VAALCO ENERGY INC quarterly report, Q2 FY2014

VAALCO Energy, Inc. — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; comparisons are with the corresponding 2013 periods. VAALCO is an independent oil and gas company whose results are driven primarily by offshore Gabon production and oil liftings.

Financial performance and position

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$52.1 million	$29.1 million	$80.2 million	$73.3 million
Operating income	$33.8 million	$11.7 million	$33.2 million	$33.2 million
Net income	$24.7 million	$7.1 million	$17.7 million	$14.3 million
Diluted EPS	$0.43	$0.12	$0.31	$0.24
Operating cash flow	Not separately stated	Not separately stated	$40.6 million	$(9.5) million

Q2 operating and net margins were approximately 64.9% and 47.4%; six-month margins were approximately 41.4% and 22.0%, respectively. Margins are calculated from reported revenue and income.

Cash and liquidity: Cash and cash equivalents were $118.6 million at June 30, down from $130.5 million at year-end 2013. Restricted cash was $13.1 million, including $10.0 million associated with Angola work commitments. Current assets were $162.8 million and current liabilities $51.4 million.
Cash flows and investment: Six-month investing cash outflow was $51.2 million, primarily capital spending; financing outflow was $1.3 million, including $1.9 million of IFC facility costs. Property and equipment expenditures were $51.3 million in the cash-flow statement. Net property and equipment rose to $167.5 million.
Debt: VAALCO had not borrowed under its $65 million IFC revolving facility, secured by Gabon subsidiary assets and maturing in January 2019. No drawn debt balance is reported. The filing describes interest, commitment fees, and financial covenants.
Other balance-sheet items: Total assets were $334.3 million, total liabilities $63.1 million, and equity $271.2 million. Asset retirement obligations were $11.7 million.

Material changes and operating results

Q2 revenue increased 79% year over year, mainly because Gabon oil liftings rose to approximately 480,000 net barrels from 280,000 and the average realized price increased to $108.24 per barrel from $102.21. Q2 production was approximately 446,000 barrels versus 432,000.
For the first six months, revenue rose about 9%, with Gabon sales of approximately 734,000 net barrels at $108.14 per barrel versus 676,000 barrels at $106.82. Production was approximately 836,000 barrels, down from 851,000; the filing notes that liftings and production do not necessarily align by period.
Six-month net income increased despite nearly flat operating income. Higher revenue contributed, while exploration expense increased to $14.6 million from $10.4 million, and depreciation, depletion and amortization rose to $11.2 million from $7.1 million.
Q2 production expense fell to $4.8 million from $7.0 million, partly due to non-operational adjustments including an accrual true-up. Q2 DD&A increased to $7.0 million from $3.4 million, reflecting higher sales and depletion rates. Six-month income tax expense declined to $15.1 million from $18.8 million; the company attributed this to a lower proportion of profit oil.
Operating cash flow improved substantially from the prior-year six-month outflow, chiefly due to favorable working-capital movements, including lower trade and partner receivables.

Outlook, risks and contingencies

Management expected second-half 2014 capital expenditures of approximately $66 million net to VAALCO, primarily for two offshore Gabon platforms. Total platform construction and installation cost was estimated at $325 million gross, or $91 million net; the separate development-well costs were excluded. Management said available cash, operating cash flow and the IFC facility should fund the remaining 2014 budget and working-capital needs.
The platform jackets were completed and en route to Gabon at quarter-end; deck sections began shipment in July. A minimum six-well development program was expected to start in Q4 2014.
Hydrogen sulfide affected production in Gabon: two Ebouri wells remained shut in, and Etame 5-H was temporarily shut in after testing identified low levels. Management said restoring production would require additional investment, potentially including a centralized processing facility and well recompletions. Investment decisions were expected in Q1 2015, with production restoration targeted for the first half of 2017.
The Etame Marin exploration license expired July 7, 2014. VAALCO had applied for a seventh license and was negotiating with Gabon; $0.8 million of undeveloped leasehold cost was expensed because renewal was uncertain.
In Angola, a proposed extension would move the exploration permit deadline to November 30, 2017 and set well timing. The first well was expected in Q4 2014; failure to drill either committed well could trigger a $5 million net penalty per well. The extension remained subject to approval.
A revised onshore Gabon production-sharing contract term sheet was signed July 31, 2014, but final approval and a development area were not assured. VAALCO had $8.9 million of capitalized discovery-well costs there; it also carried $7.8 million for an offshore Gabon discovery well.
Principal stated risks include oil and gas price volatility, reserve and production uncertainty, exploration and operating hazards, equipment availability and cost, delivery and partner risks, government actions and regulation, and capital requirements. The company had no active commodity hedges.
Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing says there were no material risk-factor changes from the 2013 Form 10-K apart from matters described in this report.

Important facts for investors to verify

Whether Gabon grants the seventh Etame Marin license and approves the onshore Gabon contract and development area.
Timing, cost, funding and execution of the platforms and development-well program, including whether anticipated second-half spending tracks the stated $66 million net estimate.
Progress on H₂S analysis and the scope, cost and schedule of any production-restoration project.
Approval of the Angola extension, drilling progress and exposure to the stated penalties; also verify the status and accessibility of the $10 million restricted cash.
IFC facility availability, fees and covenant terms. The filing’s covenant description states a net-debt-to-EBITDAX ratio “greater than 3.0”; verify the exact contractual wording and intended threshold.
Cash conversion and working-capital sustainability, given that the year-over-year operating cash flow improvement was attributed substantially to working-capital changes.