VAALCO Energy, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. VAALCO is a Houston-based oil and gas exploration and production company, with its primary producing operations offshore Gabon and exploration interests in Gabon, Angola, Equatorial Guinea, and the United States.
Financial performance
Amounts in U.S. dollars; financial statement figures in millions unless noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $29.1 | $58.8 | $73.3 | $104.1 |
| Operating income | $11.7 | $38.6 | $33.2 | $68.7 |
| Net income | $7.1 | $12.3 | $14.3 | $22.8 |
| Net income attributable to VAALCO | $7.1 | $10.4 | $14.3 | $19.4 |
| Basic EPS | $0.12 | $0.18 | $0.25 | $0.34 |
- Margins: Operating margin was approximately 40% in Q2 versus 66% a year earlier, and 45% for the first half versus 66%. Net margin was approximately 24% versus 21% in Q2, and 20% versus 22% for the first half.
- Cash flow: First-half operating cash flow was negative $9.5 million, compared with positive $28.0 million in 2012. Investing cash outflow was $41.3 million, mainly reflecting $40.8 million of property and equipment expenditures. Financing cash outflow was $1.2 million. Cash fell $52.1 million to $78.7 million.
- Liquidity and balance sheet: At June 30, cash was $78.7 million, current assets $127.3 million, and current liabilities $33.2 million. Restricted cash totaled $12.6 million, including $10.0 million set aside for Angola exploration-well obligations. Total liabilities were $44.4 million; the balance sheet presents no debt balance. Net property and equipment was $132.7 million.
Changes and operating drivers
- Revenue declined 50% in Q2 and 30% for the first half. Gabon oil sales drove the decrease: Q2 net sales volume fell to approximately 280,000 barrels from 538,000, while the average realized price decreased to $102.21 per barrel from $107.51. For the first half, net sales were 676,000 barrels at $106.82 per barrel, versus 906,000 barrels at $113.25.
- Gabon production averaged approximately 16,900 gross barrels per day in Q2 (4,100 net to VAALCO), versus 20,100 gross (4,900 net) in 2012. The filing attributes lower volumes to workovers replacing electrical submersible pumps and the shut-in of two Ebouri wells after hydrogen sulfide was detected.
- First-half production expense increased to $15.4 million from $12.1 million, mainly due to $5.7 million of workover costs. Exploration expense rose to $10.4 million from $4.3 million, including dry-hole costs for the unsuccessful Ebouri appraisal well and U.S. properties. Lower sales volumes contributed to reduced DD&A.
- First-half operating cash flow was pressured by working-capital movements, including $26.1 million of Gabon oil liftings not yet due for payment at quarter-end and repayment of excess joint-venture cash calls.
- The company acquired the remaining noncontrolling interest in a subsidiary in October 2012; accordingly, 2013 net income is fully attributable to VAALCO, unlike 2012.
Outlook, risks, and notable items
- Management expected approximately $45 million of VAALCO-share capital expenditures in the second half of 2013, primarily for two offshore Gabon platforms and two exploration wells. First-half net additions included $19.9 million for platform construction and $10.5 million for Gabon development wells. The two platforms were estimated to cost $325 million gross, or $91 million net to VAALCO, with installation expected in 2013–2014.
- Management stated that available cash and operating cash flows were expected to fund the remaining 2013 capital program and working-capital needs. This is an expectation, not a guarantee; the filing gives no earnings or production guidance.
- An Ovoka exploration well was scheduled for Q3 2013. Angola’s two required exploration wells had an extension through November 30, 2014. In July 2013, Angola’s government directed VAALCO to acquire an available working interest before farming it out; timing was uncertain. VAALCO maintained a $7.2 million allowance against partner receivables, with reimbursement timing unpredictable.
- Two Ebouri wells remained shut in due to hydrogen sulfide. Re-establishing production was expected in the first half of 2016 and likely required additional investment; design, cost, and final investment decisions were expected in the second half of 2013.
- A $25 million, 12-month share repurchase authorization was announced in June 2013. VAALCO repurchased 233,400 shares for $1.3 million during Q2; by August 1, total repurchases under the program were 1,359,106 shares for $8.2 million.
- Key risks include oil-price volatility, exploration and operating hazards, dependence on Gabon production, foreign-government and partner actions, and political and security risks. The filing notes a Gabonese government audit of energy companies, potential changes in state participation or local hiring requirements, and increased Gulf of Guinea piracy. VAALCO had no active hedges.
Investor verification priorities
- Track Gabon production, realized prices, workover outcomes, and the status and cost of addressing hydrogen sulfide at Ebouri.
- Verify timing and performance of the planned Gabon platforms, Ovoka well, and second-half capital spending against the stated budget and liquidity expectations.
- Monitor collection or recovery of the $7.2 million Angola partner receivable, the government-directed interest transfer, and the exploration-well deadline.
- Assess cash conversion and working-capital movements, particularly collection timing for oil liftings and partner balances, alongside the share repurchase program.