VAALCO Energy, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 9, 2020. VAALCO is an independent oil producer whose revenue in 2019 came entirely from the Etame Marin block offshore Gabon; its Equatorial Guinea Block P interest remained undeveloped.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $84.5 million | $104.9 million |
| Operating income | $21.2 million | $51.3 million |
| Income from continuing operations | Loss of $2.8 million | Income of $98.7 million |
| Net income | $2.6 million | $98.2 million |
| Cash from operating activities | $26.5 million | $37.2 million |
| Cash used in investing activities | $10.3 million | $14.1 million |
| Cash used in financing activities | $3.7 million | $8.7 million |
| Unrestricted cash at year-end | $45.9 million | $33.4 million |
- 2019 revenue reflected net crude oil sales of 1.251 million barrels at an average realized price of $65.20 per barrel, compared with 1.442 million barrels at $70.32 per barrel in 2018. Production expense was $30.13 per barrel, up from $28.03.
- Continuing-operations income fell sharply, principally because 2018 included a $43.3 million income tax benefit, while 2019 had $23.9 million of income tax expense. The 2019 result also reflected lower sales volumes and prices, higher operating costs, and lower derivative gains.
- Net income includes $5.4 million of income from discontinued Angola operations, primarily a settlement-related benefit. Excluding discontinued operations, VAALCO reported a continuing-operations loss.
- Fourth-quarter 2019 revenue was $21.9 million, operating income $7.8 million, continuing-operations income $1.1 million, and net income $1.0 million. In fourth-quarter 2018, those amounts were $27.6 million, $15.2 million, $10.5 million, and $10.4 million, respectively.
- Accrual-basis capital expenditures for continuing operations were $22.2 million in 2019; cash property and equipment expenditures were $10.3 million. The difference principally reflects costs incurred but not yet paid at year-end.
- At December 31, 2019, total assets were $211.5 million, total liabilities $101.8 million, and shareholders’ equity $109.7 million. The company reported no outstanding debt; its IFC term loan was repaid in May 2018. Lease accounting added $33.4 million of operating lease liabilities at year-end, including $12.0 million current.
Material changes and business developments
- VAALCO began its 2019/2020 Gabon drilling campaign in September 2019. It drilled the Etame 9P appraisal wellbore and Etame 9H development well in 2019; the 9H came online at an initial gross rate of 5,500 barrels per day. The Etame 11H development well came online in January 2020 at an initial gross rate of approximately 5,200 barrels per day.
- Estimated proved reserves were 4.966 million barrels at year-end 2019, down from 5.370 million in 2018. Reserves added in 2019 replaced 68% of production. There were no proved undeveloped reserves at year-end.
- The 2018 PSC extension runs through 2028, with two possible five-year extensions. The related commitment to drill two development wells and two appraisal wellbores was completed in February 2020.
- VAALCO began trading on the London Stock Exchange in September 2019, alongside its NYSE listing. It repurchased approximately 2.07 million shares in 2019 for an aggregate $3.7 million under its $10 million repurchase authorization.
- The company settled legacy joint-venture audit findings for $4.4 million, paying the remaining balance in February 2020. The Angola settlement was finalized in 2019, including a $4.5 million payment and elimination of a $3.3 million receivable.
Outlook, risks, and unusual items
- Management stated it expected cash and operating cash flow to fund remaining drilling commitments and other cash needs through March 2021, based on then-current expectations. It planned to manage operating costs and capital spending in response to market conditions.
- Brent prices fell below $40 per barrel in early March 2020. VAALCO warned that continued prices at or below that level could require oil and gas property write-downs. The filing’s reserve estimates use a 2019 SEC price benchmark of $63.60 per barrel.
- Four wells were shut in because of hydrogen sulfide (H2S), and no proved reserves were booked for the affected wells. Restoring production would require additional investment in processing and well work; management considered processing facilities uneconomic at then-current oil prices.
- All proved reserves and current revenue were concentrated in Gabon, exposing the company to single-country, single-block, operational, political, and commodity-price risks. The filing also highlights offshore hazards, reserve uncertainty, joint-owner cash-call risk, customer concentration, regulatory and tax uncertainty, and environmental and cybersecurity risks.
- Gabon abandonment costs were estimated at $61.8 million gross ($19.2 million net to VAALCO), undiscounted. The company had funded $11.4 million net through year-end. A currency-regulatory transfer converted the abandonment funds to local currency, and VAALCO said it could not make the scheduled 2019 contribution because the requested U.S.-dollar account had not been established.
- Block P carried $10.0 million of capitalized undeveloped leasehold costs. VAALCO was awaiting a production-sharing-contract amendment and discussing a possible promoted partner arrangement; no binding deal had been signed. Failure to meet future commitments could result in impairment.
- In 2019, the company recorded $23.9 million of income tax expense and a $3.1 million charge increasing the valuation allowance on U.S. deferred tax assets. At year-end, deferred tax assets were $108.8 million, offset by an $84.6 million valuation allowance.
- Management and the auditor concluded internal control over financial reporting was effective at year-end 2019. A material weakness reported in 2018 was stated to have been remediated. The auditor gave an unqualified opinion on the financial statements.
Key facts for investors to verify
- Whether low oil prices persist and how they affect cash generation, impairment testing, capital spending, and management’s stated liquidity runway.
- Actual production, uptime, and workover outcomes for the Etame wells, including the H2S-shut-in wells and the SE Etame 4H development well.
- Reserve replacement and the approval and timing of future development plans, given the 68% replacement rate and absence of year-end proved undeveloped reserves.
- Status and control of Gabon abandonment funds, future funding requirements, and resolution of the outstanding Gabon government audit.
- Whether Block P’s contract amendment and proposed partner arrangement become binding, and whether the $10.0 million carrying value remains recoverable.
- Reconciliation of continuing-operations losses, tax expense, and discontinued-operations gains when assessing recurring profitability and cash flow.