VAALCO Energy, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. VAALCO is an independent oil producer whose revenue and proved reserves were entirely attributable to the Etame Marin block offshore Gabon.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Crude oil and natural gas sales | $199.1 million | $67.2 million |
| Operating income (loss) | $79.1 million | $(27.3) million |
| Net income (loss) | $81.8 million | $(48.2) million |
| Net cash from operating activities | $50.1 million | $27.5 million |
| Net cash used in investing activities | $39.1 million | $24.3 million |
| Cash and cash equivalents at year-end | $48.7 million | $47.9 million |
Calculated operating margin was approximately 39.7% and net margin approximately 41.1% in 2021. Net income included a $22.2 million income tax benefit; the unusually high net margin should be considered in that context. The balance sheet lists no conventional borrowings in the presented figures; it reports $10.2 million in operating lease liabilities and $40.7 million in asset retirement obligations at year-end.
Net production was 2.599 million barrels, compared with 1.776 million in 2020; net sales volumes were 2.711 million barrels, compared with 1.627 million. Average realized oil price rose to $70.66 per barrel from $40.29. Reported production expense averaged $29.97 per barrel versus $22.93.
At year-end, proved reserves were 11.218 million barrels, up from 3.216 million. The increase included 2.633 million barrels from the Sasol acquisition and 7.968 million barrels of positive revisions, including revisions related to price and well performance. Proved undeveloped reserves were 3.991 million barrels.
Material changes versus 2020
- Revenue increased about 196%, reflecting higher realized prices, higher sales volumes and VAALCO’s increased Etame working interest following its February 2021 acquisition of Sasol’s 27.8% interest. VAALCO’s working interest rose from 31.1% to 58.8%.
- Results rebounded from a 2020 loss, when VAALCO recorded a $30.6 million property impairment and a $41.6 million charge to increase deferred-tax valuation allowances. Neither the impairment nor additional impairment charges occurred in 2021.
- Production expense rose 118% to $81.3 million, principally due to the higher working interest, workovers, and increased marine and personnel costs. Depreciation, depletion and amortization also increased with the acquired assets.
- Derivative instruments produced a $22.8 million loss in 2021, compared with a $6.6 million gain in 2020, as oil prices rose above swap prices.
- VAALCO recognized a bargain-purchase gain associated with the Sasol acquisition. The filing reports $7.7 million in the acquisition allocation and identifies $5.2 million in “Other, net” in the statements of operations, with related tax effects also reported.
Liquidity, outlook and key risks
Management said cash on hand and expected operating cash flows should support current requirements, including the 2021/2022 drilling program and the FPSO through September 2022 and FSO charter through March 2023. This outlook is conditional on operating and economic conditions; the company noted it may not be able to obtain additional financing on favorable terms if needed.
- Development spending: The four-well 2021/2022 campaign was estimated at $117 million–$143 million gross, or $74 million–$91 million net to VAALCO’s stated 63.6% participating interest. The Etame 8-H well was completed in February 2022, after year-end, with an initial reported rate of 5,000 barrels per day gross, or 2,560 net at VAALCO’s 58.8% working interest.
- FPSO-to-FSO transition: The FPSO charter expires in September 2022. Estimated FSO conversion capital is $40 million–$50 million gross, or $26 million–$32 million net. Delays could force production shut-ins and interrupt sales.
- Concentration and operations: All current revenue and proved reserves came from Etame. Four wells were shut in due to hydrogen sulfide; development to restore production would require additional investment. ExxonMobil accounted for approximately 100% of customer revenue, and its sales contract was extended through July 2022.
- Country and funding risks: Gabon OPEC+ curtailments reduced production from July 2020 through April 2021; management reported no current curtailment. Currency rules delayed required abandonment-fund contributions in 2019–2021. A 2021 study estimated abandonment costs of $81.3 million gross ($47.8 million net); $37.1 million gross ($21.8 million net) had been funded by year-end.
- Other risks: Oil-price volatility, COVID-19, offshore hazards, reserve-estimate uncertainty, customer concentration, foreign-exchange and regulatory changes, climate-related policy and demand shifts, and the company’s ability to replace produced reserves. The provisional Gabon block awards through the BWE Consortium remained subject to finalizing PSC terms and other agreements.
- Shareholder returns: The board adopted an expected quarterly dividend policy of $0.0325 per share starting in 2022; future payments remain discretionary. A January 2022 dividend declaration was a subsequent event, not a 2021 payment.
Most important facts for investors to verify
- Reconcile reported earnings to underlying performance, especially the deferred-tax benefit, Sasol bargain-purchase gain and $22.8 million derivative loss.
- Review the cash available for drilling and FSO conversion against actual project costs, timing and the transition plan before the FPSO contract expires.
- Assess the assumptions behind reserve additions, the four PUD locations, and the $61 million estimated future development costs for PUDs.
- Track abandonment-fund account approvals, delayed contributions, updated funding requirements and the related liability.
- Monitor the ExxonMobil contract renewal, buyer diversification, H2S-related shut-in wells, and final terms and commitments for the BWE Consortium blocks.