VAALCO Energy, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. VAALCO is an independent oil and gas company, with its principal producing operations offshore Gabon and additional exploration and interests in Angola, Equatorial Guinea and the United States. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 or comparison |
|---|---|---|
| Oil and gas revenue | $11.0 million | $18.2 million; down $7.3 million, or about 40% |
| Operating loss | $6.6 million | $35.3 million loss |
| Net loss | $8.1 million; $0.14 per share | $39.0 million; $0.67 per share |
| Operating margin | Approximately -60.6% | Approximately -193.4%; derived from reported revenue and operating loss |
| Operating cash flow | $(0.2) million | $(0.6) million |
| Investing cash flow | $(1.0) million | $(22.3) million |
| Cash and cash equivalents | $24.2 million at March 31 | $25.4 million at December 31, 2015 |
| Debt | $15.0 million long-term debt | Unchanged from December 31, 2015 |
| Current assets / current liabilities | $58.3 million / $66.4 million | Current liabilities exceeded current assets by $8.1 million |
Realized oil price was $28.54 per barrel, down from $48.65; net oil sales volume increased to 381,000 barrels from 372,000. Lower prices drove the revenue decline. The reported net loss included an $8.9 million rig-release expense and $3.0 million of Angolan income tax on financial gains, partly offset by a $7.6 million recovery of a previously reserved Sonangol receivable and $3.2 million of related interest income. No proved-property impairment was recorded in Q1 2016, compared with $5.4 million in Q1 2015.
Material changes and operating developments
- Production expense rose $1.3 million year over year, including $4.3 million of workover costs; excluding workovers, the company said costs declined following cost-reduction efforts.
- General and administrative expense fell $1.9 million, reflecting cost reductions. DD&A fell $3.7 million, primarily because of a smaller asset base after prior impairments.
- Cash used in investing fell substantially as the prior-year development program wound down. Q1 2016 cash property and equipment spending was $1.3 million; the company reported no accrual-basis capital expenditures for the quarter.
- Sonangol P&P paid $19.0 million in March, including the previously written-off receivable and default interest, improving liquidity.
Outlook, liquidity, risks and contingencies
- Going concern: Management stated that current cash and access to capital may be insufficient for operations, raising substantial doubt about VAALCO’s ability to continue as a going concern. The statements use the going-concern basis and include no adjustments for a potential inability to continue.
- Credit facility: The IFC facility has a stated $65.0 million commitment, but the borrowing base was reduced to $20.1 million effective December 31, 2015; $15.0 million was drawn. VAALCO said borrowing capacity was very limited and it was working with IFC to restructure the facility. It was in covenant compliance at March 31, but said it could not draw the full borrowing base and remain compliant. A further reduction or covenant breach could threaten liquidity and trigger repayment or enforcement.
- Capital and operations: Management expects 2016 capital expenditures of $1 million to $4 million, mainly maintenance. Development drilling offshore Gabon was deemed uneconomic at prevailing prices; the contracted rig was released, and no Etame Marin wells were planned for 2016. Management said depressed prices could leave 2016 revenue and cash flow inadequate to cover operating expenses. Potential responses include financing, asset sales or farm-downs, spending delays and cost reductions; success is not assured.
- Hedge and price exposure: In April 2016, VAALCO entered put contracts covering 36,000 barrels per month from June 2016 through February 2017, with a $40 Brent price, about one-third of forecast sales volume. The $0.8 million cost is to be amortized; the contracts do not qualify for hedge accounting. Management estimated a $5-per-barrel price decline at recent sales volumes would reduce quarterly revenue and operating income by about $1.9 million.
- Commitments and disputes: The rig release accrued an $8.9 million net liability, with final settlement still under negotiation. Gabon offshore abandonment costs were estimated at $17.3 million net to VAALCO undiscounted, with $5.1 million funded and $2.6 million net funding expected in 2016. Three Angola exploration wells remain due by November 2017; the net assessment is $5.0 million for each unspudded well, and the company is seeking an extension. A Gabon tax audit could result in a material liability; the ultimate outcome was uncertain. VAALCO also reported $141 million of gross remaining minimum obligations under its FPSO lease guarantee.
- Control weakness: Disclosure controls were deemed ineffective at March 31, 2016 due to an existing material weakness in financial reporting controls. Management expected remediation during 2016 but gave no assurance it would succeed.
- The Delaware shareholder litigation was dismissed on April 20, 2016; the company agreed to settle plaintiffs’ request for legal fees and expenses. VAALCO reported no material change in risk factors from its 2015 Form 10-K.
Most important facts for investors to verify
- Progress and terms of IFC facility restructuring, borrowing-base redetermination, covenant compliance and any required debt repayment.
- Cash runway and outcomes of the strategic alternatives process, including financing, asset sales or farm-downs.
- Actual production, realized prices, operating costs and the impact of the $40 Brent puts.
- Final rig-contract settlement, Gabon VAT and tax-audit outcomes, and required abandonment funding.
- Whether Angola exploration commitments are extended or met, and the status of internal-control remediation.