VAALCO Energy, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. VAALCO is an independent oil and gas producer, with substantially all continuing revenue from operated production offshore Gabon. Angola is reported as discontinued operations; Equatorial Guinea remains undeveloped.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Oil and gas revenue | $24.4 | $20.4 | $52.1 | $41.7 |
| Operating income | $5.7 | $5.6 | $18.8 | $13.7 |
| Income from continuing operations | $0.9 | $2.5 | $9.6 | $6.9 |
| Net income | $0.5 | $2.3 | $9.2 | $6.5 |
| Net income per share | $0.01 | $0.04 | $0.15 | $0.11 |
- Margins: Operating margin was approximately 23% in Q2 2018 versus 27% a year earlier; six-month operating margin was approximately 36% versus 33%. Net margin was approximately 2% in Q2 versus 11%; six-month net margin was approximately 18% versus 16%.
- Production and pricing: Q2 net production was 323,000 barrels versus 397,000; net sales were 319,000 barrels versus 414,000. Realized price rose to $74.36 per barrel from $46.83. For the first half, net production declined to 648,000 barrels from 813,000, while realized price increased to $71.23 from $49.35.
- Cash flow: First-half operating cash flow was $30.7 million, compared with $2.6 million. Continuing-operations operating cash flow was $31.5 million versus $6.6 million. The 2018 figure benefited materially from $13.2 million of joint-venture-owner payments and other working-capital movements. Investing cash outflow was $1.0 million; financing cash outflow was $8.7 million, including $9.2 million of debt repayment.
- Balance sheet and debt: June 30 cash and cash equivalents were $40.5 million, plus $1.9 million restricted cash; total assets were $100.3 million and shareholders’ equity $20.5 million. The IFC term loan was fully prepaid May 22, leaving no long-term debt reported. Current liabilities were $58.2 million, including $15.2 million related to discontinued operations and $9.8 million payable to joint-venture owners.
Material changes versus the prior period
- First-half revenue increased 25%, chiefly from higher oil prices; lower production and sales volumes partly offset the price benefit. Q2 revenue rose 20%, with the filing attributing approximately $8.8 million of the increase to price and a $4.4 million reduction to volume.
- Production expense increased 34% for the first half, primarily reflecting $4.8 million of workover costs, as well as higher fuel costs and customs fees. Q2 included $4.5 million of workover costs.
- First-half general and administrative expense rose 23%, and Q2 expense rose 64%. Higher stock-based compensation, particularly cash-settled stock appreciation rights (SARs), was a major factor.
- Q2 net income fell despite higher revenue and operating income, mainly reflecting higher other expense, including derivative and foreign-currency losses, and higher income tax expense. First-half net income increased year over year.
- VAALCO repaid its IFC debt in full in May 2018 without a prepayment penalty. It also entered into oil swaps during Q2.
Outlook, commentary and risks
- Management stated that cash on hand and continuing-operations cash generation at then-current prices were expected to support operations and cash requirements through September 30, 2019. This is conditional on commodity prices and other assumptions, not formal earnings guidance.
- Capital expenditures were approximately $1.0 million for the first half, with no material commitments reported for 2018. VAALCO may drill two or three development wells in 2019, subject to joint-venture and government approval.
- Management reported restoring approximately 1,100 net barrels per day through workovers at three wells. Production remains exposed to natural decline, equipment reliability and FPSO capacity.
- All proved reserves are tied to the Etame Marin block; its current exploitation term ends in June 2021. VAALCO is focused on extending the license. Equatorial Guinea development spending is considered unlikely in the near term.
- Oil sales were effectively concentrated with Glencore, and the sales contract ran through January 2019. Oil prices are linked to Dated Brent; management highlighted commodity-price volatility as a major risk. A $5-per-barrel price decline at recent quarterly sales volumes was estimated to reduce quarterly revenue and operating income by $1.6 million and net income by $1.4 million.
- Swaps covered approximately 364,000 barrels from July 2018 through June 2019; the reported fair-value liability was $1.0 million. Hedging may limit gains if prices rise and does not eliminate price or counterparty risk.
- Angola liabilities included a $15.0 million accrual for potential remaining drilling obligations. VAALCO was negotiating with Sonangol and believed the ultimate payment would be substantially lower, but the outcome was unresolved.
- Other matters include Gabon VAT receivables with a history of delayed reimbursement; a $5.4 million foreign-tax payable associated with profit oil taken in-kind; a planned December 2018 abandonment-funding payment of $2.3 million net to VAALCO; and a $1.3 million accrual for potential Gabon audit fees. The FPSO guarantee had $69.7 million of gross remaining minimum obligations, with VAALCO’s share of charter payments approximately $9.7 million annually; management considered a call on the guarantee remote.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated there were no material changes to the risk factors in the 2017 Form 10-K.
Most important facts for investors to verify
- Whether production recovery from the workovers is sustained, and how production decline affects sales volumes and costs.
- Renewal or replacement of the Glencore sales contract after January 2019, and the status of the Etame license extension before June 2021.
- Cash-flow quality, particularly the extent to which operating cash flow depends on joint-venture collections, accrued obligations and other working-capital movements.
- Resolution and potential cash impact of the $15.0 million Angola drilling-obligation accrual, along with Gabon VAT collection and audit exposures.
- Oil-swap settlement exposure, counterparty creditworthiness, and the funding and timing of abandonment obligations and FPSO commitments.