VAALCO Energy, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results. VAALCO is an independent oil and gas producer operating in Gabon, Egypt and Canada, with development interests in Equatorial Guinea. The 2022 comparison predates the October 2022 TransGlobe acquisition and therefore is not fully comparable.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data, prices and percentages.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $109.2 | $111.0 | $189.6 | $179.6 |
| Operating income | $20.6 | $73.1 | $42.2 | $113.2 |
| Net income | $6.8 | $15.1 | $10.2 | $27.3 |
| Diluted EPS | $0.06 | $0.25 | $0.09 | $0.45 |
| Operating margin | 18.8% | 65.9% | 22.2% | 63.0% |
| Net margin | 6.2% | 13.6% | 5.4% | 15.2% |
- Q2 net production was 1.791 million boe and sales were 1.803 million boe; the reported average realized price was $59.37/bbl. For the six-month period, production was 3.438 million boe, sales were 3.027 million boe and the average realized price was $61.92/boe.
- Q2 revenue was down about 2% year over year: lower prices reduced revenue by about $97.4 million, largely offset by higher volumes and acquired Egypt and Canada operations. Six-month revenue increased about 6%, as volume and acquired operations more than offset lower prices. Reported 2023 revenue included acquisition impacts of $31.3 million for Q2 and $75.0 million for the six-month period.
- Profit fell substantially as production expense, depreciation, depletion and amortization (DD&A), and other operating costs rose. Q2 production expense was $38.6 million versus $25.5 million; DD&A was $38.0 million versus $8.2 million. The six-month figures were $66.8 million versus $43.8 million and $62.4 million versus $12.9 million, respectively. Higher DD&A reflects acquired assets, FSO and field-reconfiguration costs, and new wells; production costs also reflect expanded operations and inflation.
- Income tax expense was $11.6 million in Q2 and $26.4 million for six months. The six-month effective tax rate, excluding discrete items, was 63.32%.
Cash flow, liquidity and obligations
- Six-month operating cash flow was $77.6 million, investing cash outflow was $54.8 million, and financing cash outflow was $27.9 million. Property and equipment cash expenditures were $54.8 million; accrual-basis capital expenditures were $41.9 million. Cash flow from operations less property and equipment expenditures was approximately $22.8 million.
- Cash and cash equivalents were $46.2 million at June 30, 2023; total cash, cash equivalents and restricted cash was $54.3 million, including abandonment funding. Current assets were $199.4 million and current liabilities $153.7 million (current ratio approximately 1.30). Total assets were $829.0 million.
- VAALCO reported no outstanding debt and no borrowings under its $50 million reserve-based revolving credit facility; it was in compliance with covenants. Facility covenants include a minimum $10 million cash balance and a maximum 3.0x net-debt-to-EBITDAX ratio. The facility commitment begins scheduled reductions in October 2023. Finance lease liabilities totaled $87.5 million; these are lease obligations, not reported borrowings.
- Financing cash use included $13.5 million in dividends, $11.4 million in treasury-share purchases and $3.4 million in finance-lease principal payments. The board declared a $0.0625 quarterly dividend, subject to board discretion. The $30 million buyback program had $17.5 million remaining at June 30.
Changes, outlook and risks
- The TransGlobe acquisition added Egypt and Canada and materially changed the scale and geographic mix of operations; direct year-over-year comparisons are consequently affected by periods before the acquired businesses were consolidated.
- Q2 included a $5.6 million FPSO demobilization and waste-disposal charge after more waste than anticipated was identified. VAALCO also accrued approximately $5.6 million net to its interest for planned disposal of naturally occurring radioactive material; the filing estimates gross disposal costs of about $9.6 million.
- Management said it had sufficient liquidity for current requirements, while noting cash generation and future spending depend on commodity prices and operating and economic conditions. No specific consolidated financial guidance was provided. Gabon’s next drilling campaign was being planned for 2024; Egypt’s 2023 drilling program was progressing faster and at lower cost than planned. The company reported that OPEC+ measures had not resulted in a mandate to reduce its Etame production.
- Key collection exposures include a $50.3 million remaining Egyptian EGPC effective-date adjustment receivable, subject to finalization and cargo-based settlement; a $19.7 million Gabon refinery receivable past due, with a separate credit-loss provision; and Gabon VAT receivables of $15.8 million net of allowance. Management was negotiating payment solutions with relevant government entities and expected recovery, but terms were not finalized.
- Other risks include oil-price volatility, supply-chain delays and inflation, foreign-exchange exposure, government approvals and actions, and abandonment-funding uncertainty in Gabon. A 10% weakening of the CFA franc was estimated to reduce the value of net XAF assets by $3.7 million.
- Disclosure controls and procedures were deemed ineffective at the reasonable-assurance level because of previously reported material weaknesses. Management expected remediation before year-end 2023; the weaknesses were not yet considered remediated. Management nevertheless stated that the financial statements fairly present the reported periods in all material respects.
Important facts for investors to verify
- Whether the Egyptian effective-date adjustment and Gabon refinery and VAT receivables are collected, on what schedule, and whether further credit-loss provisions are needed.
- Actual production, sales liftings and realized prices by asset, especially the effects of acquisition-related comparisons and Egypt’s sales/collection mix.
- Final FPSO waste-disposal costs, settlement of remaining FPSO-related amounts, and updates to Gabon abandonment funding and obligations.
- Progress against the Egyptian modernization-payment schedule and work commitments, and the timing, cost and results of drilling programs in Egypt, Canada and Gabon.
- Remediation and testing of the material weaknesses in financial reporting controls, plus continued compliance with facility covenants and liquidity requirements.
- Whether dividends and buybacks remain appropriate given cash needs, lease obligations, planned capital spending and commodity-price conditions.