VAALCO Energy, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. VAALCO is an independent oil and gas company whose production and reserves are heavily concentrated in offshore Gabon.
Financial and operating highlights
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $169.3 million | $195.3 million |
| Operating income | $77.2 million | $86.6 million |
| Net income | $43.1 million | $5.3 million |
| Net income per diluted share | $0.74 | $0.01 |
| Cash from operating activities | $75.4 million | $94.0 million |
| Capital expenditures | $66.9 million cash outflow | $71.9 million cash outflow |
| Cash and cash equivalents at year-end | $130.5 million | $130.8 million |
| Total debt at year-end | $0 | $0 |
Operating margin was approximately 45.6% and net margin approximately 25.4% in 2013. These percentages are calculated from reported revenue and income. Current assets were $167.5 million and current liabilities $45.8 million at year-end; restricted cash was an additional $13.2 million, classified between current and non-current assets.
Fourth-quarter 2013 revenue was $58.3 million and net income was $26.4 million; reported basic and diluted EPS were each $0.46. Quarterly revenue reflects the timing and size of Gabon crude-oil liftings.
Net proved reserves were 7.232 million barrels of oil and 1.333 billion cubic feet of gas at year-end, down from 7.488 million barrels and 1.544 billion cubic feet in 2012. The standardized measure of proved reserves was $137.4 million, versus $152.9 million.
Material changes versus 2012
- Revenue fell about 13%, primarily as net oil sales declined to approximately 1.544 million barrels from 1.730 million and the average Gabon oil price fell to $108.42 per barrel from $111.24.
- Total production declined to 1.603 million BOE from 1.829 million BOE. The company attributed lower Gabon volumes to natural decline and the shut-in of two Ebouri wells after hydrogen sulfide was detected.
- Production expense increased to $36.6 million from $26.7 million, including workovers and repairs. Exploration expense decreased to $23.9 million from $41.0 million, which included substantial U.S. dry-hole costs in 2012.
- Net income rose to $43.1 million from $5.3 million, largely reflecting lower income-tax expense ($34.1 million versus $81.8 million), lower exploration expense, and no proved-property impairment in 2013. Operating income nevertheless declined.
- Operating cash flow decreased by $18.6 million to $75.4 million. Investing cash outflow was $67.9 million; financing cash outflow was $7.7 million, including $11.5 million of share repurchases.
Outlook, risks, and unusual items
- Management expected 2014 capital expenditures of approximately $116.8 million, principally for Etame Marin development and platforms and exploration activity in Angola and Equatorial Guinea. Management said cash, operating cash flow, and the new facility were expected to fund the budget.
- In January 2014, VAALCO entered a secured, reserve-based loan facility with the International Finance Corporation, initially providing up to $65 million, subject to a borrowing base and semiannual redetermination. It had no borrowings outstanding as of the filing date.
- Two new Gabon production platforms were under construction for expected installation in 2014. Total estimated construction and installation cost was $325 million, or $91 million net to VAALCO. The company expected to make final investment decisions in the second half of 2014 on a separate Ebouri solution for hydrogen sulfide; restored production from the affected area was projected for the first half of 2017.
- Angola Block 5 required two exploration wells by November 30, 2014 unless an extension was granted. Failure to drill could trigger penalties totaling $10 million; $10 million was held as restricted cash. VAALCO had requested another extension and reported no assurance it would be granted. It also reported a $7.6 million allowance against partner receivables and identified $11.0 million of investment potentially at risk if the extension were denied.
- The Gabon operation accounted for approximately 96% of 2013 production and 97% of year-end net proved reserves. Operational disruption, including the Ebouri hydrogen-sulfide issue, therefore poses significant concentration risk. Gabon oil was sold to Mercuria under an annual contract, including for the first quarter of 2014.
- Other risks include oil-price and foreign-exchange volatility, partner payment and government-approval risk, offshore operating and environmental hazards, reserve-estimation uncertainty, and the long-term FPSO charter guarantee. The company reported no material litigation and no derivatives in 2013.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the 2014 platform schedule, total costs, and planned wells remained on budget and on schedule.
- Final engineering, cost, partner approvals, and timing for addressing Ebouri hydrogen sulfide and restoring production.
- Status of Angola’s requested extension, the two-well commitment, potential penalties, restricted cash, and collection of partner receivables.
- Actual 2014 production, lifting volumes, realized oil prices, and the effect of Gabon concentration and the Mercuria sales contract.
- Borrowing-base determinations, covenants, fees, and availability under the IFC facility, alongside liquidity needs and the 2014 capital program.
- Reserve revisions and development timing, particularly the proved undeveloped barrels associated with new platforms and Ebouri.