VAALCO Energy, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statement amounts below are in U.S. dollars; financial statements are unaudited. VAALCO principally produces oil offshore Gabon, with exploration interests in Equatorial Guinea and limited U.S. operations. Angola is reported as discontinued operations.
Financial performance and position
- Revenue: Q3 oil and gas sales were $14.6 million, down 16.6% from $17.5 million. Nine-month sales were $44.5 million, down 29.3% from $62.9 million.
- Profit/loss: Q3 continuing operations generated $0.2 million income, compared with a $34.5 million loss in Q3 2015; net loss was $15.6 million, including a $15.8 million Angola discontinued-operations loss. Nine-month continuing-operations loss was $15.9 million versus $50.0 million; net loss was $23.9 million versus $77.9 million.
- Operating results: Continuing-operations operating income was $2.9 million in Q3, versus a $31.0 million loss a year earlier. Nine-month operating loss was $6.2 million, versus $38.4 million. The filing does not provide a clear reported margin measure.
- Production and pricing: Q3 Gabon net oil production was 347,000 barrels versus 431,000; net oil sales were 343,000 barrels versus 396,000. Average realized oil price was $42.31/barrel versus $43.97. For nine months, realized oil price was $37.72 versus $51.02, and net oil sales were 1.161 million barrels versus 1.227 million.
- Cash flow: Nine-month operating cash flow was negative $0.04 million, compared with positive $37.5 million in 2015. Continuing operations used $13.2 million, largely offset by $13.2 million provided by discontinued operations. Investing activities provided $1.7 million, including a $15.3 million reduction in restricted cash; cash increased $1.5 million to $26.9 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $26.9 million; restricted cash was $1.6 million. Total debt was $14.4 million, including $6.3 million current and $8.1 million long-term. Total current assets were $41.6 million and current liabilities $50.0 million. Shareholders’ equity was $3.2 million.
- Costs and investment: Nine-month production expense declined to $25.8 million from $26.6 million. Cash property and equipment expenditures were $12.8 million versus $53.3 million; management expected full-year 2016 capital expenditures below $1.0 million.
Material changes versus the prior comparable period
- Lower oil prices were the main driver of the nine-month revenue decline; lower sales volume also contributed. In Q3, sales volume fell 13% and realized oil prices fell 4% year over year.
- Lower 2016 DD&A and the absence of the substantial 2015 exploration and impairment charges improved reported continuing-operations results. Proved-property impairment was $0.1 million in the first nine months of 2016, versus $29.2 million in 2015.
- Cash operating performance weakened sharply year over year, reflecting lower prices and sales, higher workover expense, and less favorable working-capital movements.
- VAALCO amended its IFC facility in June: $15 million was outstanding as a term loan, with a possible additional $5 million draw subject to IFC approval. Interest is LIBOR plus 5.75%; covenant relief raises the net-debt-to-EBITDAX limit to 5.0:1 through 2016. VAALCO reported compliance at quarter-end.
- VAALCO elected to withdraw from Angola and classified the segment as discontinued. It recorded a $15 million maximum-potential drilling-penalty liability, while asserting that prior exploration spending may reduce the amount ultimately payable.
Outlook, commentary, risks and unusual items
- Going concern: Management stated that limited liquidity and dependence on commodity prices raise substantial doubt about VAALCO’s ability to continue as a going concern. If prices remain at Q2–Q3 2016 levels, management expected cash flows to cover operating expenses through the end of 2017; weaker prices or unfavorable resolution of obligations could materially harm liquidity and financial condition.
- Operations: Failures of electric submersible pumps shut in two Avouma-area wells that had produced about 1,075 net barrels per day. VAALCO expected to restore at least some production by late Q4 2016, with its share of workover costs estimated at $3.1 million.
- Contingencies and collections: Angola’s $15 million penalty remains unresolved. Gabon had made only one payment under a VAT repayment arrangement and indicated further payments might not resume until early 2017. VAALCO also accrued $2.2 million for possible Gabon payroll-tax liability and expected to pay about $0.3 million under a separate Gabon tax audit settlement.
- Other obligations and transactions: VAALCO was paying $5.1 million for unused rig days plus demobilization costs in installments; $3.6 million remained at quarter-end. Gross minimum obligations under the Gabon FPSO lease were $133 million. A proposed Sojitz acquisition would add a 2.98% working interest in Etame Marin, subject to closing conditions; letters of intent covered U.S. asset sales for $850,000 and $250,000.
- Market and financing risks: NYSE notified VAALCO that its share price failed the $1.00 minimum average closing-price standard; delisting could hinder capital access. Further risks include oil-price volatility, covenant compliance, limited financing options, currency exposure and potential reserve/property impairments. A $5/barrel lower oil price at quarter-end assumptions would reduce quarterly revenue and operating income by about $1.7 million, per the filing.
- Controls: Management concluded disclosure controls were not effective at September 30, 2016 because a previously identified material weakness in internal control over financial reporting remained. Staffing challenges were noted.
Key facts for investors to verify
- Whether VAALCO maintained sufficient liquidity, complied with IFC covenants, and obtained any additional IFC borrowing or other financing.
- The final Angola drilling-penalty determination, settlement timing and cash impact.
- Whether the Avouma wells returned to production as expected and the realized production and repair costs.
- Collection of Gabon VAT receivables and resolution of the payroll-tax and tax-audit matters.
- Progress on NYSE listing compliance, remediation of the material weakness, and the proposed asset acquisition and divestitures.