VAALCO Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. VAALCO is an independent oil producer whose principal revenue-producing asset is its 31.1% working interest in the Etame Marin block offshore Gabon. Angola is reported as discontinued operations.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $77.0 million | $59.8 million |
| Operating income (loss) | $20.0 million | $(4.4) million |
| Income (loss) from continuing operations | $10.3 million | $(18.3) million |
| Net income (loss) | $9.7 million | $(26.6) million |
| Net income (loss) per share | $0.16 | $(0.45) |
| Cash provided by continuing operations | $11.1 million | $(15.7) million |
| Total cash provided by (used in) operations | $6.7 million | $(3.5) million |
| Cash and cash equivalents at year-end | $19.7 million | $20.5 million |
| Debt principal outstanding at year-end | $9.2 million | $15.0 million |
- Gabon oil production was 1.518 million barrels, approximately flat with 1.515 million barrels in 2016. Sales were lower at 1.423 million barrels versus 1.485 million.
- Average realized oil price rose to $52.58 per barrel from $40.13. Revenue increased $17.2 million, chiefly from a $17.7 million price benefit, partly offset by a $2.9 million volume decline.
- Production expense was $39.7 million, up $2.1 million. Revenue less production expense was approximately $37.3 million, or 48% of revenue; this simple calculation is not a company-reported operating margin.
- Cash used in investing activities was $1.6 million; cash used in financing was $5.8 million. Cash capital expenditures were $1.8 million. The company made $10.0 million of debt repayments and borrowed $4.2 million.
- Year-end total assets were $79.6 million and total liabilities $69.3 million. Current assets were $36.5 million versus current liabilities of $46.6 million, including $15.3 million of current liabilities attributed to discontinued operations.
- Net proved reserves were 3.049 million barrels of oil, all developed and attributable to Gabon, versus 2.642 million barrels at year-end 2016. Reserves rose through performance revisions and higher prices; there were no proved undeveloped reserves. The standardized measure was $22.5 million, up from $9.4 million.
Material changes and unusual items
- Results improved substantially from 2016 as realized oil prices recovered and operating costs were lower overall. The 2016 comparison included $8.9 million of other operating expense, principally $7.9 million for rig demobilization and early release; 2017 had no such charge.
- 2017 net income included a $2.6 million reversal of accruals for liabilities no longer payable and a $1.3 million deferred tax benefit from expected refunds of U.S. alternative minimum tax credits. Oil puts generated $1.0 million of losses; all puts had expired by year-end.
- The last 2017 lifting was completed January 1, 2018. Revenue of $6.5 million for 95,525 barrels was therefore deferred to 2018.
- The company sold its remaining Montana field interest in April 2017 for $0.3 million, recognizing a gain of approximately $0.3 million. Remaining U.S. interests were described as inconsequential.
- Management reported that 2016 material weaknesses in internal control over financial reporting were remediated during 2017; management and the auditor concluded controls were effective at December 31, 2017. The financial statement audit opinion was unqualified.
Liquidity, outlook, and key risks
- Management said cash on hand and expected operating cash flows at current prices should support operations and cash requirements through March 31, 2019. This outlook is sensitive to oil prices and unresolved obligations. No additional borrowing was available under the IFC term loan.
- The $9.2 million IFC loan bears interest at LIBOR plus 5.75%, matures in June 2019, and requires $6.7 million of principal payments in 2018 and $2.5 million in 2019. VAALCO reported covenant compliance at year-end, but future compliance is not assured.
- VAALCO may drill two or three Gabon development wells in 2018, subject to partner and government approval and access to funding. No material future capital commitments were reported. The company is evaluating financing, joint ventures, acquisitions, asset sales, and other strategic alternatives; completion is not assured.
- Production and reserves are highly concentrated in Gabon. Two Avouma wells were shut in pending workovers following ESP failures; additional wells are shut in for hydrogen sulfide (H2S), and processing investments to restore those areas were uneconomic at forecast prices. Current net production was reported at about 3,500 BOE per day, below the 2017 average of 4,160 BOE per day.
- The Etame license’s first relevant expiration is June 2021; extension is a key strategic objective. Gabon’s FPSO import-permit issue could impede operations if unresolved. Beginning February 2018, Gabon elected to take its profit-oil share in kind, potentially affecting sales timing and realized prices.
- Angola drilling obligations remain under discussion with Sonangol. VAALCO accrued $15.0 million as its maximum potential amount, but believes the eventual payment may be substantially lower; an unfavorable resolution could materially affect finances. The company also reported $1.8 million accrued for various Gabon audits, including $0.5 million for estimated tax-audit assessments and $1.3 million for potential customs-audit fees.
- Gabon VAT reimbursements remained delayed: the company had a net allowance of $7.0 million against VAT and other receivables, and reported that installment payments agreed with the government had not resumed. Other principal risks include oil-price volatility, foreign exchange, offshore operating and weather hazards, partner funding, political and regulatory uncertainty, abandonment costs, and NYSE listing compliance.
- Estimated Gabon abandonment costs were $61.1 million gross, or $19.0 million net to VAALCO, undiscounted. The company had funded $10.8 million net by year-end and expected to contribute about $2.3 million net in 2018.
Important facts for investors to verify
- Whether the expected operating cash flows materialize and whether VAALCO secures funding for planned drilling and loan repayments.
- Progress on extending the Etame license, the FPSO import permit, and the effect of Gabon taking profit oil in kind.
- Resolution and final amount of the Angola drilling-obligation claim, Gabon audits, and overdue VAT receivables.
- Whether shut-in wells return to production and whether ESP failures or H2S constraints further affect output, reserves, or costs.
- How oil prices, reserve revisions, abandonment estimates, and NYSE listing status evolve; the reserve standardized measure is an SEC-based estimate, not market value.