VAALCO Energy, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. VAALCO is an independent oil and gas company with producing and exploration interests in Gabon and operations or interests in Angola, Equatorial Guinea, and the United States. Financial amounts below are in U.S. dollars; statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Oil and gas sales | $17.5 million | $24.5 million | $62.9 million | $104.7 million |
| Operating income (loss) | $(32.1) million | $6.7 million | $(68.4) million | $39.9 million |
| Net income (loss) | $(33.7) million | $3.1 million | $(77.9) million | $20.8 million |
| Diluted EPS | $(0.58) | $0.05 | $(1.34) | $0.36 |
| Operating cash flow | Not provided for the quarter | $37.5 million | $54.8 million | |
| Capital expenditures, accrual basis | Not provided for the quarter | $75.4 million | $65.9 million |
Q3 realized oil price was $43.97 per barrel versus $94.67 a year earlier; for the nine-month period it was $51.02 versus $104.68. Higher sales volumes partly offset the price decline: net oil sales rose to 397,000 barrels in Q3 from 256,000, and to 1.227 million barrels year to date from 992,000. The filing does not provide a conventional gross-margin figure.
Operating expense increases and unusual charges materially affected earnings. Q3 included $18.0 million of proved-property impairment and $9.0 million of exploration expense; the latter included the $9.2 million write-off of previously capitalized N’Gongui No. 2 well costs. Nine-month exploration expense was $37.6 million, including costs associated with the unsuccessful Kindele well in Angola. Nine-month proved-property impairment was $29.2 million.
Balance sheet and liquidity
At September 30, 2015, cash and cash equivalents were $40.7 million, current assets $73.7 million, and current liabilities $57.8 million. Total assets were $195.1 million and shareholders’ equity was $106.1 million. Cash declined $28.4 million from year-end 2014. Nine-month operating cash flow of $37.5 million and financing inflows of $0.5 million did not cover investing outflows of $66.3 million.
Long-term debt was $15.0 million, unchanged from year-end. The $65.0 million IFC revolving facility had $50.0 million of stated availability after the June borrowing-base review; VAALCO reported compliance with its financial covenants. The facility requires net debt to trailing 12-month EBITDAX of no more than 3.0:1.0. The filing states that cash and operating cash flow were expected to fund the remaining 2015 capital program, with full-year capital expenditures projected at $83–$86 million and Q4 net capital expenditures of $10–$11 million.
Material changes and outlook
- Sales revenue fell 28% in Q3 and 40% year to date versus the comparable 2014 periods, principally because of lower realized prices and adverse marketing differentials. Management said realized prices were approximately half of 2014 levels.
- Management reported that two new development wells at Etame and two at the Southeast Etame/North Tchibala platform were producing by September 30. North Tchibala 2-H was being drilled, with results expected before year-end; FPSO maintenance was rescheduled to January 2016 and expected to shut in production for about six days.
- Management warned that sustained low prices could cause further impairments, impair project economics, and reduce the IFC borrowing base. A $5-per-barrel lower price assumption would have increased Q3 impairment by approximately $19 million. No commodity-price derivatives were in place.
- H2S has shut in certain Ebouri and Etame wells. Processing options were still under evaluation; if no economic solution is found, up to 2.4 million barrels of proved undeveloped reserves could be affected.
- A new offshore abandonment study was underway. Initial estimates indicated the net undiscounted funding estimate could rise from $10.1 million to $14–$28 million, increasing annual funding requirements for 2015–2021 by $0.6–$2.5 million. The company warned this could adversely affect cash flow.
- Angola partner Sonangol P&P remained in default as of November 6, 2015; the September 30 partner receivable included $7.3 million. Three exploration wells remained under the Block 5 commitment, with a potential $5 million net assessment for each well left undrilled at the November 2017 deadline.
- A Gabon tax audit was being finalized; management expected no material financial impact. A separate 2011–2012 Gabon audit was settled for $0.3 million net to VAALCO.
- A shareholder group sought to amend the bylaws, remove four directors, and replace them with its nominees. VAALCO said it would vigorously defend itself; the filing identified potential disruption, cost, and uncertainty.
Accounting, controls, and other notable matters
VAALCO corrected an immaterial prior-period impairment calculation error through Q3 results. It recorded an additional $4.5 million impairment charge in Q3 and said the correction increased Q3 net loss by $3.6 million; the nine-month correction included $7.0 million of impairment relating to 2014 and increased the period’s net loss by 9%. Management concluded prior filings were not materially misstated.
Disclosure controls were deemed ineffective because of previously identified material weaknesses in impairment-review controls and financial-reporting resources. Remediation actions included hiring a corporate controller and redesigning impairment-review controls; management expected remediation during 2015 but gave no assurance of success.
The company guaranteed gross remaining minimum payments of $158 million under the Gabon FPSO lease. A share repurchase authorization for up to approximately 5.8 million shares was announced, but no program purchases occurred in Q3. The stockholder rights agreement adopted in September was not exercisable as of November 6.
Important facts for investors to verify
- Oil-price assumptions, production levels, and the risk of additional property impairments or a reduced borrowing base.
- Available liquidity after planned capital spending, partner-receivable collection, and required abandonment funding.
- Results and economics of the North Tchibala 2-H well, H2S processing evaluation, and the suspended Gabon discovery’s development prospects.
- Progress on the IFC covenant, the Angola exploration commitments and partner default, and resolution of the Gabon PSC and tax matters.
- Completion of control remediation and the implications of the shareholder consent solicitation and board contest.