VAALCO Energy, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. VAALCO is an independent oil company operating offshore Gabon, with an undeveloped interest in Equatorial Guinea; Angola is reported as discontinued operations.
Business context and operating performance
VAALCO completed its acquisition of Sasol’s 27.8% Etame Marin working interest on February 25, 2021, increasing its working interest from 31.1% to 58.8% and nearly doubling its total production and reserves. Gabon production was no longer affected by OPEC+ curtailments at quarter-end. ExxonMobil accounted for 100% of customer-contract revenue in the quarter and first half.
- Q2 net crude sales volume was 642 thousand barrels, versus 631 thousand a year earlier; realized price was $69.61 per barrel, versus $28.31. Net production was 730 thousand barrels, versus 492 thousand.
- First-half sales volume was 1.261 million barrels, versus 925 thousand; realized price was $65.54 per barrel, versus $38.24. Net production was 1.196 million barrels, versus 942 thousand.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $47.0 million | $18.0 million | $86.8 million | $36.4 million |
| Operating income (loss) | $18.9 million | $(1.0) million | $33.2 million | $(27.6) million |
| Net income (loss) | $5.9 million | $0.6 million | $15.8 million | $(52.2) million |
| Diluted earnings (loss) per share | $0.10 | $0.01 | $0.27 | $(0.90) |
| Cash from operations | Not separately stated | Not separately stated | $13.2 million continuing operations; $13.2 million total | $20.6 million continuing operations; $20.2 million total |
Revenue increased 162% in Q2 and 139% in the first half, driven chiefly by higher realized oil prices, with increased first-half sales volumes also contributing. Approximate operating margins were 40% for Q2 and 38% for the first half. Net margins were approximately 13% and 18%, respectively. First-half 2020 results included a $30.6 million property impairment and $31.2 million income tax expense, including a substantial deferred-tax valuation-allowance charge.
- Q2 production expense was $16.4 million; first-half expense was $32.6 million. First-half production expense per barrel, excluding workovers, increased to $25.52 from $20.61.
- Derivative losses were $10.0 million in Q2 and $15.9 million in the first half, principally reflecting rising Brent prices. First-half 2020 had a $6.6 million derivative gain.
- First-half investing cash outflow was $26.8 million, including $22.5 million paid in connection with the Sasol acquisition and $4.3 million of property and equipment expenditures. Financing cash outflow was $0.1 million. Cash, cash equivalents and restricted cash declined $13.8 million.
- At June 30, unrestricted cash was $22.9 million; total cash, cash equivalents and restricted cash, including $22.8 million of abandonment funding, was $47.6 million. Current assets were $59.3 million and current liabilities $68.4 million. The balance sheet reports no debt balance.
- Total liabilities were $104.0 million, including operating lease liabilities and $32.6 million of asset retirement obligations. ARO increased from $17.3 million at year-end, principally due to $14.6 million assumed in the Sasol acquisition.
Material changes and unusual items
The Sasol acquisition generated a preliminary $7.7 million bargain-purchase gain, including $5.5 million in other income and a related $2.2 million income-tax benefit. It contributed $9.4 million to first-half revenue and $1.2 million to first-half net income. The $5.0 million contingent payment to Sasol was paid in April 2021. Acquisition fair-value allocations remain preliminary.
First-half general and administrative expense rose to $9.3 million from $3.8 million, including $3.7 million of stock-appreciation-rights expense and $1.2 million of severance costs. The company recorded a $5.6 million allowance against VAT and other receivables at June 30. First-half foreign current income-tax expense was $9.6 million; foreign taxes payable associated with Gabon’s Profit Oil obligation were $12.5 million.
Outlook, risks and contingencies
- Management planned an Etame drilling campaign beginning in late 2021 or early 2022, with two development wells and two appraisal wells. Estimated gross cost was $115–125 million, or $73–79 million net to VAALCO’s stated 63.6% participating interest. A rig contract provided for at least three wells, with options for more.
- Management believed cash balances and operating cash flow would be sufficient to support requirements, including the drilling program and an FPSO solution, through September 2022. This is management’s expectation, not a guarantee.
- The FPSO charter expires in September 2022. VAALCO was evaluating a replacement, purchase, or extension; each may require significant lead time and capital. Failure to secure storage could force production shut-ins.
- Outstanding crude oil swaps covered 729,123 barrels through January 2022 at weighted average prices of $53.10 and $66.13 per barrel for the respective contract tranches. After quarter-end, VAALCO added swaps for 314,420 barrels at $67.70 per barrel for November 2021–February 2022. Swaps limit some downside but also reduce participation in price increases.
- Key risks include oil-price volatility, COVID-19 impacts, future OPEC+ production decisions, foreign-exchange exposure, dependence on a single customer, reserve and impairment estimates, and the ability to fund development. Management cited approximately $0.8 million of COVID-related costs in Q2 2021 and $1.4 million for the first half.
- Gabon abandonment funding remains subject to foreign-currency banking constraints: the company said the Central Bank authorized an application for a U.S.-dollar escrow account in February 2021, but documentation remained in process. Annual funding payments totaling $2.9 million for 2019 and 2020 had not been made. Government audits of 2013–2014 and 2015–2016 operations remained unresolved or pending findings; management did not expect the earlier audit to have a material effect.
- Management reported no material pending litigation, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Progress, timing, funding and actual cost of the Etame drilling campaign, and whether management’s liquidity outlook remains achievable.
- How VAALCO will secure FPSO storage before September 2022, including expected capital commitments and any production-interruption risk.
- Realized oil prices, production and lifting timing, hedge volumes and prices, and the effect of hedges on cash flow.
- Final purchase accounting for the Sasol acquisition, including asset-retirement obligations and the bargain-purchase gain.
- Collection of Gabon VAT receivables, resolution of abandonment-fund banking constraints, and outcomes of government audits.
- Customer concentration and the status of the ExxonMobil sales contract, which was due to end in January 2022 after extensions.