VAALCO Energy, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter report. VAALCO is an independent oil producer whose revenue came entirely from offshore Gabon production; its Block P interest in Equatorial Guinea remained undeveloped.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $67.2 million | $84.5 million |
| Operating income (loss) | $(27.3) million | $21.2 million |
| Net income (loss) | $(48.2) million | $2.6 million |
| Net crude oil sales volume | 1.627 million barrels | 1.251 million barrels |
| Average realized oil price | $40.29/barrel | $65.20/barrel |
| Production expense | $37.3 million; $22.93/barrel | $37.7 million; $30.13/barrel |
| Cash from continuing operations | $27.9 million | $31.2 million |
| Cash used in investing activities | $24.3 million | $10.3 million |
| Cash and cash equivalents at year-end | $47.9 million | $45.9 million |
Production expense per barrel excludes workover expense. The filing does not present a single consolidated operating-margin percentage. At year-end 2020, total assets were $141.2 million, total liabilities $79.8 million, and shareholders’ equity $61.5 million. The company reported no outstanding debt; its former term loan had been repaid in 2018. Operating lease liabilities totaled $22.6 million, and asset retirement obligations were $17.3 million.
Changes versus 2019 and notable items
- Revenue fell about 20.5%, primarily because the realized oil price dropped by $24.91/barrel. Higher sales volumes partly offset the price decline; Gabon production curtailments and a December lifting delayed into January also affected volumes and timing.
- The company recorded a $30.6 million impairment of producing properties in the first quarter, driven by lower forecast oil prices. It also recorded $27.7 million of income tax expense despite a pretax loss, including a $41.6 million increase in valuation allowances against deferred tax assets. Deferred tax assets of $126.3 million were fully reserved at year-end.
- Net operating cash flow rose slightly to $27.5 million, including discontinued operations, but cash used in investing increased with the drilling program and a $4.3 million deposit related to the Sasol acquisition. Year-end cash, cash equivalents and restricted cash totaled $61.3 million, including $12.5 million of abandonment funding.
- Net proved reserves declined to 3.216 million barrels from 4.966 million. The 0.497 million barrels of extensions and discoveries were offset by negative revisions of 0.471 million barrels; the filing attributes these to 1.6 million barrels of price-related downward revisions, partly offset by 1.1 million barrels of improved well performance. The standardized measure fell to $14.7 million from $70.4 million.
- Net production increased to 1.776 million barrels from 1.269 million, reflecting new wells. Production expense decreased slightly in total and per barrel, while the company reported approximately $1.6 million of additional COVID-related costs.
Outlook, developments and risks
- Sasol acquisition: On February 25, 2021, after year-end, VAALCO completed its acquisition of Sasol’s 27.8% Etame working interest, increasing its interest from 31.1% to 58.8%. The final closing payment was $29.6 million, funded from cash on hand. A further $5.0 million is contingent on Dated Brent exceeding $60/barrel over a qualifying 90-day period between July 1, 2020 and June 30, 2022. Acquired interest results are included only from the closing date onward.
- Capital plans: VAALCO planned a drilling campaign in late 2021 or early 2022 with two development wells and two appraisal wells. Estimated cost was $115–$125 million gross and $73–$79 million net, using a stated 63.6% participating interest. Seismic data acquired in 2020 was expected to be processed and analyzed by fourth-quarter 2021. Management said, based on its expectations at year-end, existing cash and operating cash flow were sufficient to support requirements, including the acquisition, through March 2022.
- Oil market and production: Brent was approximately $51/barrel at December 31, 2020, after falling to about $15/barrel in March. Gabon’s OPEC+ production request reduced VAALCO production beginning July 2020; management expected curtailments to continue through March 31, 2021, with no assurance about subsequent quotas. VAALCO entered 2021 swaps covering 709,262 barrels at a weighted-average Dated Brent price of $53.10/barrel for February 2021–January 2022.
- Concentration and infrastructure: All 2020 revenue and proved reserves were tied to the Etame Marin block. Four wells were shut in because of high hydrogen sulfide levels and had no proved reserves booked; additional facilities and investment would be needed to restore production, which management considered uneconomic at then-current prices. The FPSO charter expires in September 2022, and a replacement, extension or purchase could require significant lead time and capital.
- Other exposures: Key risks include oil-price volatility, COVID-19 effects, Gabon production quotas and regulatory or audit outcomes, foreign-currency and abandonment-fund issues, reserve-estimation uncertainty, offshore operating hazards, customer concentration, and access to capital. ExxonMobil accounted for approximately 86% of 2020 customer revenue; its sales contract was extended through July 2021. The Gabon government audit of 2015–2016 operations had not yet produced findings. Management stated that the 2013–2014 audit was not expected to materially affect the company.
- Legal, controls and dividends: The company said ordinary-course legal claims were not likely to materially affect its financial position, cash flows or results. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2020; the external auditor was not engaged to audit internal controls. VAALCO had not paid cash dividends.
Important facts for investors to verify
- Post-acquisition liquidity and funding capacity for the 2021–2022 drilling plan, FPSO arrangements and increased working-interest obligations; distinguish the stated 58.8% working interest from the 63.6% participating interest used for the campaign estimate.
- Whether Gabon’s production curtailments ended as expected, and the resulting production, sales and lifting schedule.
- Progress on securing an FPSO solution before September 2022, including the cost and funding required.
- Oil-price assumptions underlying reserves, impairment and tax-asset recoverability; confirm how subsequent price changes affect reserves and the $126.3 million fully reserved deferred tax assets.
- Resolution of the Gabon audits and the abandonment-funding account, including the difference between the reported funding balance and future payment estimates under changing ownership interests.