VAALCO Energy, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. VAALCO is an independent oil producer operating primarily in Gabon, with undeveloped acreage in Equatorial Guinea. Angola is reported as discontinued operations.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $18.4 million | $19.8 million, down 7% |
| Operating income (loss) | $(26.7) million | $5.5 million |
| Net income (loss) | $(52.8) million; $(0.91) per diluted share | $6.5 million; $0.10 per diluted share |
| Cash from operations | $27.6 million | $13.5 million |
| Cash used for capital expenditures | $12.0 million | $0.8 million |
| Cash, cash equivalents and restricted cash | $74.1 million, including $61.0 million unrestricted cash | $59.3 million total at March 31, 2019 |
Crude oil sales volume was 294,000 barrels versus 297,000 barrels; the average realized price was $59.54 per barrel versus $64.17. Net production increased to 450,000 barrels from 315,000 barrels, but a March lifting was delayed until April because of weather. Production costs rose 19% to $9.7 million, including higher workover costs.
The $52.8 million net loss included a $30.6 million impairment of proved properties and substantial income tax expense of $33.5 million despite a pretax loss. The impairment followed the oil-price decline and reduced the carrying value of affected Gabon fields. The filing attributes tax expense in part to deferred-tax valuation allowances; the explanations and amounts are presented differently in parts of the filing and warrant review.
Balance sheet and liquidity
At March 31, 2020, total assets were $168.7 million and total liabilities were $112.3 million. Current assets of $79.0 million exceeded current liabilities of $65.7 million. The filing reports no funded debt balance; liabilities include $30.4 million of operating lease liabilities and $16.4 million of asset retirement obligations. Unrestricted cash includes $11.3 million attributable to joint-venture-owner advances, and restricted cash and abandonment funding are not freely available for general use.
Management believed existing cash and expected operating cash flow would support cash requirements through June 2021, based on its then-current expectations. It cautioned that low oil prices could sharply reduce cash flow and access to financing. Operating cash flow benefited from working-capital movements, including collection of receivables.
Material changes, outlook and risks
- COVID-19 and oil prices: Management cited pandemic-driven demand weakness, oversupply and storage constraints as creating exceptional uncertainty. It cut or deferred discretionary capital spending, reduced compensation for directors, executives and some employees, pursued vendor cost reductions and cost sharing, and introduced employee health measures. These measures also increased some costs.
- Capital program and operations: The 2019/2020 drilling campaign was completed in March. South East Etame 4H began production on March 21, and a workover restored 2,400 gross barrels per day at South East Etame 2H. In mid-April, South Tchibala 2H stopped producing after a mechanical failure; it had produced about 830 gross barrels per day and was unlikely to be repaired before the next drilling campaign.
- Hedges: The company recorded a $7.3 million derivative gain, including a $6.6 million unrealized gain. Swaps covered 172,160 barrels through June 2020 at a weighted-average fixed price of $66.70 per barrel. Management said it had no hedges in place after June unless it entered new contracts.
- Additional obligations and disputes: Addax sought arbitration over $3.7 million of disputed joint-venture audit charges; VAALCO disputes the claim and intends to defend it. The company guaranteed the FPSO charter, with $47.5 million of gross minimum obligations remaining; its net share is about $9.7 million annually. The filing also describes uncertainty over access to abandonment funds held in Gabon.
- Listing and corporate actions: On April 22, 2020, VAALCO received NYSE notice that its average share price was below $1.00. It had until January 1, 2021 to regain compliance. The board terminated the share repurchase program on April 13. Shareholder approval was still required for a new incentive plan authorized by the board in April.
Important facts for investors to verify
- Whether oil prices, lifting timing and production levels support management’s liquidity outlook through June 2021, and how much cash is practically available after restricted funds and joint-venture advances.
- The assumptions behind the $30.6 million property impairment and the recoverability of deferred tax assets, including the differing tax-allowance explanations in the filing.
- Hedge coverage and realized-price exposure after June 2020, together with any subsequent hedging activity.
- Developments in the Addax arbitration, Gabon audit matters and access to abandonment funding, as well as future abandonment obligations.
- Progress toward NYSE minimum-price compliance by January 1, 2021, and the operational and financial impact of the South Tchibala 2H outage.