvestment and Premium DividendTM plans.



Description
of equity reserves



Shareholders’ capital

Represents the recognized amount for common
shares when issued, net of equity issuance costs and deferred taxes.



Contributed surplus

Represents the recognized value of equity based
awards that are settled in shares. Once vested, the value of the awards are transferred to shareholders’ capital.



Accumulated other comprehensive income

Represents currency translation adjustments
resulting from translating financial statements of subsidiaries with a foreign functional currency to Canadian dollars at period-end
rates. These amounts may be reclassified to net earnings if there is a disposal or partial disposal of a subsidiary.



Deficit

Represents the cumulative net earnings and
losses less distributed earnings of Vermilion Energy Inc.



9


Vermilion Energy Inc.2016 Financial Statements




notes
to the Consolidated Financial Statements

For
the year ended December 31, 2016 and 2015

(Tabular
amounts in thousands of Canadian dollars, except share and per share amounts)



1. BASIS OF PRESENTATION



Vermilion Energy Inc. and its subsidiaries
(the “Company” or “Vermilion”) are engaged in the business of petroleum and natural gas exploration, development,
acquisition, and production.



Vermilion was incorporated in Canada and the
Company’s registered office and principal place of business is located at 3500, 520, 3rd Avenue SW, Calgary,
Alberta, Canada.



These consolidated financial statements were
approved and authorized for issuance by Vermilion’s Board of Directors on February 24, 2017.



2. SIGNIFICANT ACCOUNTING POLICIES



Accounting Framework

The consolidated financial statements have
been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”).



Principles of Consolidation

The consolidated financial statements include
the accounts of Vermilion Energy Inc. and its subsidiaries. Transactions between Vermilion Energy Inc. and its subsidiaries have
been eliminated.



Vermilion accounts for joint operations by
recognizing the Company’s share of assets, liabilities, income and expenses.



Exploration and Evaluation Assets

Vermilion classifies costs as Exploration and
Evaluation (“E&E”) assets when they relate to exploring and evaluating an area for which the Company has the licence
or right to explore and extract resources. E&E costs may include geological and geophysical costs, land acquisition costs,
and costs for drilling, completion, and testing of exploration wells.



E&E costs are reclassified to capital assets
if the technical feasibility and commercial viability of the area can be determined. E&E assets are assessed for impairment
prior to any reclassification. The technical feasibility and commercial viability of extracting the reserves is considered to
be determinable when proved and probable reserves are identified.



Costs incurred prior to the acquisition of
the legal rights to explore an area are expensed as incurred. If reserves are not found within the license area or the area is
abandoned, the related E&E costs are amortized over a period not greater than five years. If an exploration license expires
prior to the commencement of exploration activities, the cost of the exploration license is written off through depletion in the
year of expiration.



Capital Assets

Vermilion recognizes capital assets at cost
less accumulated depletion, depreciation and impairment losses. Costs include directly attributable costs incurred for the drilling
and completion of wells and the construction of production and processing facilities.



When components of capital assets are replaced,
disposed of, or no longer in use, they are derecognized. Gains and losses on disposal of capital assets are determined by comparing
the proceeds of disposal compared to the carrying amount.



Depletion and Depreciation

Capital assets are grouped into depletion units,
which are groups of assets within a specific production area that have similar economic lives. Depletion units represent the lowest
level of disaggregation for which costs are accumulated for the purposes of calculating depletion and depreciation.



The net carrying value of each depletion unit
is depleted using the unit of production method by reference to the ratio of production in the period to the total proved and
probable reserves, taking into account the future development costs necessary to bring the applicable reserves into production.



For the purposes of the depletion calculations,
oil and gas reserves are converted to a common unit of measure on the basis of their relative energy content based on a conversion
ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent.





10


Vermilion Energy Inc.2016 Financial Statements




Impairment of Capital Assets and Exploration
and Evaluation Assets

Depletion units are aggregated into cash generating
units (“CGUs”) for impairment testing. CGUs are the lowest level for which there are identifiable cash inflows that
are largely independent of cash inflows of other groups of assets. CGUs are reviewed for indicators of potential impairment at
each reporting date.



E&E assets are tested for impairment when
reclassified to capital assets or when indicators of potential impairment are identified. E&E assets are reviewed for indicators
of potential impairment at each reporting date. If indicators of potential impairment are identified, E&E assets are tested
for impairment as part of the CGU attributable to the jurisdiction the exploration area resides.



If an indicator of potential impairment exists,
the CGU’s carrying value is compared to its recoverable amount. A CGU’s recoverable amount is the higher of its fair
value less costs of disposal and its value in use. If the carrying amount of a CGU exceeds its recoverable amount, an impairment
loss is recognized to reduce the carrying value of the CGU to its recoverable amount.



If an impairment loss has been recognized in
a prior period, an assessment is performed at each reporting date to determine if the circumstances which led to the impairment
loss have reversed. If the change in circumstances leads to the recoverable amount being higher than the carrying value after
the impairment loss, then the impairment loss (net of depletion that would otherwise have been recorded) is reversed.



Finance leases

Finance leases are leases which transfer substantially
all of the risks and rewards incidental to legal ownership of the leased asset to Vermilion. A finance lease obligation is recognized
at the commencement of the lease term at the lower of fair value of the leased asset or the present value of the minimum lease
payments.



Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit
with financial institutions and guaranteed investment certificates.



Crude Oil Inventory

Crude oil inventory is valued at the lower
of cost or net realizable value. Cost of crude oil inventory produced is determined on a weighted-average basis and includes related
operating expenses, royalties, and depletion.



Asset Retirement Obligations

Vermilion recognizes a provision for asset
retirement obligations when an event occurs giving rise to an obligation of uncertain timing or amount. Asset retirement obligations
are recognized on the consolidated balance sheet as a long-term liability with a corresponding increase to E&E or capital
assets.



Asset retirement obligations reflect the present
value of estimated future settlement costs. The discount rate used to calculate the present value is specific to the jurisdiction
the obligation relates to and is reflective of current market assessment of the time value of money and risks specific to the
liabilities that have not been reflected in the cash flow estimates.



Asset retirement obligations are remeasured
at each reporting period to reflect changes in discount rates and estimated future settlement costs. Asset retirement obligations
are increased each reporting period to reflect the passage of time with a corresponding charge to accretion expense.



Revenue Recognition

Revenues associated with the sale of petroleum
and natural gas are recorded when title passes to the customer. Revenue is recognized when all the following conditions have been
satisfied:

| | · | Vermilion
                                         has transferred the significant risks and rewards of ownership of the petroleum and natural
                                         gas to the customer;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Vermilion
                                         retains no continuing managerial involvement to the degree usually associated with ownership
                                         or effective control over the petroleum or natural gas sold;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The
                                         amount of the revenue can be reliably measured;
| | - | --------------------------------------------------------------------------------------------

| | · | It
                                         is probable that the economic benefits associated with the transaction will flow to Vermilion;
                                         and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The
                                         costs incurred or to be incurred in respect of the transaction can be measured reliably.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



Financial Instruments

Financial instruments are measured at fair
value on initial recognition. Measurement in subsequent periods depends on the classification of the financial instrument as described
below:



| | · | Held
                                         for trading: Held for trading financial instruments are subsequently measured at fair
                                         value on the consolidated balance sheet and gains and losses are recognized in net earnings.
                                         Cash and cash equivalents and derivatives assets and liabilities are classified as held
                                         for trading.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Loans
                                         and receivables and other financial liabilities: Loans and receivables and other financial
                                         liabilities are subsequently measured at amortized cost. Accounts receivable are classified
                                         as loans and receivables. Accounts payable and accrued liabilities, dividends payable,
                                         finance lease, and long-term debt are classified as other financial liabilities.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11


Vermilion Energy Inc.2016 Financial Statements




Equity Based Compensation

Equity based compensation expense results from
equity-settled awards issued under Vermilion’s long-term share-based compensation plan (the “Vermilion Incentive Plan”
or “VIP”) as well as the grant date fair value of Vermilion common shares issued under the Company’s bonus and
employee share savings plans.



Equity-settled awards issued under the VIP
vest over a period of one to three years and awards outstanding are adjusted upon vesting by a performance factor determined by
the Company’s Board of Directors. Equity based compensation expense for the VIP is recognized over the vesting period with
a corresponding adjustment to contributed surplus. The expense recognized is based on the grant date fair value of the VIP awards,
an estimate of the performance factor that will be achieved, and an estimate of forfeiture rates based on historical vesting data.
Dividends notionally accrue to the VIP awards and are excluded in the determination of grant date fair values. Upon vesting, the
amount recognized in contributed surplus is reclassified to shareholders’ capital.



The grant date fair value of the equity-settled
awards issued under the VIP and the grant date fair value of Vermilion common shares issued under the Company’s bonus and
employee share savings plans are determined as the closing price of Vermilion’s common shares on the Toronto Stock Exchange
on the grant date.



Per Share Amounts

Basic net loss per share is calculated by dividing
net loss by the weighted-average number of shares outstanding during the period.



Diluted net loss per share is calculated by
dividing net loss by the diluted weighted-average number of shares outstanding during the period. The diluted weighted-average
number of shares outstanding is the sum of the weighted-average number of shares outstanding and, to the extent inclusion reduces
net earnings per share, the number of shares issuable under the VIP determined using the treasury stock method. The treasury stock
method assumes that the unrecognized equity based compensation expense are deemed proceeds used to repurchase Vermilion common
shares at the average market price during the period.



Foreign Currency Translation

Vermilion Energy Inc.’s functional and
presentation currency is the Canadian dollar. Vermilion has subsidiaries that transact and operate in countries other than Canada
and have functional currencies other than the Canadian dollar.



Foreign currency translations include the translation
of foreign currency transactions and the translation of foreign operations.



Foreign currency translations occur when translating
transactions in foreign currencies to the applicable functional currency of Vermilion Energy Inc. and its subsidiaries. Gains
and losses from foreign currency transactions are recorded as foreign exchange gains or losses. Translations occur as follows:

| | · | Income
                                         and expenses are translated at the prevailing rates on the date of the transaction
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | · | Non-monetary
                                         assets or liabilities are carried at the prevailing rates on the date of the transaction
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| | · | Monetary
                                         items are translated at the prevailing rates at the balance sheet date
| | - | ------------------------------------------------------------------------------------------------------------------------



Foreign operation translations occur when translating
the financial statements of non-Canadian functional currency subsidiaries to the Canadian dollar and when translating intercompany
loans that are deemed to represent net investments in a foreign subsidiary. Gains and losses from foreign operation translations
are recorded as currency translation adjustments. Translations occur as follows:

| | · | Income
                                         and expenses are translated at the average exchange rates for the period
| | - | ------------------------------------------------------------------------------------------------------------------------

| | · | Assets
                                         and liabilities are translated at the prevailing rates on the balance sheet date.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



Income Taxes

Deferred taxes are calculated using the balance
sheet method. Deferred tax is recognized for the estimated effect of any temporary differences between the amounts recognized
on Vermilion’s consolidated balance sheet and the respective tax basis. This calculation uses enacted or substantively enacted
tax rates that are expected to be in effect when the temporary differences are expected to reverse. The effect of a change in
tax rates on deferred taxes is recognized in the period the related legislation is substantively enacted.



Deferred tax assets are recognized to the extent
that it is probable that future taxable profits will be available against which the deductible temporary differences can be used.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent it is no longer probable that the related
tax benefit will be realized.



12


Vermilion Energy Inc.2016 Financial Statements




Management Judgments and Estimation Uncertainty

The preparation of the consolidated financial
statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the reported
amount of assets, liabilities, income and expenses. Actual results could differ significantly from these estimates.



Key areas where management has made judgments,
estimates, and assumptions include:



| | · | Asset
                                         retirement obligations: Asset retirement obligations are based on judgments regarding
                                         regulatory requirements, estimates of future costs, and the expected timing of expenditures.
                                         The carrying balance of asset retirement obligations and accretion expense may differ
                                         due to changes in: laws and regulations, technology, the expected timing of expenditures,
                                         and market conditions affecting the discount rate applied.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Determination
                                         of CGUs: CGU determination is subject to management’s judgment of the lowest level
                                         at which there are identifiable cash inflows that are largely independent of the cash
                                         inflows of other groups of assets. The factors used by Vermilion to determine CGUs vary
                                         by jurisdiction due to their unique operating and geographic conditions. In general,
                                         Vermilion will assess the following factors: geographic proximity of the assets within
                                         a group to one another, geographic proximity of the group of assets to other groups of
                                         assets, homogeneity of the production from the group of assets and the sharing of infrastructure
                                         used to process and/or transport production. The composition of CGUs can directly impact
                                         the calculated recoverable amount of a CGU and the recorded impairment loss or recovery.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Assessment
                                         of impairments or recovery of previous impairments: The calculation of the recoverable
                                         amount of a CGU is based on market factors (including estimated future commodity prices)
                                         and estimates of reserves and resources. Reserve and resource estimates are based on:
                                         engineering data, estimated future commodity prices, expected future rates of production,
                                         and assumptions regarding the timing and amount of future expenditures. Changes in these
                                         judgments, estimates and assumptions can directly impact the calculated recoverable amount
                                         of a CGU and the recorded impairment loss or recovery.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Income
                                         Taxes:Tax interpretations, regulations, and legislation in the various jurisdictions
                                         in which Vermilion and its subsidiaries operate are subject to change and interpretation.
                                         Changes in laws and interpretations can affect the timing of the reversal of temporary
                                         tax differences, the tax rates in effect when such differences reverse and Vermilion’s
                                         ability to use tax losses and other tax pools in the future. The Company’s income
                                         tax filings are subject to audit by taxation authorities in numerous jurisdictions and
                                         the results of such audits may increase or decrease the tax liability.The determination
                                         of tax amounts recognized in the consolidated financial statements are based on management’s
                                         assessment of the tax positions, which includes consideration of their technical merits,
                                         communications with tax authorities and management’s view of the most likely outcome.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3. CHANGES TO ACCOUNTING PRONOUNCEMENTS



The following IFRS have been issued by the IASB but are not yet
effective:



| | · | IFRS
                                         9 “Financial Instruments” will be adopted January 1, 2018. IFRS 9 includes
                                         changes to the classification and measurement of financial instruments and general hedge
                                         accounting.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | IFRS
                                         15 “Revenue from Contracts with Customers” will be adopted January 1, 2018.
                                         IFRS 15 specifies recognition and measurement requirements for contracts with customers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | IFRS
                                         16 “Leases” will be adopted January 1, 2019. IFRS 16 requires lessees to
                                         recognize a lease obligation and right-of-use asset for the majority of leases.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On the adoption of IFRS 9, Vermilion does not
currently anticipate changes to the measured amount of financial instruments and correspondingly does not currently anticipate
material changes to net earnings.



In the adoption of IFRS 15, Vermilion has in
place a transition team that will perform a detailed review of the Company’s standard contracts with customers in accordance
with the issued IFRS.



The impact of the adoption of IFRS 16 is currently
being evaluated.



13


Vermilion Energy Inc.2016 Financial Statements




4. SEGMENTED INFORMATION



Vermilion has a decentralized business unit
structure designed to manage assets in each country the Company operates in. Excluding the Corporate segment, each of the below
operating segments derives its revenues solely from the production and sale of petroleum and natural gas.



Vermilion’s Corporate segment aggregates
costs incurred at the Company’s Corporate head office located in Calgary, Alberta, Canada as well as costs incurred relating
to Vermilion’s exploration activities in Central and Eastern Europe. These operating segments have similar economic characteristics
as they do not currently generate revenue.



Vermilion’s Chief Operating Decision
maker regularly reviews fund flows from operations generated by each of Vermilion’s operating segments. Fund flows from
operations is a measure of profit or loss that provides the Chief Operating Decision maker with the ability to assess the operating
segments’ profitability and, correspondingly, the ability of each operating segment to fund its share of dividends, asset
retirement obligations, and capital investments.



Vermilion has three major customers with revenues
in excess of 10% of consolidated revenues within the France, Netherlands, and Ireland operating segments. Substantially all sales
in the France, Netherlands, and Ireland operating segments for the years ended December 31, 2016 and 2015 were to one customer
in each respective segment.





14


Vermilion Energy Inc.2016 Financial Statements








|                                            | Year
    Ended December 31, 2016
|------------------------------------------- | --------------------------------
|($M)                                        | Canada                          
|Total
    assets                            | 1,522,243                       
|Drilling
    and development                | 62,706                          
|Exploration
    and evaluation              | -                               
|Oil
    and gas sales to external customers | 252,867                         
|Royalties                                   | (21,475)                        
|Revenue
    from external customers         | 231,392                         
|Transportation                              | (15,392)                        
|Operating                                   | (71,543)                        
|General
    and administration              | (11,826)                        
|PRRT                                        | -                               
|Corporate
    income taxes                  | -                               
|Interest
    expense                        | -                               
|Realized
    gain on derivative instruments | -                               
|Realized
    foreign exchange gain          | -                               
|Realized
    other income                   | -                               
|Fund
    flows from operations              | 132,631                         



|                                            | Year
    Ended December 31, 2015
|------------------------------------------- | --------------------------------
|($M)                                        | Canada                          
|Total
    assets                            | 1,609,180                       
|Drilling
    and development                | 201,508                         
|Oil
    and gas sales to external customers | 320,613                         
|Royalties                                   | (28,144)                        
|Revenue
    from external customers         | 292,469                         
|Transportation                              | (16,326)                        
|Operating                                   | (89,085)                        
|General
    and administration              | (16,888)                        
|PRRT                                        | -                               
|Corporate
    income taxes                  | -                               
|Interest
    expense                        | -                               
|Realized
    gain on derivative instruments | -                               
|Realized
    foreign exchange gain          | -                               
|Realized
    other income                   | -                               
|Fund
    flows from operations              | 170,170                         



Reconciliation of fund flows from operations to net loss

|                                                     | Year
    Ended  
|---------------------------------------------------- | ----------------
|($M)                                                 | Dec
    31, 2016
|Fund
    flows from operations                       | 510,791         
|Accretion                                            | (24,783)        
|Depletion
    and depreciation                       | (528,002)       
|Impairment                                           | (14,762)        
|Gain
    on business combination                     | 22,001          
|Unrealized
    (loss) gain on derivative instruments | (137,993)       
|Equity
    based compensation                        | (69,235)        
|Unrealized
    foreign exchange (loss) gain          | (792)           
|Unrealized
    other expense                         | (131)           
|Deferred
    taxes                                   | 82,855          
|Net
    loss                                         | (160,051)       



15


Vermilion Energy Inc.2016 Financial Statements






5. BUSINESS COMBINATIONS



In December of 2016, Vermilion acquired, through
a wholly-owned subsidiary, interests in production and exploration assets in Germany from Engie E&P Deutschland GmbH. The
acquisition includes operated and non-operated interests in five oil and three gas producing fields, along with an operated interest
in one exploration license. The acquisition provides Vermilion its first operated producing properties in Germany, and advances
the Company’s objective of developing a material business unit in this country.



The acquisition was accounted for as a business
combination. The total consideration paid and the fair value of the assets acquired and liabilities assumed at the date of acquisition
are summarized as follows:



|($M)                                                               | Consideration                  
|------------------------------------------------------------------ | -------------------------------
|Cash
    paid to vendor                                            |                                
|Total
    consideration                                            |                                
|                                                                   |                                
|($M)                                                               | Allocation
    of Consideration
|Capital
    assets                                                 |                                
|Asset
    retirement obligations                                   |                                
|Deferred
    taxes                                                 |                                
|Crude
    oil inventory                                            |                                
|Net
    assets acquired                                            |                                
|Gain
    on business combination                                   |                                
|Total
    net assets acquired, net of gain on business combination |                                



In calculating the fair value of capital assets,
Vermilion considered the net present value of after-tax cash flows from proved plus probable reserves using applicable price decks
published by reserve engineering firms (refer to Financial Statement Note 6) and an after-tax discount rate of 12%.



The determination of asset retirement obligations
was based on a total undiscounted future liability of $182.3 million. These payments are expected to be made between 2027 and
2049, with the majority of spending occurring between 2043 and 2049 ($78.8 million). The inflation rate used in determining the
cash flow estimates was 1.28%. The present value of the obligations was calculated using a credit-adjusted risk-free rate, calculated
using a credit spread of 3.8% added to a risk-free rate of 0.9%. Refer to Financial Statement Note 8 for additional information
regarding asset retirement obligations.



As the acquisition of control occurred late
in 2016, the results of operations from the assets acquired were not significant to Vermilion's consolidated financial statements
for the year ended December 31, 2016. Had the acquisition occurred on January 1, 2016, management estimates that consolidated
revenues would have increased by $29.3 million and consolidated fund flows from operations would have increased by $8.1 million
for the year ended December 31, 2016. Fund flows from operations is Vermilion’s measure of profit or loss in accordance
with IFRS 8 “Operating Segments”. Please see Financial Statement Note 4 for a reconciliation of fund flows from operations
to net earnings.



The gain on business combination resulted from
the recognition of additional reserve value when the acquisition closed in December 2016, compared to the estimated value in June
when Vermilion entered into a definitive purchase and sale agreement and the acquisition price was determined.



16


Vermilion Energy Inc.2016 Financial Statements




6. CAPITAL ASSETS



The following table reconciles the change in Vermilion's capital
assets:



|($M)                                        | 2016        |  | 2015       
|------------------------------------------- | ----------- |  | -----------
|Balance
    at January 1                    | 3,467,369   |  | 3,511,092  
|Additions                                   | 241,545     |  | 486,861    
|Property
    acquisitions                   | 189,853     |  | 27,731     
|Changes
    in asset retirement obligations | 149,492     |  | (78,429)   
|Depletion
    and depreciation              | (491,508)   |  | (438,342)  
|Recognition
    of finance lease asset      | 960         |  | 31,028     
|Impairment                                  | (14,762)    |  | (219,808)  
|Foreign
    exchange                        | (109,704)   |  | 147,236    
|Balance
    at December 31                  | 3,433,245   |  | 3,467,369  
|                                            |             |  |            
|Cost                                        | 6,256,485   |  | 5,682,461  
|Accumulated
    depletion and depreciation  | (2,823,240) |  | (2,215,092)
|Carrying
    amount at December 31          | 3,433,245   |  | 3,467,369  



Impairment

As at December 31, 2016, Vermilion did not
identify any indicators of impairment. However, Vermilion recorded an impairment in the three months ended March 31, 2016.



In assessing the recoverable value of a CGU,
Vermilion considers the higher of its fair value less costs of disposal and its value in use. For the periods ended March 31,
2016 and December 31, 2015, Vermilion considered the net present value of after-tax cash flows from proved plus probable reserves
based on the applicable price decks published by GLJ Petroleum Consultants, Sproule, and McDaniel and Associates. In both 2016
and 2015, Vermilion applied an after-tax discount rate of 9%.



In addition, where applicable, Vermilion also
considered:

| | · | The
                                         fair value of undeveloped land determined based on orderly land transactions with similar
                                         characteristics as Vermilion’s undeveloped land.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The
                                         net present value of contingent and prospective resources, discounted at an after-tax
                                         discount rate of 15%.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Amounts calculated using fair value less costs
of disposal are categorized as a Level 3 fair value measurements due to the use of unobservable inputs in the calculation.

In 2015, as a result of declines in price forecasts for crude oil and Canadian natural gas, Vermilion recorded a non-cash impairment
charge of $274.6 million ($219.8 million relating to capital assets and $54.8 million relating to E&E assets) in the Canada
segment. The impairment charge related to the light crude oil play in Saskatchewan ($267.9 million based on a recoverable amount
of $266.8 million) and shallow coal bed methane properties in Alberta ($6.7 million based on a recoverable amount of $19.7 million).



In the first quarter of 2016, as a result of
declines in price forecasts for European natural gas, Vermilion recorded a non-cash impairment charge of $14.8 million (based
on a recoverable amount of $737.3 million) in the Ireland segment.



The following table outlines the forward commodity
price estimates that were used to assess impairment as at December 31, 2016, as well as to determine the fair value of capital
assets for the business combination discussed in Financial Statement Note 5.



|Forward
    Commodity Price Assumptions
|---------------------------------------
|                                       
|NBP
    (€/mmbtu)(2)                   
|WTI
    (US $/bbl)(3)                  
|Brent
    (US $/bbl)(3)                
|AECO
    ($/mmbtu)(3)                  



(1) Escalated at 2.0% per year thereafter.

(2) Source: Average of GLJ Petroleum
Consultants and Sproule price forecasts, effective January 1, 2017.

(3) Source: Average of GLJ Petroleum
Consultants, Sproule, and McDaniel & Associates Consultants price forecasts, effective January 1, 2017.



17


Vermilion Energy Inc.2016 Financial Statements




The determination of impairment is sensitive
to changes in key judgements, including reserve revisions, changes in forward commodity prices and exchange rates, and changes
in costs and timing of development. Changes in these key judgments would impact the recoverable amounts of CGUs, therefore resulting
in additional impairment charges and reversals. The following table demonstrates the impact of a 5% decrease in commodity price
estimates and a 1% increase in discount rate assumptions on the recorded impairment as at December 31, 2016:



|($M)                                 | 1%
    Increase inDiscount Rate |  | 5%
    Decrease inCommodity
 Prices
|------------------------------------ | ------------------------------- |  | -----------------------------------
|Saskatchewan
    light crude oil     | -                               |  | (8,304)                            
|Alberta
    shallow coal bed methane | -                               |  | (853)                              
|Ireland
    natural gas              | -                               |  | -                                  
|Impairment                           | -                               |  | (9,157)                            



7. EXPLORATION AND EVALUATION ASSETS



The following table reconciles the change in Vermilion's exploration
and evaluation assets:



|($M)                                        | 2016     |  | 2015    
|------------------------------------------- | -------- |  | --------
|Balance
    January 1                       | 308,192  |  | 380,621 
|Additions                                   | 863      |  | -       
|Property
    acquisitions                   | 2,644    |  | 1,166   
|Changes
    in asset retirement obligations | 14       |  | (130)   
|Depreciation                                | (35,238) |  | (21,893)
|Impairment(1)                               | -        |  | (54,815)
|Foreign
    exchange                        | (1,645)  |  | 3,243   
|Balance
    December 31                     | 274,830  |  | 308,192 
|                                            |          |  |         
|Cost                                        | 333,835  |  | 362,919 
|Accumulated
    depreciation                | (59,005) |  | (54,727)
|Carrying
    amount at December 31          | 274,830  |  | 308,192 



(1) Refer to Financial Statement
Note 6 – Capital Assets



18


Vermilion Energy Inc.2016 Financial Statements




8. ASSET RETIREMENT OBLIGATIONS



The following table reconciles the change in
Vermilion’s asset retirement obligations:



|($M)                                  | 2016     |  | 2015    
|------------------------------------- | -------- |  | --------
|Balance
    at January 1              | 305,613  |  | 350,753 
|Additional
    obligations recognized | 68,288   |  | 3,550   
|Changes
    in estimates              | 3,454    |  | 1,117   
|Obligations
    settled               | (9,617)  |  | (11,369)
|Accretion                             | 24,783   |  | 23,911  
|Changes
    in discount rates         | 144,729  |  | (83,226)
|Foreign
    exchange                  | (12,228) |  | 20,877  
|Balance
    at December 31            | 525,022  |  | 305,613 



Vermilion has estimated the asset retirement
obligations based on a total undiscounted future liability of $1.4 billion (2015 - $1.3 billion). These payments are expected
to be made between 2017 and 2065, with the majority of spending occurring between 2030 and 2037 ($348.2 million) and between 2044
and 2048 ($241.5 million). Inflation rates used in determining the cash flow estimates were between 0.5% and 2.2% (2015 - between
0.6% and 2.4%). Vermilion calculated the present value of the obligations using a credit-adjusted risk-free rate, calculated using
a credit spread of 3.8% (2015 - 7.0%) added to risk-free rates based on long-term, risk-free government bonds.



The risk-free rates used to discount the obligations
were as follows:



|            |        | Dec
    31, |      | Dec
    31,
|----------- | ------ | ----------- | ---- | -----------
|            | 2016   |             | 2015
|Canada      | 2.3%   |             | 2.2%
|France      | 1.7%   |             | 2.1%
|Netherlands | (0.3%) |             | 0.1%
|Germany     | 0.9%   |             | 0.7%
|Ireland     | 0.5%   |             | 1.0%
|Australia   | 3.2%   |             | 3.3%
|USA         | 2.6%   |             | 2.5%



A 0.5% increase/decrease in the credit spread
would decrease/increase asset retirement obligations by approximately $40.0 million.



19


Vermilion Energy Inc.2016 Financial Statements




9. DERIVATIVE INSTRUMENTS



The following table reconciles the change in the fair value of Vermilion’s
derivative instruments:



|                                                                                    |                                      |                  | Year
    Ended
|----------------------------------------------------------------------------------- | ------------------------------------ | ---------------- | --------------
|($M)                                                                                | Dec
    31, 2016                     | Dec
    31, 2015
|Fair
    value of contracts, beginning of year                                      |                                      | 68,342           |               
|Reversal
    of opening contracts settled during the year                           |                                      | (55,214)         |               
|Realized
    gain on contracts settled during the year                              |                                      | 65,376           |               
|Unrealized
    gain during the year on contracts outstanding at the end of the year |                                      | (82,779)         |               
|Net
    receipt from counterparties on contract settlements during the year         |                                      | (65,376)         |               
|Fair
    value of contracts, end of year                                            |                                      | (69,651)         |               
|Comprised
    of:                                                                   |                                      |                  |               
|                                                                                    | Current
    derivative asset         |                  | 4,336         
|                                                                                    | Current
    derivative liability     |                  | (47,660)      
|                                                                                    | Non-current
    derivative asset     |                  | 1,157         
|                                                                                    | Non-current
    derivative liability |                  | (27,484)      
|Fair
    value of contracts, end of year                                            |                                      | (69,651)         |               



The loss (gain) on derivative instruments for 2016 and
2015 were comprised of the following:





|                                                                                           | Year
    Ended  
|------------------------------------------------------------------------------------------ | ----------------
|($M)                                                                                       | Dec
    31, 2016
|Realized
    gain on contracts settled during the year                                     | (65,376)        
|Reversal
    of opening contracts settled during the year                                  | 55,214          
|Unrealized
    loss (gain) during the year on contracts outstanding at the end of the year | 82,779          
|Loss
    (gain) on derivative instruments                                                  | 72,617          



10. LEASES



Vermilion had the following future commitments associated with its
operating leases:





|                                 | As
    at       
|-------------------------------- | ----------------
|($M)                             | Dec
    31, 2016
|Less
    than 1 year             | 12,683          
|1
    - 3 years                  | 21,087          
|4
    - 5 years                  | 18,228          
|After
    5 years                | 1,657           
|Total
    minimum lease payments | 53,655          



A solution gas facility used in Vermilion’s
southeast Saskatchewan operations has been recorded as a finance lease. The assets are to be used for a minimum period of 10 years,
with an option to renew for successive one year terms. As at December 31, 2016, the carrying amount of the asset included in capital
assets is $26.1 million.



Vermilion had the following future commitments associated with its
finance lease:





|                                                    | As
    at       
|--------------------------------------------------- | ----------------
|($M)                                                | Dec
    31, 2016
|Less
    than 1 year                                | 6,495           
|1
    - 3 years                                     | 12,990          
|4
    - 5 years                                     | 6,043           
|After
    5 years                                   | 4,501           
|Total
    minimum lease payments                    | 30,029          
|Amounts
    representing interest                   | (3,894)         
|Present
    value of net minimum lease payments     | 26,135          
|Current
    portion of finance lease obligation     | (6,507)         
|Non-current
    portion of finance lease obligation | 19,628          



20


Vermilion Energy Inc.2016 Financial Statements




11. TAXES



The following table reconciles Vermilion’s deferred tax asset
and liability:



|                              |                                  |                  | As
    at       
|----------------------------- | -------------------------------- | ---------------- | ----------------
|($M)                          |                                  | Dec
    31, 2016 | Dec
    31, 2015
|Deferred
    tax liabilities: |                                  |                  |                 
|                              | Derivative
    contracts         |                  | -               
|                              | Capital
    assets               |                  | (265,772)       
|                              | Non-capital
    losses           |                  | 20,561          
|                              | Asset
    retirement obligations |                  | (20,577)        
|                              | Unrealized
    foreign exchange  |                  | (15,386)        
|                              | Other                            |                  | (2,359)         
|Deferred
    tax liabilities  |                                  | (283,533)        |                 
|Deferred
    tax assets:      |                                  |                  |                 
|                              | Derivative
    contracts         |                  | 18,806          
|                              | Capital
    assets               |                  | (55,718)        
|                              | Non-capital
    losses           |                  | 155,447         
|                              | Asset
    retirement obligations |                  | 28,960          
|                              | Unrealized
    foreign exchange  |                  | (72)            
|                              | Other                            |                  | 4,623           
|Deferred
    tax assets       |                                  | 152,046          |                 



Income tax expense differs from the amount that would have been
expected if the reported earnings had been subject only to the statutory Canadian income tax rate as follows:



|                                                 |                                                                                                   |                  | Year
    Ended
|------------------------------------------------ | ------------------------------------------------------------------------------------------------- | ---------------- | --------------
|($M)                                             | Dec
    31, 2016                                                                                  | Dec
    31, 2015
|Loss
    before income taxes                     |                                                                                                   | (223,228)        |               
|Canadian
    corporate tax rate(1)               |                                                                                                   | 27.0%            |               
|Expected
    recovery                            |                                                                                                   | (60,272)         |               
|Increase
    (decrease) in taxes resulting from: |                                                                                                   |                  |               
|                                                 | Petroleum
    resource rent tax rate (PRRT) differential(2)                                       |                  | 1,064         
|                                                 | Foreign
    tax rate differentials(2), (3)                                                        |                  | (16,675)      
|                                                 | Equity
    based compensation expense                                                             |                  | 14,987        
|                                                 | Amended
    returns and changes to estimated tax pools and tax positions                          |                  | 6,451         
|                                                 | Statutory
    rate changes and the estimated reversal rates associated with temporary differences |                  | (53,150)      
|                                                 | De-recognition                                                                                    |                  | 46,253        
|                                                 | Adjustment
    for uncertain tax positions                                                        |                  | 3,675         
|                                                 | Other
    non-deductible items                                                                    |                  | (5,510)       
|Provision
    for income taxes                   |                                                                                                   | (63,177)         |               



| | (1) | The corporate tax rate increased
                                         to 27.0% in 2016 from 26.2% in 2015 as a result of the 2016 full year impact from the
                                         Alberta corporate tax rate increase of 2.0% effective July 1, 2015.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In Australia, current taxes
                                         include both corporate income tax rates and PRRT. Corporate income tax rates were applied
                                         at a rate of 30% and PRRT was applied at a rate of 40%.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The combined tax rate was
                                         34.4% in France, 50.0% in the Netherlands, 24.2% in Germany, 25% in Ireland, and 35%
                                         in the United States.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2016, Vermilion has $1.0 billion
(2015 - $0.8 billion) of unused tax losses of which $520 million expire between 2030 and 2035.



At December 31, 2016, Vermilion de-recognized
$96.1 million (2015 - $51.7 million) of deferred tax assets, relating to certain non-expiring non-capital losses for which there
is uncertainty as to the Company’s ability to fully utilize such losses when applying forecasted commodity prices in effect
as at December 31, 2016.



The aggregate amount of temporary differences
associated with investments in subsidiaries for which deferred tax liabilities have not been recognized as at December 31, 2016
is approximately $1.5 billion (2015 – approximately $1.4 billion).



21


Vermilion Energy Inc.2016 Financial Statements




12. LONG-TERM
DEBT



The following
table summarizes Vermilion’s outstanding long-term debt:



|                               | As
    at       
|------------------------------ | ----------------
|($M)                           | Dec
    31, 2016
|Revolving
    credit facility  | 1,362,192       
|Senior
    unsecured notes (1) | -               
|Long-term
    debt             | 1,362,192       



|(1) |  | The senior unsecured notes were included in the current portion of long-term debt
as at December 31, 2015. The senior unsecured notes, which had a principal balance of $225.0 million, matured and were repaid
on February 10, 2016.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Revolving Credit Facility



At December 31, 2016, Vermilion had in place
a bank revolving credit facility maturing May 31, 2019 with the following terms:



|                                     | As
    at  
|------------------------------------ | -----------
|                                     | Dec
    31,
|($M)                                 | 2016       
|Total
    facility amount            | 2,000,000  
|Amount
    drawn                     | (1,362,192)
|Letters
    of credit outstanding(1) | (20,100)   
|Unutilized
    capacity              | 617,708    



|(1) |  | Included in letters of credit outstanding is a $17.8 million surety bond issued pursuant
to the recovery of costs discussed in Financial Statement Note 16.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



The facility is extendable from time to time,
but not more than once per year, for a period not longer than four years, at the option of the lenders and upon notice from Vermilion.
If no extension is granted by the lenders, the amounts owing pursuant to the facility are due at the maturity date. The facility
bears interest at a rate applicable to demand loans plus applicable margins. The facility is secured by various fixed and floating
charges against the subsidiaries of Vermilion.



As at December 31, 2016, the revolving credit
facility was subject to the following financial covenants:



|                                                           |       |  | As
    at  
|---------------------------------------------------------- | ----- |  | -----------
|                                                           |       |  | Dec
    31,
|Financial
    covenant                                     | Limit |  | 2016       
|Consolidated
    total debt to consolidated EBITDA         | 4.0   |  | 2.36       
|Consolidated
    total senior debt to total capitalization | 55%   |  | 46%        



The financial covenants include financial measures
defined within the revolving credit facility agreement that are not defined under IFRS. These financial measures are defined by
the revolving credit facility agreement as follows:



| | · | Consolidated
                                         total debt: Includes all amounts classified as “Long-term debt”, “Current
                                         portion of long-term debt”, and “Finance lease obligation” on our balance
                                         sheet.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Consolidated
                                         total senior debt: Defined as consolidated total debt excluding unsecured and subordinated
                                         debt.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Consolidated
                                         EBITDA: Defined as consolidated net earnings before interest, income taxes, depreciation,
                                         accretion and certain other non-cash items.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Total
                                         capitalization: Includes all amounts on the balance sheet classified as “Shareholders’
                                         equity” plus consolidated total debt as defined above.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22


Vermilion Energy Inc.2016 Financial Statements




13. SHAREHOLDERS’ CAPITAL



The following table reconciles the change in
Vermilion’s shareholders’ capital:



|                                                          | 2016    |  | 2015           
|--------------------------------------------------------- | ------- |  | ---------------
|                                                          | Shares  |  |                
|Shareholders’
    Capital                                 | ('000s) |  | Amount
    ($M)
|Balance
    as at January 1                               | 111,991 |  | 2,181,089      
|Shares
    issued for the DRIP                            | 4,672   |  | 192,998        
|Vesting
    of equity based awards                        | 1,320   |  | 67,146         
|Shares
    issued for equity based compensation           | 193     |  | 8,247          
|Share-settled
    dividends on vested equity based awards | 87      |  | 3,242          
|Balance
    as at December 31                             | 118,263 |  | 2,452,722      



Vermilion is authorized to issue an unlimited
number of common shares with no par value.



Dividends declared to shareholders for the
year ended December 31, 2016 were $299.1 million or $2.58 per common share (2015 - $283.6 million or $2.58 per common share).
Dividends are approved by the Board of Directors and are paid monthly.



Vermilion has a dividend reinvestment plan
(“DRIP”) with a Premium DividendTM component. The DRIP allows eligible holders of common shares to purchase
additional common shares at a discount to market by reinvesting their cash dividends. The Premium DividendTM component
allows eligible holders of common shares to reinvest their dividends in new common shares that are exchanged for a premium cash
payment equal to 101.5% of the reinvested dividends.



Subsequent to the end of year-end and prior
to the consolidated financial statements being authorized for issue on February 24, 2017, Vermilion declared dividends totalling
$51.0 million or $0.215 per share for each of January and February of 2017.



14. CAPITAL DISCLOSURES



Vermilion defines capital as net debt (long-term
debt plus net working capital) and shareholders’ capital.



In managing capital, Vermilion reviews whether
fund flows from operations (refer to Financial Statement Note 4 - Segmented Information) is sufficient to fund capital expenditures,
dividends, and asset retirement obligations. To the extent that forecasted fund flows from operations are not sufficient in relation
to these expenditures, Vermilion will reduce some or all categories of these expenditures or evaluate its ability to fund the
expenditures with the issuance of debt or equity.



To manage capital, Vermilion monitors the ratio
of net debt to fund flows from operations. Vermilion has historically maintained a ratio of between 1.0 to 1.5. However, as a
result of the decline in commodity prices in 2015 and 2016 and the corresponding reduction to fund flows from operations, this
ratio has increased to 2.7 times and 2.8 times, respectively. Vermilion has responded to this increase by reducing capital expenditures
and implementing the Premium DividendTM component of the Dividend Reinvestment Plan.



Vermilion’s revolving credit facility
has financial covenants described in Financial Statement Note 12 - Long-Term Debt. As at December 31, 2016 and 2015, Vermilion
was in compliance with these financial covenants.



The following table calculates Vermilion’s
ratio of net debt to fund flows from operations:



|                                                    | Year
    Ended  
|--------------------------------------------------- | ----------------
|($M
    except as indicated)                        | Dec
    31, 2016
|Long-term
    debt                                  | 1,362,192       
|Current
    liabilities                             | 290,862         
|Current
    assets                                  | (225,906)       
|Net
    debt                                        | 1,427,148       
|                                                    |                 
|Fund
    flows from operations                      | 510,791         
|                                                    |                 
|Ratio
    of net debt to fund flows from operations | 2.8             



23


Vermilion Energy Inc.2016 Financial Statements




15. EQUITY BASED COMPENSATION



The following table summarizes the number of
awards outstanding under the Vermilion Incentive Plan (“VIP”):



|Number
    of Awards ('000s) | 2016  |  | 2015 
|---------------------------- | ----- |  | -----
|Opening
    balance          | 1,711 |  | 1,775
|Granted                      | 777   |  | 609  
|Vested                       | (628) |  | (587)
|Modified                     | 11    |  | -    
|Forfeited                    | (133) |  | (86) 
|Closing
    balance          | 1,738 |  | 1,711



For the year ended December 31, 2016, the awards
granted had a weighted average fair value of $38.41 (2015 - $53.80). Equity based compensation expense is calculated based on
the VIP awards outstanding multiplied by the estimated performance factor that will be realized upon vesting (2016 - 1.9; 2015
- 1.9) adjusted by an estimated annual forfeiture rate (2016 - 4.6%; 2015 - 4.8%). Equity based compensation expense of $61.0
million was recorded during the year ended December 31, 2016 (2015 - $72.6 million) related to the VIP.



16. OTHER INCOME



In 2015, Vermilion was awarded a recovery of
costs resulting from an oil spill at the Ambès oil terminal in France that occurred in 2007. The French court awarded Vermilion
approximately €25 million (before taxes), of which 50% was due immediately to Vermilion upon posting a surety bond. The payment
was received in 2015, with the remainder due upon conclusion of the appeal process. Approximately 90% of the recovery was recorded
as other income in 2015.



In the fourth quarter of 2016, the Court of
Appeal of Versailles maintained this award. The remaining payment was received and Vermilion’s surety bond was returned
in 2017. While further appeal may be possible to the Supreme Court in France, Vermilion is virtually certain that the award will
be upheld. Following the decision by the Court of Appeal, Vermilion recognized the remaining amount of the recovery (approximately
$3.8 million) as other income in 2016.



17. PER SHARE AMOUNTS



Basic and diluted net loss per share have been determined based
on the following:



|                                                        |                  | Year
    Ended  
|------------------------------------------------------- | ---------------- | ----------------
|($M
    except per share amounts)                       | Dec
    31, 2016 | Dec
    31, 2015
|Net
    loss                                            | (160,051)        |                 
|                                                        |                  |                 
|Basic
    weighted average shares outstanding ('000s)   | 115,695          |                 
|Dilutive
    impact of VIP ('000s)                      | -                |                 
|Diluted
    weighted average shares outstanding ('000s) | 115,695          |                 
|                                                        |                  |                 
|Basic
    loss per share                                | (1.38)           |                 
|Diluted
    loss per share                              | (1.38)           |                 



The impact of shares issuable under the VIP
is anti-dilutive and has been excluded from the calculation of diluted loss per share. The number of shares issuable under the
VIP calculated using the treasury stock method for the year ended December 31, 2016 is 1,457 thousand (2015 – 1,409 thousand).



24


Vermilion Energy Inc.2016 Financial Statements




18. FINANCIAL INSTRUMENTS



Classification of Financial Instruments



The following table summarizes information relating to Vermilion’s
financial instruments



|                                |                                              | As
    at Dec 31, 2016 |  |             | As
    at Dec 31, 2015
|------------------------------- | -------------------------------------------- | ---------------------- |  | ----------- | ----------------------
|                                | Carrying
    value                           | Fair
    value         |  |             | Carrying
    value    
|FINANCIAL
    ASSETS            |                                              |                        |  |             |                       
|Held
    for trading            |                                              |                        |  |             |                       
|                                | Cash
    and cash equivalents                | 62,775                 |  | 62,775      |                       
|                                | Derivative
    assets                        | 5,493                  |  | 5,493       |                       
|Loans
    and receivables       |                                              |                        |  |             |                       
|                                | Accounts
    receivable                      | 131,719                |  | 131,719     |                       
|                                |                                              |                        |  |             |                       
|FINANCIAL
    LIABILITIES       |                                              |                        |  |             |                       
|Held
    for trading            |                                              |                        |  |             |                       
|                                | Derivative
    liabilities                   | (75,144)               |  | (75,144)    |                       
|Other
    financial liabilities |                                              |                        |  |             |                       
|                                | Accounts
    payable and accrued liabilities | (181,557)              |  | (181,557)   |                       
|                                | Dividends
    Payable                        | (25,426)               |  | (25,426)    |                       
|                                | Long-term
    debt                           | (1,362,192)            |  | (1,362,192) |                       



Fair value measurements are categorized into
a fair value hierarchy based on the lowest level input that is significant to the fair value measurement.



| | · | Level
                                         1 inputs are determined by reference to unadjusted quoted prices in active markets for
                                         identical assets or liabilities. Inputs used in fair value measurement of cash and cash
                                         equivalents are categorized as Level 1.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Level
                                         2 inputs are determined based on inputs other than unadjusted quoted prices that are
                                         observable, either directly or indirectly. The fair value of Vermilion’s derivative
                                         assets and liabilities are determined using pricing models that incorporate future price
                                         forecasts (supported by prices from observable market transactions) and credit risk adjustments.
                                         The fair value of Vermilion’s senior unsecured notes (included in the fair value
                                         of long-term debt as at December 31, 2015) was determined using pricing models that incorporated
                                         market rates for similar instruments.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Level
                                         3 inputs are not based on observable market data. Vermilion does not have any financial
                                         instruments classified as Level 3.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



There were no transfers between levels in the
hierarchy in the years ended December 31, 2016 and 2015.



The carrying value of accounts receivable,
accounts payable and accrued liabilities, and dividends payable are a reasonable approximation of their fair value due to the
short maturity of these financial instruments. The carrying value of long-term debt outstanding on the revolving credit facility
approximates its fair value due to the use of short-term borrowing instruments at market rates of interest.



Nature and Extent of Risks Associated with
Financial Instruments



Vermilion is exposed to financial risks from
its financial instruments. These financial risks include: market risk, credit risk, and liquidity risk.



Market Risk

Market risk includes: commodity price risk,
interest rate risk, and currency risk.



Commodity price risk

Vermilion is exposed to commodity price risk
on its derivative assets and liabilities which are used as part of the Company’s risk management program to mitigate the
effects of changes in commodity prices on future cash flows. While transactions of this nature relate to a forecasted future petroleum
and natural gas production, Vermilion does not designate these derivative assets and liabilities as accounting hedges. As such,
changes in commodity prices impact the fair value of derivative instruments and the corresponding gains or losses on derivative
instruments.



Currency risk

Vermilion is exposed to currency risk on its
financial instruments denominated in foreign currencies. These financial instruments include cash and cash equivalents, accounts
receivables, and accounts payables. As crude oil is typically sold in US dollars and as result of the Company’s operations
in Europe, Vermilion is primarily exposed to the US Dollar and Euro. The impact related to working capital is somewhat mitigated
as a result of the offsetting effects of foreign exchange fluctuations on assets and liabilities. Vermilion monitors its exposure
to currency risk and reviews whether the use of derivative financial instruments is appropriate to manage potential fluctuations
in foreign exchange rates.





25


Vermilion Energy Inc.2016 Financial Statements




Interest rate risk

Vermilion is exposed to interest rate risk
on its long-term debt. As at December 31, 2016, long-term debt was comprised solely of borrowings under the revolving credit facility.
As these borrowings consist of short-term borrowing instruments that bear interest at market rates, changes in interest rates
could result in an increase or decrease in the amount paid by Vermilion to service this debt. In both 2015 and 2016, Vermilion
had in place interest rate swaps that mitigate some of the effects of changes in variable interest rates.



The following table summarizes the increase
(positive values) or decrease (negative values) to comprehensive income before tax impact due to a change in the value of Vermilion’s
financial instruments as a result of a change in the relevant market risk variable. This analysis does not attempt to reflect
any interdependencies between the relevant risk variables.





|($M)                                                                                                | Dec
    31, 2016 |  | Dec
    31, 2015
|--------------------------------------------------------------------------------------------------- | ---------------- |  | ----------------
|Currency
    risk - Euro to Canadian                                                                |                  |  |                 
|5%
    increase in strength of the Canadian dollar against the Euro                                 | 1,338            |  | (1,986)         
|5%
    decrease in strength of the Canadian dollar against the Euro                                 | (1,338)          |  | 1,986           
|                                                                                                    |                  |  |                 
|Currency
    risk - US $ to Canadian                                                                |                  |  |                 
|5%
    increase in strength of the Canadian dollar against the US $                                 | (59,280)         |  | 3,423           
|5%
    decrease in strength of the Canadian dollar against the US $                                 | 59,280           |  | (3,423)         
|                                                                                                    |                  |  |                 
|Commodity
    price risk                                                                            |                  |  |                 
|US
    $5.00/bbl increase in crude oil price used to determine the fair value of derivatives        | (26,513)         |  | (3,262)         
|US
    $5.00/bbl decrease in crude oil price used to determine the fair value of derivatives        | 18,882           |  | 3,263           
|                                                                                                    |                  |  |                 
|€
    0.5/GJ increase in European natural gas price used to determine the fair value of derivatives | (36,999)         |  | (23,813)        
|€
    0.5/GJ decrease in European natural gas price used to determine the fair value of derivatives | 33,019           |  | 21,754          
|                                                                                                    |                  |  |                 
|Interest
    rate risk                                                                              |                  |  |                 
|1%
    increase in average Canadian prime interest rate                                             | (11,674)         |  | (10,543)        
|1%
    decrease in average Canadian prime interest rate                                             | 11,674           |  | 10,543          





The above table shows the before tax effect
on comprehensive income for a 5% change in the US dollar to Canadian dollar exchange rate based on derivative instruments, long-term
debt, and other financial instruments as at December 31, 2016.  The $59.3 million increase or decrease shown above is primarily
driven by US $0.9 billion notional of cross currency interest rate swaps outstanding as at December 31, 2016 and effective for
January 2017.



Subsequent to December 31, 2016, Vermilion
repaid $1.2 billion of borrowings on the revolving credit facility bearing interest at CDOR (Canadian Dollar Offered Rate) plus
applicable margins and simultaneously borrowed US $0.9 billion on the revolving credit facility bearing interest at LIBOR plus
applicable margins.  As this transaction occurred subsequent to the balance sheet date, it is not included in the calculations
shown in the above table. If included, the before tax effect on comprehensive income for a 5% increase/decrease in strength of
the Canadian dollar against the US dollar as at December 31, 2016 would be an increase/decrease of $0.5 million.



26


Vermilion Energy Inc.2016 Financial Statements




Credit Risk:

Vermilion is exposed to credit risk on accounts
receivable and derivative assets in the event that customers, joint operation partners, or counterparties fail to discharge their
contractual obligations. As at December 31, 2016, Vermilion’s maximum exposure to receivable credit risk was $137.2 million
(December 31, 2015 - $228.8 million) which is the value of accounts receivable and derivative assets on the balance sheet.



Vermilion’s accounts receivable primarily
relates to customers and joint operations partners in the petroleum and natural gas industry. These amounts are subject to normal
industry payment terms and credit risks. Vermilion manages these risks by monitoring the creditworthiness of customers and joint
operations partners and, where appropriate, obtaining assurances such as parental guarantees and letters of credit. As at the
balance sheet date, approximately 2.1% of the accounts receivable balance was outstanding for more than 90 days. Vermilion considers
the balance of accounts receivable to be collectible.



Vermilion’s derivative assets primarily
relates to the fair value of financial instruments used as part of the Company’s risk management program to mitigate the
effects of changes in commodity prices on future cash flows. Vermilion manages this risk by monitoring the creditworthiness of
counterparties, transacting primarily with counterparties that have investment grade third party credit ratings, and by limiting
the concentration of financial exposure to individual counterparties. As a result, Vermilion has not obtained collateral or other
security to support its financial derivatives.



Vermilion’s cash deposited in financial
institutions and guaranteed investment certificates are also subject to counterparty credit risk. Vermilion mitigates this risk
by transacting with financial institutions with high third party credit ratings.



Liquidity Risk:

Liquidity risk is the risk that Vermilion will encounter difficulty
in meeting obligations associated with its financial liabilities. Vermilion does not consider this to be a significant risk as
its financial position and available committed borrowing facility provide significant financial flexibility and allow Vermilion
to meet its obligations as they come due.



The following table summarizes Vermilion’s undiscounted non-derivative
financial liabilities and their contractual maturities:



|                      |             | 1
    month to | 3
    months to | 1
    year to
|--------------------- | ----------- | -------------- | --------------- | -------------
|($M)                  | 1
    month | 3
    months   | 1
    year      | 5
    years  
|December
    31, 2016 | 79,509      | 120,233        | 7,241           | 1,377,819    
|December
    31, 2015 | 112,890     | 353,934        | 33,663          | 1,180,486    



19. RELATED PARTY DISCLOSURES



The compensation of directors and management is reviewed annually
by the independent Governance and Human Resources Committee against industry practices for oil and gas companies of similar size
and scope.



The following table summarizes the compensation of directors and
other members of key management personnel during the years ended December 31, 2016 and December 31, 2015:



|                                                        |                  | Year
    Ended  
|------------------------------------------------------- | ---------------- | ----------------
|($M)                                                    | Dec
    31, 2016 | Dec
    31, 2015
|Short-term
    benefits                                 |                  | 4,748           
|Share-based
    payments                                |                  | 20,169          
|                                                        |                  | 24,917          
|Number
    of individuals included in the above amounts |                  | 18              



27


Vermilion Energy Inc.2016 Financial Statements




20. SUPPLEMENTAL INFORMATION



Changes in non-cash working capital was comprised of the following:



|                                                  |                                              | Year
    Ended
|------------------------------------------------- | -------------------------------------------- | --------------
|($M)                                              | Dec
    31, 2016                             |               
|Changes
    in:                                   |                                              |               
|                                                  | Accounts
    receivable                      | 28,780        
|                                                  | Crude
    oil inventory                      | 1,311         
|                                                  | Prepaid
    expenses                         | 1,762         
|                                                  | Accounts
    payable and accrued liabilities | (67,190)      
|                                                  | Income
    taxes payable                     | 30,213        
|                                                  | Foreign
    exchange                         | 1,192         
|Changes
    in non-cash working capital           | (3,932)                                      |               
|Changes
    in non-cash operating working capital | 8,366                                        |               
|Changes
    in non-cash investing working capital | (12,298)                                     |               
|Changes
    in non-cash working capital           | (3,932)                                      |               



Cash and cash equivalents was comprised of the following:



|                                                |                  | As
    at       
|----------------------------------------------- | ---------------- | ----------------
|($M)                                            | Dec
    31, 2016 | Dec
    31, 2015
|Cash
    on deposit with financial institutions |                  | 62,614          
|Guaranteed
    investment certificates          |                  | 161             
|Cash
    and cash equivalents                   |                  | 62,775          



Wages and benefits included in operating expenses and general and
administration expenses were:



|                                       |      | Year
    Ended
|-------------------------------------- | ---- | --------------
|($M)                                   | 2016 | 2015          
|Operating
    expense                  |      | 45,061        
|General
    and administration expense |      | 35,347        
|Wages
    and benefits                 |      | 80,408        



28


Vermilion Energy Inc.2016 Financial Statements






|DIRECTORS
        
        Lorenzo Donadeo 1
        Calgary, Alberta
        
        Larry J. Macdonald 2, 3, 4, 5, 6
        Chairman & CEO, Point Energy Ltd.
        Calgary, Alberta
        
        Claudio A. Ghersinich 3, 6
        Executive Director, Carrera Investments Corp.
        Calgary, Alberta
        
        Loren M. Leiker 6
        Houston, Texas
        William F. Madison 5, 6
        Sugar Land, Texas
        Timothy R. Marchant 5, 6
        Calgary, Alberta
        
        Anthony Marino
        Calgary, Alberta
        
        Robert Michaleski 3
        Calgary, Alberta
        
        Sarah E. Raiss 4, 5
        Calgary, Alberta
        
        Catherine L. Williams 3, 4
        Calgary, Alberta
        
        1 Chairman of the Board
        2 Lead Director
        3 Audit Committee
        4 Governance and Human
        Resources         Committee
        5 Health, Safety and Environment
Committee
        6 Independent Reserves Committee
        
        ABBREVIATIONS
        $M        thousand
        dollars
        $MM     million
        dollars
        AECO   the
        daily average benchmark price for natural gas at the AECO
        ‘C’ hub in southeast Alberta
        bbl(s)    
        barrel(s)
        bbls/d    barrels
        per day
        bcf        billion
        cubic feet
        boe       barrel
        of oil equivalent, including: crude oil, condensate, natural gas liquids, and natural gas (converted on the basis of one
        boe for six mcf of natural gas)
        boe/d    barrel
        of oil equivalent per day
        btu        British
        thermal units
        CGU     Cash
        generating unit, the basis upon which Vermilion’s assets are evaluated for potential impairments
        DRIP     Dividend
        Reinvestment Plan
        GJ        gigajoules
        HH        Henry
        Hub, a reference price paid for natural gas in US dollars at Erath, Louisiana
        mbbls   thousand
        barrels
        mboe    thousand
        barrel of oil equivalent
        mcf       thousand
        cubic feet
        mcf/d    thousand
        cubic feet per day
        mmboe million barrel
        of oil equivalent
        mmbtu  million
        British thermal units
        mmcf    million
        cubic feet
        mmcf/d million cubic
        feet per day
        MWh    megawatt
        hour
        NBP     the
        reference price paid for natural gas in the United Kingdom, quoted in pence per therm, at the National Balancing Point
        Virtual Trading Point operated by National Grid. Our production in Ireland is priced with reference to NBP.
        NGLs    natural
        gas liquids, which includes butane, propane, and ethane
        PRRT    Petroleum
        Resource Rent Tax, a profit based tax levied on petroleum projects in Australia
        TTF      the
        day-ahead price for natural gas in the Netherlands, quoted in MWh of natural gas, at the Title Transfer Facility Virtual
        Trading Point operated by Dutch TSO Gas Transport Services
        WTI      West
        Texas Intermediate, the reference price paid for |  | OFFICERS AND
                                         KEY PERSONNEL
        CANADA
        Anthony Marino
        President & Chief Executive Officer
        
        Curtis W. Hicks
        Executive Vice President & Chief Financial Officer
        
        Mona Jasinski
        Executive Vice President, People and Culture
        
        Michael Kaluza
        Executive Vice President & Chief
        Operating Officer
        
        Dion Hatcher
        Vice President Canada Business Unit
        
        Terry Hergott
        Vice President Marketing
        
        Daniel Goulet
        Director Corporate HSE
        
        Bryce Kremnica
        Director Field Operations – Canada
        Business Unit
        
        Kyle Preston
        Director Investor Relations
        
        Mike Prinz
        Director Information Technology &
        Information Systems
        
        Jenson Tan
        Director Business Development
        
        Robert (Bob) J. Engbloom
        Corporate Secretary
        
        UNITED STATES
        Daniel G. Anderson
        Managing Director – U.S. Business
        Unit
        
        Timothy R. Morris
        Director U.S. Business Development
        – U.S.
        Business Unit
        
        EUROPE
        Gerard Schut
        Vice President European Operations
        
        Darcy Kerwin
        Managing Director - France Business
        Unit
        
        Scott Seatter
        Managing Director - Netherlands Business
        Unit
        
        Albrecht Moehring
        Managing Director - Germany Business
        Unit
        
        Bryan Sralla
        Managing Director - Central & Eastern
        Europe Business Unit
        
        AUSTRALIA
        Bruce D. Lake
        Managing Director - Australia Business
        Unit |  | AUDITORS
        
        Deloitte LLP
        Calgary, Alberta
        
        BANKERS
        
        The Toronto-Dominion Bank
        Bank of Montreal
        Canadian Imperial Bank of Commerce
        
        National Bank of Canada
        
        Royal Bank of Canada
        The Bank of Nova Scotia
        HSBC Bank Canada
        
        Wells Fargo Bank N.A., Canadian Branch
        La Caisse Centrale Desjardins du Québec
        Alberta Treasury Branches
        
        Bank of America N.A., Canada Branch
        BNP Paribas, Canada Branch
        
        Citibank N.A., Canadian Branch - Citibank Canada
        
        JPMorgan Chase Bank, N.A., Toronto Branch
        
        Union Bank, Canada Branch
        
        Barclays Bank PLC
        
        Canadian Western Bank
        
        Goldman Sachs Lending Partners LLC
        EVALUATION ENGINEERS
        
        GLJ Petroleum Consultants Ltd.
        Calgary, Alberta
        
        LEGAL COUNSEL
        
        Norton Rose Fulbright Canada LLP
        Calgary, Alberta
        
        TRANSFER AGENT
        
        Computershare Trust Company of Canada
        
        STOCK EXCHANGE LISTINGS
        
        The Toronto Stock Exchange (“VET”)
        The New York Stock Exchange (“VET”)
        
        INVESTOR RELATIONS
        Kyle Preston
        Director Investor Relations
        403-476-8431 TEL
        403-476-8100 FAX
        1-866-895-8101 IR TOLL FREEinvestor_relations@vermilionenergy.com
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