VAALCO Energy, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. VAALCO is an independent oil and gas company, with producing operations principally offshore Gabon and exploration activity in Angola, as well as interests in Equatorial Guinea and the United States. Financial statements are unaudited.
Financial performance
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Oil and gas revenue | $18.2 million | $28.1 million; down 35% |
| Operating income (loss) | $(35.3) million | $(0.7) million |
| Net income (loss) | $(39.0) million; $(0.67) per share | $(7.0) million; $(0.12) per share |
| Cash from operating activities | $(0.6) million | $(23.5) million |
| Cash used in investing activities | $(22.3) million | $(24.5) million |
| Cash and cash equivalents | $46.6 million at March 31 | $69.1 million at December 31, 2014 |
| Long-term debt | $15.0 million | $15.0 million at December 31, 2014 |
Gabon crude oil revenue was $18.1 million, on 372,000 net barrels sold at an average realized price of $48.66 per barrel, versus 257,000 barrels at $107.97 in Q1 2014. Production was approximately 380,000 net barrels, compared with 360,000. The company noted that sales depend on lifting timing and may not track production in the quarter.
Production expense was $9.9 million, exploration expense $27.5 million, depreciation, depletion and amortization $5.9 million, general and administrative expense $4.9 million, and proved-property impairment $5.4 million. Income tax expense was $3.4 million, paid in Gabon, despite the consolidated net loss. The filing does not provide a clear consolidated gross-margin measure.
Material changes and liquidity
- Revenue fell primarily because of lower realized oil prices, partly offset by higher Gabon sales volumes. Net loss widened mainly due to the lower oil price, the unsuccessful Angola well and related leasehold write-off, and the Gabon impairment.
- The Kindele exploration well offshore Angola encountered water-bearing sands and was plugged and abandoned. VAALCO expensed $24.5 million of well costs and $2.7 million of related leasehold costs.
- A $5.4 million impairment reduced the recorded value of the Southeast Etame and North Tchibala fields to zero, reflecting lower forecast oil prices and higher planned development costs.
- Q1 capital expenditures were $28.1 million. Management expected 2015 capital expenditures of $65–75 million and said $46.6 million of unrestricted cash, together with operating cash flow, was expected to fund the remaining budget and working capital needs. Expected Q2 capital expenditures were approximately $13.6 million.
- The IFC revolving facility has a $65 million commitment, with $15 million drawn and maturity stated as December 2019 in the debt note. The filing elsewhere gives January 2019; the maturity date is inconsistent in the filing text. Further borrowing was subject to redetermination, and the debt-to-equity covenant restricted capacity to less than $5 million above the amount already drawn. VAALCO reported compliance with covenants at quarter-end.
- Operating cash use improved versus 2014, primarily due to working-capital movements and noncash adjustments, although operating results remained weak. Cash declined by $22.5 million during the quarter.
Outlook, risks and unusual items
- Management focused on maintaining and optimizing Etame Marin production. Two development wells were drilled from the new Etame platform; Etame 10-H was producing in Q1, and Etame 12-H was completed in Q2. Further development drilling from the Etame and SEENT platforms was underway or planned.
- Hydrogen sulfide has affected wells in the Ebouri and Etame fields; affected wells remain shut in. Processing or other solutions require further investment, with no assurance a facility will be completed. If no economic solution is found, up to 2.4 million barrels of proved undeveloped reserves could be affected. Management expected greater clarity on project timing as early as Q4 2015.
- Angola exploration obligations extend to November 2017. VAALCO reported $15 million of restricted cash for remaining commitments and a potential $5 million net assessment for each of four wells left undrilled at the deadline.
- Sonangol P&P remained in default over pre-assignment costs and unpaid cash calls. VAALCO had invoiced $7.6 million plus interest for prior costs and had fully reserved the $7.6 million. Collection timing and payment were uncertain, creating potential liquidity and program-funding risk.
- A Gabon tax audit was ongoing; following a tentative agreement in April 2015, management expected no material financial impact. The company also had $8.9 million capitalized for an onshore Gabon discovery, but development depended on partner and government approvals that were not assured.
- Management identified oil prices, reserve estimates, partner payments, borrowing-base and covenant capacity, operating and drilling risks, and political and regulatory developments as significant risks. VAALCO had no commodity derivatives in place.
- Disclosure controls were reported ineffective due to material weaknesses in controls over impairment evaluations and the financial-reporting control environment/resources. Management described remediation steps and expected to complete them during 2015, but gave no assurance of success.
Most important facts for investors to verify
- Whether oil prices, realized prices, production and liftings support the cash and capital-spending outlook.
- Whether the remaining 2015 development program can be funded within the stated budget and limited additional borrowing capacity.
- Progress on H2S treatment and the resulting implications for shut-in production and reserves.
- Sonangol P&P’s default status, payment of cash calls and recoverability of amounts owed.
- Angola’s remaining well commitments, restricted cash and potential assessments following the dry hole.
- Resolution of the Gabon audit and approvals for the onshore Gabon discovery.
- Remediation of internal-control weaknesses, and clarification of the inconsistent IFC facility maturity date stated in the filing.