VAALCO Energy, Inc. — Q1 2013 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. VAALCO is an independent oil and gas company whose main revenue source is its operated Etame Marin properties offshore Gabon; it also has exploration and production interests in other West African countries and the United States.
Financial results and liquidity
Unless otherwise stated, amounts are in millions of dollars.
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Oil and gas revenue | $44.1 | $45.3 |
| Operating income | $21.5 | $30.1 |
| Operating margin | 48.7% | 66.5% |
| Net income, consolidated | $7.2 | $10.5 |
| Net income attributable to VAALCO | $7.2 | $9.0 |
| Basic and diluted EPS attributable to VAALCO | $0.12 | $0.16 basic; $0.15 diluted |
| Cash from operating activities | $(9.0) | $15.2 |
| Cash used in investing activities | $(19.2) | $(10.4) |
| Cash and cash equivalents | $102.6 at March 31 | $130.8 at December 31, 2012 |
| Total current assets / current liabilities | $141.3 / $40.1 | $149.1 / $45.1 at December 31, 2012 |
| Total liabilities | $50.9 | $55.4 at December 31, 2012 |
Operating cash flow was pressured by working-capital movements, including higher trade receivables and partner-account balances. Capital expenditures paid were $18.4 million; property and equipment additions incurred were $15.3 million, with $11.8 million of additions unpaid at quarter-end. Working capital was $101.2 million at March 31, versus $104.1 million at year-end; the current ratio was approximately 3.5. The balance sheet does not show interest-bearing debt. Restricted cash totaled $12.9 million, including $10.0 million related to Angola exploration commitments.
Material changes and operating performance
- Revenue declined 2.5% year over year, while operating income fell 28.6% and consolidated net income fell 31.7%. Operating margin declined from 66.5% to 48.7%.
- Gabon oil revenue was $43.7 million. VAALCO sold approximately 397,000 net barrels at an average $110.07 per barrel, compared with 368,000 net barrels at $121.65 per barrel in Q1 2012. Higher volumes were offset by a lower realized price.
- Production expense rose to $8.4 million from $5.5 million, reflecting higher FPSO costs, offshore well workovers, and less production expense capitalized in inventory. Exploration expense increased to $6.1 million from $0.9 million, primarily due to U.S. dry-hole costs.
- Depreciation, depletion and amortization declined to $3.6 million from $5.0 million, mainly due to lower depletion rates following higher reserve estimates. Income tax expense was $14.2 million versus $19.8 million; management attributed the decrease to a higher cost-oil balance and lower taxable profit oil.
- Cash and cash equivalents fell $28.2 million during the quarter. VAALCO reported $7.2 million net income but used $9.0 million in operating cash flow and $19.2 million in investing cash flow.
Outlook, risks and contingencies
- Management said available cash and expected operating cash flow should fund the remaining 2013 capital budget and potential working-capital needs. The filing gives no overall 2013 capital-expenditure budget amount.
- The company and partners expected to spend $275 million to build and install two offshore platforms in 2013–2014, with VAALCO’s estimated share at $77 million, excluding well costs. Construction of the Southeast Etame/North Tchibala platform began in Q1; installation was expected in the second half of 2014.
- Production from two Ebouri wells remained shut in after hydrogen sulfide was found in 2012. Re-establishing production may require additional investment; decisions were expected in 2013, with production anticipated in the first half of 2016.
- VAALCO planned to drill a remaining Gabon exploration commitment well by mid-2013. Angola’s two commitment wells were extended to November 30, 2014; failure to drill could trigger $10 million in aggregate penalties. A potential replacement partner remained subject to Angolan government approval.
- A $6.9 million allowance was recorded against partner receivables associated with Angola, including $0.9 million in Q1 2013. The company also disclosed that Gabon was auditing its accounts and that political, regulatory, contractual and partner-related risks could affect foreign operations.
- Oil and gas prices are volatile. VAALCO had no active hedges. The filing also cites operational, delivery, reserve-estimation, equipment, currency and geopolitical risks. It provides no formal earnings or production guidance.
- U.S. exploration included unsuccessful wells and dry-hole costs; the company said it did not plan further investment in the South Dakota property. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether working-capital collections and operating cash flow improve after the Q1 cash outflow.
- Final costs, timing and funding for the offshore platforms and the Ebouri hydrogen-sulfide remediation plan.
- Progress on the Gabon exploration well and on the required Angola wells, partner approval and recoverability of partner receivables.
- Updates on the Gabon government audit and any resulting contractual, fiscal or operational impact.
- Current production, realized oil prices, lifting timing and whether the anticipated 2013 capital program remains financeable from cash and operations.