VAALCO Energy, Inc. — Q2 2011 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2011, compared with the same 2010 periods. VAALCO is an independent oil and gas company; its principal revenue source was production from the Etame Marin fields offshore Gabon. The company also had exploration interests in Gabon and Angola and expanding U.S. operations. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Oil and gas sales | $58.5 | $33.7 | $105.3 | $63.7 |
| Operating income | $42.5 | $20.1 | $73.9 | $38.0 |
| Net income | $13.5 | $11.4 | $26.4 | $18.3 |
| Net income attributable to VAALCO | $11.8 | $10.0 | $23.0 | $16.0 |
| Basic / diluted EPS | $0.21 / $0.20 | $0.18 / $0.18 | $0.40 / $0.40 | $0.28 / $0.28 |
- For Q2, operating margin was approximately 72.6% and net margin attributable to VAALCO approximately 20.1%; for the first half, approximately 70.1% and 21.9%, respectively.
- Q2 net sales were about 490,000 barrels of oil equivalent at an average $119.37 per barrel, versus about 443,000 barrels at $76.00. First-half sales were about 941,000 barrels at $111.90, versus 846,000 at $75.20.
- Etame-area production averaged approximately 22,200 BOPD in Q2 and 22,700 BOPD for the first half, compared with 20,200 and 19,800 BOPD, respectively, in 2010.
- Income tax expense was $29.6 million in Q2 and $47.9 million for the first half, all paid in Gabon. Management attributed the increase to higher oil revenues and a greater share of production allocated as profit oil.
Cash flow, liquidity and balance sheet
- First-half operating cash flow was $41.1 million, versus $15.0 million in 2010. Investing cash outflow was $7.4 million, including $11.3 million of property and equipment expenditures, partly offset by $3.9 million released from escrow. Financing cash outflow was $0.4 million.
- Cash and cash equivalents were $114.5 million at June 30, 2011, up from $81.2 million at year-end 2010. Current assets were $162.2 million and current liabilities $19.6 million; funds in escrow included $11.0 million in current assets.
- Total liabilities were $36.4 million, including $14.6 million of asset retirement obligations. The balance sheet presents no borrowings or other interest-bearing debt.
- Total equity was $222.1 million, compared with $196.2 million at year-end. Management said cash and operating cash flow were expected to fund the remaining 2011 capital program and potential working-capital needs.
Changes and management commentary
- Q2 revenue rose about 74% year over year; first-half revenue rose about 65%. Management cited higher oil prices and increased production, supported by three development wells completed in 2010 and a successful workover.
- First-half operating income increased to $73.9 million from $38.0 million, while VAALCO-attributable net income increased to $23.0 million from $16.0 million. Higher DD&A, exploration expense and taxes partly offset revenue gains.
- Production expense was broadly flat year over year for the first half ($11.0 million versus $11.1 million). DD&A increased to $12.6 million from $8.3 million, mainly due to higher sales volumes and depletion rates. First-half G&A rose to $5.5 million from $4.9 million; Etame overhead reimbursements fell to $1.1 million from $2.3 million.
Outlook, risks and unusual items
- Expected remaining-2011 capital expenditures included approximately $18 million for Gabon platform modifications and equipment, $3 million for Angola equipment, $5 million to complete the initial Granite Wash well, and $5–$7 million for Montana Bakken activity. A second Granite Wash well was anticipated in late 2011 or early 2012 at an estimated $10 million.
- VAALCO requested an extension of Angola’s exploration deadline beyond November 2011 and expected drilling to begin in Q1 2012. If an extension is not granted and drilling is not underway by the deadline, the company risks forfeiting $10 million in escrow and potentially impairing $14.6 million of leasehold costs and other investments. Management said an official had guaranteed an extension, but the company could not assure it would be granted.
- In Gabon, seismic work was expected to resume in September 2011; the company had one remaining exploration well under its Etame Marin commitment. Mutamba Iroru seismic reprocessing was underway, with a well expected in the first half of 2012.
- In July, VAALCO signed a letter of intent to acquire a 65% working interest in approximately 23,000 net acres in Montana; it expected completion within 60 days. Failure to complete within that period would require a $0.5 million payment. It also acquired a 364-acre Granite Wash lease for $1.4 million. The initial Granite Wash well’s fracture and cleanout work was underway, with initial sales expected in the first half of August.
- Exploration results included the unsuccessful Omangou well in 2010 ($2.6 million cost). The company continued to carry $8.0 million for the Southeast Etame discovery pending evaluation; it also capitalized $5.1 million of 2011 Granite Wash well costs pending results.
- VAALCO had no active commodity hedges. Risks cited include oil-price volatility, reserve and exploration uncertainty, operating and delivery hazards, partner and government actions, currency movements, and regulatory and country risks. Management reported effective disclosure controls and no material change in internal controls.
Important facts for investors to verify
- Whether Angola’s exploration extension is formally granted, and the resulting status of the $10 million escrow and potential $14.6 million impairment exposure.
- Actual production, liftings, realized oil prices, and the sustainability of Gabon’s profit-oil tax burden.
- Completion terms and economics of the proposed Montana acquisition, along with actual 2011 capital spending versus the stated plans.
- Results and commerciality of the Granite Wash well and evaluation of the Southeast Etame discovery.
- Cash availability after considering restricted escrow, project commitments, and asset retirement obligations.