VAALCO Energy, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. VAALCO is an independent oil producer operating primarily in Gabon, with an undeveloped interest in Equatorial Guinea. Angola is reported as discontinued operations. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $18.3 | $17.6 | $54.6 | $62.6 |
| Operating income (loss) | $4.7 | $1.5 | $(23.0) | $13.4 |
| Net income (loss) | $7.6 | $(3.9) | $(44.6) | $1.5 |
| Diluted EPS | $0.13 | $(0.07) | $(0.77) | $0.02 |
| Operating cash flow | — | $19.1 | $29.1 |
- Q3 operating margin was approximately 25.6% (operating income divided by revenue); nine-month operating margin was approximately negative 42.1%.
- Q3 Gabon net sales volume rose to 412,000 barrels from 279,000; realized price fell to $43.63/barrel from $61.26. Higher volumes more than offset lower prices in quarterly revenue.
- For the first nine months, net sales volume increased to 1.337 million barrels from 933,000, while realized price declined to $39.90/barrel from $65.00. Revenue fell 12.7%; price reduced revenue by $33.6 million, partly offset by a $26.3 million volume benefit.
- Nine-month net loss reflects a $30.6 million proved-property impairment recorded in Q1 amid lower oil-price forecasts and a $37.4 million increase in deferred-tax valuation allowances. Deferred tax assets were zero at September 30. No additional impairment was recorded in Q3.
- Q3 net income included a $2.8 million income-tax benefit. Nine-month income-tax expense was $28.5 million, largely deferred.
- Nine-month capital expenditures paid were $22.3 million; operating cash flow was $19.1 million, resulting in a simple operating-cash-flow-less-capex shortfall of about $3.3 million. Cash, cash equivalents and restricted cash decreased $4.2 million from year-end.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $42.0 million, including $6.0 million attributable to joint-venture-owner advances. Total cash, cash equivalents, restricted cash and abandonment funding was $54.9 million.
- Current assets were $54.4 million and current liabilities $37.8 million; working capital was approximately $16.6 million. Total assets were $135.4 million and total liabilities $70.8 million.
- The filing reports no debt instruments or borrowings. Operating lease liabilities totaled $25.7 million, including $12.7 million current; joint-venture partners are obligated to fund $18.8 million of the $27.2 million undiscounted future lease payments.
- Management said it expected existing cash and operating cash flow to support cash requirements through December 2021, based on current expectations, while warning that market conditions could change liquidity needs suddenly.
Material developments, outlook and risks
- COVID-19-driven demand weakness and oil-price volatility led VAALCO to cut costs, share certain operating costs with other operators, and cease or defer discretionary capital spending. The company reported no material operational disruptions through the period, but incurred about $1.2 million of pandemic-related higher costs year to date.
- At Gabon’s request under OPEC+ production measures, VAALCO temporarily reduced Etame Marin production from July through September. For Q4 2020, it planned to comply primarily through natural production declines.
- The company had no commodity swaps outstanding after June 2020. At September 30, Brent was approximately $40/barrel. Management estimated that a $5/barrel price decrease at recent quarterly sales volumes would reduce quarterly revenue and operating income by about $2.1 million and net income by about $1.9 million.
- VAALCO began a 3-D seismic survey in late September/early Q4, with estimated net cost of $4–5 million, to be funded from cash on hand and operating cash flow. It completed the development and appraisal drilling requirements under the Gabon PSC extension and brought the South East Etame 4H well online in March.
- The Gabon production-sharing contract was extended for ten years from September 2018, with rights to two further five-year extensions. The company’s Etame Marin operating period and reserve replacement depend on future development, exploration or acquisitions.
- Block P in Equatorial Guinea represents an undeveloped $10.0 million book asset. VAALCO’s working interest rose to 43%; discussions about assigning part of the interest in exchange for a carried exploration well remained non-binding and subject to government approval.
- Other items to monitor include collection of Gabon VAT receivables (about $4.1 million net to VAALCO), uncertainty around establishment of a U.S.-dollar abandonment-funding account, and the FPSO charter guarantee. The company’s net charter share was about $9.7 million annually; gross remaining guaranteed minimum obligations were $65.1 million.
- Crude sales were concentrated in Gabon. The ExxonMobil sales contract covered February 2020 through January 2021; the filing does not provide a subsequent contract outcome. The company also identified OPEC+ cuts, oil-price weakness, COVID-19, possible further impairments, foreign-exchange exposure and access to future capital as material risks.
Important facts for investors to verify
- Whether the Gabon crude-sales contract was renewed or replaced after January 2021, and the realized prices and lifting volumes under any new arrangement.
- Actual production restrictions, field performance and seismic-survey costs and results, including the effect on future capital spending and production.
- Whether management’s liquidity expectation through December 2021 remains supportable under lower prices, and how much cash is available excluding joint-venture advances and restricted funds.
- Recovery prospects for the VAT receivable and the status and accessibility of abandonment funds held in Gabon.
- Whether lower oil prices or reserve revisions trigger additional property impairments or changes to deferred-tax valuation allowances.
- Whether the proposed Block P transaction advances to binding agreements and receives government approval.