VAALCO Energy, Inc. — Q2 2015 Form 10-Q
Unaudited results for the three and six months ended June 30, 2015; amounts below are USD millions unless stated otherwise. VAALCO is an independent oil and gas company, with producing operations concentrated in offshore Gabon and exploration activities in Angola, Equatorial Guinea and the United States.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Oil and gas sales | $27.1 | $52.1 | $45.4 | $80.2 |
| Operating income (loss) | $(1.0) | $33.8 | $(36.3) | $33.2 |
| Net income (loss) | $(5.2) | $24.7 | $(44.2) | $17.7 |
| Net loss per diluted share | $(0.09) | $0.43 | $(0.76) | $0.31 |
- Management attributed the revenue decline mainly to lower realized prices: average oil price was $59.16/bbl in Q2 and $54.46/bbl in the first half, versus $108.24 and $108.15, respectively, in 2014. First-half oil-equivalent sales volume increased to 845 thousand BOE from 757 thousand BOE, partly offsetting price pressure.
- First-half operating costs and expenses were $82.1 million, including $28.6 million exploration expense and $11.2 million proved-property impairment. Production expense was $18.8 million and DD&A was $15.2 million. Income tax expense remained $7.6 million despite the pretax loss.
- Operating cash flow was $27.0 million in the first half, down from $40.6 million. Cash used in investing was $35.4 million, including $41.2 million in property and equipment expenditures; reported capital expenditures, including dry-hole costs, were $55.5 million. Cash and cash equivalents fell to $61.0 million from $69.1 million at year-end 2014.
- At June 30, current assets were $101.5 million and current liabilities $64.3 million. Total assets were $234.3 million; total liabilities were $95.2 million and equity $139.1 million.
- Debt was $15.0 million under the $65.0 million IFC revolving facility, with $50.0 million available after the borrowing-base redetermination. The company reported compliance with its financial covenants; debt matures in December 2019. Long-term restricted cash was $15.8 million, primarily related to Angola exploration commitments.
Changes, outlook and material risks
- Results shifted from profit in the 2014 comparable periods to losses in 2015, driven by roughly halved realized oil prices, the unsuccessful Kindele exploration well in Angola, and impairment charges. The Kindele well was plugged and abandoned; $27.2 million of well and related unproved-leasehold costs was charged to first-quarter exploration expense.
- Oil-price declines prompted proved-property impairment reviews. First-half 2015 charges totaled $11.2 million for Southeast Etame and North Tchibala fields; the filing warns that further impairments may be required if prices, costs or production assumptions worsen.
- Management expected 2015 capital expenditures of $70–$80 million and estimated its net third-quarter capital expenditures at approximately $15 million. It stated that cash and operating cash flow should fund the remaining 2015 budget and working-capital needs. No specific earnings or production guidance is provided.
- Development drilling continued offshore Gabon; the Southeast Etame 2-H well began production in July 2015, and North Tchibala 1-H drilling was underway, with results expected in late September. H₂S has kept certain Ebouri and Etame wells shut in; re-establishing production depends on an economic processing solution, and as much as 2.4 million barrels of proved undeveloped reserves could be affected if no viable solution is found.
- The company was pursuing a revised Gabon production-sharing contract to develop its N’Gongui discovery; partner and government approvals were not assured. Sonangol P&P remained in default as of August 6, 2015, despite $22.2 million of payments received in 2015; $7.6 million of disputed/pre-assignment receivables remained fully allowed for as uncollectible.
- Other exposures include a $142 million remaining minimum obligation under the FPSO charter guarantee, rig commitments, and Gabon audit matters that management expected would not materially affect results. The filing identifies commodity prices, reserve estimates, borrowing-base/covenant compliance, operating hazards, partner and government actions, and foreign-exchange and interest-rate movements as risks. No commodity derivatives were in place.
- Disclosure controls were deemed ineffective because of material weaknesses in impairment-review controls and financial-reporting resources. Management described remediation steps and expected completion during 2015, but gave no assurance of success. Subsequent to quarter-end, the board authorized a share-repurchase program of up to 5.8 million shares through February 3, 2017.
Important facts for investors to verify
- Whether lower oil prices, production volumes and realized pricing continue to pressure revenue, cash generation, reserve values and IFC borrowing capacity.
- Progress, costs and production results from Gabon development drilling and the timing and economics of any H₂S treatment solution.
- Whether the Gabon PSC and required partner and government approvals permit development of the N’Gongui discovery.
- Collection of Sonangol receivables, partner cash-call payments and the status of the Angola exploration commitments.
- Capital spending against the $70–$80 million 2015 expectation, liquidity after spending and any share repurchases.
- Whether the company remediates its disclosed material weaknesses and whether Gabon audit resolutions remain immaterial.