VAALCO Energy, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 14, 2013. The filing is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
VAALCO is an independent oil and gas company whose principal producing asset is the Etame Marin block offshore Gabon. The company also conducts exploration in Gabon, Angola and Equatorial Guinea and has smaller U.S. operations. Gabon accounted for about 99% of 2012 revenue; Etame Marin fields represented approximately 95% of production and 96% of year-end net proved reserves.
Financial and operating results
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $195.3 million | $210.4 million |
| Operating income | $86.6 million | $132.6 million |
| Net income | $5.3 million | $40.6 million |
| Net income attributable to VAALCO | $0.6 million | $34.1 million |
| Basic/diluted EPS attributable to VAALCO | $0.01 / $0.01 | $0.60 / $0.59 |
| Operating cash flow | $94.0 million | $89.6 million |
| Cash and cash equivalents at year-end | $130.8 million | $137.1 million |
| Total debt | None | None |
| Total assets | $268.0 million | $275.0 million |
- Operating margin was approximately 44% and net margin approximately 3% in 2012, compared with about 63% and 19%, respectively, in 2011.
- Oil and gas production was 1.829 million BOE, down from 1.911 million BOE. Net oil sales were about 1.73 million barrels at an average $111.24 per barrel, versus 1.864 million barrels at $111.98 in 2011.
- Production expense was $26.7 million, broadly unchanged year over year. Exploration expense rose to $41.0 million from $5.7 million, including $37.3 million of dry-hole costs from unsuccessful U.S. wells. Proved-property impairment was $7.6 million; bad-debt expense was $1.6 million.
- Income tax expense was $81.8 million, all associated with Gabon production. Operating cash flow exceeded investing cash outflows of $71.8 million; financing cash outflows were $28.5 million, including $26.2 million to acquire the noncontrolling interest in the Gabon subsidiary.
- Year-end current assets were $149.1 million and current liabilities $45.1 million; the current ratio was approximately 3.3. Restricted cash totaled $12.1 million. The company reported no debt.
- Net proved oil reserves increased to 7.488 million barrels from 6.048 million; proved gas reserves were 1.544 billion cubic feet, down from 1.925 billion. The standardized measure of proved reserves fell to $152.9 million from $166.2 million.
Changes, outlook and material matters
- Revenue declined 7% and operating income fell 35% versus 2011, reflecting lower oil volumes and sharply higher U.S. exploration write-offs. Net income attributable to VAALCO fell to $0.6 million, principally reflecting those items and the allocation of earnings to the noncontrolling interest before its acquisition.
- Fourth-quarter 2012 revenue was $53.6 million, operating income $2.3 million, and net loss $18.9 million (also the loss attributable to VAALCO for the quarter). The filing reports no standalone Q4 cash-flow figures. The Q4 loss included significant exploration and impairment charges.
- Two Ebouri wells were shut in after hydrogen sulfide was detected in July 2012, reducing gross block production by approximately 2,000 barrels per day, or about 10%. Management expected additional facilities and wells would be needed; a 2013 investment decision was anticipated and production restoration was expected in the first half of 2016.
- The company and partners approved two additional Etame Marin platforms, with estimated construction and installation costs of $275 million gross, or $77 million net to VAALCO, during 2013–2014; well costs are additional. Management expected a 2013 capital-expenditure budget of approximately $75 million, funded from cash and operating cash flow.
- A 2012 Mutamba Iroru exploration well in Gabon resulted in a discovery. A development plan was expected in 2013; the filing says the permit extension amendment had not been executed, leaving further extension subject to government approval.
- Angola Block 5 remained dependent on approval of a replacement partner and drilling two commitment wells by November 30, 2014. The company held $10 million of restricted cash for the potential well penalties and warned that failure to obtain any needed further extension could put $11 million of investment at risk and trigger a further $10 million penalty.
- U.S. drilling results were weak: four Montana exploration wells were unsuccessful, and the initial South Dakota well drilled in early 2013 was also unsuccessful. Management said it expected to be selective about future domestic acquisitions and did not plan further investment in that South Dakota property.
- Mercuria purchased approximately 99% of total sales in 2012 and 2011 and held the Gabon crude sales contract for 2013. The company noted short-term disruption could follow loss of this buyer.
- Other obligations and risks include the FPSO charter guarantee, with VAALCO’s share of estimated charter payments through the contract term totaling $57.7 million; foreign-exchange exposure; environmental and regulatory risks; and dependence on partner cash calls. No derivatives were in place during 2010–2012.
Most important facts for investors to verify
- Whether the planned Gabon platforms, drilling program and H2S remediation proceed on schedule, at the disclosed costs, and with the expected production impact.
- How the $81.8 million Gabon tax expense, cost-recovery and profit-oil arrangements affect future net earnings and cash generation.
- Whether Angola secures a replacement partner and meets its well commitments before the 2014 deadline, and whether the restricted funds or receivable allowance change.
- Whether reserve additions and the $152.9 million standardized measure translate into commercially productive volumes and support planned development spending.
- Whether cash and operating cash flow remain sufficient for the approximately $75 million 2013 budget and other commitments, including FPSO and abandonment obligations.
- The scale and timing of continuing losses, impairment charges or capital commitments from U.S. properties and exploration.