VAALCO Energy, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Amounts below are in U.S. dollars unless stated otherwise. VAALCO is an independent oil and gas company whose principal revenue source is its interests in offshore Gabon; it also operates or holds interests in Angola and U.S. properties.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Oil and gas revenue | $45.3 million | $46.8 million; down 3% |
| Operating income | $30.1 million | $31.3 million; operating margin about 66.5% vs. 67.0% |
| Net income | $10.5 million, including noncontrolling interest | $12.9 million |
| Net income attributable to VAALCO | $9.0 million; diluted EPS $0.15 | $11.2 million; diluted EPS $0.19 |
| Cash from operations | $15.2 million | $13.8 million |
| Capital spending cash flow | $10.7 million spent; investing cash outflow $10.4 million | $5.5 million spent; investing cash outflow $1.9 million |
| Cash and cash equivalents | $140.3 million at March 31 | $137.1 million at December 31, 2011 |
| Total assets / total liabilities | $294.9 million / $50.7 million | $275.0 million / $41.9 million at December 31, 2011 |
Production averaged approximately 5,200 net barrels per day in Gabon, down from 5,700 net barrels per day a year earlier. VAALCO sold about 388,000 net barrels of oil equivalent at an average $116.59 per barrel, compared with 450,800 barrels at $103.76. The filing attributes lower production mainly to normal decline in mature offshore wells; sales also depend on the timing and size of liftings. No borrowings are listed on the balance sheet. Current assets were $171.3 million against current liabilities of $33.5 million.
Changes and notable items
- Revenue declined despite a higher realized selling price, as sales volumes fell. Net income attributable to VAALCO decreased about 20%, reflecting lower oil revenue and higher income taxes.
- Gabon’s royalty rate changed from a sliding scale to a fixed 13%, replacing a recent 15% rate. The retroactive adjustment added $3.1 million to revenue and $1.5 million to tax expense, for a stated $1.6 million net-income benefit.
- Income tax expense rose to $19.8 million from $18.3 million; the company said Q1 income taxes were paid in Gabon. Production expense increased to $5.5 million from $5.2 million, while DD&A decreased to $5.0 million from $6.1 million. G&A rose to $3.5 million from $3.0 million, and Q1 2012 included a $0.3 million bad-debt expense.
- Net property and equipment additions incurred were $16.9 million, although cash paid for property and equipment was $10.7 million. The filing reports $12.5 million of additions incurred but unpaid at quarter-end.
Outlook, risks and contingencies
- Management expected approximately $40 million of the company’s share of capital expenditures for the remainder of 2012, including U.S. drilling and Gabon wells and infrastructure. It believed cash and operating cash flow would fund the remaining 2012 program and potential working-capital needs. No earnings or production guidance is provided in the filing.
- Gabon plans included additional offshore drilling and platform work, with installation of water-treatment facilities and a personnel module expected in the second half of 2012. A development decision on the Southeast Etame discovery was expected in mid-2012. A remaining Etame Marin exploration well is due by July 2014.
- For Angola Block 5, VAALCO was awaiting a government response to its proposal to proceed without a replacement partner. The current deadline for two commitment wells was November 30, 2012; a further extension might be needed and was not assured. The company had a $4.7 million allowance against partner receivables. If the wells are not drilled and an extension is denied, it may have to impair $11.0 million of leasehold costs and investments and potentially pay $10.0 million; that amount is held as restricted cash.
- VAALCO estimated its share of offshore Gabon abandonment costs at approximately $14.0 million undiscounted and agreed to a funding arrangement expected to begin in 2012, subject to finalizing details with the Gabon government. Payments are to be reimbursed through the cost account.
- Management cited oil-price volatility, reserve and production uncertainty, operating and delivery hazards, partner and government actions, equipment availability, currency movements, and capital needs as risks. The company had no active commodity hedges. Its Q1 financial statements were unaudited, and interim results are not necessarily indicative of full-year results.
Facts investors should verify
- Whether Gabon production trends, lifting timing, and realized prices support future revenue and cash generation.
- Execution, cost, and funding of the stated 2012 capital program and planned Gabon/U.S. drilling and infrastructure work.
- Angola government decisions, partner recovery, extension status, and potential impairment or commitment-payment exposure.
- Implementation and reimbursement terms for Gabon abandonment funding, and the continuing effect of the royalty change on revenue and taxes.
- Cash-flow conversion and working-capital movements, including unpaid capital additions and partner receivables.