VAALCO Energy, Inc. — Q2 2020 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2020. VAALCO is an independent oil producer operating offshore Gabon, with undeveloped acreage in Equatorial Guinea; Angola is reported as discontinued operations. The filing was signed August 6, 2020.
Financial and operating performance
- Q2 revenue: $18.0 million, down 28.8% from $25.2 million a year earlier. The realized oil price fell to $28.31/bbl from $68.62/bbl; higher sales volumes of 631 thousand barrels versus 357 thousand partly offset the price decline.
- Q2 profit: Operating loss was $1.0 million versus operating income of $6.4 million. Net income was $0.6 million, compared with a $1.0 million net loss. The quarter included a $2.2 million income tax benefit.
- First half revenue and earnings: Revenue was $36.4 million versus $45.0 million. Operating loss was $27.6 million versus operating income of $11.9 million; net loss was $52.2 million versus net income of $5.5 million. Basic loss per share was $0.90, compared with earnings of $0.09.
- First half costs and unusual charges: Results included a $30.6 million impairment of proved oil and gas properties and a $42.8 million increase in deferred-tax valuation allowances. Income tax expense was $31.2 million. Production expense rose to $21.9 million from $18.0 million, while general and administrative expense fell to $3.8 million from $7.2 million.
- Cash flow and investment: First-half operating cash flow was $20.2 million, up from $16.6 million. Investing cash outflow was $20.1 million, primarily for the 2019/2020 drilling campaign, versus $1.2 million in 2019. Cash, cash equivalents and restricted cash decreased $0.8 million to $58.3 million.
- Liquidity and obligations: Unrestricted cash was $44.8 million, including $9.3 million attributable to joint-venture-owner advances. Current assets were $62.2 million and current liabilities $50.5 million. The balance sheet reports no borrowings; the filing says the Company had no debt instruments with a material LIBOR provision. Management believed available cash and operating cash flow would support requirements through September 2021, subject to uncertain market conditions.
- Margins and balance sheet: Q2 operating margin was approximately -5.4%, versus 25.2% in Q2 2019; first-half operating margin was approximately -76.0%, versus 26.5%. Total assets were $147.7 million, down from $211.5 million at year-end 2019; shareholders’ equity was $56.7 million, down from $109.7 million.
Changes, outlook and risks
- Production increases from new wells supported sales volumes, but the collapse in oil prices drove lower revenue and the first-quarter impairment. Q2 crude prices improved sufficiently that no additional property impairment was recorded in that quarter.
- In July, VAALCO reduced Etame Marin production at Gabon’s request under OPEC+ measures and expected reduced output through September 2020. It forecast Q3 production of 4,200–4,600 barrels per day, compared with 5,410 barrels per day in Q2, reflecting quotas and planned field maintenance. The Company planned to reassess production thereafter.
- Management had deferred discretionary capital spending, cut or shared costs, and expected no remaining material non-discretionary capital expenditures for the balance of 2020. Two PSC-required technical studies, estimated at $0.4 million net to VAALCO, were underway and expected to finish on time.
- The Company had no commodity swaps outstanding at June 30; existing swaps covered only part of production through June. Management may consider new hedges but gave no commitment or timing. Oil-price weakness, COVID-19, Gabon production restrictions, operating disruption, and reduced access to financing could adversely affect cash flow, liquidity, reserves and asset values.
- VAALCO held $11.4 million in abandonment funding, but regulatory and banking issues in Gabon had prevented the 2019 annual payment and left the funds converted to local currency. In July 2020, the Central Bank authorized foreign-exchange escrow accounts; the completion timetable remained unclear. The PSC provides that joint owners are not liable for a funding shortfall if the Gabonese bank fails to reimburse the funds.
- The Company guaranteed FPSO charter payments with $39.5 million of gross minimum obligations remaining; its share was approximately $9.7 million annually, and the recorded guarantee liability was $0.3 million. The charter was extended through September 2022. Management considered performance under the guarantee remote.
- The Etame joint-venture audit claims were resolved, including a $0.8 million payment agreed in June 2020. Management did not expect the outstanding Gabon government audit to materially affect financial condition, results or liquidity. Block P activity remained subject to a PSC amendment and other approvals; proposed farm-out discussions were non-binding.
Investor facts to verify
- Whether oil prices, Gabon quotas and COVID-19 conditions materially change production, realized prices or the September 2021 liquidity assessment.
- How much of reported cash is available for VAALCO’s own use, given joint-venture advances and restricted/abandonment funds.
- Whether lower prices or revised reserve estimates trigger further impairments or changes to deferred-tax valuation allowances.
- Progress establishing the Gabon foreign-exchange escrow account and recovering or accessing abandonment funds.
- Remaining FPSO guarantee exposure, lease commitments and the status of Block P approvals and any binding farm-out agreement.