VAALCO ENERGY INC quarterly report, Q2 FY2022

VAALCO Energy, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results. VAALCO is an independent oil producer operating primarily in Gabon, with an undeveloped interest in Equatorial Guinea; Angola is reported as discontinued operations. Dollar amounts below are in millions unless stated otherwise.

Financial performance and position

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Oil and gas sales	$111.0	$47.0	$179.6	$86.8
Operating income	$73.1	$18.9	$113.2	$33.2
Net income	$15.1	$5.9	$27.3	$15.8
Diluted earnings per share	$0.25	$0.10	$0.45	$0.27
Operating cash flow	Not provided for quarter	Not provided for quarter	$69.0	$13.2

Revenue drivers: Q2 net crude sales volume was 958 thousand barrels versus 642 thousand; average realized price was $113.38 per barrel versus $69.61. For the first half, sales volume was 1.574 million barrels versus 1.261 million and realized price was $111.92 versus $65.54. Revenue growth reflected higher prices, higher sales volumes and VAALCO’s increased Etame working interest.
Costs and margins: Q2 production expense rose to $25.5 million from $16.4 million; first-half expense rose to $43.8 million from $32.6 million. First-half production expense excluding workovers increased to $27.85 per barrel from $25.52. Operating margin was approximately 65.9% in Q2 and 63.0% for the first half, versus approximately 40.1% and 38.3%, respectively, in 2021.
Taxes and derivatives: Income tax expense was $46.3 million in Q2 and $41.6 million for the first half. The six-month effective tax rate, excluding discrete items, was 72.59%; management cited non-deductible items, including derivative losses, and valuation-allowance changes. Derivative losses were $9.5 million in Q2 and $41.3 million for the first half, including cash settlements and fair-value changes.
Cash flow and investment: First-half operating cash flow was $69.0 million; investing cash outflow was $60.3 million, primarily for drilling and field reconfiguration. Accrual-basis capital expenditures were $69.9 million, compared with $4.3 million in the first half of 2021, excluding the Sasol acquisition. Cash, cash equivalents and restricted cash ended at $75.1 million, including $53.1 million of unrestricted cash.
Liquidity and debt: Current assets were $156.9 million and current liabilities $164.9 million at June 30, 2022. VAALCO had no borrowings outstanding and reported a $50 million borrowing base under its new secured reserve-based revolving credit facility; it was in covenant compliance. The facility includes a minimum cash covenant of $10 million and a maximum net-debt-to-EBITDAX ratio of 3.0x.
Balance sheet: Total assets were $369.6 million, total liabilities $201.4 million, and shareholders’ equity $168.2 million. Asset retirement obligations were $41.6 million.

Material changes versus the prior comparable period

Q2 revenue increased approximately 136% and first-half revenue approximately 107%; the company attributed the gains to higher realized prices and volumes, with the acquired Sasol interest also contributing to first-half growth.
Operating income increased substantially, while net income growth was smaller, particularly for the first half, reflecting materially higher derivative losses and income taxes.
First-half production expense and DD&A increased, reflecting higher operating costs and the larger depletable asset base from drilling-related capital spending. First-half G&A declined modestly.
First-half operating cash flow increased by $55.8 million year over year, while investing outflows increased as spending shifted to the drilling campaign and Etame field conversion.
Trade receivables rose to $70.3 million from $22.5 million at year-end 2021; crude oil inventory rose to $13.9 million from $1.6 million. Accrued liabilities and other increased to $99.2 million from $49.4 million, and foreign income taxes payable increased to $29.2 million from $3.1 million.

Outlook, developments and risks

Drilling program: VAALCO estimated the six-well 2021/2022 campaign at $174–$213 million gross, or $111–$135 million net, with approximately $44–$54 million net expected in the second half of 2022. Two wells had reported initial production rates of approximately 5,000 and 3,100 gross barrels per day. A July well had a less favorable Gamba result but was completed in the Dentale D1 formation at an initial 293–390 gross barrels per day; the company planned to evaluate the D9 zone.
FPSO-to-FSO transition: The existing FPSO charter was scheduled to end in September 2022. Estimated total field conversion costs were $66–$80 million gross ($42–$51 million net to VAALCO). The replacement FSO was expected to arrive in August, with hookup and commissioning targeted for Q3. Management said the work was on schedule but warned the transition could cause additional costs, production interruptions or delayed sales.
TransGlobe transaction: After quarter-end, on July 13, VAALCO agreed to acquire TransGlobe for stock consideration estimated at approximately $307 million. If completed, existing VAALCO shareholders were expected to own about 54.5% of the combined company. The transaction was subject to shareholder, court, listing and other approvals, and was expected to close before year-end 2022. Certain termination scenarios could require a $9.15 million fee.
Production marketing and customer concentration: Exxon accounted for 100% of customer revenue in the periods presented. Its sales agreement ran through July 2022; a Glencore marketing agreement was to begin in August 2022, with pricing based on Dated Brent subject to adjustments.
Commodity exposure: Outstanding hedges at June 30 covered 375 thousand barrels through September 2022: swaps at $76.53 per barrel and October–December collars with a $70 floor and $122 ceiling. Hedges reduce downside exposure but limit some benefit from rising prices. Management estimated that a $5 per barrel price decrease at the latest quarterly sales volume would reduce quarterly revenue and operating income by $4.8 million and net income by $4.3 million.
Other risks and contingencies: The filing highlights oil-price volatility, Gabon regulatory and tax matters, foreign-exchange exposure, customer and counterparty risks, COVID-19 uncertainty, climate-related regulation, and drilling and FSO execution risks. Abandonment funding remained affected by delays in establishing a U.S.-dollar account under Gabon/CEMAC rules; the company said it would resume funding once the account arrangements were completed. Routine Gabon audits were ongoing; management did not expect the identified matters to have a material financial effect. Management reported no material litigation and no material changes to risk factors other than those disclosed for the merger and facility.
Dividends: VAALCO paid $0.0325 per share in March and June and announced the same quarterly dividend for September 2022. Future payments remain at the board’s discretion.

Key facts for investors to verify

Whether the FSO transition and field reconfiguration were completed on schedule and within the estimated $42–$51 million net cost range, and whether production or sales were disrupted.
Subsequent drilling results, well production, and whether the campaign remained within the disclosed cost range.
TransGlobe approval and closing status, final share issuance and ownership dilution, integration costs, and any realized benefits.
Collection of elevated trade and VAT receivables, the TVA-related allowance, and the timing of Gabon tax and supplier payments.
Cash generation after capital spending, borrowing-base redeterminations, covenant headroom, hedge settlements and exposure after the disclosed hedge periods.
Resolution of abandonment-fund account restrictions, updates to abandonment cost estimates, and outcomes of outstanding government audits.