VAALCO Energy, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Amounts below are U.S. dollars unless stated otherwise.
Business context
VAALCO is an independent oil and gas producer whose revenue is concentrated in the Etame Marin block offshore Gabon. Its Gabon working interest was 31.1% after a November 2016 acquisition. The company also held undeveloped interests in Equatorial Guinea and Montana and discontinued its Angola operations in 2016.
Key financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $59.8 million | $80.4 million |
| Operating loss | $4.4 million | $103.1 million |
| Loss from continuing operations | $18.3 million | $120.6 million |
| Net loss | $26.6 million; $0.45 per share | $158.7 million; $2.72 per share |
| Net cash from operating activities | $(3.5) million | $38.9 million |
| Capital expenditures, accrual basis | $(4.1) million | $66.4 million |
| Cash and cash equivalents at year-end | $20.5 million | $25.4 million |
| Total debt at year-end | $15.0 million | $15.0 million |
| Working capital | $(17.1) million | Not stated here |
| Proved reserves | 2.642 million BOE | 3.031 million BOE |
| Standardized measure of proved reserves | $9.4 million | $27.1 million |
Revenue fell about 26% year over year. The average realized oil price declined to $40.13 per barrel from $47.85, while net oil-equivalent sales volume decreased about 12% to 1.509 million BOE. Production expense was $37.6 million. The company reported a continuing-operations operating margin of approximately negative 7% (calculated from reported operating loss and revenue).
Fourth-quarter 2016 revenue was $15.3 million, operating income was $0.8 million, continuing-operations loss was $3.4 million, and net loss was $3.6 million, or $0.06 per share.
Changes versus prior period and notable items
- Net loss narrowed substantially from 2015, largely because 2016 included only $0.1 million of proved-property impairment versus $81.3 million in 2015. 2016 operating results also included $8.9 million of other operating expense, primarily rig demobilization and early-release costs.
- Operating cash flow shifted from positive $38.9 million to negative $3.5 million. Working-capital movements materially affected the year-over-year comparison.
- Proved reserves declined about 13%; all year-end proved reserves were in Gabon, with no proved undeveloped reserves. Reserve revisions were positive, but lower reserve pricing and production reduced the total.
- VAALCO acquired an additional Etame Marin interest for approximately $5.7 million, sold its two producing North Texas wells for $0.83 million, and recorded no U.S. proved reserves at year-end.
- Four wells were shut in because of hydrogen sulfide concerns. The company said restoring production from affected areas would require additional investment and was not economic at forecast prices.
- VAALCO withdrew from Angola and accrued a $15 million maximum potential drilling-commitment penalty. It believes prior exploration spending may reduce the amount ultimately payable; resolution remained uncertain.
Liquidity, outlook, risks and controls
- The IFC term loan had $15 million outstanding, matures in June 2019, and carries interest at LIBOR plus 5.75%. Quarterly principal and interest payments began March 2017. VAALCO reported compliance with its financial covenants at year-end; covenants restrict additional borrowing, asset sales, spending and other actions.
- Management stated that, assuming oil prices remained around then-current levels, forecast cash flows should cover operating expenses through March 31, 2018, and concluded that substantial doubt about continuing as a going concern was not raised as of March 13, 2017. Liquidity remained limited, and lower prices or unfavorable resolution of obligations could materially harm liquidity.
- For 2017, the company planned very limited capital spending, no development drilling, cost reductions and production optimization. It was preparing for a possible later Etame drilling program, subject to partner and government approval, and exploring financing, joint ventures, acquisitions, asset sales or a merger. No transaction was assured.
- Oil puts covered 792,000 barrels of anticipated 2017 sales at a weighted-average price of $48.46 per barrel. Derivatives were not designated for hedge accounting and do not eliminate price or counterparty risk.
- Gabon’s OPEC production commitment was expected to reduce VAALCO’s net production by approximately 170.5 barrels per day; management expected to manage this through deferred workovers and natural declines. Glencore accounted for 99.9% of 2016 revenue; its sales contract expires in January 2018.
- Key exposures include reliance on one offshore block and purchaser, volatile oil prices, production and H2S risks, foreign-government actions, abandonment obligations, and a $17.1 million working-capital deficit. Estimated net Gabon abandonment funding was $19.0 million undiscounted, with $8.5 million funded by year-end.
- Management and the auditor identified material weaknesses in internal controls over financial-report review, reconciliations and unusual transactions, and physical observation of equipment. The auditor gave an adverse opinion on internal control effectiveness; the financial-statement audit opinion was unqualified. Management planned further remediation during 2017.
Important facts for investors to verify
- Progress on cash generation, liquidity, debt service and compliance with the IFC loan covenants as scheduled principal repayments fall due.
- The final amount and timing of any Angola drilling-penalty liability, and the status of related government discussions.
- Production recovery and reliability of the Etame wells, including H2S-affected wells, and the effect of Gabon’s production reduction.
- Whether management completes control remediation and whether subsequent reporting continues to identify material weaknesses.
- Renewal or replacement of the Glencore sales contract, the Etame license extension, and any funding or strategic transaction needed to support growth.
- Changes in reserve estimates, abandonment costs, unpaid Gabon VAT receivables, and the outstanding Gabon audit matters.