VAALCO Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results. VAALCO is an independent oil producer operating primarily offshore Gabon; Angola is reported as discontinued operations, and Equatorial Guinea’s Block P remains undeveloped.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $25.2 million | $24.4 million | $45.0 million | $52.1 million |
| Operating income | $6.4 million | $5.7 million | $11.9 million | $18.8 million |
| Continuing-operations income (loss) | $(0.9) million | $0.9 million | $(0.04) million | $9.6 million |
| Net income (loss) | $(1.0) million | $0.5 million | $5.5 million | $9.2 million |
| Cash provided by operating activities | — | $16.6 million | $30.7 million |
Q2 revenue rose 3.3%, chiefly on higher sales volumes, despite a lower realized price of $68.62/bbl versus $74.36/bbl. Six-month revenue declined 13.6%, reflecting lower sales volumes and prices; production was 648 thousand net barrels in both six-month periods, while sales were 654 thousand versus 712 thousand barrels. Q2 production was 333 thousand net barrels versus 323 thousand.
Production expense fell to $9.8 million in Q2 from $12.8 million, and to $18.0 million for six months from $23.8 million, mainly because workover costs were substantially lower. General and administrative expense was $2.7 million in Q2 versus $5.0 million, largely due to lower share-appreciation-rights expense. Q2 other operating expense of $4.4 million included a charge for a legacy joint-venture audit settlement.
Income tax expense was $9.2 million in Q2 and $12.0 million for six months, including deferred tax expense. The reported Q2 effective tax rate was 79%. Six-month net income includes a $5.5 million after-tax gain from the Angola settlement; continuing operations were approximately break-even.
Cash, debt and liquidity
At June 30, 2019, cash and cash equivalents were $48.6 million; cash, cash equivalents, restricted cash and abandonment funding totaled $61.8 million. Working capital was approximately $22.8 million, based on current assets of $69.9 million and current liabilities of $47.1 million. VAALCO had no outstanding debt; its IFC term loan had been repaid in 2018.
Six-month operating cash flow was $16.6 million, down from $30.7 million, in part because the prior-year period benefited from joint-owner cash-call timing. Cash capital expenditures were $1.2 million; accrual-basis capital expenditures were $2.3 million. Management said cash on hand and expected operating cash flow should fund operations and requirements through September 30, 2020, assuming current prices.
Operating lease assets and liabilities were recognized under the new lease standard; June 30 lease assets and liabilities were each $34.1 million. The company also authorized up to $10.0 million of share repurchases over 12 months and had repurchased 141,686 shares for approximately $0.2 million by June 30.
Changes, outlook and material matters
- The Etame PSC was extended for ten years from September 2018, with two additional five-year extension options. The cost-recovery percentage increased from 70% to 80% through September 2028.
- VAALCO and its partners planned to drill two wells and two appraisal wellbores at Etame by September 16, 2020, at estimated gross cost of $61.2 million ($20.5 million net to VAALCO). Drilling was expected to begin in the second half of 2019; a possible third well remained subject to approvals.
- Etame 4H stopped producing in July after averaging 350 gross barrels/day in Q2; remedial work was under technical review. North Tchibala 2H also stopped flowing after a July acid stimulation, and further work was planned. A scheduled FPSO/platform turnaround included an approximately eight-day full-field shutdown in Q3.
- VAALCO entered oil swaps covering approximately 500,000 barrels from July 2019 through June 2020 at a weighted-average Brent price of $66.70/bbl. The swaps are economic hedges, not hedge-accounting instruments, and may limit gains if prices rise.
- The Angola settlement required a $4.5 million payment and elimination of a $3.3 million receivable; VAALCO paid the $4.5 million in July. A separate $4.4 million net-to-VAALCO joint-owner audit settlement was agreed in principle in July and accrued as a Q2 expense, pending a final binding agreement.
- Disclosure controls were deemed ineffective due to a previously identified material weakness in review of income-tax effects of significant or unusual transactions. VAALCO hired tax expertise and expected remediation during 2019, but gave no assurance it would succeed.
- Key risks include oil-price volatility, production and drilling execution, Gabon regulatory and audit matters, currency exposure, and collection of VAT receivables. In Equatorial Guinea, VAALCO’s license-holding subsidiary was not in good standing; failure to restore its status could lead to penalties or other administrative action. Failure to drill an exploration well at Block P could result in loss of the license and impairment of its $10.0 million carrying value.
Investor verification priorities
- Track production restoration at Etame 4H and North Tchibala 2H, the planned turnaround impact, and results and funding of the Etame drilling program.
- Confirm final execution and payment terms for the $4.4 million joint-owner audit settlement and monitor remaining Gabon government audit matters.
- Assess the sustainability of liquidity and cash generation against drilling commitments, lease obligations, repurchases, and oil-price exposure.
- Monitor tax expense and deferred-tax asset assumptions, as well as remediation and effectiveness testing of the disclosed material weakness.
- Verify Block P good-standing status, operator approval, partner arrangements, and the timetable for the exploration well; also monitor renewal of the crude oil sales contract, which ran through January 2020.